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China’s rise – risks and opportunities for Eurasia

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Balancing economic growth with demographic decline, calibrating brewing social expectations, tempting anti-politics of nationalism, all with the security dilemmas remains a fundamental issue for Beijing, but also for the most of Eurasia. Former Chairman of Morgan Stanley Asia, distinguished Yale University professor and friend of MD, Stephen S. Roach gives his highly interesting account on the topic.

It has taken nearly seven years of internal debate, but China now seems set to embark on a new economic course. Its long awaited pro-consumption rebalancing is finally at hand, or at least that seems the verdict to be taken from last November’s Third Plenum of the Central Committee of China’s 18th Party Congress.

The debate over China’s growth strategy began in earnest in March 2007, when former Premier Wen Jiabao pondered the fate of an economy that looked strong on the surface, but which in his own words was beneath the surface increasingly “unbalanced, unstable, un-coordinated, and ultimately unsustainable.” These “Four Uns” underscored the realisation that China’s highly successful “Producer Model” powered by exports and fixed investment had outlived its usefulness. That left the option of a rebalancing towards more of a consumer society, a strategy that was formally endorsed in March 2011 in the 12th Five-Year Plan.

But that plan was always more of a broad framework than a detailed transformational blueprint. It was up to China’s newly installed fifth generation of leaders headed by Xi Jinping to put the plan into action. The Third Plenum provided that opportunity, and by focusing on social reforms it filled in an important missing piece of the 12th Five-Year Plan. Committing 30% of the profits of China’s state-owned enterprises to funding woefully under-funded safety-net programmes like retirement and healthcare will make Chinese families’ futures much more secure. Other reforms to the one-child family planning policies, the residential permit (hukou) system, and a likely shift to market-based deposit interest rates also featured prominently in the Third Plenum.

China now has a well-articulated strategy (the 12th Five-Year Plan) as well as a comprehensive implementation framework (Third Plenum), both of which complement each other in the transition to a new economic model. The plan established new opportunities for emerging middle class consumers – more job creation via the development of an embryonic services sector and higher wages that come with aggressive urbanisation. Together, they will provide an important impetus for higher incomes and more consumer purchasing power. The social reforms of the Third Plenum complete the circle by prompting shifts in behavioural norms that should provide incentives for Chinese families to reduce their fear-driven precautionary saving and allocate more income toward discretionary spending.

With China on the cusp of a major structural transformation, there’s enormous opportunity for its major trading partners to participate in what could well be the most spectacular consumption bonanza of the 21st century. Unlike Japan, which was modern Asia’s first growth miracle, although a relatively closed economy, there is good reason to believe that China will be much more effective at spreading the wealth. China’s imports have averaged 28% of its GDP since 2002 – triple Japan’s historical ratio – and its neighbours in Asia are specially well positioned to benefit from the coming upsurge in Chinese consumption – not just because of their proximity but also because they have long provided critical supply chain inputs to Chinese producers and assemblers.

A simple extrapolation helps convey the dimension of this coming opportunity. It is based on three key assumptions: One, that average Chinese GDP growth will tail off to about to about 7% between now and 2025. Two, that the growth rate in U.S. dollar terms will be about 1.5 percentage points faster per annum due to the steady appreciation of China’s currency, the renminbi. Three, that the consumption share of Chinese GDP increases by about 1 percentage point a year, starting in 2014, from its current rock-bottom portion of 35%. Under those conditions, Chinese consumption would increase between now and 2025 by about $10 trillion in U.S. dollar terms. If the import share of its GDP holds at the historical norm of 28%, that would translate into incremental growth of nearly $3 trillion that would be available to China’s trading partners.

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The coming structural transformation of the Chinese economy will only deepen China’s now well-established role as the dominant economic engine in Asia

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Export-led Asia will be first in line to benefit from this rebalancing bonanza, because China is now many Asian countries’ largest export market. It wasn’t always that way; throughout the 1990s, the United States and Europe were the largest export markets for most Asian economies other than China. Then, around the turn of the century, Asian exporters started to draw greater support from China, and that’s especially true of Japan, South Korea and Taiwan. The World Trade Organisation says their exports to China account for an average 23% of their total export earnings. For ASEAN countries like Indonesia, Malaysia, the Philippines, Thailand and Singapore, shipments to China generally rank in the top three export destinations and account for around 12% of their total exports.

