Troubled times ahead for China

S P SETH

The state of China’s economy, and its impact on the country’s social and political stability, continues to figure prominently, even more so in the context of the recent National People’s Congress (NPC) meeting. China’s economy has slowed down from its double-digit growth some years ago to just under 7 per cent. There are even suggestions that the real growth might be much lower, probably as low as half of that. At around 7 per cent, though, China’s economy comparatively is doing much better than most other countries. However, there are serious problems emerging and some of it were acknowledged by Prime Minister Li Keqiang in his annual state-of-the-nation report to the NPC. For instance, talking of economy in general, Premier Li said in his report that, “Domestically, problems and risks that have been building up over the years are becoming more evident.” As a result, “Downward pressure on the economy is increasing.” He, however, maintained that, with appropriate adjustments, it would be possible for China to achieve an average annual growth rate of 6.5 per cent in the next 5 years.

And what are these problems? A major problem is that over the years some crucial industries have built up overcapacity that is weighing down on the general economy. For instance, there is now a glut of coal, cement, steel and other industrial commodities. Even as these industries have created high level of pollution, their profits have declined and some are even losing money. These and other industrial enterprises would need to be overhauled/closed, leading to massive loss of jobs. And it is already happening. As Li put it, “We will focus on addressing the overcapacity in the steel, coal and other industries facing difficulties.” Besides: “We will address the issue of ‘zombie enterprises’ proactively yet prudently by using measures such as mergers, reorganizations, debt restructurings and bankruptcy liquidations.” In other words, the economy will undergo a severe shake up and the resultant loss of jobs will not be without social unrest.

The legitimacy of China’s ruling system is largely based on an implied compact between the regime and China’s masses where its people abide by the Communist Party’s monopoly power in return for a progressive improvement in their economic conditions. The government is not unaware of the social problems that might arise from loss of millions of jobs and is setting aside about $15 billion to support laid-off workers. But such economic disruptions are never easy and inevitably cause social unrest. Already, protests are happening in some regions and industries--mining for instance-- over loss of jobs and unpaid wages. The scale and management of such unrest will be an important challenge for the political system. The economic turbulence recently experienced by China’s stock market, affecting millions of small investors earlier encouraged by the government to make good money through this seemingly ever-expanding channel, is another example of the general malaise. At the same time, its exports sector, once an important source of economic growth has slowed down, which has also caused unemployment.

Faced with slow economic growth and its inevitable social consequences, the Chinese government is easing its credit policy, though it is till not sure how far to go with injecting more liquidity. Such ambivalence is the result of a mountain of debt that has piled up following the stimulation of the economy after the 2008-9 global economic crisis. The total debt is said to be 2.5 years of its economic output, and there are questions being asked about its manageability. The views on this are varied. One view is that with its monopoly power, the ruling Communist Party of China (CPC) will not allow things to get out of control in any and all spheres of national life. Which is true but we have seen that its instruments of control didn’t help much when the stock market went berserk. If anything, it tended to aggravate the situation.

It has, of course, large foreign exchange reserves of over $3 trillion. Which might seem huge, but once the draw down begins they might not last long. China has already spent some of these reserves to support its currency from falling too precipitously. Then there is the flight of capital, caused by nervousness about the economy. As one American fund manager is quoted to say in the Sydney Morning Herald, “There are 1.3 billion people in China. If 4 per cent of the population took out their $50,000 limit, the $3.3 trillion in foreign reserves is gone…” At the same time, there are said to be a trillion dollar worth of seriously bad debts on Chinese banks’ books. Developing his argument about serious risk for China’s economy, Kyle Bass, the fund manager at Hayman Capital Hedge Fund, based in Dallas, USA is quoted to say, “The Chinese financial system is overstretched [likely to be further overstretched with more easy money]. China let the banking system grow 1000 per cent in 10 years.” And he adds, “China’s [ratio of] bank deposits to resources is one of the worst in the world.” And this cannot continue without causing economic tremors.

It is not a pretty picture. Its implications are quite bad for both global and domestic economies. China’s growth is now quite enmeshed into global economy. Its stimulation after the 2008-09 global financial crisis helped to mitigate the financial meltdown. In commodity-based economies like Australia, Canada, Brazil and others, it even ushered in a period of great prosperity. And its slowdown and stock market gyrations are causing great economic distress in parts of the world because of falling demand from China for commodities like iron ore, coal, oil and gas. There is a great need for China to stabilize its economy through sensible transition from exports and construction-led phase, which is almost all it has known in the last few decades, to a consumption-led domestic growth. The government knows this but it is not working as well and as fast.

And in the interim period, the restructuring of the economy leading to massive unemployment is creating unrest. And dealing with it through rough and ready and top heavy exercise of power, that has been the feature of the system, will be quite challenging. Indeed, President Xi Jinping is busy further consolidating his power, being christened as the ‘core’ leader in the tradition of Mao Zedong.   Does it mean, by any chance, that China’s ‘supreme’ leader is gearing for uncertain times ahead?

It doesn’t’ however, mean that China’s economy or system is going to crumble. What it means is that the seriousness of its economic problems might set in motion a process over a period of time that might erode the legitimacy and durability of the communist regime and all that underpins it. 

Note: The above article was first published in the Daily Times.

