China’s faltering economy

S P SETH

During the recent trial of Bo Xilai, the ousted leader of the Chongqing metropolis of 30 million people, the People’s Daily, the Communist Party of China’s newspaper, remarked cryptically that, “Constant denials [of his crimes] will only bury you [Bo Xilai] deeper in a trap.” How true! Bo is now sentenced to spend the rest of his life in jail on corruption and reated charges. In political terms, though, his legacy would persist, having challenged the established system from within. By invoking Mao Zedong’s red flag he sought to rally people behind him, who feel short-changed by the system that favours the rich and powerful who have built fortunes through corruption and connections. Bo Xilai’s populist message is likely to resonate as China’s economic growth falters. China is still growing at around 7 per cent but it is not as good as 10 percent and above over the years. China needs a fairly steady high growth rate to soak up unemployment and to improve people’s living standards.

There are broadly two views about the country’s future economic prospects, and consequently its social and political stability. One view is that China has already set in motion a strategy to favour domestic consumption over an export-based economy. The exports and investment (construction) sectors will still remain an important component of growth but that growth will be constrained by slowing demand for Chinese goods in the US and European countries, and over-investment in infrastructure. As economist Patrick Chovanec, one time professor at Tsinghua University and now an economic strategist with a US asset management company, has reportedly said “…China has been growing for these last several years by adding to its capacity [like Japan did], but for growth to be real, that capacity has to be used.” But the fact of the matter is that, “There’s a lot of empty ports, empty apartment buildings, empty offices, empty airports company.” Unless these assets are productively used with a fair return on investment, they are a serious drag on the banking system.

China’s large economic stimulation package, which helped stave off recession from the global financial crisis, is now creating serious problems for the economy from an excessive growth in credit in the last few years. For instance, it has led local and regional administrations to push ahead with some dubious infrastructure projects. Similarly, easy credit led them to put money into shoddy financial transactions that has over-extended the banking system.  The debt to GDP ratio is now estimated to be above 200 per cent, about that of Japan.

 A big chunk of the money went into real estate, creating the potential of a boom/bust cycle, as happened in Japan. The real estate prices are now simply beyond the means of many people. As a result, there are many empty apartment buildings. The easy availability of credit and its shoddy use has entrenched corruption even further.  And corruption, especially at high levels, tends to erode the legitimacy of the political system. Indeed, many people are becoming deeply cynical about campaigns, at different times, to eradicate corruption, as the outcome is always patchy. And when some high level party bigwigs are caught in the campaign, it is generally because they have fallen out of favour with the party headquarters, as is the case with Bo Xilai.

Bo Xilai lost his political battle to the party front line, and was dumped as party chief in Chongqing, and charged with abuse of power, bribery and so on.   His wife has already been convicted of murder of the British businessman, Neil Heywood, and was given a suspended death sentence. It is quite possible that he and his family built up a vast fortune through corruption and abuse of power. But so have many others at the top party levels.

Indeed, a New York Times investigation had found that Wen Jiabao’s family, till recently prime minister, had built up a fortune in questionable ways. Another investigation by Bloomberg also dug up  corruption material on Xi Jinping’s (the current president) family. Whether or not it is true is beside the point. The point is that if a party leader falls out of favour, he/she will pay a terrible price.  

Corruption is so entrenched in the system that most party officials, at all levels, are part of it. This is common knowledge and the people’s cynicism is understandable. Even the mighty People’s Liberation Army (PLA) is infected with it. Take the case of Lieutenant General Gu Junshan, till recently deputy chief of the general logistics department who left his post in February last year without any official explanation. He probably would be charged soon with corruption. Senior Colonel Gong Fangbin recently said in an interview with the official Global People that, “When corruption has become a type of culture, and has developed to a certain level [at the top], change becomes very difficult.” Its seriousness was highlighted by General Liu Yuan, son of a former (but disgraced) president Liu Shaoqi, at one time number 2 under Mao Zedong, who reportedly said in December 2011 that, “No country can defeat China. Only our own corruption can destroy us and cause our armed forces to be defeated without fighting.”