So as an increasingly open Chinese economy shifts from export-led to consumer-led growth, the rest of Asia will be well positioned to capitalise on this latest shift in China’s development. The China-centric character of Asia’s export-led growth dynamic offers the region a new and potentially powerful source of economic growth at just the point in time when many are questioning the dynamism of the developing world.
The coming structural transformation of the Chinese economy will only deepen China’s now well-established role as the dominant economic engine in Asia. Data from the International Monetary Fund underscores recent dramatic shifts in China’s economic leadership position. In 2012, the Chinese share of world output was estimated at 14.7% when measured on a purchasing-power parity basis which adjusts for international disparities in pricing structures. In other words, China accounted for nearly 43% of total Asian output in 2012, up from about 36% of the Asian total in 2000. China’s export impetus was even more powerful, its one-third share of all Asian exports in 2012 was 2.3 times the 14% share in 2000.

The rebalancing from the producer model towards a consumer society will undoubtedly change the character of China’s economic leadership in Asia. It will become an economy that relies increasingly on its trading partners – not just in Asia but even in the developed economies of Europe and America – as sources for its emerging internal demand of both goods and services. That stands in contrast with the first phase of the Chinese development miracle from 1980 to 2007, where the producer model squeezed out others for market share. In that vein, the rebalancing of China’s economy should be viewed as an opportunity for its major trading partners, especially in Asia.

But the opening up of a rebalanced Chinese economy to Asian partners comes with a possible offsetting wildcard – mounting pan-regional strategic frictions between China and its neighbors. This would be, to say the least, a disconcerting development. That’s especially true of the deep-rooted animosity between China and Japan now being exacerbated by the territorial dispute over the Diaoyu/Senkaku Islands in the East China Sea. It will be especially difficult for two nationalistic leaders, Xi Jinping and Shinzo Abe, to defuse these tensions without damaging their carefully cultivated public support for the “China Dream” or the rejuvenation of Japan after two lost decades. The establishment of overlapping air defense identification zones over the disputed islands is already heightening the risk of a military accident that could then escalate.
There isn’t as much geopolitical tranquility as might be wished elsewhere on China’s borders. Tensions over maritime security lanes in the South China Sea have been mounting, leading to frictions with the Philippines, Vietnam, Malaysia, Indonesia and India. Add Washington’s “Asian pivot” to the equation, with its shift in American naval strategy back towards Asia, and there’s little mistaking China’s growing sense of geo-strategic isolation. Acutely sensitive to these risks, the Third Plenum’s establishment of a new State Security Council, rumored to be headed by Xi Jinping and apparently modelled after the U.S. National Security Council, looks set to elevate geostrategic security concerns as a major consideration for China.

This is a precarious balancing act. The pan-Asian economic opportunities that will stem from China’s pro-consumption rebalancing could go for naught if regional security tensions were to boil over. Historians have long warned of the risks of its rising power, and the record-breaking speed of China’s economic ascendancy only accentuates these risks.
Modern China’s leaders have long spoken of the “peaceful rise” of their nation, and its focus on internal stability and rising prosperity, with an absence of territorial ambitions. The rest of Asia has benefitted greatly from the economic rise of China, and is likely to realize even greater benefits from the coming consumer-led transformation of the Chinese economy. The risk that escalating geostrategic security considerations might compromise those benefits remains a worrisome wildcard for Asia and the world at large.

(First published by the Europe’s World, article re-posted per author’s permission)

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East Asia

Hong Kong: No more China’s disheartened capitalism, please

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Hong Kong’s unrest started in June 2019. It was triggered by the plans to allow extradition to mainland China. Critics felt this could compromise judicial autonomy and jeopardise free-speech legacy.

Until 1997, Hong Kong was under the British rule as an overseas territory (effectively a colony), but then returned under the mainland China jurisdiction. Under the Deng’s “one country, two systems” arrangement, it has considerable autonomy, and Hongkongers (Mandarin: 香港人) enjoy comparatively more civic rights.

The controversial bill was finally withdrawn in September 2019. Under the slogan ‘too little too late’, the demonstrations continued, growing even larger. Protesters now demand full democracy and an independent inquiry into police actions.

Lately, clashes between police and activists have turned worryingly violent; police firing rubber bullets and occasionally even live rounds, while protesters counter-attacking officers by throwing stones and petrol bombs.

Generational and Class struggle is back?

What still remains rather underreported are social and generational dimensions of the protests. Hence, it indeed feels to comment on some distorting interpretations and oversimplified views.

