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China’s military doctrine with President Xi Jinping

Giancarlo Elia Valori

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Which is President Xi Jinping’s military doctrine and his  “warfare rationale”?

With a view to well understanding the evolution of Chinese warfare studies to date, however, we need to study the tradition of the People’s Liberation Army (PLA) and the vision that the Communist Party of China (CPC) had in the history of warfare doctrine.

Firstly, for China, the different terminologies used within NATO and, more generally, in Western military doctrines such as “global strategy”, “national security strategy” or “national defense strategy” are not separate concepts or ways of thinking, but are all subsumed in the Chinese general notion of “military strategy”.

Again in Chinese terminology, in simpler terms,the strategy “guidelines” are the political-military policy lines developed by the CPC leadership.

In these policy lines we can perceive the geopolitical threat that the CPCthinks to be closer and hence the likeliest type of future war that China must absolutely be ready to wage and fight.

The initial evaluations of the Chinese handbooks are the equivalent of the Western strategic assessment, while the analytical ones refer to the Chinese Armed Forces’ capabilities in relation to “present and future wars”.

According to China’s current strategic thinking, the science of military strategy is the study of warfarelaws and of the laws on the conduct of war, as well as the analysis of war predictions and the study of the most probable type of war in the future – all analyzed on the basis of past, present and future scenarios.

Our analysis, however, needs to begin at least with the military philosophy of Deng Xiaoping, who was the first Chinese leader to break with the philosophy of Maoist “people’s war”, in which the missing technology was replaced by the large dimension of masses in arms.

It is worth noting that, in Mao’s mind, all thiswas the policy line for being prepared to resist a nuclear attack with a subsequent invasion – a nuclear attack carried out, in all likelihood, by the USSR or the United States.

Indeed, the Two Worlds of Mao’s doctrine on foreign policy – the Third World was the world of Poor Countries, which were bound to be globally directed and led by Communist China.

Conversely, in Deng’s opinion, there was a shift from the primary perception of a global threat to the theory of local and “limited war” around China’s borders.

Deng Xiaoping’s “policy line” on war and defense envisaged above all land conflicts on the Northern and Eastern borders (the “Northern enemy”, namely the Soviet Russia, as Deng called it), but also sea clashes and surprise air attacks, with the subsequent necessary countermoves of the People’s Liberation Army.

What wasmissing in Deng’s military thinking – and that was Mao’s legacy – wasa specific doctrine of the nuclear weapon that – as Soviet Marshal Shaposhnikov also taught us – was “a weapon like the others”.

Jiang Zemin – after Deng – when the Four Modernizations (the last of which was exactly the military and technological one) redeveloped Deng Xiaoping’s model by envisaging “limited warfare under high-technology conditions”.

In that new context – the first real theoretical departure from  “Mao’s policy line” on war – Jiang Zemin envisaged  two primary intervention areas, the one near Taiwan and the one against all US networks in the Pacific, while the fall of the USSR made the traditional Chinese defense against the “Northern enemy” basically useless.

This was the first real maritime dimension of the Chinese doctrine, after Mao Zedonghad thought about an almost entirely terrestrial defense, on the basis of his Long March.

As early as the 1950s, however, the internal documents of the Central Committee identified the Philippines, Southeast Asia, the Pacific Islands and obviously Taiwan and even Japan, as future areas of Chinese invasion or hegemony.

Hence, in technological terms, Jiang Zemin’s new war meant a clash based on intercontinental missiles, fine electronics, multi-dimensional battlefields, sensors and intelligence.

The Central Military Commission, namely the highest Party’s body for defense matters, officially accepted Jiang Zemin’s policy line in 1992.

It is easy to imagine what the Chinese military decision-makers were observing and studying at thetime: the war in the Balkans; the first Gulf War of 1990-1991; the war in Rwanda; the “ten-daywar” between Slovenia and the Republic of Yugoslavia; the beginning of the Algerian jihadist insurgency; the outbreak of war in Somalia; the clashes in Georgia; the conflict on the border between Armenia and Azerbaijan and some other minor conflicts.