In the midst of it all, the example of western liberal democracy (even with its many faults) is terribly destabilizing for China’s political system. The Communist Party rulers seem quite worried about this. In this connection, the New York Times has quoted from a memo referred to as “Doctrine Number 9”, apparently emanating from the top level (s) cautioning Party cadres against perils threatening the system. These reportedly are: “Western constitutional democracy”, “universal values” of human rights, western-inspired notions of media independence and civil society, ardently pro-market “neo-liberalism” and “nihilist” criticism of the party’s traumatic past. The document goes on to say, “Western forces hostile to China and dissidents within the country are still constantly infiltrating the ideological sphere” as well as stirring up “trouble about disclosing officials’ assets, using the internet to fight corruption, media controls and other sensitive topics…”

An important element in this hypersensitivity is that the country’s economy is now at a critical point. According to Charlene Chu, the senior director in Beijing of the Fitch rating agency, “The credit-driven growth model is clearly falling apart. This could feed into a massive over-capacity problem and potentially into a Japanese-style deflation.” The problem is further compounded from the parallel shadow banking system operating outside the system. As Charlene goes on to say, “There is no transparency in the shadow banking system and systemic risk is rising. We have no idea who the borrowers are, who the lenders are, and what the quality of assets is.”

It is, therefore, not surprising that the top party leadership is worried at the complex interplay between the country’s economy, social stability and latent threat to the political system. But there doesn’t seem any immediate danger to the party’s rule because the state in China is very powerful, and has all the regulatory and control mechanism to deploy. Besides, it has deep pockets with an estimated $3 trillion worth of foreign currency reserves, and its debt is mostly internal.

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

Contact: sushilpseth@yahoo.com.au 

Will China eclipse US?

S P SETH

When China sneezes, Australia catches cold, metaphorically speaking. Australia’s prosperity over the last ten years is significantly underpinned by continuing high economic growth in China. If China’s growth rate is even fractionally low, Australia’s stock market, particularly its resources sector, loses badly. Australia’s good economic fortune depends on high demand from China of its mining and mineral resources at high prices. Australia might be a special case of a direct link between its prosperity and China’s growth rate but, in varying degrees, China is now a growth engine for global economy, especially at present times when much of the western world is either growing at a snail’s pace or actually in the negative growth territory.

Which brings us to China’s rise into a future superpower; that future, according to some analysts, is getting closer and closer.  One of the most confident predictions in this regard is made by Arvind Subramanian in an article he wrote in the US journal, Foreign Affairs, entitled “The Inevitable Superpower”, now expanded into a book called, Eclipse: Living in the Shadow of China’s Economic Dominance. Subramanian wrote in his Foreign Affairs article, “ The upshot of my analysis is that by 2030, relative US decline will have yielded not a multipolar world but a near-unipolar one dominated by China.” He added, “China will [then] 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 goes on, “At that point, China’s per capita GDP will be about $33,000, or about half of US GDP. In other words, China will not be dirt poor, as is commonly believed. Moreover, it will generate 15 percent of word 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.”

 Subramanian doesn’t think that the US can reverse this trend because it has multiple economic problems. In his words, “… the country has a fiscal problem, a growth problem, and, perhaps most intractable of all, a middle class problem… High public and private debt and long-term unemployment will depress long-tem growth.”

And what is this middle class problem? It is that, “The middle class is feeling beleaguered: It doesn’t want to have to move down the skill ladder, but its upward prospects are increasingly limited by competition from China and India.”

China’s economic dominance over time will enable it to translate this into achieving its political objectives, the same way as the US did since WW11. Being a country deeply in debt to China, the US might find it increasingly difficult over time to stand up to China in its regional territorial and maritime disputes, thus enabling Beijing to prevail in the region. Subramanian has made a strong case that China, most likely, would eclipse the US as a superpower over the next few decades. He admits, though, that it might still “mess up”.

The problem with Subramanian’s thesis is that its linear argument is too neat without making any allowance for different variables. Generally speaking, economic forecasts are qualified to indicate that a certain outcome is likely if other factors remain equal. For instance, very few economists foresaw the global financial crisis that is still hobbling US economy and creating severe problems for the European Union. The global economic curve was supposed to be going upward all the time. Such was the magic of the new economy, so they said.  

In China’s case, it has severe unresolved social, economic and political problems, not to speak of intractable maritime disputes with a number of its neighbours tied in with the US in bilateral alliances. China’s Leninist polity, with Communist Party enjoying monopoly power, and a partial capitalist economy, is complicating things all the time. There is lack of transparency, large scale corruption, widening economic disparities between regions and among people, and the absence of any kind of higher idealism that Mao promoted and that many people in China, including in the CPC, are keen to bring about. With all these issues around, it is a brave man that would make such a confident prediction as in Subramanian’s thesis. He might turn out to be right but a guarded forecast might be in order.

An entirely opposite conclusion is reached by Edward N. Luttwak in his book, “The Rise of China vs. The Logic of Strategy”. He finds fault with China’s strategy of messing up its relations with its regional neighbours with its maritime claims, thus damaging China’s superpower prospects. Reviewing his book in the New York Review of Books, Ian Johnson writes that, “If accurate, Luttwak’s theory means Americans don’t have to worry too much. China will essentially self-destruct, at least diplomatically. And the list of problems facing China make it seem that this could well be happening right now.”

