by Guy de Jonquieres, August 4, 2015, Nikkei
China’s leaders must be rubbing their hands with glee at negotiators’ failure to conclude, on schedule, an agreement on the U.S.-led Trans Pacific Partnership.
By casting doubt on the fate of the 12-nation trade pact — the linchpin of Washington’s planned “pivot to Asia” — the debacle has delivered a serious blow to U.S. prestige and to its efforts to reassert regional leadership in the face of China’s economic, political and military muscle.
Worse still, the TPP setback on Saturday came just a few months after close and long-established U.S. allies, led by Britain, openly snubbed Washington by spurning its exhortations to boycott the Chinese-backed Asian Infrastructure Investment Bank. Instead, they eagerly lined up to become founder members and shareholders in the new institution.
In sharp contrast to these U.S. stumbles, Beijing has been on a roll. Not only has it successfully launched the AIIB, after the U.S. Congress blocked reforms that would give it a bigger say in the International Monetary Fund, it is pressing ahead with two other ambitious initiatives: its grand “One Belt, One Road” strategy for building infrastructure and expanding its influence across Asia, and the planned Regional Comprehensive Economic Partnership, a rival trade grouping whose membership partly overlaps with that of the TPP but which excludes the U.S.
Other things are going Beijing’s way, too. The IMF has declared that, on a purchasing power parity basis (which adjusts for differences in living costs), China’s economy has recently overtaken that of the U.S. China continues to expand its presence in the South and East China seas in aggressive pursuit of disputed territorial claims. And Beijing has just been chosen to host the Winter Olympics in 2022, becoming the first city to hold both sets of games.
The great “rebalancing”
In reality, China today presents a stark and unsettling paradox. Never in living memory has it appeared from the outside to be mightier, more self-assured or more determined to impose its will on the rest of the world. Yet never has it been beset internally by more formidable threats to its continued development and, ultimately, even to its political system.
China’s leaders are struggling simultaneously with economic problems on four fronts: a steady slowdown in growth, which many analysts suspect is now running well below the 7% annual rate reported by the government; a massive debt burden exceeding 250% of gross domestic product, the toxic legacy of the credit splurge unleashed at the end of 2008 in response to the global financial crisis; a vertiginous rise and steep fall in the stock market, which frantic intervention by the government has failed so far to arrest; and a difficult transition away from an unsustainable investment-driven economic model that has squandered capital, bred inefficiency and generated vast excess capacity in many industries.
Behind those immediate problems, others are crowding in. Adverse demographics will leave a rapidly growing elderly population dependent for support on a steadily shrinking labor force. Water shortages are acute and widespread. Chronic environmental degradation poses an increasingly serious threat to human and animal health and limits future growth.
Those challenges not only cloud China’s economic prospects. Still more seriously for the country’s leaders, they shake the foundation of the Communist Party’s claims to political legitimacy and monopoly on power. They put to the test its reputation for efficiency and competence and its ability to go on delivering steadily rising living standards year in, year out.
China’s hopes of weathering those storms rest heavily on the far-reaching reform program laid out by its leadership in late 2013. This calls for a fundamental “rebalancing” of the economy to replace investment with consumption as the main growth driver. It is to be achieved by measures including radical overhaul of the tax system, streamlining state industries, industrial restructuring and promotion of innovation, and the opening up of services markets.
Market forces vs. state control
Progress toward these goals has so far been patchy, advancing fastest in the areas of fiscal and financial policy. The leadership has yet to overcome deeply entrenched opposition to change, notably in the country’s powerful politico-industrial complex, which benefits greatly from the status quo. That is despite President Xi Jinping’s rapid accumulation of personal power and his prosecution of a ruthless anti-corruption purge that is at least partly intended to remove opponents of economic reform.
Even if resistance is beaten down, reform must clear other hurdles. The huge economic adjustments involved risk further depressing growth and putting people out of work in the short- to medium-term, jeopardizing the party’s prized goal of maintaining political and social “stability.” At a more fundamental level, the reform drive must overcome what appears to be a near-existential internal contradiction.
This, in essence, is that the party knows its longer-term survival depends on modernizing China’s economy. Yet to succeed, the process must involve a liberalization of markets that is at odds with the party’s insistence on retaining absolute control. The conflict is encapsulated, though not resolved, in the reform blueprint, which calls for “a decisive role” for market forces as well as a continuing central role for state-owned enterprises.
It is still unclear whether — and how — even a leader as powerful as Xi Jinping can bridge such obvious fault lines and get China’s economy back on track. The government’s ham-fisted and ineffectual attempts to stem the recent stock market rout suggest that combining liberal capitalism with iron state control will be a tricky feat to pull off.
If Xi fails, the costs could be high. By amassing so much personal power and marginalizing political rivals, he has left himself highly exposed, with nobody else to blame if things go wrong. What would then happen is anybody’s guess.
Two faces of China
That there can be two so completely different perceptions of China simultaneously — one of expansive outward self-confidence, the other of inner perils and fragility — is partly due to an optical illusion. Such is the country’s size and complexity, and so deep the opacity of its political system, that foreign observers often do not see the reality of China but, rather, reflections of their own beliefs, values, hopes and fears. It is, in effect, the world’s biggest Rorschach test.
These two images of China cannot both be accurate. Sooner or later, one must prove nearer the truth than the other. It is too early to say which it will be. However, policymakers and China-watchers around the world, who have grown accustomed to the belief that its rise and ambitions are limitless, ought to be preparing for the possibility that the country could stumble badly. This is not a prediction that it will, but it would be a sensible precaution to prepare for such a scenario in a highly uncertain world.
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