Will China Lend Europe a Helping Hand?

By S.P.SETH

While Europe is undergoing economic self-flagellation, China appears to be sitting pretty with its foreign currency reserves of over $3 trillion. Despite approaches from European leaders for China’s help, Beijing is acting rather coyly. Apparently, the Chinese would like Europe to approach them formally and, in the process, make China the crucial player in the European salvage operations.

Besides Europe, even the US is not too great a shape economically. In other words, the entire global financial architecture needs overhauling. And China has deep pockets in terms of its foreign exchange reserves to be able to play a leading role. And in the process demand a determining role in the global financial institutions, like IMF.

It would also like the Western countries to lay off China in terms of its currency valuation, market status of its economy, building up protectionist barriers against Chinese exports and so on. To give one example: Premier Wen Jiabao reportedly said in September that, “We have on many occasions expressed our readiness to extend a helping hand, and our readiness to increase our investment in Europe.”

He added that it would be good “if they should recognize China’s full market-economy status” before the 2016 deadline set by the World Trade Organization. This is the way, he maintained: “To show one’s sincerity on this issue a few years ahead of that time the way a friend treats another friend.”

In other words, China will exact a price ranging from re-arranging the global financial architecture to political and strategic concessions as things evolve.

The point, though, is it is in China’s economic interest to help Europe because, first, it is China’s major export market and, second, it has a big chunk of its foreign exchange reserves in euro. And if Europe slows down or falls into recession (as might happen with the US too), its repercussions on China’s employment situation will only add to social instability.

For instance, when global financial crisis hit in 2008 and 2009, China experienced a major slump in its export industry with millions of workers laid off. And there were fears that the returning rural migrants could create an explosive economic and social situation back in the countryside.

China’s massive stimulation package saved the situation in the short term, but resultant inflationary pressures, over-investment, developing asset bubbles, sectoral imbalances, new unaffordable apartment buildings with no occupants, increased internal debt--- all these anomalies have still to work their way out.

China is in the advantageous position of having large foreign currency reserves. But it also has a large internal debt estimated anywhere between 100 and 200 per cent, when one includes the borrowings of local, regional and other government instrumentalities. And it is creating serious distortions in the country’s economy.

To take one example: The interest on saving deposits in China is around 2 percent while inflation is around 6 per cent, which is eroding people’s savings. This, in turn, has created a black market in lending with usurious interest rates.

In other words, there is something about China’s economy that just doesn’t add up. As Larry Elliott writes in the Guardian: “Historically, an uncontrollable rise in credit has been the best indicator of a financial crisis, as the West knows from recent experience.” And he posits the question: “Can China buck this trend?”

He believes: “There is exaggerated confidence in the ability of the People’s Bank of China to finesse a soft landing, just as there was in the ability of the ‘maestro’ Alan Greenspan to prevent the American bubble popping a decade ago.” It looks like the Chinese situation has the “booming echoes of the [US] subprime crisis.”

The question arises: how healthy is China’s economy? The bullish view is that China’s economic growth (even if at a slightly lower rate than the usual of around 10 per cent) has a long way to go driven by the country’s urbanization and industrialization. Therefore, any slowdown will be short term.

The problem with this view is that it doesn’t take into account social and political factors that are complicating China’s picture. At some point, there is a need to interlink the country’s economic growth with social and economic equity and political reform.

China is said to be about 50 percent urbanized and in the next decade or two there is talk of taking it close 100 per cent. One shudders to think of a billion people living in a dog-eat-dog culture of greed, not to talk of the resultant pressure on social and related infrastructure.

We are talking here of a society with a long historical and cultural tradition of close family and clan traditions that have provided succor through times good and bad. And their displacement from such a close and known environment to an urban setting, putting them in the midst of an unfamiliar and, sometimes, hostile surroundings, is likely to create severe pressures and social breakdowns.

And even its rosy economic picture appears dubious at times. WikiLeaks reportedly revealed a conversation in 2007 between the then US ambassador to China and Li Keqiang (likely to be China’s next Premier), then governor of China’s Liaoning province, in which Li told the US ambassador that China’s gross domestic product number was “man-made” and “therefore unreliable.”

