Just a thought (3): Can China continue to rise?

This is the first of three articles in which I will discuss China’s rise (and the problems associated with it) and Sino-Canadian relations, especially trade relations; two items appear today and one more will follow tomorrow.

The Economist noted, about two weeks ago, thatAt a Politburo meeting to discuss economic plans for 2019, Screen Shot 2018-12-25 at 10.05.05China’s top leaders agreed that they should be ready for problems and must, above all, maintain domestic stability. It was a striking contrast with the same meeting a year earlier. Then the Politburo oozed confidence, concluding that China was the world’s economic engine, with a new level of power.” What a climb down … are Donald Trump’s trade war tactics working?

This nervous, inward turn explains why, after a year of eye-for-eye fighting with America,” the article says, “China is determined to bring the trade war to an end. The view, once commonly heard in Beijing, that it could outlast America in a grinding tariff battle has given way to the realisation that, as the country with the huge trade surplus, China has more to lose upfront. Optimism that the government could fight on two fronts—taming its heavy debt burden at the same time as taking on America—has also cracked. The economic outlook has darkened. Analysts are debating whether the government will, once again, deploy a big fiscal stimulus to prop up growth.

The article notes that China is backing away from e.g. its own, retaliatory auto tariffs and says also that President Trump seems pleased, so far, tweeting that ““China wants to make a big and very comprehensive deal. It could happen, and rather soon!”” But the article says there are mixed feelings inside the administration and within the US business community ~ many want Trump to bear down even harder, they will not be happy until China is forced to deal honestly and openly with foreign, especially American suppliers and with business partners. Another fly in the ointment is Meng Wanzhou, the Chief Financial Officer of Huawei and the daughter of the tech giant’s founder and CEO. She is being detained in Canada on a US warrant and some Chinese fear that the US Justice Department is going to go after China for all manner of breaches of US trade law.

The crucial question,” The Economist says “is therefore what kind of results China can deliver. Reducing tariffs on auto imports and buying soyabeans should not count for much. Those measures merely return the trade relationship to its position a year ago. But demands for fundamental change are much harder for China. They cut to the heart of its economic model, potentially requiring it, for example, to curtail subsidies for state-owned companies.

The article notes that “Chinese negotiators are focusing on two themes, according to people familiar with the talks:

  • First, they are walking away from the “Made in China 2025” plan, a blueprint for turning the country into an advanced manufacturing power. Foreign businesses object to it because it specifies market-share targets for China in sectors from biotech to robotics. Chinese officials have already downplayed its significance, describing it as a vague, aspirational document. References to it have all but vanished from state media. Now, the government appears ready to rescind it formally. Even the Global Times, a nationalist state-owned tabloid, has called for a new plan; and
  • Second, the government wants to show that foreign companies play on a level field. Liu He, the lead Chinese trade negotiator, has asked the central bank to devise guidelines for how “competitive neutrality” would work in China, according to someone briefed on the project. The idea, promoted by the oecd rich-country club, is that state-owned companies can form part of a healthy market economy provided they enjoy no special advantages. China will try to convince Mr Trump that it is serious about meeting this standard.

Those measures look like wins for President Trump’s trade war tactics.

The article goes on to say that: “China is matching its words with actions [but only] up to a point. After a flurry of approvals, it can argue that it is opening its economy to foreign firms. Tesla is on track to be the first foreign carmaker to have a wholly owned manufacturing facility in China. UBS, a Swiss bank, recently became the first foreign firm to be allowed a majority stake in a Chinese brokerage. ExxonMobil will soon start to build a wholly owned petrochemical complex, which until recently foreign firms could not do. China has also published tougher rules for protecting intellectual property, which foreign companies have long demanded … [but, it adds] … Placating American negotiators will … be difficult. The challenge for China is to prove that these are more than cosmetic changes to an economic system in which the state remains overwhelmingly powerful. Scepticism abounds. As long as the government wants to build state-owned companies into global powerhouses, foreign rivals will have good reason to think that the deck is stacked against them in China.