Yet another view is that as China goes along, it will change and adapt to manage its rise. Odd Arne Westad broadly expostulates this view in his book:  Restless Empire: China and the World since 1750.

China carries heavy weight of its history on its back. It is reflected at two levels. The first is an intense pride in its hoary history and civilization as the Middle Kingdom, with its territorial and maritime claims in the region based on ancient maps going back several centuries of dynastic rule. Beijing refuses to accept that the intervening colonial conquests and the rise of nation states might militate against such claims and that these might have to be revisited through negotiations.

The second is a great sense of humiliation and consequent anger from nearly 200 years of being subjected to Western and Japanese intervention and invasion. It is now determined to restore China’s rightful historical place in the world. China believes that this phase (of colonial humiliation) was just an aberration in its otherwise glorious history and that the new China must rectify this situation.

Both aspects of its history, its glory and a period of humiliation it suffered, seem to be reinforcing each other to push China into a new historical phase of reclaiming its past and recreating a new future. And with its power growing economically, politically and militarily China has the confidence that it can do it again and become the new Middle Kingdom to eclipse the United States as the world’s only superpower.

Note: This article was first published in Daily Times. 

Contact: sushilpseth@yahoo.com.au

China: challenges for the new leadership

By S P SETH

With the confirmation of Xi Jinping as China’s new president this month at the National People’s Congress (NPC), the political transition from the outgoing leader, Hu Jintao, would be complete.  Indeed, the transition effectively had taken place last November when the Communist Party of China (CPC) chose Xi as its general secretary, because all political power in China flows from the party. With the formal NPC confirmation of Xi as the country’s new president, he will become China’s most powerful leader by combining the offices of the party general secretary and president of the country. Li Keqiang will become China’s new prime minister, replacing Wen Jiabao. The new team has many challenges facing them.

A important challenge facing Xi Jinping will be to clear the debris from the Bo Xilai affair who was removed from his position as the leader of Chongqing metropolis last March, around the time of the then party conclave. He is accused of a litany of crimes but his trial is still awaited. It appears that he is not ready to self-incriminate himself, as his wife Gulai did, and disappear from the political scene quietly. His pedigree as the son of a revolutionary veteran is reported to give him some protection from a forced confession.

Be that as it may, his brand of politics of reviving Maoist slogans did win him popular and powerful support at some levels. Even though he is almost finished politically, his Maoist brand has enough traction in the mist of high-level corruption and widening economic disparities.

The new leader Xi Jinping’s task will be to reconcile Mao’s revolutionary politics with Deng Xiaoping’s focus on economic growth. If he panders to the left wing of the party espousing Maoism to appease Bo Xilai constituency, he is likely to offend the liberal-right in the party that are for more economic reform in Deng Xiaoping’s tradition. To bridge this contradiction he has sought recently to emphasize continuity between Mao’s revolutionary politics and Deng’s reforms. The continuity claim is tenuous and problematic because Mao would have been horrified to see the loss of revolutionary and ideological ethos that was the hallmark of his times. It would be to ignore completely the Cultural Revolution in mid-sixties, till his death in 1976, that Mao launched to restore revolutionary purity, as he saw it.

Because of the highly uneven growth of China’s economy, with rich becoming richer and corruption thriving, a nostalgia for Mao’s times and politics, is very much there in sections of the party and the people. It is, therefore, not surprising that Xi is keen to take the Party’s left with him by emphasizing continuity between the Mao and Deng periods. At the present, however, it would seem that the CPC has lined up behind him to see how he would reconcile the irreconcilable of Mao’s politics and ideology with Deng’s pragmatism. When times are tough and social unrest gathers momentum, these contradictions tend to come on the surface creating complications.

 Another challenge for Xi will be to deal with the call from some sections of the party for political reform. The retiring prime minister Wen Jiabao was one of them. Without political reform, the argument goes, the system is lacking transparency and accountability leading to massive corruption. And corruption, if not tackled genuinely and seriously, has the potential of destroying the party, as people are increasingly cynical and losing faith. But any serious effort at eradication of corruption has to begin at the top. At the top, though, many party functionaries and their families are beneficiaries of the system with economic rewards flowing from political power. This is why, with all the talk of corruption eradication, nothing much seems to happen. Will Xi Jinping wield the broom to clean up the mess? That will remain to be seen.

