Since the end of the Mao era, China has adopted a straightforward social contract: the people support the Communist Party so long as they enjoy rising standards of living. Demands for civil and human rights, good public health, environmental sustainability and accountable government have been largely muted in exchange for economic growth.

Now that that growth is slowing, however, Chinese leaders are changing tack. The shift has included limited concessions, such as cracking down on corruption and promising to rein in pollution; similar limited reforms may follow. For the most part, however, Beijing is appealing to nationalism through the trope of the "Chinese Dream." While this rhetoric is mostly peaceful, it often takes on a hawkish tone: "A rich nation without a strong military is an insecure power," writes bestselling author and former PLA colonel Liu Mingfu.

Slowing Economic Growth

China cashed in on its demographic dividend as perhaps no other country on earth has, harnessing the energy of a young and educated population—not to mention vast coal reserves—to fuel decades of supercharged GDP growth. In this context, the bulk of the population felt hopeful and happy, while the government was under little pressure to develop policies aimed at sustainable growth.

That pressure, however, may now be building. In the first quarter of this year, China's GDP grew at its slowest rate since 2009. Markit's flash manufacturing PMI for the country fell to its lowest level in 15 months in July, at 48.2, signaling a contraction. These signs of stagnation come amid a closely watched crash in Chinese equities. The Shenzhen Composite—made up mostly of smaller companies—more than doubled in value in the year to June, when average valuations topped 60 times earnings. A correction in mid-June erased $4 trillion in a couple of weeks, with losses largely hitting highly leveraged retail investors. The government took drastic measures to halt the sell-off, suspending trading on many stocks, cutting interest rates and pumping liquidity into the flagging market. The resulting picture is of an economy that is straddling the line between planned and market models, but is severely off balance. 

At the same time, China's economic interests remain global and ambitious. The Asian Infrastructure Investment Bank places it at the head of an international lending body that counts a number of NATO members among its shareholders—and leaves the U.S. sulking on the outside. Ambitious Silk Road projects emulate one of the greatest trading routes the world has ever seen. China now imports more crude oil than any other country, bringing it into closer contact with Middle Eastern nations. Outflows of foreign direct investment from China may soon surpass inflows, and not only to commodity-rich countries in Latin America and sub-Saharan Africa, but to tech hubs such as Israel. The government is seeking IMF recognition of the renminbi as an official reserve currency on par with the US dollar, the British pound, the yen and the euro. (For more, see Why Israel Is Attracting Chinese Investors.)

Resuming The Arms Race

China's increased economic engagement with the rest of the world is mirrored by increased military engagement, although so far this is mostly limited to the Western Pacific. The context of this military buildup is inseparable from the United States’s short history as a global superpower. Following World War II, European colonial powers faded from prominence, and the U.S. stepped in as a dominant political, economic and military global force. The Soviet Union, however, had similar ambitions, not to mention a conventional military that dwarfed America's as well as its NATO allies' forces. The U.S. offset this advantage by building a nuclear arsenal sufficient to obliterate human civilization, in what has become known as the First Offset.

The Second Offset came when the Soviet Union built up an equally destructive nuclear arsenal. There seemed to be nowhere to go from there until the Yom Kippur War, fought in 1973 between U.S.-armed Israel and a coalition of Soviet-armed Arab states. The conflict provided a real-world model for a non-nuclear engagement between Soviet and U.S. conventional forces, and it inspired an idea: rather than go big, the U.S. would go small, developing high-precision conventional weapons that could accurately pinpoint and eliminate small targets.

The resulting doctrine, AirLand Battle, led to a host of technological innovations, including GPS, stealth aircraft, guided missiles and reconnaissance satellites. Designed for a Warsaw Pact invasion of Central Europe, the strategy was displayed in a rather different setting during the Gulf War. The U.S.’s Tomahawk missiles clocked an unprecedented 94.94% success rate, Mark Perry writes for Politico, and the coordination between air and ground forces led to a total rout of Iraqi forces.

China's People's Liberation Army was rattled, but grateful for the demonstration. The PLA has since developed its own offset strategy based on the principle of anti-access and area denial (A2/AD). The goal is to bar the U.S. military from operating in the Western Pacific, which China clearly now considers its sphere of influence. The bulky aircraft carriers the U.S. has deployed in the Pacific since World War II, for example, can be cheaply deterred with precision ballistic missiles—no need for China to build ships as big or bigger. (For more, see: U.S. vs China Military Budget.)

Cyber warfare is another dimension of China's strategy, one at which the U.S. is woefully incompetent. Most recently, an attack at the Office of Personnel Management, attributed to Chinese hackers and affecting perhaps 7% of the U.S. population, demonstrates the gulf in hacking prowess. Outer space is also being weaponized. In 2007, China destroyed one of its satellites amid international pressure on the Bush administration to stop research into anti-satellite lasers. (For more, see: Cybersecurity Is The Way To Play Defense Spending.)

Tension In The Western Pacific

China has sparked a outrage in the South China Sea by claiming the entire area bounded by the "nine-dash line" its officials submitted to the UN in 2009; it has since added a tenth dash to make clear that it claims Taiwan. The claim, which appears to have no basis in international law, puts it into conflict over islands, reefs, rocks and oil and gas fields that Vietnam, Brunei, Indonesia, Malaysia, the Philippines and Singapore also claim. That, however, has not stopped it from turning uninhabited reefs into bases boasting airstrips and communications facilities.

These artificial islands do not just bolster China's territorial claims. They could serve as an effective deterrent to American forces in the Western Pacific and allow China to intimidate or even occupy its smaller, poorer neighbors. American allies in the region are getting nervous, which has led to increased rapprochement, even with former enemies such as Vietnam.

Meanwhile, the Pentagon is beginning to seriously rethink the U.S. military's overarching strategy in what's being labeled the Third Offset. Among its major components is AirSea Battle (since changed to JAM-GC), which is designed to enhance cooperation between the Navy and the Air Force. Unmanned submarines, electromagnetic rail guns, high-powered lasers and advanced sea mines are among the technological components of this strategy. Then Secretary of Defense Chuck Hagel also discussed the incorporation of robotics, miniaturization and 3D printing last year.

So far China's military ambitions have been mostly regional, while its economic ambitions are clearly global. Might the Chinese military begin to play a role in regions that provide its essential resources, as European powers, the U.S. and the Soviet Union all have at various times? History suggests that this is inevitable, but perhaps a world that counts China as a superpower will operate under a different set of rules.

The Bottom Line

The Chinese Dream is no longer limited to rising incomes and standards of living. As these paths to social stability narrow, the government has begun to think globally, making itself not just a market for raw materials, but a trading partner and even financier for economies of all shapes and sizes. It has also beefed up its military capabilities, and it will probably not be long before the country sets its sights beyond its own backyard. The age of unchallenged U.S. dominance has been brief and chaotic, and it is coming to an end.