The Economist concludes by saying that, “On December 18th China celebrated the 40th anniversary of the start of its “reform and opening” period, the rebirth of the economy following Mao’s disastrous rule. Some had hoped that Mr Xi would use the occasion to launch bold new reforms. But in a speech at the Great Hall of the People in Beijing, he instead reflected on how far China had come, guided by the Communist Party’s strong hand. A humble veneer cannot conceal China’s pride in its own success over the past four decades, even if the past few months have been turbulent. It is reluctant to junk and replace what it sees as a winning formula.

I think that’s the correct conclusion. President Trump may have found ways to stymie Chinese traders, for now, but the Chinese economy is huge and it is still growing, albeit more slowly that Xi Jinping would like, and he appears to be personally invested (too invested?) in his 2050 plan … he appears to have no choice. But he is not alone, that “China’s basic dictatorship” that Justin Trudeau said he admires so much is actually rather large: there are five to ten people at the very centre of power: all, now, loyal to Xi Jinping. But observers must understand that the Party is a deep organization and that people with different ideas are moving up through the ranks, as they did under Mao and then under Deng, and as Xi Jinping, himself, did under a series of leaders. Some will favour Xi’s goal, others will want to return to Deng Xiaoping’s philosophy: “hide your ambitions and jjposaildisguise your claws.” Still others will want to toe different lines. I expect that most prospective leaders share one overarching goal: to keep China prosperous and at peace. That may well require China to trim its sails and to tack into strong headwinds, sometimes, but I seriously doubt that any Chinese leader, not the current team and not any up-and-comers, are willing to sacrifice the core objective. Therefore they will, from now until 2024 if need be, “beat to windward” as the sailors say and as they must in order to preserve what they have gained thus far, and they will keep working on projects that aim to spread their commercial and political influence around the world. Donald Trump can slow China’s progress, albeit at some cost to America, too, but I do not believe that he, and not the entire US led West, can stop it.

I need to reiterate my personal view of China’s strategic vision which is that it intends to frivers_sibiriensbe THE superpower on the East Asian mainland and in the China Seas ~ unchallenged by anyone, including Russia, India and America. Now, the Chinese see Asia is everything from, at least the Yenisei River, possibly the Ob, perhaps even the Ural Mountains, all the way to New Zealand, from the Arctic to the Antarctic. They will recognize that India is a great power, too, in Asia, but it will not be allowed to dominate the entire region. That has HUGE implications for Japan, Malaysia, the Philippines, Australia and everyone else in Asia. I think China wants to be respected throughout the rest of the world as a great power, not as the only great power, but as one of them. It plans to be a global leader, but not necessarily, THE global leader in a wide range of political, social and economic matters.

Notwithstanding its aims and plans and intents, I am fairly confident that China will stumble on its path … it is possible, but highly unlikely in my view, that Donald J Trump will cause any of those stumbles. I suspect that China is going to have business-economic-stock market crises, a recession or two and some serious political problems on its way to achieving its goals. I think that if they are able to nurture good leaders in the ranks of the Party that they can avoid a revolution and, probably, get where they want to end up, but not, perhaps by 2050.

Of course, there are many good scholars, like Professor Graham Allison of Harvard who believe that what he calls the Thucydides Trap will make a war between America and China inevitable. But other scholars believe that the problem is simply that too many Americans are afraid of any nation’s rise that might challenge America’s global supremacy. I tend to agree with the second position; I believe the Thucydides Trap can be avoided … or could be if anyone expect Donald Trump was President of the United States. He understood that inchoate fear in “middle America” and he tapped into it and I’m not at all sure that he doesn’t share it.

It seems pretty clear to me that President Trump wants to put China “back in the box,” and return it to the status of a struggling, developing, second rate power. It seems equally clear that the Chinese have no intention of allowing that to happen. For the moment President Trump has the better hand in the trade war because, as The Economist pointed out, “as the country with the huge trade surplus, China has more to lose upfront [in any trade war].” But China, like Canada, is intent on diversifying its trade, globally, and, in the long run, trade wars almost always hurt both antagonists equally. My own, personal assessment, therefore, is: China’s rise will continue, aided, possibly, by Australia, Brazil, Canada, Europe and even India and Japan, but it will not be as smooth as Xi Jinping suggested just a year ago. There are problems with American trade and there will, inevitably be other problems that are common to any large or growing economy ~ a “basic dictatorship” or not.

 

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