The Chinese study of military doctrine always refers to concrete cases. In China’s traditional philosophy there is nothing resembling the Aristotle’s or Kant’s “categories”.

Hence, according to China and “Jiang’s policy line”, the war was bound to be won always by means of elite troops and preventive operations, although China has always refused to be the first to start a military clash- even a solely nuclear one.

The new local wars theorized and studied by Deng Xiaoping and Jiang Zemin were supposed to be “quick battles to force quick resolutions”.

Instead of making the enemy enter deep into the Chinese territory – as Mao Zedong thought – and later holdingand gripping it as in a vice of masses in arms, Deng’s and Jiang’s new doctrine envisaged operations deep into the enemy’s territory.

Therefore emphasis was laid on very advanced technological preparation and on the elite troops’ abilities, as against the great masses of Mao’s time, as well as on undercover operations, the tactical and strategic element of surprise and deep combined actions.

Beyond the myth of all-out nuclear war -in which also  Mao believed and which, however, was a paper tiger –  Jiang Zemin’s new military policy line focused on the maximum lethality of weapons, on tactical precision and on the encirclement and tacit overcoming of the enemy, as well as penetration beyond the lines.

Later the CPC’s military and strategic thinking focused on the Revolution in Military Affairs, which the United States had developed in the early 1990s.

It should be recalled, however, that the first theory of Revolution in Military Affairs had been developed by Marshal Ogarkov in the Soviet Union, by laying emphasis on the robotization of the battlefield and the increasingly important role played by space technology and satellites as weapons in themselves and for tactical and strategic intelligence.

Jiang Zemin revised those Western and Soviet concepts and added a series of considerations on the political and social dimension of the conflict, but always in a framework of “regional war under conditions of high-technology and  computerization”.

After China had studied the war in Kosovo, the specific doctrinal concept was developed in 2004.

Chinahad also well studied the theories of “non-violent warfare” developed by Gene Sharp in the United States and later implemented them thoroughly in the “color revolutions” of Georgia and Ukraine, as well as in the case of OTPOR! in Serbia.

Specific emphasisis laid – although not explicitly – onpsychological warfare in the current Chinese military doctrines.

As clearly stated in the 2004 White Paper, China’s IT and cyber warfare consists mainly in “inflicting a heavy toll on the enemy, even the conventionally superior one, through a variety of tools ranging from the destruction of its satellites and missile systems to the use of electromagnetic pulse weapons to hit enemy ships or aircraft and even its civilian IT networks”.

At the time, the idea of ​​Chinese political and military decision-makers was the shift from “mechanization to ICTs  and computerization” leading to multiple asymmetric, non-contiguous and non-linear wars in the strategic clash region.

If we consider the provincialism characterising many “White Books” of the European Armed Forces at the time, what stands out is the vitality of the Chinese strategic thinking, certainly devoid of semantic ambiguities or pacifist concerns.

Conversely mechanization was the specific aim of the 2008 White Paper, when the CPC’s central power still supported the idea of ​​training the best military elites on the field and also acquiring the Command, Control and Intelligence (CCI) IT networks,in addition to acquiring the weapon systems most suitable for the 2008 new doctrine, which followed the doctrine of the official documents of 2004 and subsequent years.

According to the Chinese decision-makers, ICTs and computerization werethe Achilles’ heel of the weapon and command systems of Westerners or anyway of China’s possible enemies.

The “web” was supposed to be the PLA’s first attack frontin a situation of limited warfare or global confrontation.

Therefore, the Chinese decision-makers did not only seek  an efficient network for the Chinese CCI, but also a specific doctrine for the “electronic warfare” and the signs that it would be greatly developed in the following years.

Many of you may remember that, in those years, the Western interestin the Military Operations Other Than War (MOOTW) emerged.

In the Chinese official doctrines from 2007 to 2010, we could note that specific attention was paid to the role that the Chinese Armed Forces could play in assisting the Chinese economy and society and in supporting the population during natural disasters.

In this regard, we cannot certainly forget the role played by the PLA against sabotage, internal subversion and factionalism with respect to the Party and the Chinese nation.

