China sees opportunity in the West’s loss of confidence

This review was published in the Weekly Standard under the title Tigers at Bay. 

There is little doubt among economic forecasters that over the medium term Asia’s emerging economies, China and India foremost among them, are expected to drive global economic growth. Taken as one, the region from India to Japan is not only the biggest market for raw materials, energy and the shipping industry that carries them; it is both the European Union’s and the United States’ biggest trading partner.

As a region, it is also more robust than either the EU or the US, where the International Monetary Fund forecasts that growth will rise from 1.6 percent last year to two percent next year. In contrast, ASEAN will grow by more than double that rate - 5.2 percent in 2018 - and even though growth is forecast to slow in China, it will still stand at an enviable six percent next year. In India, it will be 7.7 percent.

The sustainability of this growth is an object of study for obvious reasons. In China, the key trading partner on whom much of the region’s and the globe’s prosperity rests, concerns currently focus on finance and the state.

First, there are concerns that state owned enterprises, with all their attendant nepotism and inefficiency, still dominate. While they are only a fifth of the economy by size, state players tend to distort legislation and deprive the private sector of growth opportunity in key industries such as transport and energy. 

The lingering hand of the state affects finance. The OECD estimates that corporate debt has soared from 120 percent of GDP five years ago to over 160 percent today. In most emerging markets it stands closer to 60 percent. Two thirds of that debt belong to state-owned enterprises, and much of it may be subject to write-downs.

Nonperforming loans have risen fourfold in the last three years, particularly ‘special mention loans’, offered on lenient terms. Chinese banking statistics are opaque by Western standards and nonperformance is thought to be under-reported. Given that China’s banking system is now the biggest in the world, and that even less accurate reporting exists of a shadow banking industry living off the largesse of state investments, the potential effects of a Chinese financial meltdown can only be imagined. The “regulatory windstorm” recently unleashed by China’s banking regulator must be taken as a sign that Chinese authorities, too, are concerned about the systemic risk of defaults.

A final element of concern over China’s financial system is that its capital controls are creating too high a surplus inside the economy (last year alone, Chinese households saved five trillion dollars) instead of allowing that money to be invested overseas. This not only deprives other economies of growth; it puts all of China’s eggs in one basket.

Second, there are fears of a housing bubble. House prices have surged by a staggering 10 percent of GDP in two years, yet entire cities’ worth of real estate goes unsold and uninhabited because of overcapacity. A housing bubble would further undermine financial stability.

Third, the rising level of inequality goes unaddressed. Wealth discrepancy, recently measured by the IMF, rose from a Gini coefficient of 0.71 in 1995 to 0.81 in 2002. Given that China is (at least nominally) a socialist country, this is unacceptably close to the US wealth discrepancy of 0.78. The communists can claim an enormous victory against poverty in the countryside, which has fallen by a stunning 90 percent over the past 35 years, but this has happened thanks to China’s growth rather than redistribution. The IMF study reveals that what applies in capitalist economies largely applies under socialism: Less educated, older and non-state workers have been those most hurt most by the transition from a low-skilled, rural economy to a manufacturing economy.

Fourth, Premier Xi Jinping has chosen to uphold the Chinese standard policy of resisting any political liberalisation. Freedom House, the civil society watchdog, has tracked a sharp uptick in authoritarianism and a move away from civil freedoms. In the last year the government has imposed strict supervision standards for NGOs, increased surveillance of people through the Internet, and imprisoned human rights lawyers and their clients for months or (in older cases) years without charging them.

Given all this, there are justifiable concerns about whether the Chinese Communist Party can competently manage a transition to slower growth and an ageing population, as well as address risks such as corporate over-indebtedness, a looming real estate bubble and environmental degradation.

In The End of the Asian Century, Michael R. Auslin undertakes the ambitious task of displaying the potential for disruption in Asia by assessing the political, economic, demographic and defence risks of not just China, but also India, Japan, Korea (north and south), Indochina and the large archipelagic states of the eastern Pacific. This is an analytical carousel on the potential for armed conflict sparked by North Korea; the appalling poverty of India, where a third of the population still lacks electricity and literacy; gender inequality throughout southeast Asia, which leaves the talents of half the population outside the economy; the combination of reform gridlock and demographic decrepitude in Japan; and the general resistance to transparency, accountability, meritocracy and democracy through much of the region, values which in the West have underpinned sustained economic and social development for two centuries.

