China
Tests Global Diplomacy and Economy
The country risks nations’ pushback as it moves ahead with
its ambitions under the cover of Covid-19.
By
May 23, 2020, 2:48 AM
GMT+10
Long-repressed contradictions have a way of flaring up in public
in times of stress. China is suddenly at the center of two of them, and they
could well entail significant global diplomatic and economic consequences.
In the
first case, Beijing’s signal on Thursday that it intends to tighten legislative
restrictions on Hong Kong under the rubric of national security has brought to
the surface the inherent inconsistency of the “one country, two systems” paradigm
that has governed the relationship between the two for almost three decades.
Underpinned by the 1997 agreement that governed the U.K.’s hand-off of Hong
Kong to China, it promised a 50-year transition for many elements of Hong
Kong’s economic, financial, institutional and political structure.
With
time, this notion of “one country, two systems” has come under increasing
pressure, fueling a tug-of-war between China and the pro-democracy movement in
Hong Kong that has periodically erupted in street protests. It has also
increased tensions between China and other countries. Both would intensify if
Thursday’s announcement were to be codified in legislation.
There is
a growing perception both in Hong Kong and globally that China is taking the
world’s general preoccupation with the Covid-19 crisis to press forward with
national, regional and international ambitions. This has included more pressure
on Hong Kong, a stepped-up military budget, a more aggressive regional tone and
the introduction of “face mask” diplomacy in developing countries aimed at
positioning China as the more reliable superpower ally. While this has resulted
in discomfort in some countries in Asia and Europe, as well as the U.S., there
has been little effective pushback so far.
That
could change with the latest Hong Kong step, depending on how China proceeds
and how focused and united other countries are. Already, politicians in both
the U.K. and the U.S. have indicated that they are starting to consider
possible responses.
The Hong Kong situation also fuels a second narrative that is of
more direct relevance to the global economy and markets: that the time has come
for Europe and the U.S. in particular to draw a firmer line that signals
“enough is enough” when it comes to China’s pursuit of its domestic objectives
with little regard to its global commitments and responsibilities.
Many in
the west see the Hong Kong signal, as preliminary as it is, as a further
illustration of Beijing’s only partial adherence to rules governing intellectual
property rights, cross-border trade and investment activities, and the
multilateral underpinning of international payments — all while other
countries have provided China with greater economic and financial access,
including under the auspices of the World Trade Organization agreement, thereby
turbocharging its impressive development process.
In
addition to exacerbating the challenges facing companies highly exposed to
China and Hong Kong, this could well put more pressure on countries, such as
Australia, that have pursued a “dual option” strategy — relying on
the U.S. security umbrella while also deepening economic and financial
relations with China.
It could also ratchet up the risk for the global economy.
Specifically, an intensified “cold war” could lead to faster
deglobalization, greater fragmentation and intensified weaponization of
economic tools — all of which would dampen an already challenged economic
recovery from the coronavirus shock. To maintain the drastic
decoupling between financial markets and economic and corporate
fundamentals, central banks would be pressured in such a scenario to
sacrifice even more future financial stability and efficient market functioning
in favor of maintaining elevated asset prices.
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