In other words, China’s economic statistics might be dodgy. If that is true, it changes the entire picture requiring a re-evaluation of what is and what is not true about China’s economy.

But that doesn’t detract from China’s capacity, based on its foreign reserves, to lend Europe a helping hand at its time of crisis. Apart from its own economic advantage of maintaining an important export market and the value of its euro holdings, it is an important opening for China to create a new strategic space in a fast changing Europe.

China’s Moral Vacuum

By S.P.SETH

Many Chinese and people around the world were aghast to see video pictures of a two-year old run over twice by a van, and then again by another van, when passers-by simply went about their business ignoring the grisly sight. At the end, a kindly old scavenging woman picked up the little one but to no avail as she died in the hospital.

The questions have been asked and answers demanded about such callousness dramatized in this incident, and others less spectacular but equally disturbing cases of indifference often displayed in modern day China.

One explanation, of course, is that the country’s obsession with growth and greed is making everyone selfish and self-centered. China is growing in a moral vacuum detached from its traditions and humanitarian values. There is no overriding vision of a compassionate society that China might become.

Obviously, for this to happen, the government and the system have to set the example and that, unfortunately is missing. The people of China find in their day-today-living that the system largely exists and serves those who hold power and exercise it in an uncaring, corrupt and venal way. It is becoming a dog-eat-dog society.

There are no role models now, and the corrupt political-business nexus rules the roost.

With political transition next year to a new generation of leadership, there is need for some serious introspection and debate about where the country is going. And this should be thrown open to wider participation.

But the CPC will resist any such obvious course for fear that it might get out of hand, threatening its hold on power. However, to any dispassionate observer, the problems are well known, and were spelled out in China’s Charter 08, signed by many Chinese seeking a change of course for their country.

According to the Charter, “The political reality, which is plain for anyone to see, is that China has many laws but no rule of law; it has a constitution but no constitutional government. The ruling elite continues to cling to its authoritarian power and fights off any move towards political change.”

The result: “The stultifying results are endemic official corruption, an undermining of the rule of law, weak human rights, decay in public ethics, crony capitalism, growing inequality between the wealthy and poor, pillage of the natural environment as well as of human and historical environments, and the exacerbation of a long list of social conflicts, especially in recent times….”

What should be done: “The decline of the current system has reached the point where change is no longer optional.”

But try telling this to the those in power and you will be thrown into dungeon as happened with the prominent dissident Liu Xiaobo, the leading light of Charter 08 movement, now serving 11 years in prison for seeking a new democratic direction for his country.

These dissidents are not self-serving politicians. They genuinely and honestly believe that China is on the wrong track. Indeed, even some of the children of the post-Cultural revolution ruling elite have started muttering such criticism.

The Sydney Morning Herald’s Beijing correspondent, John Garnaut, recently reported such criticism at a gathering at the Hall of Many Sages. One such participant, Ms Ma Xiaoli, with a pedigree of close relationship with other prominent Party families, reportedly said, “The Communist Party is like a surgeon who has cancer. It can’t remove the tumor by itself, it needs help from others, but without help it can’t survive for long.”

Ye Xiangzhen, daughter of Marshal Ye Jiangyang, said: “In today’s China we are facing tremendous challenges that range from the rapid decline of moral standards, to poisonous and genetically modified food, to rampant official corruption.”

Still another one, Lu De, told those gathered that the party and government officials spent a third of all government revenue on their own luxury cars, travel, healthcare, banquets and other perks. He added ironically, “And yet we still call it the Communist Party and socialism.”

Indeed, Ma Xiaoli unburdened herself with what might prove to be prophetic remarks: “In the 80s when the party faced criticism we defended it… In the 90s we sympathized with the critics but today we almost want to join them”

And significantly, according to Garnaut’s report in the Sydney Morning Herald, she went as far as to invoke the example of Taiwan’s Chiang Ching-quo who transformed dictatorship into a prosperous democracy.

Of course, these ‘princelings’ can say these things and get away with it because of their connections at the highest level of the party leadership.

But the point is that if they feel so frustrated with the existing state of affairs, one can’t avoid the conclusion that the Party is outliving its welcome (if they ever had it) with the people.