The End of the Asian Century brings a great deal of knowledge and two decades of experience to the layreader. For the non-expert on Asia it is equivalent to a concentration of lectures complete with references. For that alone, anyone interested in the geopolitical risks of the region and the global economy will find it worthy of their time.

Its quality of an Asian Panopticon is both its strength and weakness, however. The problems of Vietnam, the Philippines and Indonesia simply don’t measure up to the magnitude of the risks in China. This lack of focus means there is no over-arching conclusion (for what conclusion can one draw from so disparate a set of nations?) and means that the book amounts to no more than the sum of its parts.

More importantly, The End of the Asian Century does not prioritise its political preoccupations over the economic. The competitiveness of Asia, based as narrowly as it is on explosive population growth (followed by precipitous population drop), cheap labour and willing buyers abroad, might truly be at risk in purely economic terms, but that is not what makes such a book such as this important to a Western reader. The real cause for concern is that the Chinese Communist Party can apparently proceed unreformed, and in the process attempt to rewrite the rules of the global economy.  

The fact that despite the industry of its people China’s growth “remains driven by the state and private business sectors and not yet by consumers,” or that “since the Tiananmen Square massacre of 1989, the party has become ever more isolated from the citizenry and is seen as corrupt, inefficient and often brutal… distrusted and disliked by the vast majority of the population,” means that individual rights are set at naught for a large proportion of the world’s population. Other dictators in the region and as far away as Iran and Sudan receive material and diplomatic succour from China’s stance – people who “threaten their neighbours, oppress their people, or seek to destabilise the international order,” as Auslin puts it.

This means that China, more potently than Russia, challenges the American and European worldview and international order. Even in Europe, China has launched the “16+1” forum of former Warsaw Pact countries in a direct challenge to the EU. Not surprisingly, US influence in the Far East is now weighed against China’s, where “smaller nations feel pressured to pick sides, when their greatest desire is to antagonize neither.”

China’s direct challenge to American power in the Pacific, now taking the tangible form of military runways on once insignificant atolls, means that the US will be called upon to shore up its security mantle.

Auslin omits to mention that China is flexing its soft power, too. Under the One Belt One Road initiative launched in 2013, the Chinese government is to spend almost a trillion dollars building infrastructure around the world to extend the reach of its exports. It is perhaps the largest such spending programme ever conceived, dwarfing even the Marshall Plan after the Second World War. Like the Marshall Plan, it will have political ramifications, cultivating markets and fostering loyalties.

There is a further effect of China’s strident defiance of the Western order. The fall of communism in Europe was oversold as final victory for capitalism, which would in theory sow a middle class demanding democracy in former communist states. This has not yet happened, and social scientists are divided about whether it will. The open society and the international trade system America built after World War Two appear to be insufficient to overthrow what Ronald Reagan referred to as Evil Empires. Even worse, since the 2008 financial crisis they appear unable to provide quality of life to this generation and equal opportunity to the next. As a result, the US is transitioning from the land of greatest economic and social opportunity to a country of increasingly entrenched privilege, growing inequality and a falling labour force participation rate.

The sensible remedies Auslin suggests for building leverage over authoritarian regimes in Asia are precisely the ones America cannot enact because of its growing self-doubt: using the Trans-Pacific Partnership to create a swirling vortex of trade among democracies, eventually, perhaps, luring China and other illiberal regimes into greater accountability and rule of law; raising the cap on H1B visas for skilled workers to pre-9/11 levels and cultivating Western political values; and expanding exchanges run by the State Department’s Bureau of Educational and Cultural Affairs, targeting future business and political elites.

Unfortunately, these are precisely the extrovert, patient policies the Trump administration has declared void. TPP has gone by the board and State Department budgets are earmarked for slaughter. Many Americans seem to have forgotten that what made America great was its willingness to spend time and money building multilateral alliances that strengthened democracy and free trade.

Herein lies the far greater threat: not that the combined pressures of Russia, China and other illiberal regimes which find that US-EU hegemony has grown long in the tooth will overthrow it by force; but that American and European societies are losing confidence in the qualities that make them enviably different from China and Russia. Western societies are lured by the nationalist sirensong that their liberal systems will not stand up to state capitalism and its alleged ability to make up for their waning qualities. This loss of confidence is now evident in the fact that press freedom in the West has been falling for over a decade, while authoritarian leadership and nationalism are gaining currency, boosting partisanship and straining political systems to the point of distorting them. The economic threats to Western capitalism from lack of reform in Asia are indeed real; but the political problems are home grown.  

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