TV panel discussion on Inside Story with Aljazeera English Channel on 23 August. This was one day before the crisis was averted temporarily by a face-saving deal for both sides.
N.B. There is an erroneous reference to "Member of the Legislative Council of Hong Kong" in my credentials appearing in the show. This belongs to a namesake in Hong Kong whom I know but have no connection with whatsoever. I have asked Aljazeera to delete this reference from their databank so that it doesn't recur in future.
As for the implications of the North-South Korean deal, please visit my subsequent radio interview on 25 August with Radio Sputnik of Moscow.
Finally, on the same subject, I was featured in another full-length TV panel discussion on Cross Talk with RT (Russia Today) of Moscow on 26 August.
As President Xi Jinping’s first state visit to the United States draws near, his phraseology of “New Great Power Relations” seems being shunned by Washington. A host of doubts and worries comes to mind. How robust is China’s Rise to merit Great Power status? Is it sustainable? What are China’s ultimate intensions? Should China be contained or confronted? What about the America-led post-War world order?
Indeed, a US Council on Foreign Relations Special Report (March 2015) argues that China has been adopting a grand strategy for global power at the expense of American "vital national interests". This involves increased state control over Chinese society, pacifying China's periphery, cementing China's status in the international system, and replacing the United States as the most important power in Asia. The Report recommends that the United States should more robustly counter and balance against China's Rise, using all military, trade, economic, diplomatic and technological assets at her disposal and by empowering and cementing a coalition of like-minded US allies in the region.
To read China correctly, however, a number of myths need to be debunked.
The first is that China may be dream-walking towards twilight . This recurrent “China collapse” speculation, as before, does not accord with reality. Despite slower growth, China’s ambitious Third Plenum reforms are beginning to shift the economy towards more moderate and less energy-intensive development. According to the work report of Premier Li Keqiang at the March 2015 National People’s Congress, despite slower growth, 2014 saw 13.22 million new urban jobs created, more than the year before. Newly created businesses increased by 45.9% or 12.93 million units. Energy intensity dropped by 4.8%, the largest in several years. Contribution by consumption and services to GDP increased slightly from 50% to 51.2% and from 46.1% to 48.2% respectively. A PEW 2014 Global Attitude survey puts China at the top of citizens’ satisfaction index with 87% positive response, up 2% over the previous year.
The second myth is that China’s power may be illusionary as it can hardly be considered at par with the United States. While China’s per capita GDP, creativity, military capacity, network of allies, and above all, soft power, are far inferior, power dynamics does not always depend on parity. China’s gravitas lies in connectivity at the hub of a globalized supply and production chain. This is likely to be further enhanced if China succeeds with a One Belt, One Road pan-continental strategy. Influence also comes with size as China has become the world’s largest trader and resource customer. More currencies now move in tandem with the Renminbi than with the Dollar.
Even though China’s comprehensive military strength is way behind, including firepower, global reach and C4ISR (Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance), her survivable nuclear arsenal, including multi-warhead, nuclear ICBMs (intercontinental ballistic missiles) on vehicular carriers, nuclear submarines and nascent hypersonic nuclear missiles, poses sufficient assured mutual destruction to make the classic Thucydides Trap less inevitable.
As for allies, while China has few to speak of, many American allies have China as a key trading partner, export market, and source for economic growth and job creation. Their recent rally for China’s Asian Infrastructure Investment Bank (AIIB) initiative speaks volumes.
The third myth is the fear that China’s Rise would overturn the world order at the expense of United States and her allies. China has been the greatest beneficiary, and indeed staunch supporter, of the existing world order. There is no sign that China wants or is able to form a new one. She desires to share power in global institutions such as the International Monetary Fund (IMF), failing which she has launched the AIIB initiative. She yearns for status on equal terms (1) with the United States. But this is very different from re-writing the United Nations Charter or the established rules of international trade, finance and investment.
