GIS Dossier: From Mao to Xi, China’s quest for growth
- We live in the Asian era.
- The economic dominance of China in global markets has been one of the main driving forces behind the Asia-Pacific’s growing importance on the world stage.
- The most important geopolitical developments in the 21st century will take place in this region.
GIS’s new “Dossier” biweekly series aims to give our subscribers a quick overview of key topics, regions or conflicts. This entry surveys developments in the Chinese economy, based on a selection of GIS reports since 2011.
China has developed its national strategy in phases over more than 60 years. Growth is one of the cornerstones. During the past decade, China outperformed the most bullish expectations despite the global financial crisis. It replaced Germany as the world’s largest exporter in 2009 and, one year later, dethroned Japan as the second largest economy measured by gross domestic product. China’s GDP is expected to overtake that of the United States in the mid-2020s.
In its historic quest for wealth and global influence, however, the world’s most populous nation faces tough challenges, both internal and external.
Successful growth was established after 30 years of turmoil
The national goals were established at the foundation of the People’s Republic of China (PRC) in 1949. “They were unity, growth and stability and were aimed at creating a strategic identity,” GIS expert Dr. Uwe Nerlich pointed out in his seminal report in August 2011.
“Unity was extended to Xinjiang, the largest province covering a sixth of the country’s total area in northwestern China in 1949, to Tibet in 1950, Hong Kong in 1997 and Macau in 1999. The island of Taiwan was never contested as part of China, as both the PRC and Taiwan remained committed to a one-state doctrine. The second priority, growth, was pursued through four modernizing goals. These were agriculture, industry, science and defense.
Successful growth was established after 30 years of turmoil, Dr. Nerlich wrote, “and widened China’s external interests through dependence on exports and financial markets, as well as demands for energy and investments. It led to regional and, in a long-term perspective, global influences on China’s national strategy.”
What has been achieved amounts to “a miracle given a background of 120 years of colonial exploitation and humiliation, almost a decade of brutal Japanese occupation in the 1930s, an exhausting civil war, Mao Zedong’s ‘Great Leap Forward’ of 1958 when he attempted to modernize China [ ] through the chaotic ‘cultural revolution.’ This was followed by the U.S. lifting China out of isolation and Deng Xiaoping’s daring domestic reforms toward a market economy, when he was leader of the Communist Party of China, which produced what Helmut Schmidt, the former Chancellor of West Germany, has called the ‘largest economic experiment in world history,’” Dr. Nerlich wrote in another 2011 report, “The Challenges facing China’s evolution.”
“The strategy was guided by the single aim of domestic stability, coherence and growth. But the key to success was China’s gradual opening to global economics, above all through foreign investments and cheap exports. This was based on a combination of feeling like a homogeneous country, the size of the population and a growing sense of a resurgent nation reinforced by the steering power of an evolving political system designed to make its 1.3 billion people remotely governable.”
The GIS expert quoted seasoned China watcher Jonathan Fenby:
“Given the enormous dynamism which the economic reform process had released [ ] the first three decades since the late 1970s may have been the easy part. Transforming this into a long-term, viable social and political system is likely to prove much tougher. [ ] Behind the booming statistics and enormous challenges, this is the basic issue facing a country that has taken on a global role without having sorted out its own evolution from the history that still prevails.”
China’s problems in the decades ahead will be the result of its success over the last 30 years
China’s success in achieving its strategic goals, Dr. Nerlich concluded, “is far from guaranteed and hinges on its long-term ability to convince other nations that scaling back alliances with the U.S. is in their best interests. China’s problems in the decades ahead will be the result of its success over the last 30 years. It needs continued growth rates of at least 6-8 percent, driven by continued exports and a weak currency, to maintain this. It needs to cope with the challenges of an aging population and the growing apprehension among its neighbors and geopolitical rivals.”
As early as January 2013, GIS expert Dr. Kim R. Holmes noted that China had to confront some fundamental weaknesses at the heart of its political and economic system. Unless these are addressed, he warned, “China might not merely miss its rendezvous with destiny as a world power, it could slide into weakness and instability, disrupting Asia and the world order in the process.”
According to Dr. Holmes, the 18th National Congress of the Communist Party China (Nov. 2012) could end up being “one of the most significant in decades.” For the first time since 1949, the new Chinese leader, Xi Jinping, was not picked by the old cadres of the revolutionary era and represented the pragmatic wing of the party.
The root of China’s political problem, Mr. Holmes pointed out, “is that the Communist Party leadership has monopoly control of the economy.  An imbalanced economy based mainly on making state ‘investments’ to maintain the economic structures beneficial to the Communist elite is unstable, and it is likely to depress growth in the future.”