At another level, the phenomenal growth of internet users in China (an estimated over 500 million Chinese have access to the internet), and its own social media and blogs, has put the CPC regime under scrutiny, with people demanding answers and a greater role in what goes on. Despite firewalls and strict censorship of the political debate, the savvy among the internet users, a small minority admittedly, is able to circumvent this by logging on to outside channels. This challenge has been building up for many years and is reaching a critical mass, requiring the regime to deal with pent up demand for political reforms giving people some voice in what is decided for them.

However, the CPC is against Western-style democracy, fearing this will lead to chaos and anarchy. But they also have no alternative political blueprint, except vague talk of democracy with Chinese characteristics--whatever that means. Indeed, their opposition to free wheeling democracy has been further reinforced since the fall of the communist system and collapse of the Soviet Union in the early nineties, attributed to Gorbachev’s hasty introduction of political restructuring (perestroika) in late-eighties. The Chinese leadership, from Deng Xiaoping onwards, fears that any introduction of perestroika might do to China what it did to the Soviet Union. And Xi Jinping is committed not to go the Gorbachev way.

Facing this herculean task of bridging China’s growing internal contradictions, both within the party and between the party and the people, will be the big challenge facing the new leadership. Which doesn’t mean that China will not continue to grow economically, though at a relatively slower pace, and make waves internationally. The only danger is that, at some point, these internal contradictions might explode with the party unable to contain, guide and channel them constructively.

We have seen this happening with the Arab Spring where a simultaneous social and political explosion has left the landscape charred because it was so sudden, unexpected and directionless. Chinese leaders are aware of it as they have tried to censor any reference to the Arab Spring and associated popular protests in their media and on the internet. Knowing that this could happen in China too, one would hope that the Chinese leadership would take the lead to initiate political change while they can still manage and channel it.

The change doesn’t have to be imitative of the Western democracy or Gorbachev’s perestroika. With their considerable inventiveness as shown in their economic growth strategy, it shouldn’t be beyond China’s leadership to introduce some sort of popular political participation to make it a double act of economic and political liberalism. Will they do it? That is the big question.   

China-Japan showdown likely

S P SETH

The spat between China and Japan over disputed sovereignty on a group of small islands in East China Sea, called Senkakus  by the Japanese and Diaoyus in China, is taking dangerous overtones. China is sending planes and surveillance vessels to test its claims, with Japan taking counter measures. Taiwan too has entered the fray, as the alternative China, with Japanese firing water cannons at a Taiwanese boat carrying a group of activists wanting to land on the disputed islands. The situation is further complicated with the US secretary of state, Hillary Clinton, recently coming out clearly on Japan’s side, stating that the islands ”are under the administration of Japan” and hence protected under the 1960 US-Japan security treaty. In other words, Japan can invoke this treaty if China were to take military action to wrest the islands from Japan.

The US position is not surprising. What is surprising is that it has been so clearly enunciated by the US secretary of state, while China was hoping that it might at least continue the pretence of neutrality, calling upon both countries to resolve it through peaceful means. Not surprisingly, China “resolutely opposes” Clinton’s remarks; its news agency, Xinhua, calling it “foolish” for Washington “ to throw support behind Japan” in the islands’ dispute. China has been brimming with confidence, but US’ open support for Japan will compound the dangers.

Looking back at the historical experience of the two major powers of our times, Britain and the United States, the dominance over oceans and sea-lanes was a pre-requisite for regional and global primacy. Indeed, this is how China was humbled during the opium wars of the 19^th century and reduced to a semi-colonial status. And now China wants to establish its sway over South China Sea and over the disputed (with Japan) islands in the East China Sea. 

When the communists won the civil war and established the People’s Republic of China in 1949, the US was the dominant military power ruling the waves in much of the world in the midst of a Cold War, with China on the Soviet side. After intense internal ideological and power struggle, and a serious rift with the Soviet Union in the sixties and seventies overlapping into the eighties, China started to slowly emerge as a power in its own right under the stewardship of Deng Xiaoping. Deng was a practical leader with emphasis on learning from facts and not too infatuated with communist ideology, though he was a strong upholder of the Party’s monopoly power. He wanted to modernize China and build it into a strong and powerful nation. But he also advised that China should bide time while building its strength.

His successors obviously believe that the time has come for China to assert and reclaim its power and national interests. And these interests include recovering, what it perceives to have been historically its sovereign territories and waters in South China Sea and other maritime territories, including  Senkaku/Diayou islands, controlled by Japan. In regional political power play, China once had an advantage over Japan as its atrocious war record in China and other Asian countries created a kind of aggrieved brotherhood revived now and then over specific issues like the “comfort women”, Asian prostitutes, that Japanese soldiers used during the war time.

