As China amps up bellicosity toward Taiwan ahead of House Speaker Nancy Pelosi’s expected visit, its economic slump continues.

Driving the news: The latest data shows an ugly outlook for growth.

  • Official data Monday showed China’s manufacturing shrunk in July, a surprise underscoring the struggles of the world’s second-largest economy.
  • Last month, China reported its slowest growth rate since the COVID crisis hit, as its harsh lockdown policies strangled economic activity.
  • And the Chinese property market, a key source of domestic growth for the export-focused giant, continues a slow-motion collapse, pulling down home prices and adding to the awful mood among Chinese consumers.

The big picture: Analysts doubt China will ever regain the breakneck pace of economic growth that raised hundreds of millions of Chinese out of poverty in the late 1990s and early 2000s.

  • That burst of prosperity has long been seen as the basis for the ruling Chinese Communist Party’s claim to legitimacy.
  • With few options to easily reinvigorate growth, President Xi Jinping has de-emphasized the economy and highlighted his goal of returning China to what he sees as its rightful position as a “great power.”

Yes, but: This doesn’t mean that China’s recent saber-rattling toward Taiwan is some sort of “Wag the Dog”-style distraction from China’s current economic issues.

  • Since its founding in 1949, the People’s Republic has been enormously sensitive to any issue around Taiwan, where Chinese nationalists fled after the communists prevailed in the civil war that year. The Chinese government has threatened to take control of the self-governing island.

The bottom line: President Xi has shifted the source of his legitimacy away from delivering economic growth and toward a broader sense of national prestige, said Gerard DiPippo, a senior fellow in the economics program at the Center for Strategic & International Studies.

  • “It’s the idea of China standing up, no longer hiding and biding, and being a world power be taken seriously, ” said DiPippo. “Economics is part of that, but the non-economic side is louder now than it was ten years ago.”