“China’s economy lost some of its past glitter during late 2014 and early 2015 [ ] and many commentators are fretting,” observed GIS economist Professor Enrico Colombatto in his April 2015 report. He continued: “Predictions for the rest of 2015 are not encouraging either, by Chinese standards. [ ] But China is still growing very fast by any standards.”
By June of the same year, the outlook became more clouded even as China was stepping up its monetary and fiscal measures to stimulate the economy. Expert Cameron Frecklington wrote: “China’s golden years of economic expansion are now firmly behind it. [ ] Premier Li Keqiang says China needs to prepare itself for a not-so-rosy economic near-future, with its government hoping to hold steady for 2015 [at] the slowest annual growth rate in 25 years, although this level would be the envy of many nations worldwide.”
By that time, slackening growth – 7 percent per year, according to the government, or considerably less, according to its critics – had been given an official title. National media took to referring to the “new normal” “to inoculate Chinese public opinion against the challenges to come,” Mr. Frecklington noted in his June 2015 report on the country’s economic performance.
“When China released its first quarter GDP data, many research and forecasting firms put the headline figure much lower, with most forecasts ranging from ‘less than 6 percent’ at Citibank to 3.8 percent at Lombard Street Research. One outlier, an estimate by Cornerstone Macro, put first-quarter expansion at 1.6 percent. Skepticism changed to open disbelief when figures for the second quarter came out, as Twitter commentary from China watchers derided the GDP statistics as a mockery.”
Even the official figures, however, showed problems.
“Whatever the number, the key issue is how well China’s leadership is managing the transition to the post-boom era,” Mr. Frecklington concluded.
Western economies acknowledge the role that China has recently come to play in the developing world
By October 2015, concerns over Beijing’s handling of the slowdown were so widespread that Professor Colombatto warned: “[w]hile the Chinese economy’s gradual deceleration is indeed problematic, its consequences pale in comparison to what could happen if frustration and disappointment led to a systemic crisis.”
The IMF’s good news
At the end of November, the International Monetary Fund (IMF) announced that from October 2016, the Chinese yuan would be part of the basket of currencies that defines the Special Drawing Right (SDR), the accounting unit that the IMF uses to carry out financial operations.
While “the immediate practical effects will be minor,” wrote Professor Colombatto in December 2015, the decision “enhances the prestige of Chinese leaders at home… [It] means that the Western economies acknowledge the role that China has recently come to play in the developing world. From now on, China will no longer simply be a developing country that is larger and more powerful than the others. Instead, it will be a political actor playing on an equal footing with the U.S. It will be more authoritative than Western European governments and more influential than other major players such as Russia.”
In September 2013, Chinese President Xi Jinping launched the country’s One Belt, One Road (OBOR) initiative in a speech at Nazarbayev University in Astana, Kazakhstan. The framework, which combines China’s Silk Road Economic Belt program and its 21st-century Maritime Silk Road strategy, makes the country’s regional neighborhood – both on land and at sea – the main strategic priority. “As it did centuries ago, China views itself as the ‘Middle Kingdom’ geographically and geopolitically,” remarked GIS expert Dr. Frank Umbach.
The initiative will shape China’s ties with some 65 countries and more than 4 billion people. For years to come, it will make Eurasia the central focus of Chinese diplomacy and security policy, as well as the most important destination for the country’s foreign investments. “The strategy should ameliorate China’s growing structural economic problems and bolster political stability both at home and in the neighborhood,” according to Dr. Umbach.
China’s offshore assets will likely triple from $6.4 trillion to almost $20 trillion by 2020
Since 2015, China has become the world’s largest economy (based on the World Bank’s purchasing power parity calculations), as well as its biggest manufacturer, exporter, energy consumer and coal importer. It accounts for between a quarter and a third of manufacturing imports in Japan, the European Union and the U.S. According to various estimates, it will become the world’s largest overseas investor by 2020. China’s offshore assets will likely triple from $6.4 trillion to almost $20 trillion by 2020.
China is bolstering the OBOR program through huge foreign direct investments and the creation of new financial institutions to fund its related projects, Dr. Umbach wrote in a follow-up report in November 2015. By the end of 2015, Beijing had launched the Asian Infrastructure Investment Bank (AIIB), played a major role in the development of the New Development Bank and established a Silk Road Fund.
Throughout history, changes in the balance of power could be charted by the rise and fall of maritime powers, observed GIS Expert Joseph Dobbs in May 2017. “The last great shift, away from British control of the seas, paved the way for the so-called ‘American century.’ In the 21st century, a new maritime power is beginning to emerge: China.”
A crucially important component of Chinese maritime power is seaborne commerce. “Shipping lines, lanes and ports can help control and influence international maritime norms,” wrote Mr. Dobbs. “In this respect, China is going from strength to strength.”