But with China’s rise and its determination to consolidate and expand its power, it is now simultaneously involved in sovereignty disputes over islands in the South China with a number of regional countries, like Vietnam, the Philippines and others and with Japan in East China Sea. Which is creating an aggrieved brotherhood of a different kind against China, with Japan increasingly regarded favourably. The most welcoming of Japan in this respect is the Philippines with its own serious maritime dispute with China. Japan and the Philippines have become strategic partners agreeing to collaborate to resolve their territorial disputes with China. And they have expressed “mutual concern” about China’s increasingly assertive claims.

Vietnam is another country with a serious maritime dispute with China in the South China Sea, and has lately drawn strategically close to the United States. Both Japan and the Philippines have their security pacts with the United States, as does Australia. But Japan is not without its own problems arising from a serious maritime dispute with South Korea, which too is a US ally. The US has been urging both its allies to resolve their dispute but signs so far are not propitious.    

Even without US security connection, Japan is not an inconsequential power, though constrained militarily because of the US imposed post-WW11 pacifist constitution. There has been a slow erosion of that position with US support as Washington has been urging Japan for quite some years to play an important regional military role as its ally. With Shinzo Abe as Japan’s new Prime Minister, known for his ultra nationalist views, Japan will raise its defence expenditure and also take measures to get rid of the relevant constitutional provision constraining its military power.

China is already an ascendant military power with its defence budget reportedly doubling over the last six years. It seems determined to uphold its perceived national interests, which is its great strength with the Chinese people. While the government might not be playing the military band, the country’s senior military officers are not holding back their frank views. This was recently the case with Senior Colonel Liu Mingfu of China’s National Defence University in an interview with John Garnaut, China correspondent of the Sydney Morning Herald.

He said colourfully, “America is the global tiger and Japan is Asia’s wolf and both are now madly biting China.” He hypothetically raised a scenario of nuclear retaliation by raising the WW11 analogy when Japan attacked Pearl Harbour and asked, “…how do you know it wouldn’t receive another nuclear bomb?” And said, “The world would hail if Japan receives such a [nuclear] blow.” He amplified, “I don’t want to mention China here [presumably, the country that might deliver the blow], as it is sensitive.” And he had a message for Australia not to follow the US or Japan into any military conflict, saying, “Australia should never “play the jackal for the tiger or dance with the wolf.”

Though Colonel Liu said his views didn’t represent government policy but, at the same time, emphasized that his views were consistent with what political and military leaders thought, if not what they said. In addition to the interview, Liu also provided written comments accusing the US of creating  “ a mini-NATO” to contain China with the US and Japan at its core and Australia within its orbit.

Having taken such a strong public stand on the sovereignty issue, the Chinese government would find it difficult to retreat from that position. Japan will equally be averse to making its sovereignty over the islands an open issue. If so, China and Japan are heading for a showdown of some sorts in the not-too-distant future. And that won’t be pretty regionally and globally.

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

Contact: sushilpseth@yahoo.com.au

Asia-Pacific’s highly combustible mix

S.P.SETH

The recent East Asia summit in Phnom Penh, Cambodia, once again highlighted underlying regional tensions. We will come to that later. But first let us look at the background to all this. It basically stems from concerns about China’s rise, particularly whether or not it will be managed peacefully. Beijing certainly regards it as a peaceful development to correct the historical aberration of China’s humiliation by the colonial powers and Japan during the 19^th and first half of the 20^th century. The establishment of the People’s Republic of China on October 1, 1949, supposedly put an end to it.

Though China’s communist revolution restored the country’s independence and dignity, it didn’t bring to fruition its perceived historical role as the Middle Kingdom that it once was. This was mainly because China remained preoccupied with Mao Zedong’s perpetual revolution. It was not until after Mao’s death in 1976, and Deng Xiaoping’s political ascension a few years later, that China started to build up a strong economy. And in the decades since 1980, China’s economy has increased several folds, its armed forces have got new weaponry, it now has an advanced space program and, above all, the country is brimming with new confidence to restore its perceived historical role of asserting political primacy in the Asia-Pacific region.

Believing that China was once a beacon of light for the region and the world, its new rulers do not have much sympathy with any country or countries that oppose, what it regards, as, its historical right and destiny. There is one problem, though. Which is that between the era of China’s dynastic rulers and now, the process of de-colonization in Asia and elsewhere has seen the emergence of new nations. And they are opposed to the assertion of China’s power, especially when it impinges on their own national interests. In this new world of nation states, territorial claims drawn from the old kingdoms/empires and maps, are contested and resisted, as is happening now in the Asia-Pacific region.

Like the rest of Asia (and, for that matter, Africa) China too was a victim of European colonialism. The Chinese have never forgotten and forgiven their humiliation by European powers and Japan. Ultimately, though, power remains largely the arbiter of relations between nations. With its new-found power and wealth, China is now seeking to assert its primacy, creating potential enemies in its neighbourhood with their competing and contending territorial and sovereign claims.