The fourth myth is that China’s Rise would dominate Asia, replicating America’s former Monroe Doctrine in the Western Hemisphere, and resulting in intense security competition with potential for war. “Offensive realists” (2) surmise that the United States would do all it can to retard China’s economic growth (3). However, the age of gunboat diplomacy is long past. The “flatter” world (4) is highly inter-connected and interdependent. China’s economy affects the world, America included, let alone her US treasuries purchases. Likewise, it makes no sense for China to push the US out of the Asia-Pacific. American trade and investments enlarge the economic pie. Her military presence underwrites regional security at little cost to China.
So, what does China want and should her Rise be confronted, contained or shaped to maintain world order and American primacy?
Despite warts and all, China’s vision is encapsulated in the “China Dream” – a strong, prosperous, harmonious, and sustainable nation harking back to glorious past as a great power. Facing umpteen internal and external challenges, the last thing China wants is to rock the global order through aggression, let alone military conflict. But central to the China Dream are what Beijing deems “core interests”. These include the One Party State, National Security, Territorial Integrity, and Development Interests. The South China Sea encompasses three of them. With a legacy of centuries of national humiliation, China is likely to fight tooth and nail in defence of these interests. Mishandled, the South China Sea could well boil over, destabilizing the Pacific (5), if not the entire world.
China is accused to be a spoiler in the South China Sea. On the other hand, China is increasingly ready to contribute to the global commons over such challenges as Dafur, the Gulf of Aden, North Korea, and the nuclear deal with Iran . China fields the largest peacekeeping contingent amongst Permanent Members of the UN Security Council.
In Still Ours To Lead (6), Bruce Jones, Senior Fellow at Brookings Institution, accepts the reality of rising powers and outlines America’s unparalleled leadership in pulling together broad and disparate coalitions for the common good. In The China Challenge – Shaping the Choices of a Rising Power (7), Thomas Christensen, director of the China and the World Program at Princeton University, contends that the United States should aim not to block China’s rise but to provide strategic reassurance on China’s “core interests” so as to shape her choice of contributing to the global order.
In The China Choice (8), Hugh White, Professor of Strategic Studies at the Australian National University, argues that the United States should share power with China, Japan and India to form a stabilizing “Concert of Asia”. In Strategic Vision: America and the Crisis of Global Power (9), Zbigniew Brzezinski, a doyen in American foreign policy, proposes that America should accommodate and shape China’s rise by acting as a regional balancer, brokering a “cooperative triangle” between the US, China and Japan.
All in all, these prognoses seem to suggest that the United States should accept the reality of China’s Rise with all this implies, including China’s need for power projection to safeguard “core interests” with a blue-water navy.
In Is the American Century Over? (10), Professor Joseph Nye explains why “leadership is not the same as domination.” In an era of diffused powers, America would be well advised to curb instincts of Jacksonian “exceptionalism” (11) by deploying still unrivalled yet increasingly-challenged (12) military, economic and soft powers to incentivize others and by sharing power and responsibility in maintaining a benign international order.
During President Xi’s state visit, the term “New Great Power Relations” may or may not be articulated (24). But an era of such relations may already be in the making.
(1) On Equal Terms: Redefining China's Relationship with America and the West, Mingxun Zheng, Wiley, 2011
(2) Offensive Realism is a structural theory belonging to the neorealist school. It posits that great powers are never certain of their adversaries’ intentions and inevitably want to maximize power in order to fortify dominance. John Mearsheimer is regarded as a leading protagonist of this theory.
(3) The Tragedy of Great Power Politics, John Mearsheimer, University of Chicago, W.W. Norton, 2014
(4) The World Is Flat: A Brief History of the Twenty-First Century, Thomas Friedman, Farrar Straus Giroux, 2005
(5) Asia’s Cauldron, The South China Sea and the End of a Stable Pacific, Robert Kaplan, Random House, New York, 2014.
(6) Still Ours To Lead, Bruce Jones, Senior Fellow, Foreign Policy, Project on International Order and Strategy, Brookings Institution, 2014
(7) The China Challenge – Shaping the Choices of a Rising Power, Thomas Christensen, W.W. Norton, New York, 2015. Similar arguments are advanced in Meeting China Halfway: How to Diffuse the Emerging US-China Rivalry, Lyle Goldstein, Georgetown University Press, 2015
(8) The China Choice, Hugh White, Australian National University, Black Inc, 2012
(9) Strategic Vision: America and the Crisis of Global Power, Zbigniew Brzezinski, Basic Books, 2013
(10) Is the American Century Over, Joseph Nye, Jr., Harvard Kennedy School, Polity Press, Cambridge UK, 2015. “Leadership is not the same as domination” (p.126).
