How vulnerable is China?

S P SETH

China’s stock market has been very volatile lately, affecting adversely the fortunes of its small investors who number in the millions. We will come to that later but first let us see how Xi Jinping is faring since taking over as president and secretary general of the Communist Party of China (CPC), late 2012. Since then, President Xi Jinping has been busy consolidating his power internally and projecting it externally. Internally, he moved fast to get rid of Bo Xilai, the powerful Communist Party Secretary of Chongqing, who reportedly had his own political ambitions. Bo’s wife, Gu Kailai, testified against her husband and that was enough to seal his fate. It took a little longer for another powerful political foe, Zhou Yongkang, a former security chief and member of the Party Standing Committee to be put on trial and convicted for life. In Zhou’s case, his wife and son testified against him. According to reports circulating at the time, both Bo and Zoe were considered fellow conspirators, though their trials and convictions were on corruption and related charges. Convicting on the basis of the testimony of close relatives is a bit over the top but that is how Bo and Zhou ended up. They both accepted the justice so delivered. Xi’s power is now virtually unchallenged.

Simultaneously, he is unapologetically entrenching the CPC’s monopoly power under his leadership. And he has no time for western notions of democratic elections, free speech and human rights. A leaked party document cautioned against such subversive notions and activities designed to undercut the CPC’s power. In other words, China’s model of one party rule is a legitimate alternative. Indeed, it is considered necessary and effective for economic growth and social stability and enabling China to uphold and protect its “core interests”. And these “interests” include its territorial sovereignty and integrity as projected into South China Sea and East China Sea, where China has contested sovereign claims over a bunch of island/islets/reefs. It has simultaneously been creating artificial islands out of the sea and creating a network of military facilities that is bringing the US and some of the regional countries together to counter-balance China.  For instance, Japan participated, for the first time, in joint military exercises here in Australia,that included US, Australia and New Zealand and reportedly involved 30,000 troops. The Japanese government is also pushing ahead to ditch its pacifist constitution, enabling it to be part of collective defence with the US. All this is happening against the backdrop of China’s projection of power in the region.

At the same time, China is also committed to pursue its economic growth. In the absence of any demonstrable index of popular approval, like periodic elections and a free press, the validity and durability of China’s political system depends essentially on a healthy growth rate of its economy, providing employment and a modicum of economic prosperity for its people. Which China has achieved, though there are pockets of economic deprivation here and there. There is a fairly broad sense of dissatisfaction and resentment, though, with widening income disparities between rich and poor and between rural and urban sectors. And such resentment is fortified and accentuated with widespread corruption at all levels of the party hierarchy and administration. Which Xi Jinping is seeking to deal with, though it has a strong whiff, at times, of settling some old political scores.

All in all, China’s economic growth since the eighties has been remarkable, though it is starting to slow down. But, at 7 per cent, it is still impressive. The Communist Party under Xi Jinping’s leadership not only intends to keep it this way but improve on it by liberalizing and broadening the economy. In the midst of such self-assurance on economy, the recent volatility of the stock market must have come as a rude shock. In a few turbulent weeks, the market lost over $3 trillion, about one-third of its total valuation. And this is despite all the measures the authorities took to stop the rout. In its efforts to broaden the Chinese economy, the government had encouraged China’s middle classes to invest in the stock market. And they took to it with great passion at playing the market. With very low returns on bank deposits, the stock market seemed the ultimate casino which promised easy way to riches. And that was mostly true as China’s stock markets reached dizzying heights till recently.

As the markets fell, China’s nearly 90 million middle class stock market players had to reckon with margin calls for failing stocks. Which further increased the pressure to sell. With the authorities doing all they could to stop the fall, but with limited success at that point of time, the all-powerful image of the CPC took a bit of a hit. Some small investors, who lost heavily, were critical of the government for not doing enough. They reckoned they were simply following what their government had encouraged them to do. Indeed, the authorities had even encouraged investors to play the market by using their property as collateral. The stock market volatility, therefore, affects the economy in all sorts of way.

First and the foremost, it is the fading of the wealth effect. And once that takes on, it might affect consumer spending across the board. At a time when China is transitioning to a consumer-driven economy, rather than lopsided emphasis on investment in construction, infrastructure and export sector, any loss of consumer confidence from a falling or static stock market is not helpful. Its knock on damaging effect on property market would be another worry. The authorities have been doing everything possible to stabilize the situation. They suspended trading in almost half the stocks. They have injected liquidity. They have extended a hefty credit line to the country’s major brokerages to buy up shares. And they have cut interest rates. Which has helped but doesn’t rule out another bout of volatility.