As an illustration, one can take reporting such as James A. Dorn’s columns (eg. “If protesters want to protect Hong Kong’s way of life, they must win the war of ideas”). This author is cited as a China specialist. Essentially, he is a senior fellow of the Cato Institute, a conservative think tank similar to The Heritage Foundation, which often declares Hong Kong the “world’s freest economy”, even though Hong Kong’s working class endures horrid living conditions here.

Authors like him allude to a “war of ideas” and do criticise socialism with Chinese characteristics, even though China has made tremendous economic progress and enjoyed political stability. One wonders why such views and opinions about Hong Kong or China should be considered or adopted.

China has not dictated how the US or other Western countries should run their economies or political systems, nor has it solicited advice from these free market theoreticians or think tanks. China has lifted at least half a billion people out of poverty, helping to alleviate poverty globally.

Another country which has done exceptionally well and which has not subscribed to neoliberal dogma but retains strong state control of the economy and political freedom is Singapore.

Hong Kong’s main problem is that the sacrosanct free market has become a political excuse for government non-interference, allowing tycoons and big businesses to freely game the system, gorge themselves on Hong Kong’s resources and create large wealth disparities that have contributed to our current social and political instability.

This neither alleviated the suffering of Hong Kong’s working class nor solved the housing problem. Rather it has allowed tycoons to profit. The city needs tax reform so that government revenue does not rely on land sales.

The policy of non-intervention has led to tycoons and big businesses privatising necessities like housing, health care, education and, through the Mandatory Provident Fund, retirement savings. This benefits the private sector at the expense of the public.

Driven by an unrestrained greed, someone wishing to monetise, gambles with our future. Simply, compare the Gini for Hong Kong of 1997 and of today, and see yourself.

Massive social costs to enrich few – Parasites among us

Nowhere in the world is housing as unaffordable and nowhere has it made property developers as wealthy. Allowing markets to set prices only reinforces the housing crisis, as does letting local and foreign investors buy up property despite the housing shortage. Another absurdity is calling for more free competition to break up the property cartel.

As professor Anis H. Bajrektarevic observed and compared: “… it seems that the narrative by which the ‘freedom’ obsessed and spoiled capitalist youth is fighting the big egalitarian communist apparatus is overly simplified and is, thus, short in capturing the truth… It is [what is happening last months in Hong Kong] closer to an outcry of excluded and pauperised youth – quite similar to the one on the streets of Europe, whose protests faded away years ago … [Well] educated but disfranchised youth that feels the generational warfare replaced the social welfare… The Hongkongers are not fighting against the egalitarian ideas or system. Quite to contrary, they are bitterly opposing social inequality and endemic generational exclusions. The very tomorrow of European society might be – prudently or violently – decided on the streets of Hong Kong.”

A low-tax regime mostly benefits the landlord class and big business. Hong Kong residents actually pay among the highest taxes in the world in the form of high rents and housing prices, yet they have scant social safety nets. A wealth tax and more progressive taxes should be imposed to generate government revenue, instead of relying on land sales.

Hong Kong needs the opposite of the free-market dogma, so we can have more humane living conditions and social stability. Or as a former Vice-chancellor of the Hong Kong University wonderfully captured: “Neither violence, nor Beijing, can fix City’s housing shortage and lack of a social safety net.”

Many Hongkongers have lost out due to economic changes, and many have deep-seated distrust of mainland China. The Hong Kong government must first address their social exclusions and financial insecurities, enhancing all-generational debate before it can work on fostering a sense of Chinese identity.

 From our partner International Affairs

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China struggles to fend off allegations of debt trap diplomacy

Dr. James M. Dorsey

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Desperate for cash, Tajikistan is about to sell yet another vital asset to China at a time that countries like Sri Lanka and the Maldives are demanding renegotiation of debt settlements that either forced them to surrender control of critical infrastructure or left them with unsustainable repayments.

The pending Chinese acquisition of  a stake in Tajikistan’s aluminium smelter, coupled with earlier tax concessions to Chinese companies that would substantially reduce the trickle down effect of investments for the troubled Tajik economy, suggest that China has yet to fully take account  of frequent criticism of its commercial approach to Belt and Road-related projects.

The Washington-based Center for Global Development warned last year that “23 of 68 countries benefiting from Belt and Road (BRI) investments were “significantly or highly vulnerable to debt distress.”

The centre said eight countries — Tajikistan, the Maldives, Pakistan, Djibouti, Kyrgyzstan, Laos, Mongolia, and Montenegro — were particularly at risk.