(11) America Right or Wrong: An Anatomy of American Nationalism, Anatol Lieven, Oxford University Press, 2012.
(12) Jacksonian chauvinism informs much of America’s unilateral military adventurism in the Middle East, which has ignited a wildfire of anti-Americanism and fundamentalist terrorism. Together with crumbling physical and flawed social infrastructure, this has led to perceptions of American decline. See The End of the American Century, David Mason, Rowman & Littlefield Publishers, Maryland, USA, 2009.
A July 2015 Research Paper for the Chatham House Asia Program by Dr Kun-Chin Lin, director of the Centre for Rising Powers and Dr Andrés Villar Gertner, research associate of the Centre at Cambridge University, argues the following -
" ... the maritime domain embodies unique risks that require different solutions from those deriving from a Westphalian notion of statehood and land-based projection of power. While there is no rolling back the naval modernization efforts of Asian powers, the United States and China in particular need to exercise statesmanship. They need to forge the requisite political will for cooperation by all parties, in order to expand strategic options beyond a reductive Cold War-esque calculus.
" We encourage Asian countries to explore a range of instruments and institutions of collective commitment, voluntary compliance and dispute resolution – from bilateral agreements on fisheries management to the UN Convention on the Law of the Sea (UNCLOS) – in support of shared values on sustainable development of ocean resources and freedom of navigation.
"We argue that there is no global best practice in governing maritime commons, but Asians could draw on diverse references that include the European experience with the Arctic Council.
"Asian regionalism has traditionally been weak in incorporating non-state interests. A breakthrough in maritime governance will depend on the representation of a broad constituency that encompasses trading sectors, fisheries, energy and transport industries, scientific communities, NGOs, think-tanks, environmental activists and local communities."
The frictions and rivalries of the East and South China Seas contain historical realities and rising nationalistic and geopolitical calculations which no precedents or existing international institutions seem adequate to resolve. The Cambridge researchers' insight may offer a constructive and acceptable avenue to explore for all the parties involved in grappling with potentially mutually-damaging horns of a dilemma.
A South China Morning Post article of 26 July 2015 argues that it could take a decade for the mainland to get on top of the debt crushing its competitiveness, and that slower economic growth only makes it harder. It seems that the prediction of China 's imminent collapse is not far from reality after all. Click here
While the data presented in the SCMP article seem irrefutable, it is worth examining the argument in greater depth.
Rapidly expanding debt, especially margin-lending, coupled with insider share manipulation, recently triggered the largest bloodbath in China's stock market history. However, it must be said that debt expansion has become a global malaise, according to the attached February 2015 McKinsey Report. Needless to say, America's debt mountain is legendary.
A vast work-in-progress as a rapidly developing nation, China tries to open up its still relatively close financial sector to fast too soon without a robust prudential system in place. Click here
It will be noted that the majority of China's debt is government debt (including local government ) or government-backed (state-owned enterprises). Private debt remains relatively small by international comparison. Those public debt entities are open to backing by Beijing's massive foreign currency reserve.
As for shadow banking, a Brookings Institution research paper estimated the size at RMB 25 trillion, or 43% of GDP, in 2013. This compares to an estimate by the Financial Stability Board (FSB) that global shadow banking assets were equivalent to 120% of GDP. On the same basis, the US was at 150%. Thus, China’s shadow banking sector is relatively small compared with advanced economies. Using figures from the PBOC’s measure of Total Social Finance (TSF), shadow banking accounted for about 18% of net flows of TSF in 2014. However measured, it is clear that, despite its rapid growth, shadow banking remains substantially less important than formal banking as a source of credit in China. Click here
As for competitiveness, we are not seeing other countries usurping China's role anytime soon as the center of the global supply and value chain and the world's largest recipient of overseas directive investment.
