Commentary on Political Economy

Monday 26 November 2018


Perhaps China’s richest man really did miss teaching.
When Jack Ma announced in September that he would step down as chairman of Alibaba, the eCommerce giant he founded in his Hangzhou apartment 19 years ago, to return to his chosen profession of English teacher, eyebrows were raised.
The 54-year-old was at the top of his game. His online trading behemoth had grown from small start-up to China’s largest corporation with a market capitalisation of $US382 billion ($527.9bn). Ma himself was worth an estimated $US35bn. Why quit now?


Adding to the speculation was that Ma’s announcement came as China’s government was exerting unprecedented control of the country’s corporate sector.
Small Communist Party committees are being imposed on private corporations as part of a push by Chinese President Xi Jinping to reassert party control over all aspects of Chinese life. The move has unnerved executives and has raised questions about how much influence party cadres will have in commercial decision-making.
“I suspect Ma had had enough,” Michael Shoebridge, former senior defence policy and intelligence official and now head of the Australian Strategic Policy Institute’s defence and strategy program, tells Inquirer. “I suspect Ma didn’t want to run his company with the CCP looking over his shoulder.”
To Shoebridge, Ma’s resignation is symptomatic of larger problems emerging in Chinese society. Shoebridge is one of a growing number of China experts sceptical of what may be termed the “China narrative”, the belief that Chinese supremacy is inevitable because of the country’s size and governance model, which allows it to set far-reaching national priorities untroubled by the social and political pressures that play on democracies.
Shoebridge says this narrative has clouded thinking about China’s rise and risks distorting policymaking. China’s strengths are in fact weaknesses and its long-term growth is far from assured.
In short, we have swallowed the Chinese Communist Party’s version of itself.
“The CCP narrative about the inevitably of China’s rise and strategic power is not well contested in Australia or any other Western capital,” Shoebridge says. “I think it’s accepted uncritically.”
There are signs that is starting to change. Last week’s Asia-Pacific Economic Co-operation summit in Papua New Guinea was supposed to showcase Beijing’s growing prestige in the region.
Instead, a squabble over the wording of the final communique, blunt words about Beijing’s pernicious debt diplomacy from US Vice-President Mike Pence and a string of infrastructure announcements in which the West, and not Beijing, would partner with Pacific nations exposed the limitations of Chinese power. It also was the clearest signal yet that Washington is willing to push back in meaningful ways against China’s influence campaign in the Pacific.
The US has been startled by the rapid gains China has made in the South China Sea, where in the space of a few years Beijing has been able to construct and fortify a string of disputed islands, entrenching its strategic position and potentially threatening sea lanes. In remarks aimed squarely at China, Pence said the US offered a “better option” for developing Pacific nations dependent on foreign aid and investment.
“We don’t drown our partners in a sea of debt,” he said. “We don’t coerce or compromise your independence. The United States deals openly, fairly. We do not offer a constricting belt or a one-way road. When you partner with us, we partner with you, and we all prosper.”
From an opaque economy to an untested military to soaring income inequality, the signs are Chin­ese society is set to be roiled by a series of problems that will undermine growth and challenge the legitimacy of its ruling party. Its economy is being stifled by a resur­gence of central planning.
Its much-vaunted military is large but untested in battle. Its population is ageing.
“Authoritarian regimes can force stakeholders to endure pain in the short term, but in the long term they’re dependent on results,” US Studies Centre senior fellow John Lee says. “It’s telling that Xi feels that if there’s not a six in front of China’s growth rate figures, their legitimacy could be in question. That’s not indicative of a very secure regime.”
Nor is mass surveillance. China’s government is developing a “citizen credit score”, a compulsory system that will assign each citizen with a score based on their civic virtue. Citizens will get extra points for donating blood or volunteering at a homeless shelter and deductions for liking the wrong social media post or jaywalking on a public street.
According to Chinese officials, about seven million people have already been banned from boarding flights and three million from riding high-speed trains after their credit scores fell below the requisite level.
No doubt the scheme is a masterful way of ensuring an orderly populace. But what does it say about the security of the regime? “The fragility of the Chinese state, the inability to control the population, has always dominated CCP thinking,” Shoebridge says. “But we don’t understand that; we act as if it’s all powerful.”
Lee says more than 40 per cent of the central funds raised by the CCP after local transfers go to internal and external security. It is a colossal, unsustainable figure. As a result, China is spending less on social goods than most middle-income or low-income economies as a proportion of gross domestic product. This is causing internal tensions that sooner or later will have to be addressed. China also has the worst income inequality for any major economy, barring Brazil. The benefits of China’s amazing national prosperity have not being shared evenly.
