US decline is China’s opportunity

By S.P.SETH

While terrorism continues to hog the limelight as an international issue, there is much more happening in the world that is not receiving due attention. One is the progressive decline of the US’ power in global affairs. Indeed, there is a correlation between the two. The 9/11 tragedy in 2001 was also the beginning of the US war on terrorism, leading to its invasion of Afghanistan.

As if Afghanistan was not enough, the United States opened another front in Iraq in 2003 to rid it of Saddam Hussein, and foster democracy in that country. Indeed, the “shock and awe” military campaign announced the practical workings of President Bush’s pre-emptive war strategy, with Iraq as a demonstration model of what might be in store for other regimes in the Middle East (like Iran, Syria and others) if they stood in the way of the US “vision” of the world. But, as we know, things didn’t work out quite like that and the US is seeking to extricate itself from these disasters.

The new Bush administration, at the turn of the new century, was keen to remake much of the world to suit its strategic priorities. There was a sense that the previous Clinton administration had squandered US power and opportunities to remake the world. The leading figures of the Bush administration already had a blueprint ready to make up for the lost time under Clinton. This was an administration in a hurry and convinced that the US should behave and act like the sovereign of the world. Because, in the ultimate analysis, what was good for America was good for the world.

The 9/11 tragedy, horrible as it was, simply spurred the new Bush administration to fix up the world. Their invasion of Afghanistan, against the backdrop of 9/11 and the Taliban and al-Qaeda link, seemed understandable to many countries. And the follow up in Iraq was an opportunity to solve the US’ Middle Eastern headaches by making an example of Iraq.

But its long involvement in these two wars, particularly in Afghanistan, with no satisfactory conclusion in sight, has damaged its global image as well as the reality of its power. It has overstretched its resources, both militarily and economically. That a superpower, with all its military muscle, has failed to produce a successful outcome against the Taliban insurgents in Afghanistan is an invitation to all the ragtag irregular militias anywhere in the world to pinprick the US and its allies.

The Somali insurgents of al-Shabab are an example in point. They recently struck in Uganda killing 75 people watching a World Cup Soccer match. The al-Shabab sees Uganda as a US proxy in Somalia. And by killing Ugandans they were in a way challenging the US power. The US, at times, appears like a giant groaning under its own weight and unable to turn around to reposition itself to its changing situation.

At the economic level, the war has seriously drained the US treasury. The cost of these two wars varies from $1 trillion to 3 trillion. The latter estimate tends to include all the societal, medical and related expenses resulting from the war operations.

Aside from the two wars, the Bush administration’s free market fundamentalism has also contributed to the US decline. For instance, it has brought the US economy to its lowest point since the 1930s depression. And infected most Western economies that bought into subprime US housing loan packages of dubious value. The merry-go round of almost limitless cheap credit seemed to have created the illusion of a new economy where all the assets (secured or unsecured) seemed to have only an upward trajectory.

And when the bubble burst, as it was bound to at some point, the American economy (and other Western economies) found themselves without any shock absorbers. With no rational solutions in sight, they all took recourse to huge borrowings to stimulate their downbeat economies to prevent a precipitous fall in unemployment, to revive failing and failed banks and so on. By socializing private losses of banks, financial institutions and insurance companies, the crisis is now assuming the form of sovereign debts. Greece is the leading example of this, with others to follow.

The United States is struggling with all these economic issues, while still mired in Afghanistan and, in a limited way, in Iraq. How this will all end is anybody’s guess! But it certainly has created an image of an America that is struggling to find its feet, while still acting as the global sheriff.

CHINA’S RISE

While the US has been busy in Afghanistan and Iraq, and the war against terrorism in general, China has steadily built up its image as an emerging superpower. In a sense, terrorism created a shared concern between the two countries with China eager to brand the Uighur separatists in Xinjiang as terrorists. It won an important concession from the US on this by labeling the East Turkistan movement as a terrorist organization.

