Global attention has focused on the plunge in the Shanghai stock market and mounting evidence that China’s economic growth is slowing dramatically. Moreover, the contagion appears to be spreading, characterized by extreme volatility and alarming declines in America’s own equity markets. Those worries are compounded because there always have been doubts about the accuracy of Beijing’s official economic statistics. Even before the current downturn, some outside experts believed that Chinese officials padded the results, making the country’s performance appear stronger than it actually was. If China is now teetering on the brink of recession, the political incentives for officials to conceal the extent of the damage would be quite powerful.

The focus on the possible wider economic consequences of a severe Chinese economic slowdown is understandable, since the ramifications could be extremely unpleasant for the U.S. and global economies. But we should also be vigilant about how such economic stress might affect Beijing’s diplomatic and military behavior. It is not unprecedented for a government that feels besieged to attempt to distract a discontented public by fomenting a foreign policy crisis. In Henry IV, Shakespeare pithily described that process as the temptation to “busy giddy minds with foreign quarrels.”
China’s leaders likely feel increasingly uncomfortable. The implicit bargain that has been in place since the onset of market-oriented reforms in the late 1970s has been that if the public does not challenge the Communist Party’s dominant political position, the Party will deliver an ever-rising standard of living for the people. The bloody Tiananmen Square crackdown in 1989 was a graphic reminder of what happens if the Party’s position is challenged. However, until now, the economic portion of the bargain seemed secure, characterized by breathtaking, often double digit, rates of growth. It is uncertain what happens if the Party can no longer maintain its part of the implicit bargain, but it is likely that a dangerous degree of public discontent will surface.