Currently, four of the top 10 global port operators and four of the top 20 shipping lines are Chinese. Nearly two-thirds of the world’s top 50 ports are either owned by China or have received some Chinese investment (as much as $46.6 billion total), up from one-fifth in 2010, the expert pointed out.
Failure to reform
In April 2015, GIS expert Cameron Frecklington described how President Xi had set about establishing his political grip. The effort started with a sharpening of socialist rhetoric and a purge of Mr. Xi’s opponents – often as part of loud anti-corruption campaigns. The aim was to get party cadres to toe the line and to concentrate decision-making authority.
For all his hyperactivity and micromanagement, President Xi has failed to reform the economy in any fundamental way, GIS guest expert Nick Fielding wrote in February 2016. “In particular, the government has not dealt with well-entrenched, inefficient state monopolies. As a result, the low productivity, overcapacity and excessive debt that are endemic to China’s public sector show no signs of abating.”
According to Mr. Fielding, non-financial debt in China rose from 100 percent of GDP in 2009 to about 250 percent in early 2016, even as the economy slowed. The central and local governments borrowed more than $4 trillion to help finance investment projects – more than Germany’s entire economy. At the same time, China’s banking regulators allowed poor-quality assets to be used as collateral for many of these loans. “Under these circumstances, it is hardly surprising that the renminbi is depreciating against the dollar and can be expected to do so for the rest of this year,” wrote Mr. Fielding.
Either way, China’s economic leadership has spooked the markets
Yet not all China’s problems are structural. Some, as Mr. Fielding noted, are purely “self-inflicted.” For example, actions taken by the Chinese Securities Regulatory Commission (CSRC) and the People’s Bank of China (PBC) helped to set off the stock market crisis in July 2015 and the shock currency devaluation in August. The latter forced the U.S. Federal Reserve to postpone its planned interest rate increase for several months. The CSRC and the PBC played leading roles in the events leading up to the currency panic on January 7, 2016. “Put it down to lack of experience or incompetence. Either way, China’s economic leadership has spooked the markets,” the GIS expert wrote.
China’s state-owned enterprises (or SOEs) dominate vast expanses of the economy, but their outlook is grim. Rapidly growing debts from politically motivated loans, risky real estate deals and lower investment returns imperil their future and that of the entire Chinese economy. Many will be privatized, merged, or otherwise dissolved within the next few years. How this reform is managed, wrote Brendan O’Reilly in September 2016, will have a huge impact on China and possibly the world.
These businesses employ roughly 35 million people and are thought to control roughly one-third of the industrial and service sectors in China.
SOEs are now blamed for slowing the pace of China’s economic growth and innovation, Mr. O’Reilly observed. Their returns on assets are usually half to a third of those for private Chinese enterprises, and yet they receive disproportionately large loans from the state-run banks.
An old regime’s Reaganomics
The Communist Party of China (CPC) is 95 years old, has been in power for over 65 years and has more than 80 million members, notes Henrique Schneider of the Swiss Federation of Small and Medium Enterprises in a May 2016 comment. The key to CPC’s success is its own pragmatism, he argued.
The party learns from the past, especially from its mistakes. It absorbs and combines different schools of thought, from Marxism to capitalism. “This ideological patchwork serves the purely instrumental purpose of keeping the party in power,” Mr. Schneider asserted, noting that the CPC incorporates different strata of Chinese society. “What began as a movement of peasant soldiers rearranged itself as the vanguard of the working class and has since mutated into a kind of trade union for middle-class technocrats. Over 22 percent of its members are enterprise managers and entrepreneurs.”
Finally, Mr. Schneider pointed out the party’s organizational skills were to combine these material and ideological resources, mobilize the population and act: “In short, the CPC is a learning organization, with an utterly pragmatic learning curve. In the struggle to preserve its dominant power, the party keeps remaking itself – a skill that consultants call adaptive leadership.”
Declarations from President Xi and other party leaders suggest that they intend to adopt economic policies similar to Reaganomics, noted Prince Michael of Liechtenstein in a March 2016 comment. As he observed, “a country that calls itself “communist” may address its economic, environmental and social problems by applying free-market solutions. The Chinese government is proposing tax cuts, deregulation and a reduction in state spending. It also wants to restructure inefficient industries – especially coal and steel, with their associated environmental and profitability issues. The pessimists on China may yet be proven wrong.”
- Name: People’s Republic of China (PRC), established in 1949
- Population: 1.35 billion (UN 2010)
- Capital: Beijing
- Language: Mandarin Chinese
- Religions: Buddhism, Christianity, Islam, Taoism
- Exports: Manufactured goods, clothing and textiles, electronics, arms
- Media: World’s most online users with 420 million on the web, 2,000 newspapers and 1,000 state-owned radio stations
- Head of state: Xi Jinping, president since 2013 and general secretary of the Communist Party of China since 2012
- Head of government: Li Keqiang, prime minister since 2013