Even though the government has lost some shine to its virtually omnipotent image, some analysts believe that the stock market turbulence will settle down, at least in the short period. Even though the stock market lost over $3 trillions, nearly one-third of its value in a short period, it comes after a much steeper rise over the past 12 months. In other words, the diminishing wealth effect might be more psychological than real. But psychological effect does feel real to many people. It is this image of things going wrong that would need to be tackled. As one analyst commented, “A failure to stabilize the market (indeed to achieve a notable recovery from current levels) could lead to a crisis of confidence in the heretofore infallible state apparatus.”

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

Contact: sushilpseth@yahoo.com.au

      

        

How serious is the Asia-Pacific situation?

S P SETH

The ongoing tensions between China and its Asia-Pacific neighbours over contested sovereignty over a bunch of islands/islets in the South China Sea are creating a dangerous situation, with potential for escalation into an armed conflict. The US wants China to back off from its unilateral actions to change the status quo. China claims exclusive sovereignty and is taking steps to assert control of the islands. It is simultaneously dredging out new surface areas to build military facilities. Admiral Harris, the commander of the US Pacific Fleet, had earlier sounded an alarm in a speech in Canberra when he said, “China is creating a Great Wall of Sand with dredgers and bulldozers over the course of months.”  He added, “When one looks at China’s pattern of provocative actions towards smaller claimant states… and the deep asymmetry between China’s capabilities and those of its smaller neighbours---, well it’ no surprise that the scope and pace of building manmade islands [by China] raises serious questions about China’s intentions.” The issue also was the focus of the regional security dialogue in Singapore, with the US raising concerns and China reiterating its position of exclusive sovereignty.

It would appear that China seems unconcerned, on the surface at least, about what the US and its Asian neighbours are all about. It is pretty sure about its sovereignty over the islands and much of the waters in the South China Sea, making it into a virtual Chinese lake. Beijing feels confident hat it has the military capability to deter any military challenge to its “sovereignty” from the United States, which it believes is behind some of its neighbours’ counter claims. As China’s foreign minister, Wang Yi, has warned that “the determination of the Chinese side to safeguard our own sovereignty and territorial integrity is as firm as a rock, and it is unshakable.” Indeed, in its latest defence white paper, Beijing has signaled its intention to expand “offshore waters defence” to include “open seas protection.” China regards the US as an external power with no business to interfere in the region, which it regards, though not explicitly, as its own backyard.

During his recent China visit, the US secretary of state, John Kerry, urged Beijing to “reduce tensions and increase the prospect of a diplomatic solution.”  However, any diplomatic solution would require some flexibility regarding the claims and counter-claims from China and its regional neighbours and that is not forthcoming. If this tense situation persists, it is quite possible that this might develop into a nasty confrontation. The concern in the US is that China is seeking to create a de-facto situation where its control becomes unchallengeable. And it starts interfering with freedom of navigation in these busy sea-lanes for trade and other activities. In that event, the US might find itself eventually eased out of the Pacific region, where it has been, and still is, the dominant naval power. It is, therefore, keen to impress on China that its actions might have consequences.

It is reported that US military officials are drafting options for President Obama, including sending warships within 20 kilometres of the reclaimed reefs and rocks to make clear that the US considers them international waters. Some of it is already happening with warnings from China against US aerial surveillance. At another level, the US is planning to put long-range bombers in Australia to deter China. As David Shear, the US defence department assistant secretary for Asian and Pacific Security Affairs, has reportedly said that, “we will be placing additional air force assets in Australia as well, including B-1 bombers and surveillance aircraft.” Which has created a controversy here, with both Canberra and the US embassy saying that Mr Shear “misspoke”. Which would suggest that he probably spoke too soon and too clearly, even though the broad thrust of his statement was to the point.

A US embassy spokeswoman in Canberra clarified that “we [the US and Australia] are currently exploring a range of options for future rotations [of US forces] with our Australian counterparts, and the specifics of future force posture cooperation have yet to be finalized.” In other words, both the US and Australia are worried about Chinese activities in the regional waters requiring a coordinated response. At the same time, Australia doesn’t want to damage its relations with China, which is its biggest trading partner. It is, therefore, not surprising that Prime Minister Tony Abbot sought to brush aside the statement of the Pentagon official, maintaining that the Pentagon official “misspoke and that the US does not have any plans to base those aircraft in Australia.”

