A few years ago, President Xi Jinping began warning about an impending major storm that occurs once every 100 years. As is typical in the early stages of a hurricane, one can now start to feel its effects. Undeniably, the circumstances and mood in China have changed to become more threatening. These changes are mostly due to large cyclical forces. The most joyful and productive environments are ones with freedom, civility, and creativity, where people can turn their dreams into great realities with widespread prosperity. This occurred in China from around 1980 until around five years ago. It is quite typical for such booms to produce debt bubbles and large wealth gaps that cause the booms to transform into bubbles and then busts. This happened in China at the same time as intensified global great power conflict, so China is now in the post-bubble and great power conflict portion of the Big Cycle driven by the five large forces that have changed the mood and environment. In this piece, I will first briefly describe how the Big Cycle has unfolded over roughly the past century, and then I will explain the current situation in China, focusing on the challenges it faces. This history and these dynamics are complex and important to world history and the global order—everything I write here is based on my own experience, relationships, and research. How the Big Cycle in China Unfolded to Create the Conditions from the Beginning of the PRC Through the Current Situation
In the 1930-45 period, there was the last 100-year major storm, driven classically by the confluence of 1) a debt bust that triggered a global depression, 2) a civil war in China between the wealthy right-wing capitalists and the poor left-wing communists (which ended in 1949 when the Communists won), 3) an international great power conflict-war that ended in 1945 when the United States (and, to a much lesser extent, Great Britain and Soviet Union) won, creating the American-led world order, 4) many disruptive acts of nature, and 5) major technological changes. That period ended in the classic ways they end, with an economic and debt collapse, one side winning the international war and the new world order beginning (in 1945), and one side winning the civil war and the new domestic order beginning (in 1949).
From 1949 (the year the new domestic order was created via the founding of the PRC) until 1978 (the year Deng Xiaoping came to power), there was a typical post-war consolidation period led by Mao in the way he wanted via a domestic economic policy that was communist, a domestic political policy that was oppressive (dictatorial and designed to purge the opposition), and a foreign policy that was isolationist. That and major disruptive acts of nature led to many significant challenges and periods of difficulty and few economic and technological advances. Mao and that era ended in 1976.
When Deng Xiaoping came to power in 1978, he reduced one-man control and repressions, increased collective leadership, replaced hardcore autocratic communism with more free markets and increasingly larger doses of capitalism, and opened China up to foreigners to learn from and do business with them. It was like sprinkling water on fertile ground that led to a great blossoming. From 1978 until Xi came to power, there was a classic capitalist revival that led to a boom in which the economy, living standards, and debt all grew significantly. At the same time, China was not perceived by other countries to be a threat to the leading great power () and its world order. As a result, China had a joyous and productive environment with a relatively large increase in freedom, civility, and creativity, and where people could turn their dreams into great realities and most people benefited, though the rich benefited more than the poor. As is typically the case, these policies also produced greater wealth gaps and greater amounts of corruption. That began to end when Xi came to power, not because he came to power but because of where China was in its Big Cycle and how the new leadership approached it.
When President Xi came to power in 2012, a roughly 11-year transition began that brought China from what it was like in 2012 to what it is like today. I was fortunate to see it up close. At the start of his presidency, Xi and the leadership’s main goals were to reform the economy and eliminate corruption. For most of Xi’s first five-year term there was a) still an openness to outside thinking, b) a strong desire to further reform the economy by making it more market-driven and building and reforming the capital markets, and c) strong actions taken to eliminate corruption. The senior leaders chosen were inclined to do those things. Of course, how to do these things was debated and some people benefited from the changes while others were hurt by them, so in Xi’s first term there was a movement to consolidate power via a shift to “core leadership.” This became clearest in the leadership changes that accompanied the shift from the first to the second five-year term under Xi. In 2015, Xi put out his bold 2025 plan, which was viewed as aspirational by the Chinese and threatening by Americans. China could no longer “hide its power.” Americans viewed the Chinese as a threat. By the time Trump came to power in 2017 and Xi began his second term in 2017, the great power conflict had begun. In 2019-20, COVID-19 emerged. At the same time, the debt bubble and the wealth gaps had grown—so the classic convergence of forces led to the formation of the “100-year major storm.” In 2021, about halfway through Xi’s second term, China’s domestic debt bubble burst and the international great power conflict intensified. At the beginning of Xi’s third term in October 2022, China’s leadership changed from reform-minded globalists to loyal communist nationalists, and purges and crackdowns ensued, which brings us up until now. I will soon describe what things now look like, but before I do, I want to emphasize the point about how the Big Cycle is playing a major role in driving what has happened.
The Hand Xi Was Dealt and How He Is Choosing to Play That Hand A Chinese leader, historian, and friend of mine told me several years ago that the conditions of the times create the type of leader that emerges because the evolutionary process pulls out the leader who suits the environment. In other words, how the times are unfolding determines the leader even more than the leader determines how the times are going. He gave me the book The Role of the Individual in History by the Russian political philosopher Georgi Plekhanov, which you might find interesting. When I was writing my book on leadership and we talked about what makes a great leader, he made the same point—that what made a great leader at the time depended on what was needed at the time. For example, Konrad Adenauer (West Germany’s chancellor immediately after World War II) was a great leader for a country that was defeated after a war because he knew how to be both deferential and pushy enough to deal with both 1) the dominant powers that Germany had just come out of a horrendous war with and 2) a domestic population that was defeated and destroyed in most ways. My point is that what is happening now and Xi’s leadership must be looked at within the context of the Big Cycle. In other words, it is important to distinguish between the hand that Xi was dealt and how he has been choosing to play it. It is also important to understand what is happening now and how Xi is playing his hand without judging these things, because judging them can stand in the way of understanding them. My goal is only to understand what’s happening and what’s likely to happen, and I don’t want to let judgments stand in the way of doing that.
How should these problems be dealt with? To me, as a macroeconomic thinker who approaches such debt and economic problems more like a doctor than an ideologue, the leadership needs to have a debt restructuring, which it should do via engineering a beautiful deleveraging (see my book Principles for Navigating Macroeconomics and Debt Crises).