 The most vociferous, among them, are Vietnam and the Philippines, though others too have overlapping claims to islands in the South China Sea which China claims almost in its entirety.  In Beijing’s view, these countries have been put up to confront China by the United States with its renewed strategy of a “pivot” to Asia, as articulated by President Obama in November 2011 in the Australian parliament during his visit here.

China has sought to reinforce its claims by stamping its passports with its version of the sovereignty that covers South China Sea and the rest, drawing protests from other countries. It has also asserted its right to board and search ships passing through disputed waters. According to reports, China contends that its sovereignty dates back to the Ming dynasty that ruled between 14^th to 17^th centuries, if not even earlier. In other words, China’s sovereignty is incontestable.

These claims have been around ever since the communists came to power in 1949. But China then lacked the power to enforce them. It still is not able to enforce its sovereignty without causing considerable tensions in the region with the potential to lead to military conflict. Beijing would probably have wished the US to remain mired in Iraq and Afghanistan for the next decade or so, enabling it to bring its neighbours, contesting South China Sea islands, to its way of thinking. But this was not to be. And the US, even though drained by its two wars and the continuing financial crisis, still remains the strongest military power in the world. It is determined to play a leading role in the Asia-Pacific region of which it regards itself geopolitically, economically and strategically an integral part.

With a view to maintain its regional primacy, the US is beefing up its regional alliances, creating new strategic connections and projecting forceful economic and political role. This was evidenced at the recent East Asia Summit in Phnom Penh, Cambodia, attended by President Obama. The United States, with its regional allies and political partners, would like the South China issue to be debated in regional forums with a view to create an agreed code of conduct for resolving the maritime boundary issue and for the unhindered use of sea lanes for international trade.

China sees a trap in this to regionalize/internationalize the contested nature of South China Sea issue, and is determined not to allow it. And it succeeded in keeping it out of the Association of South East Asian Nations (ASEAN) and East Asia Summit by leaning on Cambodia, the host country, to disallow it. But the issue of South China Sea will continue to dog every regional forum and keep regional tensions ticking.

At another level, China and Japan are also embroiled in a maritime dispute which, if not resolved, is equally, if not more, inflammatory. It revolves around the competing claims of sovereignty over the Senkaku/Diaoyu islands in East China Sea creating an eyeball-to-eyeball situation between the two countries. It is feeding ultra nationalism on both sides. Indeed in the forthcoming snap election in Japan this month, the newly formed Japan Restoration Party, led by Toru Hashimoto, mayor of Osaka, and Shintaro Ishihara, till recently governor of Tokyo, will be campaigning on a program to revive Japan because: “If Japan keeps going like this [as a weakling], it will sink into a pit and die.” As part of this revival, Japan is urged to rebuild its military strength including, if necessary, acquiring nuclear weapons. In other words, China-Japan issue is not just a political spat between the two countries but a much more dangerous regional confrontation.

There are also unresolved questions between China and Indonesia over the Natuna Islands in the South China Sea.  The Spratly and Paracel islands in South China Sea are subject to overlapping sovereignty claims involving China, Taiwan, Vietnam, the Philippines, Brunei and Malaysia. And there is, as mentioned earlier, the China-Japan dispute in the East China Sea. This is quite a list. But when some of these countries are also US allies, the situation is even more combustible. 

After US election, it is China’s Party

S P SETH

By a strange coincidence, the United States and China have been going through a leadership transition at about the same time. And what a contrast! In the US where Barack Obama has been returned as President for another term of four years, the election was a high political drama played out in the public space with both rival candidates making their own pitch for popular mandate. It was a chaotic and boisterous affair with a long drawn-out pre-election battle, with neither candidate knowing for sure their political destiny until the end. 

In China, the meeting of the 18^th Party Congress to formally anoint a new leadership for the next 10 years was very carefully choreographed and controlled without popular participation and lacking any sense of political drama. It has been known for quite sometime that Xi Jinping, vice-president, will succeed Hu Jintao as the CPC’s general secretary and the country’s new president early next year, and Li Keqiang, a vice-premier, will replace Wen Jiabao as premier. And this has come to eventuate, as well as a 7-member standing committee (the country’s apex governing body), a new politburo and central committee. This is China’s top political structure for the next ten years.

China’s economy is now the world’s second largest though, in the last few years, its growth rate has slowed. The country’s frantic economic growth in the last thirty years, with many millions lifted out of poverty and a rising middle class, has created some severe structural and societal problems. Hu Jintao, the outgoing party general secretary, highlighted some of them in his work report to the Congress, with special emphasis on corruption in the higher echelons of the party.