However, Peter Jennings, who chairs the Abbot government’s advisory panel for drafting the upcoming defence white paper, has reportedly recommended greater military cooperation between Australia and the United States, including sending military aircraft and ships to the South China Sea to stop China from asserting control across some of the world’s most important trading lanes. Jennings also said that to maintain its credibility, the US would have to puncture the Chinese claims by sending US vessels and aircraft through Chinese-claimed waters and air space, maintaining that Australia would need to follow suit. The Australian government, however, continues to believe that it can somehow reconcile its closer security relations with the United States to counter China’s projection of power while continuing to expand economic opportunities with China. That will become increasingly difficult as China continues to flex its muscles. And when you bring Japan into the picture, which has its own maritime sovereignty issue with China in East China Sea, the emerging strategic picture in the Asia Pacific region is quite disturbing, to put it mildly.

The US and Japan are entwined in a security alliance, with the US committed to its defence. But this is steadily changing its character, where Japan might also now be willing to help in regional defence and not just be the recipient of the US military protection. This triangular strategic counter to China, including the US Japan and Australia, would be designed to impress on Beijing that there would be consequences if it continued to press ahead with its plans. Under Prime Minister Shinzo Abe, US-Japan relations have become much more active. Indeed, Abe was the first visiting Japanese Prime Minister to recently address the US Congress, as well as attend a state dinner at the White House.

In his speech to the Congress, Prime Minister Abe strongly supported the Trans-Pacific Partnership (TPP), a proposed free trade agreement between the US and other regional countries. China is excluded from the proposed TPP. While dwelling on the values of TPP, Abe thus emphasized its strategic value: “Long term, its strategic value is awesome… The TPP covers an area that accounts for 40 per cent of the world economy and one-third of global trade.” And he meaningfully added against the backdrop of China’s threat, “We must turn the area into a region for lasting peace and prosperity.” In other words, China must be contained and countered in a comprehensive way to include economic, political and military cooperation.

  

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

Contact: sushilpseth@yahoo.com.au 

China’s rise inspires awe

S P SETH

China’s rise inspires awe, a combination of fear and admiration. The fear is much more pronounced among some of its neighbours, involving claims and counter-claims of sovereignty over a clutch of islands in the South China Sea and East China Sea. In the South China Sea, the Philippines and Vietnam are particularly at odds with China as it has sought to physically occupy/encircle the disputed islands/islets. In some cases, China is also said to be creating new island (s) out of a submerged coral reef (s) turning them into military facilities/bases to project power and threaten its neighbours. Admiral Harry Harris, new chief of the US Pacific Command, sounded the alarm in Australia recently about a string of islands China has dug out and leveled, posing a threat to stability in the South China Sea, which has some of the busiest sea-lanes carrying global trade.

This is what Admiral Harris reportedly told a dinner at the Australian War Memorial: “China is creating a great wall of sand with dredgers and bulldozers over the course of months.” He added, “When one looks at China’s pattern of provocative actions towards smaller claimant states, the lack of clarity on its sweeping nine-dash line claim that is inconsistent with international law, and the deep asymmetry between China’s capabilities and those of its smaller neighbours—well, it’s no surprise that the scope and pace of building man-made islands [by China] raises serious questions about China’s intentions.” In other words, China is posing a threat to regional stability. According to Professor Michael Wesley, director of the Asia Pacific School at the Australian National University, “This marks a real ramping up of US determination and resolve in the region, reflecting a realization that China is determined to play hard ball in the South China Sea.” In other words, the US is unlikely to let China get away with it. Indeed, this looks like a delayed follow up to President Obama’s declaration of the US “pivot” to Asia announced in the Australian parliament in 2011 during an earlier visit.  

And how will the US go about dealing with the China threat? One way is to forge a common strategy with member states of the Association of South East Asian Nations (ASEAN), as a number of them are contesting China’s sovereignty claims in South China Sea. For instance, ASEAN member states might be encouraged to form joint maritime patrols. As commander of the US 7^th Fleet of the Pacific Fleet, Vice Admiral Robert Thomas, reportedly said, “If ASEAN members were to take the lead in organizing some thing along those lines, trust me the US 7^th Fleet would be ready to support.” Rebutting the idea that China threat might not eventuate, Admiral Harris reportedly told the dinner gathering in Canberra that, “As we like to say in navy circles, hope is not a strategy.”