As Charter 08 says, “The decline of the current system has reached the point where change is no longer optional.”

But the Party seems determined to hang on until overthrown by the people, like they have done with their rulers in the Middle East.

But China’s rulers are further tightening the system to hopefully prolong their rule and the Communist Party’s monopoly on power forever. And to this end, among other repressive measures, they are turning their attention to social media like Sina Weibo, a Chinese version of Twitter.

It is reported that the Centrally Committee of the Communist Party has undertaken to “strengthen the guidance and administration of social internet services and instant communication tools [to ensure] orderly dissemination of information.”

And how will they do it? They propose to identify those who spread “false rumors” and make an example of them. Which means another coercive tool to virtually lock up anyone or everyone disseminating any kind of information that the Party finds unpalatable.

It is said that Sina Weibo has already hired 1000 people for this under pressure from the government.

Whether or not they can build an effective Great Firewall around social media, like they have already done generally with internet, is another thing because those who want to reach out will find creative ways to circumvent it.

But the Party leadership is petrified at the role of the social media in Arab Spring and increasingly in the Occupy Wall Street movement in the US and its versions elsewhere in the world.

It certainly is a terribly nervous Party constantly seeking to build flood levees to control anticipated floods of people’s frustration and anger.

Is China the “Inevitable Superpower”?

By S.P. SETH

There is much talk these days about China’s emergence as the next superpower in a decade or two. Indeed, Arvind Subramanian, a Senior Fellow at the Peterson Institute for International Economics, has predicted that China is the inevitable superpower. In an article in a recent issue of the Foreign Affairs Magazine titled, The Inevitable Superpower, (extracted from his forthcoming book), he argues why China’s dominance is a sure thing.

“The upshot of my analysis”, according to Subramanian, “is that by 2030, relative U.S. decline will have yielded not a multipolar world but a near-unipolar one dominated by China. China will account for close to 20 per cent of the global GDP (measured half in dollars and half in terms of real purchasing power), compared with just under 15 per cent of the United States.”

He adds: “At that point, China’s per capita GDP will be about $33,000, or about half of U.S. GDP. In other words, China will not be dirt poor, as is commonly believed. Moreover, it will generate 15 per cent of world trade---twice as much as will the United States.”

Therefore: “By 2030, China will be dominant whether one thinks GDP is more important than trade or the other way around; it will be ahead on both counts.” Case closed---as far as Subramanian is concerned.

It is a pretty confident thesis, with the author willing to stand by it like a proven mathematical formulation. Indeed, the subtitle of his article is: “Why China’s Dominance Is a Sure Thing.”

And he poses the question: Can the United States reverse this trend? His answer obviously is not likely.

He writes: “Its [US] economic future inspires angst: the country has a fiscal problem, a growth problem, and, perhaps intractable of all, a middle-class problem…. High public and private debt and long-term unemployment will depress long-term growth….”

He adds, “The middle class is feeling beleaguered: it does not want to have to move down the skill ladder, but its upward prospects are increasingly limited by competition from China and India.”

Subramanian even conjures up a horrible scenario in the future when China might be able hold US to ransom “by selling some of its currency reserves (by then likely to amount to $4trillion).”---Requiring the US to withdraw its naval presence from the Pacific Ocean as a condition of financial bail out, replicating the situation faced today by Greece and other vulnerable European countries.

In other words, China’s will use its economic dominance as a political tool to change the global strategic balance in its favor.

Against this backdrop of his racy and predictive account of China’s “sure” rise to preeminence, he does concede in passing, though, that: “China can radically mess up, for example, if it allows asset bubbles to build or if it fails to stave off political upheaval.”

Undoubtedly, the United States has serious economic problems of debt and sluggish growth. But to project that China will have a virtually smooth run to become the world’s new superpower is a gross simplification.

Subramanian’s thesis is too neat and predictive on a subject that doesn’t lend itself to such simple formulation. Generally speaking, economic forecasts are qualified to indicate that a certain outcome is likely if ‘other things remain equal.’

Even though the author believes that China might still mess up things, he says it in a throwaway line passing without any serious discussion of other variables. And these variables will eventually determine where China goes.