He warned that, “If we fail to handle this issue well, it could prove fatal to the party, and even cause collapse of the party and the fall of the state.” And added, “All those who violate party discipline and state laws, whoever they are or whatever power or official positions they have, must be brought to justice without mercy.” Apart from being a general statement of intent, this seemed like a pointed reference to the case of the dismissed Chongqing party boss, Bo Xilai, who will soon be tried for corruption and other charges.

The pertinent question, though, is: why didn’t the outgoing party leadership deal with this issue during the last ten years they were in power, when Premier Wen Jiabao was singling it out as a major issue for some years now?  During all this time corruption has grown like a virus infecting the entire body politic of the country, suggesting a serious disconnect between rhetoric and action. Which would suggest that corruption is now deeply entrenched into the system at all levels, preventing any serious action to clean up the system.

Indeed, a recent investigative report in the New York Times has found that Premier Wen Jiabao’s family (without pointing a finger at the premier himself) has amassed nearly $2.7 billion worth of fortune through all kinds of direct or indirect business deals. Which, of course, has been vigorously denied, and termed as an attempt to destabilize the country. However, the Chinese authorities have blocked any access on the internet to the New York Times’ report. Similarly, it is reported that the new party general secretary, Xi Jinping’s family too have helped themselves to a billion dollar fortune.

Whether or not these reports are true or tendentious, the question of corruption in the party, as highlighted by Hu Jintao in his report, is a make or break issue not only for the party but also for the Chinese state. Xi Jinping, the CPC’s new general secretary (and the country’s new president from early next year) has also highlighted the danger from corruption for the party as well as the state. But he too hasn’t unveiled any new strategy to root out this monster.

Apparently, it is a very sensitive issue and any radical action might not suit all the stakeholders. But without an effective strategy, backed up with necessary institutional changes like greater political transparency and accountability, this is likely to aggravate social unrest in China. With economic growth slowing, even as the wealth gap widens between rich and poor and between urban and rural areas, the government cannot afford to let this issue become a trigger for spontaneous social combustion like the Arab Spring in the Middle East.

In whatever way the CCP tackles social, economic and political issues; China today is undoubtedly a powerful country. And this is due to the economic reforms, since the eighties, under Deng Xiaoping. What should be the next course of action to propel the country’s economy is a divisive issue in the party. The Bo Xilai affair was a manifestation of it, as he unfurled Mao’s red banner against economic liberalization. Wen Jiabao, the outgoing Premier, on the other hand, has been a strong proponent of further economic liberalization, as well as some political reforms. In his report to the Congress, Hu Jiantao too emphasized the need for economic and political reforms, but again without any clear direction.

However, there is one issue that broadly unites the country and that is to build up a strong military to assert China’s national power. And Hu Jintao stressed the need for China to build a “strong national defense and powerful armed forces.” Apparently keeping in view China’s maritime disputes with some of its neighbors, he didn’t mince his words when he said, “We should enhance our capacity for exploiting marine resources, resolutely safeguard China’s maritime rights and interests and build China into a maritime power.”

It is interesting that even though China’s finances are in a much better shape than the United States with foreign currency reserves of over 3 trillion dollars, it appears to be losing economic momentum, not knowing how to break the logjam between its competing political factions in the party. In an altogether different political landscape from China, and despite Barack Obama’s re-election as the country’s President, the United States is also stuck in a rot of sorts. Against this backdrop, when there are no easy solutions to internal problems, there is always a danger of hyper nationalism getting out of control, especially in the volatile Asia-Pacific region. And this is a challenge for both China and the United States.

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

New challenges for China’s new leaders

By S P SETH

China is set to have a new leadership team for the next 10 years that will formally be announced at the 18^th Party Congress, starting early next month. The next general secretary of the Communist Party of China (CPC), who will also be the country’s president, has already been selected in behind-the-scene party conclaves as part of the factional deals. The Party Congress is expected to put an official stamp on it. By most accounts, the new president and the party general secretary (the latter title is more important because the party wields actual power) are Xi Jinping, presently vice-president, and Li Keqiang, a current vice-premier. The party standing committee, the governing body of 9 members, might be cut to seven in the new reshuffle. The new leadership line up will be known for certain at the 18^th Congress, slated to start on November 8.