The US already has security alliances with some regional countries though they are not specifically directed against China. It periodically holds military exercises with its regional alliance partners. Australia, for instance, is a strong regional ally, and has not made any secret of its concern about China’s regional claims, at least the way it is pursuing them. Similarly, Japan is a US ally and Tokyo is involved in, what looks like, a tit-for tat situation with China over a clutch of islands in the East China Sea, with a potential for military clash. And Japan is also helping Vietnam and the Philippines by supplying naval patrol boats and the like to help them face the Chinese threat. By virtue of its security linkages, the US is already  bound up with regional defence. As Professor Alan Dupont of the University of NSW in Sydney said, “We need to work with our nearest neighbours to persuade China that it is not in their best interest to militarize South China Sea and there would be consequences in doing so.”

But Beijing doesn’t seem terribly perturbed, being quietly confident that the countries in the region will have no choice but to accept the new realities of power. This was reflected in a strong rebuke from China to Australian foreign minister Julie Bishop’s criticism of China’s air identification zone over disputed (with Japan) islands in the East China Sea. The Communist Party of China newspaper, The Global Times, said at the time that Australia (and other countries, for that matter) would be forced to adjust its rhetoric to the realities of international bargaining power. It added, “Bishop calls for standing up to China, but what resources does she have to do so with?” In economic terms, Australia’s future seems tied up with China as its biggest trading partner.

Other regional countries might not be as heavily dependent on trade with China, but it is emerging as the economic powerhouse for the region and, indeed, for the world. China-floated Asian Infrastructure Investment Bank  (AIIB) is an example of its economic clout that will supplement its growing military power. Starting by the end of this year with an initial Chinese capitalization of $50 billion, AIIB seems to be making a healthy beginning with many countries already signing up as its foundation members. Despite US pressure, some of its closest European allies like Britain, Germany and France are keen to be part of it. Japan, which has a prominent role in the Asia Development Bank, doesn’t appear to have been invited. India, Asia’s second largest country, is in it. The US’s major Asia-Pacific ally, Australia, has also made a decision to be part of it as soon as some matters about its functioning are resolved.

The US, on the other hand, is opposed to it because it will weaken the post-World War 11 global financial architecture by creating a parallel structure dominated by China. The decision by some of its closest allies to join AIIB is dictated by the prospect of economic opportunities from investment in the vast infrastructure needs of the Asian region. With initial capitalization of $100 billion for AIIB, $50 billion from China, its financial role will expand over the years with China’s $4 trillion in foreign reserves. The economic potential of the AIIB is one major reason that US’ closest allies are prepared to go against its advice.

Another reason is that they would like to shape the governing structure of the AIIB so that it doesn’t simply end up being China’s strategic tool to supplement its political influence. Australia’s thinking in this respect gives some insight into it. Announcing his country’s decision to consider joining the AIIB, Prime Minister Tony Abbot said, “Key matters to be resolved before Australia considers joining the Asian Infrastructure Investment Bank include the bank’s board of directors having authority over key investment decisions, and that no one country control the bank” among other things. But China might not be too keen on replicating the governing structure and practices of the World Bank and International Monetary Fund. As Li Ruogu, a former chairman of China’ Export-Import Bank reportedly said, “This newly established institution cannot be a clone of the old ones [where the US and its European allies have preeminent roles]; we are working in a very different environment.” Indeed. China would want its own way and pursue its own national interests, and might not be averse to using its economic, political and military assets to that end.

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

Contact: sushilpseth@yahoo.com.au

NPC highlights China’s problems

S P SETH

That there are problems with China’s rapid economic growth has been known for some years. After double-digit growth rates over many years in the past, China is now settling for single-digit growth. Last year it was 7.4 per cent, said to be the slowest in more than two decades. This year, as announced by Premier Li Keqiang, it would be “about 7 per cent”, half-a-percent down from last year’s aspiration of “about 7.5 percent”, and a “new normal” for the Chinese economy. Speaking at the annual session of the National People’s Congress (NPC), Li was quite candid about the problems facing China’s economy, even though its growth rate would still remain the envy of many countries. In his annual report card, he said, “With downward pressure on China’s economy building and deep-seated problems in development surfacing, the difficulties we are to encounter in the years[s] ahead may be more formidable than those of last year.”