Yes, the old-styled Chinese manufacturing of cheap, low-value added products, is coming to an end. Right now, China is already leading the world in capacity of installed robotics. Click here
To hone new competitiveness, China has recently announced a new national manufacturing strategy - Made in China 2015. It would probably take China decades - at least by 2025 - to complete the process of economic transformation.
The above is the topic of an insightful tour d'horizon dated 6 July, 2015 of China's ambitions to reclaim the Middle Kingdom's historical centrality in power, influence and prestige by The Red (Team) Analysis Society, a UK-based non-profit global strategic foresight weekly.
In particular, the analysis highlights the global economic linkages China is developing by agreeing to build a Pakistan-Iran railway, partnering with Israel in exploiting water and urban sustainability technologies, investing in Greenland for rare earth and forming closer ties with other Scandanavian countries including Denmark, Norway, Iceland and Finland through her Permanent Observer status in the Arctic Council.
The latter is anticipation of a future relatively ice-free Arctic, which would open up not only a cornucopia of submerged energy and other resources but also much shorter shipping routes between the Atlantic and the Pacific through the Northern Passage in Canada, the Bering Strait and Russia's northern sea route. (This was heralded in my article The Green Swans of Climate Change in October 2009 in a business magazine "China Ethos").
Along with her One Belt, One Road initiative, China's space exploration program is part and parcel of China's overall strategy for national Renaissance. Nevertheless, it is a little far-fetched to link the two directly as the former is focused on global infrastructural connectivity.
The Economist(11 July, 2015) points out that China wants to be King Canute turning the tide of the market in face of a looming meltdown. This, the esteemed journal says, exposes the emptiness of China's vow to let the market take center stage.
While there is much truth in The Economist's analysis, I am afraid it risks missing the whole truth.
China in recent months has been relentless in opening up her financial sector. She has also begun to rein in her over-bloated state-owned enterprises. They are now required to double their tribute to the state to the tune of 30% of profits. Various selected assets are beginning to open for private investment.
Despite slowing growth in 2014, new businesses registered an increase of 45.9% or 12.93 million units. 13.22 million urban jobs were created, more than the preceding year. There was a spate of e-commerce innovation, leading to the largest Wall Street IPO in history.
The stock market, too, has undergone momentous loosening, with initiatives like Shanghai-Hong Kong Connect permitting investors on both sides to invest in the other market, subject to quota limits.
Clearly the economy is changing towards slower but more market-oriented and innovative growth.
But China remains a huge work-in-progress. The recent market clash had been waiting to happen for some time. The massive demand of ordinary savers and investors to seek higher yields in a yet-to-fully-open financial system with interest-rate suppression mismatches the less-than-mature prudential system. Many companies have been taking advantage of this mismatch to deliberately restrict the volume of shares for market manipulation. There may also be some hedge funds or speculators hiking up prices in order to short the market. Shadow banking may also have played a part. This has led to ridiculous rapid swings in share prices.
Beijing knows this but was caught off-guard with the ferocity and rapidity of the roller-coaster. To prevent Armagedden, the leadership has seized the moment and vows to give what it takes to stabilize the market. The robust backing has led to a temporary rebound.
Both Beijing and the mass investors, many having their fingers burnt, have learnt a big lesson.
In future, Beijing is likely to redouble efforts to enhance her market prudential system, including perhaps mandating automatic suspended trading when volatility breaches certain preset limits, pending immediate investigation of any market irregularities.
But as my earlier analysis shows, it is too fast to jump to the conclusion that China's reform is stalling, or worse, as David Shambaugh claims, that the One Party regime is heading towards twilight, if not immediate collapse.
Meanwhile, however, Q2 GDP outturn is better than expected, although outlook for GDP growth in 2015 appears dimmer, according to forecast by BBVA, a Spanish banking group.
N.B. The sell-off by 30% in a matter of days is alarming and reveals innate weaknesses of China's stock market. However, it doesn't signal the beginning of the end of the China story as commonly portrayed.The following facts are relevant -
China's stock market size is 1/3 of GDP, compared with generally over 100% in advanced countries.
Stocks represent less than 15% of China's household assets.
They account for less than 1.5% of total banking assets.
Notwithstanding the 30% market drop, average share prices are still up 75% compared with last year.