The Uighur separatism, alongside Tibet, were major issues of human rights violations that the US had often raised with China to its discomfiture, and as an exercise (Beijing believed) in encouraging separatism in China. After the US declared war on terrorism, it softened on the human rights question in China, as well as on trade and political issues.

The trade between the two countries expanded, and the general tone of exchanges between them was marked by cordiality. China appeared to have gained certain respectability, buttressed further by its rapid rate of economic growth of about 10 per cent annually. China was becoming the factory of the world, with its exports of manufactured goods rising and creating sizeable trade surpluses in its favor. For instance, China’s trade surplus with the US is reportedly at about $200 billion a year, and another $100 billion with the rest of the world. It has amassed around $2.5 trillion of foreign currency reserves and rising.

Although China was hit by the global financial crisis with a significant fall in its exports, the situation has largely been retrieved. Even though Western economies are in bad shape, they have no real options except to buy cheap goods from China. Therefore, the US and European countries have been pressing China to revalue its currency to (1) regain the competiveness of their manufactures and (2) to reduce their respective trade deficits with China.

China has lately responded with some small appreciation of its currency but, unless the Chinese currency appreciates significantly, it will not make any dent in China’s trade surpluses with much of the world. And there is no sign that China will significantly appreciate its currency to the satisfaction of the US and its other Western trading partners.

However, China wants to reduce its dependence on exports and has taken some steps to stimulate its domestic economy. But there are dangers that this could create inflationary pressures. This has been evident in the real estate market where prices have simply ballooned to make it unaffordable for most Chinese people except the very rich.

As part of its large stimulation package, the government had leaned on banks to lend indiscriminately, resulting in upward pressure on real estate and stock markets. This has created serious economic distortions. In the industrial and construction sectors (like steel industry, infrastructure development, spending by local and regional governments) there has been a lot of wasteful spending and overproduction. The Chinese government is aware of some of these problems and has taken some remedial measures, like tightening the credit market.

Notwithstanding its counter-measures to rein in the economy, the hybrid nature of China’s capitalist economy and the Communist Party’s monopoly power is creating serious contradictions. It is difficult to reconcile the two irreconcilable elements. For instance, an uncomfortable nexus has developed between the Party and the new economic class spawned and controlled by the Party. Some of the major strategic industries, like power, transportation etc., are either owned or controlled by the children (dubbed ‘princelings’) of the top former and present Party leadership.

A similar picture is replicated at the lower rungs of the power structures in regions, local areas and so on. Which has led to widespread nepotism and corruption nationally causing great resentment among the people, even though dissemination of such information defaming China’s power elite is prohibited; except in cases where the defamed Party leaders have fallen foul of the dominant power group at different levels.

Which brings up the question of lack or absence of accountability, leading to the perpetuation of the same old rot for want of remedial avenues through open airing of corruption in relevant political and judicial structures.

Another serious problem arises from a relatively depressed rural sector of the economy. Indeed, the first sector to gain from a relatively open economy in China was the agricultural sector where communes and collectives were dismantled, with peasants energized to work on their farms (though, still, owned by the state) with increased production and improved earnings. However, from the nineties the emphasis shifted to industrial economy, with the rural sector providing a supportive role. In other words, the farming sector increasingly came to subsidize the urban economy.

The primary shift to industrial economy affected the rural sector in a number of ways: First, there was the relative neglect from the state, with very little new investments in the rural sector, (2) leading to depressed economic conditions with no new employment opportunities, (3) the influx into urban areas of rural migrant labor with no legal status and hence denied whatever state benefits accruing to those with legal urban residency, (4) cheap migrant labor, with staggered and delayed wages, and (5) the perpetuation of urban tales of rising crimes attributed to the new rural work force.