Hence we can envisage an internal military role of the Armed Forces which is far subtler and more careful than the usual one prevailing in Western countries – a role which is also predictive and proactive, not just ex post.

As you may have realized, all these considerations show that there is very clear submission of the PLA to the Party, but also the creation of a specific political role for the Chinese Armed Forces.

A role that is played through the Central Military Commission which,since 1990,has increased its importance within the CPC hierarchy.

It is in this political and strategic context that the global threats to the Chinese status quo really change: the USSR collapsed in 1991 – hence there is no longer the danger of a great invasion from the North, as the CPC’s leadership   had feared during the clashes on the UssuriRiver in 1968.

The Ussuri River war broke out when, a year before, the “Red Guards”  had besieged the USSR Embassy in Beijing and hence the USSR attacked the Chinese border guards right on the Ussuri River.

The USSR threatened the use of nuclear weapons against  China, but the United States threatened heavy repercussions against the Soviet Union if this happened.

Thiscurrently well-known data coming from the US archives make us imagine how natural was for China at the time to accept the US proposal for a new opening towards the United States to clearly oppose the Soviet Union.

It should also be noted that Mao’s famous theory “on the correct handling of contradictions among the people” was, in fact, an appeal to compromise with the Soviets, who supported the “Parliamentary way” – as also the Parties  depending on the USSR did – while China wanted a greater “anti-imperialist” and anti-colonialist struggle.

Other military resultswere also achieved between China and the Soviet Union in that political and ideological juncture: Khrushchev refused to actively respond to the US Marines’ operations in the Lebanon, besides refusing to support China when it began bombing the island of Quemoy still  occupied by Chiang Kai Shek’s Kuomintang, and later making it clear to everyone that the Soviet Union would never grant a nuclear bomb prototype to China.

This is the real military plot of a now very famous discussion – apparently scholastic and obscure – between the two Marxist powers of the world.

Therefore in 1991, the “Northern enemy”, namely the USSR, no longer existed and the fear of the great invasion had waned.

However, as the Chinese decision-makers rightly thought,  the no longer bipolar world increased – and certainly not  diminished – the likelihood of regional conflicts.

Nothing to do with the pacifist dreams or delusions not only of the unaware public, but also of Western decision-makers.

The sanctions imposed on China by the United States after the Tiananmen Square events; the ongoing Anglo-American controversy on human rights in China; the US support to Taiwan during the 1996 crisis, when the United States sent two aircraft carriers to the Formosa Strait, and the Tibet issue – as well as the Xinjiang issue, which is currently mounting between the US and European media influencers – and finally the commercial tensions between the United States and China, are all factors which made us think – in those years, but also at a later stage – that China’s “far enemy”, namely the United States, would remain – in fact – the only real enemy.

It was the US technology show in the two Gulf Wars of  1991 and 2003which definitely convinced the Chinese decision-makers of the new IT turn and direction the CPC’s National Armed Forces had to take.

Nevertheless the moment of truth came for China when the United States created the casus belli in Kosovo. For the Party’s and PLA’s decision-makers that proved how the United States wascapable of creating difficult situations by manipulating both diplomacy and the military equilibria of a wholeregion.

But what is President Xi Jinping’s current political-military vision?

In the official documents,Xi Jinping’s “policy line” regards not so much the analysis of new threats or the most  abstract doctrinal issues, but rather the list of things that the PLA must absolutely accomplish in a short lapse of time:

  1. a) to improve the ability of simultaneously coping with a wide range of internal emergencies and tactical or non-tactical military threats, which could endanger China’s sovereignty at terrestrial, sea and air levels;
  2. b) to support the harsh and specific protection of the unification of the Motherland – an essential factor for achieving the great Belt and Road Initiative;
  3. c) to ensure China’s security “in new contexts” – and here reference is obviously made to the protection of the financialand industrial system, besides the political one;
  4. d) to ensure the protection of China’s interest overseas – the truly new strategic asset of China as global economic power;
  5. e) to improve the efficiency of strategic nuclear and cyber deterrence, as well as the PLA’s possibility of successfully launching a quick and highly dissuasive nuclear counterattack;
  6. f) to increase the PLA’s participation in international peace-keeping operations – a full recognition of China’s role also at military level;
  7. g) to strengthen the protection of the Chinese homeland against separatism and terrorism;
  8. h) to improve the PLA’s ability to fully carry out its tasks during environmental and health crises – as was the case with the bird flu crisis in 2003 and in the following years.

