Not too long ago, the Chinese economy appeared to defy both gravity and doomsayers. Despite years of unbalanced growth, Beijing has managed to rely on investment to power its economy and keep growth high. The country’s binge on credit since 2009, which has brought the debt-to-GDP ratio close to 300 percent, a perilous level for an upper-middle income country, has not triggered a financial crisis. Its real estate bubble, perhaps the largest the world has ever seen in terms of completed but unoccupied residential housing, is leaking air but has yet to crash totally.
It was this appearance of economic invincibility that has emboldened the Chinese government to embark on an ambitious but highly-risky new foreign policy in the last few years. Many Chinese elites saw the United States and the rest of the West as in inexorable decline and China’s rise unstoppable. Hubris has led to the adoption of economic and security policies that would certainly make the late Deng Xiaoping turn in his grave. Instead of maintaining a low profile, Beijing has greatly extended its economic commitments abroad and begun openly challenging the U.S.-led security order in East Asia.