China is believed to have a floating rural migrant workforce of anywhere between 120 to 150 million and always on the move. Worst still, because of the needs of urban construction of housing and industrial plants, more and more rural land has been acquired legally (with grossly insufficient compensation) or illegally depriving its occupants of their living and occupations. In other words, there is a wide chasm between rural and urban China in terms of incomes and socially, creating a lot of resentment and protests in different parts of China. There are reportedly more than 100,000 cases of protests and demonstrations in China annually.

Out of China’s total population of 1.3 billion, its rural proportion is estimated at around 800 million. And these are the people who have either missed out or only partly gained from China’s industrial transformation, and are not terribly happy about the glaring inequalities and inequities of new China.

While China has opened up economically and socially in so many ways, its political system remains tightly controlled. The Party has largely co-opted the urban middle class into the glitter of moneymaking and upward mobility, thereby neutralizing its political aspirations and thus leaving the Party to exercise its political monopoly.

But the gap between the middle and rich classes (with Party connections) is growing fast, creating widespread resentment. And almost all Chinese people hate the systemic and ever-growing corruption involving the Party bureaucracy and political elites. Since China’s political system is largely closed, people do not have valid and legal channels of letting off steam. There is, therefore, always the danger of a spontaneous combustion of popular anger at some point in time.

However, as things stand today, China is increasingly emerging as a new superpower, though the United States still remains the world’s most powerful military power, with the world’s largest economy. The US economy, though, is plagued with all sorts of problems, with China emerging as a major creditor by investing close to 1 trillion in US securities. Indeed, China is emerging as a creditor to a number of countries, including some European countries. It has recently entered into a number of deals with Greece to invest in different sectors of its economy, thus propping up its hopeless economic situation. Greece is likely to be the stepping-stone for similar deals with other European countries in difficult economic situation.

China is investing and making deals all over the world (Africa, Middle East, Asia, Latin America) to secure the supply of oil, gas, metals and other resources to keep up the momentum of its growing economy. These deals sometimes reek of a neo-colonial pattern. For instance, these countries will not receive any share of profits until all the Chinese loans have been paid off with newly discovered resources. At the same time, China is developing new markets in these countries for its manufactures, with damaging effects on local industry.

Such dependent relationships, where even labor is exported from China to work on Chinese-funded projects, is already creating resentment in some countries. But China has the ready money, and is not concerned about the nature of the political regimes it is cultivating. Which gives Beijing an edge over the US and other Western countries, enabling it to expand its economic presence and political influence at the expense of the United States and Western Europe.

China’s imperial rise

By S.P.SETH

It rightly made news when China suddenly emerged as Greece’s economic savior of sorts. It happened around the time when credit ratings agency, Moody’s, had downgraded the country’s rating to junk level. Which means that investing in Greece or lending it money was a high-risk proposition.

Even though the European Union and IMF had thrown it a credit line to bolster up its credit worthiness, the markets weren’t convinced.

In Germany, the European Union’s biggest economy, the move to bail out Greece wasn’t popular at all. Greece was not only facing economic ruin but also political and social instability.

The austerity regime imposed on Greece by the European Union and IMF was creating turbulence. And the Greece’s socialist government was (and still is) at wit’s end.

It was against this backdrop that China entered into a series of bilateral agreements with Greece to further broaden China’s economic horizon that, in turn, will help Greece at a very difficult time.

It must be noted that China is not doing these economic deals out of the goodness of its heart. These deals make important political and economic sense. The Chinese vice premier, Zhang Dejiang, made two visits to Athens during a one month period to make deals worth billions of dollars in shipping, tourism, telecommunications and more.

It is reported that the 14 deals with Greece amounted to the biggest single investment by China in Europe, though no figure has been put on it.

As for Greece, it bolsters its economic situation at a critical time. By investing in Greece in such a public and dramatic way, China has expressed its confidence in Athens’ capacity to successfully deal with its debt situation.

Zhang Dejiang said, “ I am convinced that Greece can overcome its current economic difficulties.” And such a vote of confidence was very sorely needed by Greece in its current economic travails.