For instance, China’s rise is subject to two important qualifications. First is social and political stability. And this doesn’t seem very encouraging from the growing popular unrest in different parts of the country.

Indeed, the government has been so nervous about the ripple effect of the Arab Spring that it went on a hurried round up of political dissidents and human rights activists, as well as further tightening of internet censorship, to preempt any spontaneous uprising.

It doesn’t say much about China’s oligarchs’ capacity to manage political transition/change that is overdue. Beijing cannot pretend that the country will keep growing economically in the medium term without a corresponding political change toward greater political openness and popular participation.

At present, there is a serious disconnect between China’s partially capitalist economy and authoritarian/Leninist polity. The recent history shows that after a point political authoritarianism becomes counter-productive and destructive without the necessary transition to democracy. South Korea and Taiwan come to mind.

Political oxygen is imperative to continued economic growth. Otherwise, the entire edifice might collapse.

Second: Politics apart, even as an economy, China is facing serious problems. The statistical economic growth is not the true indicator of economic health. There are other important factors. China’s growth is lopsided, creating and widening income disparities, urban-rural divide and regional imbalances.

Economic growth, at any cost, has elevated greed into an overriding compulsion, creating an endemic culture of corruption at all levels; with the Party functionaries and bureaucrats riding roughshod over people, acquiring their land and property in the name of development.

The obsession with statistical growth has created terrible environmental problems, with polluted rivers and degraded landscape. In a word, economic growth has become an end in itself, and not a tool for social uplift.

This is untenable and unsustainable, as even Premier Wen Jiabao admitted recently. For instance, asset bubbles are already developing in the economy, particularly in the property and stock markets as happened in Japan during the nineties and is continuing to plague its economy to this day.

The difference between China and Japan, though, is that Japan’s stagnation started from a much higher base, and its democratic polity allows necessary safety valve for the system.

With inflation rearing its head, China’s political system is a closed shop with little or no safety valve. And if too much steam builds up in China’s pressure cooker society from wider social unrest, there is a danger of spontaneous combustion tearing down the entire edifice.

Therefore, whether or not China is the “inevitable superpower” is subject to a lot of variables than just its high economic growth.

China and the US arms sales for Taiwan

By S.P.SETH

The recent announcement of a US arms sales package of $5.8 billion to Taiwan drew a predictably angry response from China. The official Chinese news agency, Xinhua, called it a “despicable breach of faith in international relations.” And the Chinese foreign affairs ministry warned of serious harm to relations.

Will it? Considering that the US decision, for the time being at least, is for upgrades of the existing fleet of F-16’s, Beijing shouldn’t feel too bad. It could have been worse because Taipei had asked for new F-16’s to face up to China’s military threat. That request from Taipei has reportedly has been deferred for possible reconsideration at a later time.

But in the light of China’s past angry responses to every US arms sales to Taiwan, its protest over this one is part of a pattern. Beijing, though, might signal its displeasure in some concrete way.

And the most dramatic would be the cancellation of Vice President Xi Jinping’s (likely to take over as the country’s president and party chief next year) country’s president next year) forthcoming US visit; though such strong reaction is considered unlikely.

The point is that China is not happy. It doesn’t reflect well on the government and the party that the US should get away with it at a time when China is feeling increasingly confident of its international standing; and nationalism is its one strong card with the people.

It would need to show people that the country’s communist rulers are determined to uphold national dignity. The US arms supplies to Taiwan, regarded by China as its territory, are considered an “affront” to its sovereignty.

However, any dramatic response will have to be carefully balanced to convey a strong message but without rocking US-China bilateral relationship. These are difficult political and economic times for both the countries requiring careful management.

Beijing also needs to consider the impact its response might have on the political fortunes of the Ma Ying-jeou’s administration, which has so far been their best bet in Taiwan’s fractious political landscape.

China certainly wouldn’t like the opposition Democratic Progressive Party to stage a come back. Therefore, don’t expect any hard response from China, but it has to dramatize its strong displeasure. And what it will be remains to be seen.

Over many years now China has felt bitter and angry at the United States over Taiwan. Under its 1979 Taiwan Relations Act, the United States has committed to provide weapons to Taiwan against any armed threat from China. Washington has no problem with peaceful unification, if people of Taiwan were so inclined. But the use of force by China is another matter.

