China has opened 2016 with another roaster-coaster market crash. Continuing capital outflow anticipates RMB’s perceived downward slide and risks of slowing growth under the “New Normal”. Although a Goldman Sachs Investment Strategy Group report Download 2016OutlookLastInnings thinks a hard-landing is a negligible probability, growth in 2016 is forecast to range between 5.8% to 6.8%, testing Premier Li Keqiang’s reportedly-suggested 6.5% as the required minimum.
Environmentally, the signs have not been propitious. Beijing sounded the highest possible “red-alert” in December as the city was repeatedly choked by smog.
China’s neighbourhood remains problematic. A landed test flight on reclaimed land in the disputed Spratly Islands in the South China Sea further rattled the United States and its allies. Click here
However, fixating on China’s travails misses the point. Indeed, these may be considered birth pangs as a new China struggles to be born. Contradictions abound, reminiscent of Charles Dickens' "It's the best of times. It's the worst of times." The old is withering away while the new is sprung upon the unwary across a wide front. Click here
According to Natixis, a French corporate and investment bank, the die is cast for a series of tectonic shifts towards a new China. With the RMB having appreciated by some 50% since 2005, exports such as office machines, footwear, textiles and clothing are plummeting. However, a more expensive RMB will boost the consumer power of a rapidly- expanding urban population. 81 million more urbanites will be added by 2020, pushing the urbanization rate from 54.8% to 60%. Dynamic consumption growth is expected in leisure and other quality-of-life products and services. Industry is likely to be driven more by research-based innovation, particularly in the internet, semi-conductor, robotics, and nuclear energy sectors. Meanwhile, China is becoming a more proactive and outward-looking global player. Backed by new financial institutions like the Asia Infrastructure Investment Bank, China’s One Belt, One Road trans-continental initiative is beginning to take shape.
According to Kevin Rudd, president of the Asia Society Policy Institute in New York, China in 2016 will be preoccupied with preparations for a new leadership team, to be unveiled in the 19th Party Congress in 2017. Apart from President Xi and Premier Li Keqiang, the rest of the current Politburo Standing Committee Members will have reached retirement age. A proactive and assertive foreign policy is expected to continue in face of Taiwan’s changing political ecology and developments in the South China Sea. Click here
2016 will be a “ground-breaking” year for China to realize the "two-centenary" ambitions. These are to become (a) a moderately well-off country by 2021, the 100th anniversary of the Communist Party of China (CPC) and (b) "a modern socialist country that is prosperous, strong, democratic, culturally advanced and harmonious" by 2049, the 100th anniversary of the founding of the People's Republic of China (PRC). The first aim would be crucial to the second. Click here
Three key "hard-battle" grounds are highlighted. The first is economic restructuring. Ahead of the much-awaited March release of the 13th Five Year Plan (2016-20), Beijing's Central Economic Work Conference has unveiled an economic blueprint, focusing, for the first time, on "supply-side reform". The required structural adjustment includes de-stocking of overcapacity, state-owned enterprise reform, currency and interest rate liberalization, debt and deflation management, old-age healthcare and a greener and more sustainable economy. On the cards are subsidized sales of empty housing to migrant workers and innovative reforms to enhance productivity in finance, natural resources, manpower, equipment and technologies. Click here
Another "hard battle" ground is the eradication of poverty. Notwithstanding rising affluence, some 250 million Chinese (18% of the population) still subsist on less than $2 dollars a day. Gross economic inequality remains a threat to the CPC's legitimacy as a governing Party.
The third "hard battle" ground is military transformation. This aims to reduce the size of the People's Liberation Army (PLA) by 300,000 strong and to revamp the entire operational and strategic command structures spanning the Military Commission, PLA regions and strategic units. It is designed to shape capabilities to fight and win warfare in the 21st century, including information and space warfare . Central to this "hard battle" is the ongoing anti-corruption campaign covering the military.
These mammoth tasks presage a struggling transition in 2016 as the Chinese juggernaut’s about-turn continues to make waves in economic, social, financial and geopolitical spheres.
Perhaps the most challenging transition is towards a freer, more open and just society where the rule of law, rather than "rule by law", will be upheld. One of the key essentials is to subject the Party to check and balance held to public account. A crucial component is an autonomous or "independent" judiciary. Already, measures are in hand to transfer the power of judicial appointments to the provincial level. There are also moves to introduce a system of "circuit courts". Huge problems remain, including the lack of professional judges and the whole bureaucratic culture of a one-Party state.
Meanwhile, a new domain of opportunities is appearing on the micro-economic and business horizon, including innovative manufacturing, agricultural imports, wealth management services, green and quality-of-life businesses, movie entertainment, both online and offline, and football, according to a McKinsey report.
Following the Paris COP21 Climate Summit, dynamics are in place which augur well for a more ecologically-balanced China. A new Air Pollution Prevention and Control Law came into effect on 1st January. This has incorporated planning mechanisms in the US State Implementation Plan and the UK’s Local Air Quality Management program. Laggard cities are now held accountable for targets with public inputs and monitoring. Stringent measures are being introduced to curb coal usage, including caps and coal-free zones. While lip-service and slack enforcement remain huge obstacles, the Environmental Protection Law effective 1st January 2015 mandates accumulative fines and holds local governments to account. Indeed, party secretaries’ career credentials are being judged on how well they perform in helping to create a more harmonious and greener China. Click here and here
How China evolves is bound to modify the world order, for better or worse. As Henry Kissinger observes*, history is to be discovered, not declared. Indeed, China’s transition in 2016 and beyond opens up a whole new vista of Olympian competition and win-win partnership in helping shape a Rising China. As cautioned by President Xi Jinping, misgivings notwithstanding**, the "Thucydides Trap" engulfing rival great powers doesn’t have to be sprung.
*World Order – Reflections on the Character of Nations and the Course of History, Henry Kissinger, Penguin Books, 2015, p. 374, last paragraph
**The Improbable War – China, The United States and the Logic of Great Power Conflict, Christopher Coker, Hurst and Company, London, 2015