It is also getting older. Lee says that by 2030, China will have a demographic bulge like western Europe, where a shrinking pool of young workers will be required to foot the bill for an ageing population. But unlike Europe, China has no across-the-board pension system to support these older citizens. Lee traces blame for the problem to the one-child policy, a classic example of the kind of unintended consequences yielded from central planning.
“China is going to have the worst kind of demographics because of the one child policy,” says Lee. “And they’re not prepared for it. The bottom line is they’re going to have to spend more on social goods and obviously that has implications for national power.”
The CCP has always wielded a heavy hand: China is, after all, a communist country.
But Xi’s 19th party congress reversed a trend followed by every Chinese leader since Deng Xiaoping, who recognised that a vib­rant corporate sector uncon­strained by ideology was the fastest way to economic growth and national power.
According to Lee, it was those reforms that set China up for its current era of growth.
“President Xi has said what we need is state champions to become dominant,” Lee says. “In a sense, economics has become sub­ordinate under politics.”
Lee says that whereas the tiger economies of Singapore, South Korea and Taiwan began to liberalise their politics as their economies grew wealthier, Xi has intensified China’s authoritarian model. The risk is that China’s corporate sector will become less agile in responding to market pressures and opportunities.
“The lesson of the Soviet Union and the lesson of the pre-Deng era in China is that Communist Party decision-making does not lead to vibrant business outcomes,” Shoebridge says.
Market economist and former senior adviser to the federal treasurer during the Asian crisis Stephen Joske agrees. In fact, he says in many ways the problem is worse. Joske predicts that China’s opaque credit markets are headed for a crash. This looming financial crisis could tip the country into an extended recession, shaking the country’s political foundations.
“In my view, in a few years’ time they’ll go into negative growth,” Joske tells Inquirer.
“That’s not something they’ve experienced before. They’re lending at a rate that outstrips deposits so they’re funding from the wholesale markets and that’s where the risks appear.”
Modern China has never had a recession, although most analysts believe Beijing fudged its GDP numbers in 1999 to hide a temporary dip. Countries experience and recover from recessions all the time, but Joske says in China’s case the risk is that the political stress associated with a slowdown can undo the compact between China’s ruler and its citizens, which is based on power in exchange for prosperity.
Beijing’s trade war with Washington also is causing unexpected stresses. Lee says the general assumption was that Beijing would be able to stare down US President Donald Trump, who eventually would yield to pressure from domestic lobby groups.
If anything, the opposite is true.
“There’s some support for the trade war in the US, but in China President Xi is under heavy criticism. That’s not something most economic analysts were expecting,” he says.
Joske, like Lee and Shoebridge, holds that the belief in China’s economic potential rests on a series of lazy assumptions about the robustness of the Chinese growth model. He gets frustrated with what he describes as the “complacency of the China narrative”.
“There’s a whole lot of things that can go wrong. China’s got this long history of civil war. It has been disunited more than it has been united throughout its history. It has always required a strong central government to keep it together. If they blink it tends to fall apart.”
It is China’s economy that ultim­ately will determine the extent to which it can project hard power in the world. China has been expanding its military rapidly but the results have been mixed.
Shoebridge says that unlike the US, whose military has been fighting continuously for two decades, the People’s Liberation Army is untested in battle. The rapid growth of the PLA also has led to questions about its cohesion. Modern warfighting is heavily networked and it is unclear how effectively integrated China’s sprawling military is.
China has developed cutting-edge capabilities such as the J-20, its own version of the fifth-generation fighter plane technology that will determine air supremacy in the decades ahead.
But unlike comparable aircraft developed in the West, little is known about them. The lack of information could be a strategic advantage, but it could equally be a sign of the weakness of China’s development process, which takes place without the relative transparency that occurs in the West, and the rigour that goes with it.
Shoebridge says: “I would say they have an impressive order of battle with a wide array of new systems, some of which have novel capability which could surprise, but being able to operate support and integrate those capabilities effectively, is a question mark.”
None of this means the China project is about to fail, although Shoebridge says that remains “a credible scenario”, one that Xi and his contemporaries inside the CCP are acutely aware of.
Rather than economic collapse, Joske predicts an abrupt adjustment as the Chinese economy evolves, probably followed by a Japan-style slowdown. Lee says China is set for an internal squabble over competing budgetary pressures, meaning the present focus on national power is not sustainable.
Either way, Shoebridge says, the combination of internal economic and political pressures combined with an increased resistance to Beijing’s pushy foreign policy means China’s current trajectory cannot continue. “That’s the inevitability,” he says.

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