The annual summer retreat of the CCP leadership in Beidaihe has concluded, and it ended without fanfare.

It can be reasonably inferred that no major resolutions were reached during the retreat. Those who expected the CCP to introduce significant measures to rescue the economy will likely be greatly disappointed.

What’s Happening With China’s Economy?

The overall situation of China’s economy is extremely dire. Various economic data released over the past few days, including import and export figures, financial data, and more comprehensive statistics from the National Bureau of Statistics, indicate outcomes worse than anticipated. Despite the government’s efforts at macroeconomic stimulus over the past few months, the economy has not rebounded and has instead shown a sharp downward trend. Foreign investment has significantly decreased, and the once promising “Invest in China” year now appears to be a shattered myth.

In analyzing China’s economy, the most critical question to address is the extent to which this economic downturn is cyclical or more deeply rooted in systemic issues.

If it is cyclical, akin to the crisis of 2008, it can be anticipated and managed. For instance, the Chinese government implemented a 4-trillion-yuan stimulus package, similar to the quantitative easing pursued by the United States, to stimulate investment and consumption.

However, if the problem is more fundamental, such as Chinese citizens growing tired of the one-party-rule model, especially when foreign countries begin rejecting this model, then it’s not merely a cyclical issue.

It is becoming increasingly clear that this is not primarily a cyclical problem — all major economies are curbing inflation while China is facing deflation. Instead, the CCP has deceived the world for many years, and now it seems that the world’s tolerance has reached a critical point. Many countries are saying this cannot continue, and the CCP can no longer deceive us.

I have consistently cautioned against underestimating the CCP’s ability to deceive the world or the Chinese people’s resilience, particularly since the CCP’s control over the nation’s resources has transformed China into a giant corporation that can operate agilely on the international stage, as well as equip its companies with resources to compete internationally. (READ MORE: Reject China, Inc.)

Many researchers on China have thought I was exaggerating the power of the CCP’s unified system. Yet even now, I believe that the CCP is facing substantial trouble, primarily of structural nature and a lack of credibility, as well as opposition to this system by the major democracies. 

Why Has Foreign Capital Fled?

Foreign investment is primarily attracted by China’s market size. The CCP’s one-party rule has remained unchanged, but during times of economic prosperity, it was not a significant issue for foreign investors. With huge and rising demand there, they simply hid their disgust toward the CCP and made money.

So, the current drastic decrease in foreign investment is due to two main reasons: First, the loss of confidence among Chinese consumers, leading to a smaller market; second, and more importantly, the perception of higher political risks associated with the CCP’s precarious rule, along with increasing risks to personal safety within China. Under Xi Jinping’s leadership, the CCP has rapidly escalated its clash with democratic nations, which has left foreign businesses with no option but to leave. (READ MORE: The New Spy-Hunting Season in China)

The impact of foreign capital leaving on China’s economy isn’t significant; China has accumulated substantial capital through years of rapid development. The significance of foreign capital lies in its contribution to technology and talent. From a broader perspective, if foreign capital leaves, China’s economy might increasingly deviate from those of developed nations, posing substantial risks for the country.

Why Is Xi Procrastinating? 

The biggest weakness of a dictator is not recognizing their own weaknesses. Xi would never acknowledge that people lack confidence in him, let alone take steps to remedy that lack of trust. On the contrary, his approach often involves further eroding people’s trust in him. Without recognizing his own weaknesses, how could he possibly find solutions?

The only solution he knows is the “carrot and stick” strategy. In recent years, he has used the stick a lot; now is the time to hand out a few carrots. The CCP is adept at this strategy: When the economy is doing well, it squeezes profits from private enterprises; when the economy falters, it humbles itself to court these enterprises. Of course, most business owners, especially Wall Street investors, tended to remember the carrots and forget the sticks, so this strategy worked well. After being clubbed severely so many times, however, even these money-seeking creatures can’t take the beating anymore and have started to leave. 

The trouble with a highly centralized model is that those at the lower levels must discern the intentions of the highest level in order to propose feasible solutions. Without knowing the inclination of the leader, their proposals have a high chance of going awry, and they would lose their years of accumulated status and benefits and even go to jail. Without clear instructions from above, no one is willing to take the initiative.

Another problem with this model is that once the intentions of the top leader are understood, the intention will be amplified at each lower level until it becomes a policy tsunami, leading to excessive measures. This is why top leaders are cautious about expressing their opinions directly. Hence, the China model is inherently inefficient in seeking solutions to new problems, as it requires innovation and competition among different ideas, which the CCP prohibits.

Clearly, Xi is at a loss right now. Because he won’t consider that the problem lies with the system itself, he remains confident in the system. His approach is to treat this economic downturn as cyclical and sit it out. Meanwhile, he is resorting to the CCP’s old trick: blaming the downturn on American imperialism and reactionary forces worldwide. This form of propaganda. however, likely won’t be very effective either.

What Should the CCP Do?

It is unfair to say that the CCP did nothing at the Beidaihe meeting. It recently introduced 24 guidelines to encourage foreign investment. But these measures are not even “old wine in a new bottle” — they are “old wine in the old bottle.” Below is my take on the guidelines:

• “Urging foreign capital to come” — This is largely a fantasy.
• “Inviting foreigners to invest in the biomedical industry” — They have to be kidding: After China spread the coronavirus globally, who would help China in that industry?
• “Providing virtual private networks for foreign companies [to overcome China’s Great Firewall]” — What a joke: It is shameful for the CCP to deprive people of their information freedom, and now the CCP extorts allowing foreigners to access the internet as a favor! (Note: The CCP prohibits the Chinese from circumventing China’s internet firewall.)
• “Enhancing intellectual property protection” — This is asking the fox to guard the chickens.
• “Offering convenient permanent residency for foreign employees” — But with the CCP’s current focus on catching spies, who want to live there?
• “Boosting foreign confidence in China” — This is a pipe dream.

So, what should the CCP do? The root cause of this significant recession lies in dissatisfaction with the one-party rule and a lack of credibility of the CCP. To solve this problem, the CCP must open up politically, step by step.

Several feasible actions could be taken. First, releasing all political prisoners and so-called foreign spies. This will instantly restore people’s confidence and lead to more foreign investment in China. Second, tearing down the Great Firewall. This will greatly stimulate the demand for information goods and services in China. Third, relaxing foreign exchange controls. This will drastically increase financial activities and cross-border investments.

These are concrete and achievable. Without these gradual political openings, merely focusing on stimulating the economy will not solve China’s problem.

Shaomin Li is a professor of international business at Old Dominion University.