“There is…concern that debt problems will create an unfavourable degree of dependency on China as a creditor. Increasing debt, and China’s role in managing bilateral debt problems, has already exacerbated internal and bilateral tensions in some BRI countries,” the report said.

Progress on the construction of a road in Afghanistan’s Wakhan Corridor, a narrow strip in the east of the country that touches the Chinese border and separates Tajikistan from Pakistan and Pakistan-controlled Kashmir, may explain China’s seeming insensitivity to the concerns of beneficiaries of the People’s Republic’s largesse.

The road would link the corridor to Central Asia in the north and Pakistan’s Chinese-built Arabian Sea port of Gwadar in the south, a crown jewel in China’s infrastructure- and energy driven Belt and Road initiative.

To be sure, the road has local rather than geopolitical significance for workers building the road and the region’s shepherds as documented by anthropologists Tobias Marschall and Till Mostowlansky.

The road creates temporary employment for labourers. For shepherds, it facilitates access to mountain pastures.

For China, the stakes are geopolitical and economic.

The road would not only facilitate commerce with Central Asia as well as traffic from Gwadar but also construction of shorter pipelines as well as a fibre optic cable.

Perhaps more importantly, it would together with a military base in Tajikistan and Chinese cross border operations in the corridor itself, facilitate the movement of troops in China’s gradual projection of military power beyond its borders, particularly in regions adjacent to its troubled north-western province of Xinjiang.

The road’s potential military significance raises questions about the sustainability of a presumed division of labour between Russia and China under which Russia shoulders responsibility for security in Central Asia while China concentrates on economic development.

Ironically, if the examples of Sri Lanka, the Maldives, Pakistan and Malaysia coupled with anti-Chinese sentiment in Central Asia, fuelled in part by the brutal crackdown on Turkic Muslims in Xinjiang, are anything to go by, China’s approach to Belt and Road-related development could turn out to be a threat to its broader geopolitical ambitions and regional security policy.

Sri Lanka recently demanded that China return control of Hambantota port.

Sri Lanka became the poster child of allegations that China was pursuing debt trap diplomacy when it two years ago surrendered to China control of the port as part of a deal to reduce the country’s debt payments.

China lent Sri Lanka US$5 billion between 2010 and 2015 for infrastructure projects that included development of Hambantota at interest rates of up to 6.3 percent.

By comparison, World Bank and Asian Development Bank rates on soft loans range from 0.25 to three percent.

“The perfect circumstance is a return to the norm. We pay back the loan in due course in the way that we had originally agreed without any disturbance at all,” said newly appointed Sri Lankan prime minister Ajith Nivard Cabraal.

Similarly, the foreign ministry of the Maldives said earlier this month that it was seeking to restructure its Chinese debt.

“Borrowings by the previous government were unreasonable and put us in difficulty. But we can solve this mess through diplomatic means,” said foreign minister Abdulla Shahid.

Last month, former president Abdulla Yameen was jailed for five years and fined US$5 million for corruption during his term that ended late last year. Mr. Shahid’s government has accused China of land grabs during Mr. Yameen’s reign.

In a rare success, Malaysia earlier this year negotiated a one third reduction in the cost of a US$15.7 billion Belt and Road-related rail project.  In a further concession, China agreed that 70 percent of the workforce would be Malaysian and that Malaysian contractors would get 40% of the civil works.

China has repeatedly been accused of employing Chinese rather than local labour for Chinese-funded projects along the Belt and Road and importing materials from China rather than sourcing them locally.

The government of Pakistani prime minister Imran Khan has been less successful than its Malaysian counterpart.

It recently bowed to Chinese pressure to revive hundreds of projects initially suspended after it came to office in 2018.

The appointment of a retired lieutenant general as head of a new authority overseeing the China Pakistan Economic Corridor (CPEC) that groups Belt and Road-related projects reflected China’s wariness towards messy Pakistani politics and preference for dealing with the country’s military.

With Sri Lanka as the anti-thesis, analysts suggest that China is determined to make Pakistan a success story.

“The big battle at the moment is about CPEC’s reputation, and Beijing cares about salvaging that. They need to show BRI has been a success, that it hasn’t put Pakistan’s economy in trouble and that there isn’t a backlash. If they can’t do it in a context like this, it suggests that there is something flawed in the model,” said Pakistan and China scholar Andrew Small.