Hence, with a view to winning a cyber regional war – the PLA’s first political and strategic goal – the utmost protection of strategic surprise is needed, also on the part of the CPC itself – in addition to the protection of China’s interest overseas, another primary goal of the Chinese leadership.

Moreover, the defense of interests “in other fields” refers to China’s expansion at the maritime, space and cyber levels.

An expansion going well beyond the territorial limits of China and of the areas such as Hong Kong and Macao.

In fact, China is currently looking for new military bases abroad, namely Chongjin in North Korea; Port Moresby in Papua New Guinea; Sihanoukville in Cambodia;Koh Lanta in Thailand;Sittwe in Myanmar; Dhaka in Bangladesh; Gwadar in Pakistan; Hambantotaportin Sri Lanka; the Maldives and the Seychelles islands; Djibouti; Lagos in Nigeria; Mombasa in Kenya; Dar es Salaam in Tanzania;  Luanda in Angola and Walvis Bay in Namibia.

Certainly this program of military expansion and strategic repositioning under President Xi Jinping implies a series of anti-corruption actions that have also heavily affected the PLA, especially its highest ranks.

Therefore President Xi Jinping thinks that highly technically and operationally advanced Chinese Armed Forces are needed. They must above all be strongly and exclusively subjected to the Party, which has also been undergoing an anti-corruption probe for many years.

Mao Zedong’s Chinese dilemma “Reds versus Experts” is back again, but this time in the new global horizon imposed by Xi Jinping’s Presidency.

Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is an eminent Italian economist and businessman. He holds prestigious academic distinctions and national orders. Mr Valori has lectured on international affairs and economics at the world’s leading universities such as Peking University, the Hebrew University of Jerusalem and the Yeshiva University in New York. He currently chairs "La Centrale Finanziaria Generale Spa", he is also the honorary president of Huawei Italy, economic adviser to the Chinese giant HNA Group and member of the Ayan-Holding Board. In 1992 he was appointed Officier de la Légion d'Honneur de la République Francaise, with this motivation: "A man who can see across borders to understand the world” and in 2002 he received the title of "Honorable" of the Académie des Sciences de l'Institut de France

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The Implication of China’s Diplomacy in APEC and ASEAN

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It is truly unusual that the Chinese President Xi Jinping and its Premier Li Keqiang are visiting the same area during nearly the same time: Xi’s visit to APEC from15th to 21st November and Li’s visit to ASEAN on 15th November. Yet, if we look into China’s foreign policy towards this area over the past years since President Xi took power, it is not difficult to understand both Xi’s and Li’s official visits to the “larger Pacific” and the meaning beyond.

As we know, President Xi has reiterated that the Pacific is large enough for the countries involved to share the prosperity with each other. In order to achieve the inclusive rather than exclusive benefits for all, China’s diplomacy aims to reject any kind of unilateralism, trade protectionism and anti-globalization. Given this, Xi’s at APEC and Li’s at AEASN is defined as a signal of China’s diplomacy to further reform and bold openness.

As a rising great country, China is surely eager to expand its investment and trade with the south Pacific area, and Papua New Guinea (PNG) is the first country visited by Chinese president. What is more, PNG joined the Asian Infrastructure Investment Bank (AIIB) early 2018 and then became the first state of Pacific islands to sign the MoU on “The Belt and Road Initiative” construction. As the theme “Harnessing Inclusive Opportunities, Embracing the Digital Future,” the APEC summit will focus on Regional economic integration, digital economy, connectivity, sustainable and inclusive growth and so forth.

Also during Premier Li’s visit to the ASEAN, he highlighted the necessity of the collaboration and mutual benefit among the countries involved on the 21st China-ASEAN leaders meeting. This is also the 21st ASEAN Plus Three Summit (10+3) and the 13th East Asia Summit (EAS).