In 1996, then President Clinton moved an aircraft carrier toward the Taiwan Strait when China looked like attacking Taiwan, and the crisis was averted. In other words, Taiwan was saved.

Starting with the premise that Taiwan is a part of China, Beijing has sought to achieve this in a number of ways. It has tried to internationally delegitimize Taiwan as a sovereign entity.

To this end, any country maintaining normal diplomatic relations with Taiwan has been subjected to Chinese pressure and coercion and/or inducements. And as China has become more powerful economically and politically, it has managed to isolate Taiwan internationally.

But all through this Taipei has maintained its nerve. Two things have helped Taiwan. First, of course, is that the US has stood against its annexation.

Second: Taiwan’s transition to democracy in the eighties has given it a certain moral edge over China. Why would Taiwan, for instance, willingly agree to be incorporated by a totalitarian/authoritarian state, and lose its democratic freedoms?

China has also sought to foster and cultivate groups and constituencies within Taiwan sympathetic to and supportive of the mainland.

The business community was and has been its foremost target, keen to invest and manufacture in China to avail of its low production costs and marketing advantages.

And in this, China did a pretty good job. The mesmerizing image of China’s low production costs and a huge market, made the business community critical of the then-ruling DPP that seemed to “provoke” China.

The perception that Chen Shui-bian was unduly provoking China, without going anywhere ahead, also had a negative effect on the populace at large. In other words, China made some political gains in Taiwan that translated into Ma’s election as President.

Ma, of course, claimed during his election campaign that he would do wonders in improving relations with the China for Taiwan’s economic advantage. There hasn’t much of that. He also talked of negotiating a peace treaty with China that, not surprisingly, hasn’t happened.

A peace treaty is generally contracted between sovereign states. Since China regards Taiwan as its territory, that was obviously a non-starter.

China, therefore, continues to target more than 1,000 missiles at Taiwan to keep its people on notice that it means business if it doesn’t get its way. Indeed, Beijing has kept the military option open to prevent Taiwan from formally declaring independence.

In its dealings with the US regarding Taiwan, Beijing has maintained a two-fold strategy. In the first place, it has sought to persuade/pressure Washington to ditch Taiwan and thus create a new cooperative and friendly relationship between their two countries.

As part of this, the US is required to stop selling arms to Taiwan (as part of its 1979 Taiwan Relations Act) thus encouraging it to become part of China. Which hasn’t succeeded.

In the second place, China is building up its military power strength and use it to turn Taiwan Strait into its territorial lake. This, Beijing believes, will deter the US from coming to Taiwan’s help by making it a costly affair.

But if China were to raise the stakes that high by daring the US, it will then cease to be a matter involving just Taiwan. Indeed, it will look like China’s bid to openly declare its domination of the Asia-Pacific region.

They are already doing it with the South China Sea by declaring it their territorial waters. And they tried unsuccessfully to bar the US from joint naval exercises in the Yellow Sea.

And if they try to raise the stakes on Taiwan, it might not just stop there. Because it will signal to the US and other regional countries that China is a threat to most of them.

China is unlikely to go that far in the short term. It will bide its time. But there are quite a few hotheads in China’s military and political establishments that are itching to make it the ultimate power.

In that sense, US’ decision to supply arms to Taiwan is an important deterrent, as well as an assurance to Taiwan that it will not be alone.

China as an alternative global model

By S.P.SETH

When the United States’ political system was in gridlock over the question of raising the country’s debt limit, China’s official media couldn’t help lecturing Washington over its bad housekeeping.

Its news-agency, Xinhua, said, “It is time for the naughty boys in Washington to stop chicken games before they cause more damages.” In another commentary, the agency said that, “China has every right now to demand the US to address its structural debt problems and ensure the safety of China’s dollar assets.”

Well, imagine China’s glee in being able to talk down to the United States in its capacity as its principal creditor. China must have waited long for this day, not believing that the day will ever come.

Against this backdrop, it is not surprising that China fancies itself as a preferred alternative global model. As the Economist observes, “So attempts to apply precepts devised by ancient Chinese philosophers to the modern world are in vogue. One popular revival is the [ancient] notion of tianxia, or ‘all under heaven.’”