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Standing up to China: Czech mayor sets a high bar

Dr. James M. Dorsey

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A Czech mayor’s refusal to endorse Beijing’s One China policy potentially sets a high bar as Western powers grapple with how to respond to allegations of excessive use of violence by police against Hong Kong protesters and the implications of leaked documents detailing a brutal crackdown in China’s north-western province of Xinjiang.

Prague mayor Zdenek Hrib rejected a sister city agreement between the Czech capital and Beijing in late October because it included a clause endorsing the One China policy, which implicitly recognizes China’s sovereignty over Taiwan, as well as Hong Kong and Tibet.

Mr. Hrib argued that the agreement was a cultural arrangement and not designed to address foreign policy issues that were the prerogative of the national government.

The mayor’s stance has since taken on added significance against the backdrop of US President Donald J. Trump’s signing of legislation that allows for the sanctioning of Hong Kong officials, embarrassing Communist party leaks that document repression in Xinjiang, the election of a new Sri Lankan government that intends to adopt a tougher policy towards China, and simmering anti-Chinese sentiment in Central Asia and beyond.

Mr. Hrib’s rejection was in fact a reflection of anti-Chinese sentiment in the Czech Republic as well as opposition to the pro-China policy adopted by Czech president Milos Zeman.

To be sure, Mr. Hrib, a 38-year old medical doctor who interned in Taiwan, was shouldering little political or economic risk given Czech public anger at China’s failure to fulfil promises of significant investment in the country.

On the contrary, Mr. Hrib, since becoming mayor in mid-2018, appears to have made it his pastime to put Mr. Zeman on the spot by poking a finger at China.

Mr. Hrib visited Taiwan in the first six months of his mayorship, flew the Tibetan flag over Prague’s city hall, and rejected a request by the Chinese ambassador at a meeting with foreign diplomats to send Taiwanese representatives out of the room.

Beijing’s cancellation of a tour of China by the Prague Philharmonic Orchestra in response to Mr. Hrib’s provocations forced Mr. Zeman to describe the Chinese retaliation as “excessive” and his  foreign minister, Tomas Petricek, to declare that “diplomacy is not conducted with threats.”

Perhaps more importantly, M. Hrib was taking a stand based on principles and values rather than interests. In doing so, he was challenging the new normal of world leaders flagrantly ignoring international law to operate on the principle of might is right.

“Our conscience is not for sale,” said Michaela Krausova, a leading member of the governing Pirate Party of the Prague city council. Ms. Krausova and Mr. Hrib’s party was founded to shake up Czech politics with its insistence on the safeguarding of civil liberties and political accountability and transparency.

While couched in terms of principle, Mr. Hrib’s stand strokes with newly installed Sri Lankan president Gotabaya Rajapaksa’s intention to wrest back control from China of the island’s strategic Hambantota port that serves key shipping lanes between Europe and Asia.

Hambantota became a symbol of what some critics have charged is Chinese debt trap diplomacy after Sri Lanka was forced to hand over the port to China in 2017 on a 99-year lease because the government was unable to repay loans taken to build it.

“I believe that the Sri Lankan government must have control of all strategically important projects like Hambantota. The next generation will curse our generation for giving away precious assets otherwise,” Mr. Rajapaksa said.

Fears of a debt trap coupled with the crackdown on Turkic Muslims in Xinjiang, which targets not only Uighurs, but also groups that trace their roots to Central Asian countries, have fuelled anti-Chinese sentiment in Kyrgyzstan, Tajikistan and Kazakhstan.

“Given that China is likely to continue to expand its presence, further irritating local publics, the temptation of opposition groups to exploit such anger will only grow. If that happens…the anti-Chinese demonstrations that have taken place to date will be only the prelude to a situation that could easily spiral out of control, ethnicizing politics in these countries still further,” said Central Asia scholar Paul Goble.

Beyond Xinjiang, anti-Chinese sentiment in Central Asia is fuelled by some of the same drivers that inform Czech attitudes towards China.

The shared drivers include unfulfilled promises, idle incomplete Chinese-funded infrastructure projects, widespread corruption associated with Chinese funding, and the influx of Chinese labour and materials at the expense of the local work force and manufacturers.

Beyond Xinjiang, Central Asians worry about potential debt traps. The Washington-based Center for Global Development listed last year two Central Asian nations, Kyrgyzstan and Tajikistan, as risking China-related “debt distress.”

Warned China and Central Asia scholar Ayjaz Wani: “Chinese principles in Central Asia are hegemonic. China has always interacted with Central Asian states without regarding their cultural identities, but according to its own vested interests… However, the ongoing anti-China sentiments may be coming to a tipping point.

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