The general secretary/president is generally also the chairman of the central military commission, combining both the executive political and military roles in his/her person, making him the most important Chinese leader. However, in the last leadership transition in 2002 when Hu Jintao became the party general secretary and the country’s president, the then president, Jiang Zemin, was keen to over-stay beyond his  agreed 10 years. It was eventually resolved with Jiang staying on for another two years as chairman of the military commission, which showed his political clout in the corridors of power. And his faction was also accorded some weighty representation in the powerful standing committee. Will Hu Jintao insist on remaining as head of the military commission, like his predecessor, for a period of time, to share power with Xi Jinping should be known soon at the 18^th Congress?

It is important to highlight such difficulties because of the lack of institutional mechanism for leadership succession from popular mandate. At some point China would need to work out a transparent succession mechanism to avoid, in future, factional power struggles between its leaders that can be quite disruptive and even dangerous, especially when, after Mao Zedong and Deng Xiaoping, China no longer has a supreme leader. Both Jiang Zemin and Hu Jintao had Deng Xiaoping’s imprimatur. Premier Wen Jiabao is on record to emphasize the need for popular participation when he said, “If we are to address the people’s grievances we must allow people to supervise and criticize the government.”

Take the recent case of Bo Xilai, the powerful boss of the Chongqing metropolis of 30 million people, who came close to threatening the stability of the system by raising the Red banner of Mao Zedong against corruption, and the widening gap in wealth between the country’s poor and rich with Party connections. In the end, he was deposed and expelled from the CPC and will soon will face trial for corruption and much more. His wife has been given a suspended life sentence for the murder of a British businessman, Neil Heywood, for a real estate deal gone sour. It is important to remember that Bo was not alone in his crusade for the poor and had attracted some important party and military functionaries around him, equally dissatisfied with the state of affairs at high level.

This is not the first time that the CPC has faced purges as part of a power struggle at the top, going back to the time when Mao was the supreme leader. His Great Cultural Revolution (1966-76) was a period of great disorder and large scale political purges in China. The 1989 students’-led democracy movement, crushed by the People’s Liberation Army (PLO) at the behest of the CPC under Deng’s direction, was another watershed moment. Zhao Jiang, the then general secretary of the CPC and an appointee of Deng Xiaoping was purged because he was sympathetic to the students’ aspirations and spent rest of his life in house arrest till he died some years ago.

Be that as it may, China has gone on to make rapid economic progress, kick started by Deng Xiaoping since 1979-80, and resumed in 1992 after a couple of years of interruption from the democracy movement of 1989. Indeed, in terms of its economic growth, China has sprinted over the last three decades at an average rate of 10 percent, until now. After the global financial crisis of 2008-09, China faced economic sluggishness with millions of jobs lost due to recession in the US and Europe. China’s economic growth had been fuelled by cheap exports to the US, Europe and other countries, making it the factory of the world. And when the global economy nose-dived, China suffered. But with a large stimulus package of about $600 billion, investing into construction work across the board (infrastructure, housing, local level projects with banks asked to lend generously to local and regional governments and so on), China was able to keep up the economic momentum.

But this also caused problems, like inflationary pressures, mounting internal debt (according to some estimates, it is close to 100 per cent of GDP), excess housing and production stocks causing bubbles in sectors of the economy. Which, in turn, led the government to curb unwarranted spending to control the situation. China’s economic growth has slowed down to about 7.5 per cent, still quite healthy but not like 10 to 12 per cent in the years before. The government is now initiating a less ambitious stimulus program to maintain economic momentum. In other words, the authorities are trying to engineer a soft landing for the economy to contain any major eruption of social unrest.

China’s economy is at a critical point, requiring “structural reforms” as Prime Minister Wen Jiabao told China’s National People’s Congress in March. And political reforms are a pre-requisite for that. According to Wen, “Without political restructuring, economic restructuring will not succeed and the achievements we have made… may be lost.”

What it means is that China’s new leadership has a hard task ahead to create new pathways. That won’t be easy because of the vested interests of the country’s ruling class in the status quo. But to avoid a spontaneous outbreak of social unrest, as has happened during the Arab Spring (with the Chinese banning any internet access to key words there), the government would need to address large scale corruption in the country, as well as the  widening gap between the rich and poor and between the urban and rural areas. The migration of millions of rural workers into urban industrial economy has created its own problems, with urban crime increasingly blamed on rural immigrants.

On the positive side, though, China’s rapid economic development has lifted millions of its citizens from poverty and made China the world’s second largest economy and, at times, the envy of the world for its economic growth. But China now needs a new path and a new national consensus for a new century. Will the new team of its leaders be able to do what Deng Xiaoping did in another era? He charted a new course of economic growth based on the slogan that “to be rich is glorious?” That might not work now because China needs a new political and economic pact based on social harmony that President Hu Jintao promised but was unable to deliver. In the next ten years and after, it will be interesting to see if China will once again surprise the world!