“ Tianxia”, according to the Economist, “is widely understood as a unified world dominated by one country (call it the ‘middle kingdom’, perhaps), to which neighbors and those beyond look for guidance and pay tribute.”

How will this global system work? Apparently, one way is China’s ‘benign’ authority drawn from its moral and political example, and accepted by the rest of the world. There is a view in China that it once enjoyed such moral and political ascendancy widely accepted by rest of the world around it. And it is only a question of reviving and reasserting that dominance.

However much China might want a new Middle Kingdom, it is frankly a pipedream. First, the world has long since moved on from those times, if they ever existed as postulated by a new crop of Chinese scholars.

Second: any revival of China’s past brings it into conflict with the narrative of the country’s communist revolution that was based on rejection of the past. Indeed, its main premise was that China lost its way because it clung to its past and failed to reinvent itself in the modern world. That was said to explain its subjugation by the West and Japan.

And now to argue that China’s traditional past was right all along and should be re-established as a global order will need re-writing its history. That will be a stupendous task, if it could be undertaken at all. In that sort of re-writing, the communist revolution, and the state based on it, will become an aberration, making the country’s communist rule even more illegitimate.

Third: to elevate present-day China into a worthy global example, it has to have a certain moral stature and ascendancy. And, by no stretch of imagination, its communist regime is a standard bearer.

The country’s communist oligarchy is afraid of its own shadow. The way it has gone about rounding up dissidents and intellectuals and shutting up social media sites, fearing a possible onset of Arab Spring in China, is an example of its nervousness. The regime seems to be all the time worrying about some social cataclysm overtaking it.

For instance, according to the New York Times (quoting WikiLeaks), Chinese officials in 2009 sought the help of US embassy in Beijing to block Chinese citizens from visiting the Twitter website with postings of accurate pollution readings in the capital.

They feared that the comparison between their lower and sanitized readings and the Twitter postings by Americans might lead to “social consequences”—read social unrest.

Despite China’s impressive economic growth rate, the regime worries that its “unstable, unbalanced, uncoordinated and ultimately unsustainable” growth could create social instability.

And they are right because unless statistical economic growth is translated into social justice for all, there is every reason that things could derail and collide as badly as happened recently between its two high-speed trains. Like the hurry in putting together the high-speed rail system into operation without the necessary preparatory work and in the midst of an endemic culture of corruption, the country’s entire economy is built on such creaky foundations that have not been adequately secured.

And these are becoming shakier by the day with reports of rising unrest and demonstrations in different parts of the country, including the capital.

There are many examples of social unrest arising from endemic corruption, widening urban-rural divide, huge income disparities, demolition of old urban dwellings to make way for new, often without adequate and timely compensation, arbitrary acquisition of rural land for urban and industrial development, iniquitous and arbitrary local levies in rural areas. choking cities and polluted rivers, lack or absence of transparency, an arbitrary justice system and the list goes on.

The government takes great care, through its wide network of security and surveillance system, that all the incidents of social unrest remain local and do not develop into a wider conflagration, as has happened in the Arab world.

There is no suggestion here that the Chinese regime, and the system underpinning it, is about to collapse, though the same could also have been said of the Tunisian and Egyptian dictators who had apparently perfected their respective systems of internal repression over many years. But when the time came, it wasn’t much use against people power.

The point to make here is that with all the steam building up within China’s pressure-cooker society, it has to find some outlet before being blown up. The one way to release is by introducing political reforms, such as popularly elected representative governments at all levels and constitutionally validated political institutions, so that people can vent their grievances and frustrations through legal channels.

The problem is that China’s communist oligarchs fear that this might not work in their favor, and they will lose their monopoly on power. Their self-serving argument is that the Western-style democracy is not suited to China and will lead to social instability and chaos.

Rather, it is the other way around. Because, if China’s scattered unrest here and there is not channeled properly through legal avenues, this is likely, at some point, to take the form of the Arab Spring now pervading in the Middle East with China’s communist rulers gone with it. It might not happen now but unless political reforms are introduced in China soon, it is bound to happen sooner or later in some form or the other.