Of course, it will provide China a useful conduit to expand its economic and political tentacles into other countries in the European Union, especially Portugal, Spain, Ireland, and the Balkan region.

Even the United Kingdom is not looking good, with its budget deficit at around 11 percent of GDP, close to that of Greece. Its total debt is believed to be the second biggest in the European Union after Ireland.

Though China’s economy is not in sterling shape, it does have large foreign currency reserves from its trade surpluses, particularly with the United States. It is estimated to have over $2 trillion worth of foreign currency reserves, and rising.

Its annual trade surplus with the United States is rising at over $200 billion a year, and another $100 billion with rest of the world. Which means that its reserves are growing at the rate of over $300 billion a year.

China, therefore, can play politics with its money to expand its political and economic reach into Europe.

Although China has large foreign exchange reserves, it still has a fairly serious problem of indebtedness. China’s official figure of its debt at 20 per cent of GDP is simply, like its other statistics, not believable. Victor Shih of Northwestern University in Illinois, reportedly puts it at about 96 per cent of China’s GDP by next year—to include the debts of local instrumentalities and state-funded debts.

But, like in Japan, China’s debt is mostly internally funded, with low interest-bearing savings of its hard working and thrifty people. It is still debt, though. If there were to be a loss of faith in the government, this could lead to a run on government banks and other related agencies.

Be that as it may, China’s large foreign exchange reserves are an important part of its wide reach. And unless the European Union puts its house in order, China will have ample opportunities to use its financial power to create serious mischief.

For instance, in many African countries, China is already virtually pillaging their resources’ through investment in mining, oil, gas and other extractive industries. In return, these countries pledge their commodities to China over many years to pay for the Chinese debt.

In other words, these African countries will remain poor and destitute for many years to come even after their mines and oil fields become operational and profitable.

This was once called colonialism, and still is even if the perpetrator, China, once suffered and railed against such inequities.

Europe might not suffer in the same way as China’s African targets. But exchanging one kind of debt with another (even if it is called investment) from China doesn’t alter the fact that such relationships entrench economic dependency and hence exploitation.

With its long historical memories of how China was done in by the colonial powers in the past, it might not be averse to doing the same to European countries.

Europe apart, China is everywhere in the United States’ backyard of Latin America. For instance, China is now Brazil’s biggest trading partner, having supplanted the United States. Its trade with Brazil has reportedly risen from $10 billion a year in 2000 to over 100 billion today.

Like in Africa, Latin American exports to China are commodities and minerals. And they are increasingly becoming an important source of their revenues. With such growing economic dependence on China, these countries are losing the ability to develop an equitable relationship.

And China is exploiting its economic power to push exports of manufactured goods into these countries, with its artificially depressed wages aided by its undervalued currency.

In the circumstances, these countries will have no prospect of developing a manufacturing base. And where it does exist in a small way, that too will be destroyed in the face of China’s onslaught.

China is developing into a neocolonial power. And its entrenchment in the US’ backyard has all sorts of pitfalls for the United States and the region.

Sometimes, it would seem that China is seeking to contain or encircle the United States. The only thing missing is that it doesn’t yet have the military power to enforce its writ.

But they are working on it, conscious that China will need a much bigger military machine to enforce compliance on their economic dependencies.

But there are two important constraints here. First: they have too many internal problems to reckon with. Therefore, a large and disproportionate diversion of national resources to the PLA might further upset the internal imbalance.

As it is, China’s spending on health, education and social welfare are hopelessly inadequate.

Second: by elevating the armed forces to a higher level of guarding and expanding China’s imperial interests, the PLA might become a threat to the Party’s political supremacy.

Therefore, there are inbuilt internal constraints on China’s emerging imperial overstretch. At the same time, the promotion of national chauvinism would appear to be a calculated move by the Party to underpin its legitimacy.