South China Sea: storm clouds gathering

S P SETH

Australia is not a high roller internationally, except by virtue of its delicate position as China’s biggest trading partner and one of the US’ closest allies. Which makes Canberra tread warily between the two in the midst of the storm clouds gathering over South China Sea slands, where China is expanding its territorial control and strategic influence and the US is now seriously seeking to challenge it. The point, though, is that however much Canberra might try to appear even-handed, it simply can’t because its strategic priorities by virtue of its US alliance leave no scope for any ambiguity.

Australia’s white paper on defense, which formulates a large expansion and modernization of all elements of its defence forces, is largely couched against a backdrop of regional tensions from China’s activities in the South China Sea, including building military facilities on a whole swath of reclaimed land from reefs and shoals. In a broad statement, it says that “while it is natural for newly powerful countries [read China] to seek greater influence” but the problem is that some (China) “sought to challenge the rules that govern actions in the global commons of the high seas, cyberspace and space in unhelpful ways, leading to uncertainty and tension.”  As US allies, Australia, along with Japan, would hate to see China dominate and control the Asia-Pacific region. Other regional countries, like Vietnam and the Philippines, contest China’s sovereignty claims over South China Sea Islands. It is, therefore, a highly charged matter and has the potential of becoming a regional powder keg. Compounding it is the disputed sovereignty issue between China and Japan over the Senkaku islands in the East China Sea.

China’s rising economic and military power, and US’s diminishing but still considerable power, is creating a situation where they both are now competing and contending, particularly in the Asia Pacific region. The US’ preoccupation with Middle Eastern wars and turmoil enabled China to expand its political and strategic space in the region, causing nervousness and fear among some of its neighbors as Beijing laid sovereignty claim and control of island chains in South China Sea, which they too claimed and their claims seemed more valid by virtue of their proximity to these islands.  

The regional tensions over South China Sea show no sign of easing. If anything, it is getting worse. China has built military structures on new and old islands. It regards the expanse of waters around them as its exclusive zone for exploring and extracting minerals, and it is feared that it might start to regulate and interfere with the free movement of commercial shipping, and right of passage. And to assert the principle of freedom of navigation through these waters, the US has lately sent a naval ship or two to test China’s intentions. Australia is also being urged to assert its right of “freedom of navigation” and Canberra agrees with it in principle. The US is keen that other regional countries should be part of such ‘right to freedom navigation’. Vice-Admiral Jose Aucoin, Commander of the Japan-based US 7^th Fleet reportedly said in Sydney recently that it would be valuable for other countries, including Australia, to challenge Beijing’s assertiveness than leave it to the US to be “portrayed as the US versus China” issue. He emphasized that, “The scale and the speed of the reclamation of China has been alarming…but… we’re [the US] going to sail, fly, operate in these waters and be prepared for any contingency.” In other words, the US, preferably with its regional friends and allies, is determined to challenge China’s unilateral claims in South China Sea.

China, of course, regards the US as an outside power bent on creating mischief and trouble and would like to edge it out of the region. While neither the US nor China is seeking conflict, they both seem to not only hold their ground but also to press ahead to assert their respective position. Beijing simply wants the US and other regional countries to accept its claim and assertion of sovereignty as a historical fact, a kind of Monroe Doctrine that the US proclaimed in 1823 declaring domination of the American continent. China, it appears, hopes to establish domination of the Asia Pacific region with its growing power.  

Even as Beijing is laying down its regional strategic architecture, it has contended that its installations on newly reclaimed lands are for humanitarian reasons, for search and rescue and so on. But the latest satellite imagery showed that China has deployed surface-to-air missiles on Woody Island, part of the Paracel chain claimed also by Vietnam. This is said to be in clear breach of President Xi Jinping’s commitment/assurance that China wouldn’t militarize the island chains. And the US Secretary of State, John Kerry, was quick to point out that he would make “very serious” representations with Beijing over the deployment. He reportedly said, “When President Xi was here [on a US visit], he stood in the Rose Garden with President Obama and said that China will not militarize in the South China Sea.” Kerry went on, “But there is every evidence, every day, that there has been an increase of militarization of one kind or another. It’s of serious concern.”

There are now reports of stationing of radar systems and fighter aircraft and all sorts of military facilities on the islands. China is reported to have reclaimed more than 1200 hectares of artificial land on reefs and shoals in the area. This has led Admiral Harry Harris, head of the US Pacific Command, to say that China is “clearly militarizing” the disputed waters of the South China Sea, and he quipped, seriously though, that, “You’d have to believe in a flat Earth to think otherwise.” Pointing to the dangers ahead, he said that, “Regrettably there are missiles and fighter aircraft and guns and other things that have been placed into the South China Sea and this [is] of great concern to everyone who transits and relies on the South China Sea for peaceful trade.” In other words, China’s activities in the South China Sea are a threat to global trade.

But China is steadfast. A Chinese foreign ministry spokeswoman has said that, “China’s deployment of limited, necessary defence facilities on its own territory [islands in the South China Sea] is its exercise of its right of self-defence to which a sovereign state is entitled under international law.” The problem, though, is that it is contested sovereignty. But such semantics are lost in international power play. And China feels pretty confident that it will have its way. When asked at a press conference if Australia and Japan, together with the US, were intent on containing China, its Foreign Minister Wang Yi said with a straight face, “… I also don’t think that any country or power in the world can stop that rise.”

Note: This article was first published in the Daily Times.