Quite understandable, since the 1960s, the center of world economy has shifted from North Atlantic to Asia-Pacific, its dynamic growth in the region create countless jobs and push the development of world economy. This is the reason that Asia-Pacific region has the most trade agreements and the most complicated economic architecture around world. APEC and ASEAN, as two institutions that possess most member states, are the very pillars of the tumbledown regional economic architecture. APEC was launched by Australia and later included 21 member states in the region, amongst are United States, China, Japan, the economic giant three of the world economy. ASEAN is an institution that consist of ten small and middle states. Though they are not strong enough to meet the challenges from the power politics alone, ASEAN is a core force that firmly facilitate the economic integration of the whole region of East Asia and the Pacific. No matter what the way they embrace, they are the de facto basic regionalism of Asia-Pacific. The withdrawing of United States from Trans-Pacific Partnership (TPP) and hard-achieved Regional Comprehensive Economic Partnership (RCEP) once brought the regional economic architecture a fig leave and strengthened the impact of APEC and ASEAN.

As a result, the two visits of Chinese top leaders to the same region at the same time definitely attract worldwide attention, because they not only represent China’s recent diplomatic focus but also mark the fact that Asia-Pacific region has become one of the vital fields where China’s diplomacy will be actively conducting in terms of the Belt and Road Initiative, and carry on the good-neighbor policy. Since China has argued for creating a peaceful development milieu, to enhance economic transformation and upgrading oversea markets and partners in Asia-Pacific region.

Consider these facets, China, as the second largest economy, aims to promote its well-articulated stance on multilateralism and inclusiveness and globalization. As both President Xi and Premier Li have strongly said that China is ready to work with Pacific island countries to endeavor together and sail for a better future for bilateral relations. For the sake of that goal, China always believes that as long as all the countries involved have firm confidence in each other’s development, cooperation and the future of East Asia, and work closely together and forge ahead, all sides would achieve more and reach a higher level in the next 15 years.

For sure, China belongs to the part of a larger Asia-Pacific family, and the Chinese government defines its goal as the shared prosperity of this region. Therefore, China will continue to work hard and constructively to promote the overall development of impoverished but promising Pacific island countries under the Belt and Road Initiative.

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An uncertain step in moving China-Japan relations

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Authors: Meshach Ampwera  & Luo Xinghuan

On October 26, Chinese President Xi Jinping met Japanese PM Shinzo Abe and praised that both China and Japan have pledged to strengthen bilateral ties amid continuous efforts made by the two nations. Xi said, “Bilateral relations have returned to the right track and gained positive momentum, which is something the two sides should cherish.” As the two largest economies in Asia, China and Japan are also the vital players in Asian security and the global development.

In addition, since this is the first official visit to China by a Japanese PM in a seven-year “Cold Peace” period, it is widely assumed that Abe’s visit symbolizes the resumption of high-level visits and will be followed by an increasing rapprochement between China and Japan. True, the leaders of the two economic giants witnessed a wide range of agreements, including a 30 billion US dollar worth of currency swap pact, the establishment of a maritime and air liaison mechanism, and enhancing people-to-people exchanges.

Yet, three factors have to be considered seriously in looking into Japanese foreign policy given the current changing geopolitical landscape regionally and globally. First, Japan has still regarded itself as a “defeated” state during the WWII. Since then, Japan’s postwar posture has frequently described as a new pacifism; yet in fact it is considerably more complex. As Henry Kissinger put it: “Japan had acquiesced in the U.S. predominance and followed the strategic landscape and the imperatives of Japan’s survival and long-term success.” This means that the governing elites in Tokyo used to hold the constitution drafted by U.S. occupying authorities with its stringent prohibition on military action, and adapted to their long-term strategic purposes. As a result, Japan was transformed from the pacific aspects of the postwar order (that prohibited military action) into a nation that has focused on other key elements of national strategy, particularly using economic leverage regionally and globally, though not uncontroversial.