After Mao Zedong’s death in 1976 and the end of the Great Cultural Revolution, which turned China upside down during the sixties and into the seventies, China was set on a high growth trajectory during the eighties under Deng Xiaoping as China’s new helmsman. Despite the great convulsion of the students-led democracy movement of 1989, put down by the army, Deng managed to keep the ship of the state on an even keel committed to keep the economy growing and to transform China into a strong country. In the process, he was prepared to discard communist ideology to favour capitalist growth but under the tight political control of the Communist Party of China (CPC). And he didn’t mind if this made some people rich and increased the rich-poor gap. It also greatly widened the gap between coastal regions as the favoured development zones and the interior of the country, as well as between urban and rural areas. Everything else was subordinated to the economic growth index.

In the process, over the years, such high-speed industrial development led to all sorts of problems. The growth of urban industrial centres encouraged developers and their party backers to virtually expropriate rural lands on the outskirts of overlapping boundaries, with nominal or very little compensation causing social tensions. Of course, such developments led to a tremendous boom in real estate prices, making developers very rich and contributing to a bubble/bust situation. So much so that some of these apartments and estates have no buyers because of the their high price tags.

Another serious problem from such high-speed development has been the plague of corruption from highest to low levels of the party and bureaucracy. President Xi Jinping has made the eradication of corruption as his crusade, and some high rollers in the party have become its victims. It sometimes has the look of a political purge and is causing some fear in the party ranks and among associated people, like relatives and cronies occupying cozy and powerful positions in state monopolies. And it is also said to extend to the military. But the high-pitched anti-corruption drive seems to go well with people who have been sick of everything goes in the system. Talking of corruption, Premier Li said in his NPC report, “Shocking cases of corruption still exist. Some government officials are neglectful of their duties, holding on to their jobs while failing to fulfill their responsibilities.”

As China’s pollution levels having been rising, environment has emerged as an important public policy and health issue. Premier Li duly touched on it in his report when he told the NPC delegates that, “Environmental pollution is a blight on people’s quality of life and a trouble that weighs on their hearts.” China’s cities, like Beijing, are blanketed with smog and one often sees people wearing masks to minimize its health dangers. China’s acute environmental problem is largely due to the overriding primacy of development over other considerations and failure to devise a comprehensive integrated national policy factoring in other factors. But China is not the only culprit in this regard. It has been, like other developing countries, a late starter in economic development when enough damage had already been done to the environment due to industrial development in, what are now called, developed countries.

But there are indications that China is now taking environmental pollution seriously. A recent joint announcement with the US on addressing climate change suggested that China’s carbon emissions should peak by 2030, starting a downward process from then on. It will increasingly reduce the use of fossil fuels like coal, cut energy intensity, expand trials for trading in carbon emissions, use non-fossil fuels like solar, and further expand its nuclear energy sector. The environmental pollution is of great public concern. A documentary on the subject, Under the Dome, on China’s catastrophic smog went viral on the internet viewed by many millions before it was ordered to be removed for fear of “hyping” up people’s concerns. Indeed, before it was ordered to be withdrawn, the documentary won praise from China’s new environment minister, Chen Jining. He also said that China faced an “unprecedented conflict between development and environment.” Despite internet censoring of the documentary, President XI appears serious on the issue of climate change. He reportedly said the other day that China would punish “with an iron hand any violators who destroy ecology or environment, with no exceptions.” How successful and how soon environment would become an important determinant of China’s overall development priority would remain to be seen.

An important element of China’s modernization and building a strong country has been, and is, an emphasis on modernizing and expanding its defence forces. There are two reasons for this. First, China is seared by historical memory of its humiliation at the hands of, first, the west and then Japan. The two opium wars imposed on China by the British in the 19^th century are an illustrative example of the first. And Japan carried on its depredations through the thirties and during WW11. And now that China is strong it is determined to not let this happen again. But the flip side is that Beijing not only wants to be militarily strong to defend itself but it also wants to turn Asia-Pacific region into its regional enclave as, it believes, it was historically when China was the centre of the world.

And this is creating a lot of tension with its neighbours over sovereignty of some of the disputed islands in South China Sea and East China Sea. China is determined to hold its ground and has been increasing its defence budget by double-digit figures over several years now. Officially, China’s defence budget last year was $132 billion, the second largest after the United States where it is inching towards $600 billion. Justifying such rise, a spokeswoman for the NPC said, “As a large country, China needs the military strength to be able to protect its national security and people.”

All in all, the picture that emerged from the NPC session is of a country, led by the Communist Party of China under its general secretary Xi Jinping, who is also  President of the country, confident of steering the ship of the nation to revive China’s ancient glory. The important question is: will its neighbours accept China’s version of its history and geostrategic vision? That might be examined some other time.

Note: this article first appeared in the Daily Times.

Contact: sushilpseth@yahoo.com.au