Second, in a recently-released paper written by the former US Secretary of Defense Ash Carter, he maintained that “Japan is a close ally of the U.S. and a rising military power, too, because of legal and constitutional changes of great significance championed by Prime Minister Abe.” In practice, the Japanese administration has engineered an expansion to enable its military to operate regionally and even globally in response to the rise of China, violent extremist activity in Asia, and the alleged North Korean belligerence.

Actually in 2013, Japanese Government White Paper revealed a desire to become a “normal country” with an active alliance policy. In a searching for a new role in the Asia-pacific region, Japan aims to act as an “anchor” of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) concluded in 2018 after the withdrawal of the United States. Now it involves 11 countries and representing 13.4% of global GDP ($ 13.5tri.). As the largest economy of the CPTPP, Japan has been active in moving it forward. Early this year when the British government stated it is exploring becoming a member of the CPTPP to stimulate exports after Brexit in 2019, Abe stated that the United Kingdom would be welcomed to join the partnership. It is said that even the U.S. reconsiders possibly rejoining the CPTPP if it were a “substantially new deal” for the United States.

Japan’s ardent involvement into the US-led strategy in Asia has also been endorsed to expand steadily as a normal power regionally and globally. For example, the Asia-Africa Growth Corridor (AAGC) is the result of the joint declaration issued by the India and Japan in 2016. Although it is premised on four pillars of development and cooperation, it is self-evident that the AAGC reflects a growing special “strategic and global partnership between India and Japan” in which both sides have viewed China’s growing, pragmatic and successful presence in Africa as a menace. There is no question that AAGC is a well-crafted vision and agenda of both India and Japan, linking with their own development priorities. But with increasing pressure from Washington and Brussels, Japan and India are in effect driven by the option for the AAGC to rebalance China’s Belt and Road Initiative (BRI).

From the inception of the BRI, they have more than ever before been concerned with being isolated in Africa by Beijing’s initiative. But, as Ampwera Meshach, a researcher at Jilin University put it, “Africa is on the growth trend and offers potential markets and raw materials. For this reason, Africa largely needs pragmatic and scientific, technological and development- oriented initiatives and these are clearly reflected in China’s BRI.” In light of this, the AAGC does neither reflect a novel nor pragmatic approach on how it fits within the African agenda. Instead, AAGC’s foundational pillars seem more inclined to the Western cooperation approaches that have for decades not been translated into development.

Controversially, two days before Abe’s visit to Beijing, Japan had decided to scrap official development assistance (ODA) to China, which is a program where Japan provides aids to developing countries starting back in 1954. Even though some people argue that Japan’s ODA is reasonably cancelled because China’s GDP is even 2.5 times larger than that of Japan, yet, it is necessary for Chinese to be aware of the reality that Japan is a longstanding ally of the United States. As Japan has long been an economic power, its impressive military capabilities would not be confined to a strict policy of territorial defense—no projection of Japanese power or the U.S.-Japan alliance to the region as a whole.

It is during the Abe’s administration which has recognized an environment of growing Chinese assertiveness, violent extremist activity in Asia, and North Korean hostility, and therefore, Japan has eagerly participated in Asian security, including training and exercising with other nations, beyond a purely passive, home-island defense role. This makes it an increasingly important player serving the US strategy in Asia but challenging the rise of China globally.

It is true that Abe tweeted about the trip — while recognizing the challenges in moving bilateral relations forward, he said that he would still work to “push Sino-Japan relations to the next level”. Given the two countries’ economic links, it is only understandable that there is a need for the two sides to come closer. Moreover, Japanese businesses has been an extremely active force behind the government’s shift of attitude on the Belt and Road Initiative (BRI).

Yet, all in all, we should never ignore that Japan’s ambitious foreign policy has gone beyond the economic goal.

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Red Flags: Why Xi’s China is in Jeopardy – Book Review

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George Magnus writes about the dangers of the Middle-Income Trap in the Middle Kingdom, among other issues, in Red Flags: Why Xi’s China is in Jeopardy. President Xi’s face adorns the book cover, with his name looming above.  Fitting, seeing as China has removed presidential term limits; China’s fate is thus likely to be tied to the decision making of Xi for the next couple decades.

Magnus writes about the dangers of Xi’s likely ascendance to President-for-Life.  Ever since the excesses of Mao’s one-man rule, China’s Communist Party has largely ruled by consensus, while provincial governments have served as a counterweight to federal authority via control of their land and many of their local State Owned Enterprises (SOEs).  Xi is challenging this staus quo.  So-called Xi Jinping Thought is now official party canon, being taught in schools and in the media.  The 2012 crackdown on corruption by Xi in his inaugural year was widely seen as a pretense for taking out political opponents and sending a message to his potential opponents.  Ever since, Xi has been working to centralize power to himself.  Magnus notes that being leader for life largely shields Xi from short-term popular discontent, but also means that every long-term decision, good or bad, will become part of Xi’s legacy.  Hence, the book informally reads as a personal policy checklist for Xi.

Red Flags lists four, well, red flags of likely impediments to Chinese economic development.  Firstly is debt.  China has been an unprecedented money-making machine for the past three decades or so.  However, signs are starting to appear of a possible economic slowdown.  Most significant is the debt-GDP ratio, which has skyrocketed over the past few years.  Magnus writes extensively about how China’s growth, up to this point, has largely been fuelled by credit (debt).  China’s much-maligned (by Trump, most notably) trade balance surplus has shrunk to no more than a few percent, statistically insignificant.  China could theoretically make up for shrinking foreign demand for goods and services with domestic consumers.  Magnus is unfortunately the bearer of bad news in this regard: “Household savings rose from about 5% of disposable income in the late 1970s to about 38% in 2016, or just over 25% of GDP. Savings by companies are also elevated, amounting to about 17% of GDP in 2016.”

Hence, the Xi regime has been trying to maintain economic growth via ever-greater sums of state investment funding.  Magnus explicitly warns against this: “The reason the investment rate has to fall is because the more China relies on it, the more inefficient that investment will become.”  Such a statement might seem self-evident, but Magnus backs it up with facts.  For instance, he points out, “Between 1978 and 2006, for example, China spent between 2 to 4 yuan of investment to get 1 additional yuan of GDP. Since then, the amount has risen steadily to reach about 9 yuan in 2015, corresponding to a marked fall in investment efficiency.”

Magnus writes a lot about the inefficiency of China’s thousands and thousands of SOEs.  “Officially, and according to some China-watchers, SOEs now account for just a fifth of output and a tenth of employment. The presumption though that the rest of the economy is in private hands, as we understand it in the West, is incorrect. Many private firms have large or majority state owners, who exercise significant control over senior appointments and corporate strategy, and state ownership is often disguised by multiple layers of investment companies ultimately owned by a state entity. Allowing for these opaque adjustments, the purely private part of the enterprise sector may actually be little higher than 20–30 per cent.”  SOEs have built much of modern China, but their efforts are increasingly being wasted on skyscrapers and airports that remain almost empty, Chinese Roads-to-Nowhere.  A blank check invites planners to ignore long-terms concerns of viability, blinded by short-term gains that go directly into the pockets of Party-affiliated contractors.  China’s financial services sector isn’t much better off.  Magnus writes about all the bailouts, takeovers and general heavy-handedness by the government of various Chinese banks and other related companies.  Due to a slowdown in trade and many other issues discussed in the book, state investment will figure to play an ever-larger role in China’s economy, inefficiency be damned.

The book’s second diagnosed problem for China’s future growth is its currency, the renminbi.  Xi mirrors the isolationist mindset of China’s ancient emperors with regards to cash inflows and outflows.  It’s very hard for Chinese investors to send renminbi out of the country.  Likewise, China restricts the ability of foreigners to own reserves of renminbi, or Chinese financial assets in general.  The renminbi is subject not only to this lack of liquidity, but also the confines of a planned economy.  China is infamous for its strict control of its currency valuation, as well as its monetary policy via diktats, investment and bailouts.  Its ownership of USD and other foreign currency reserves must always be flawlessly balanced to safely back up the value of the renminbi.  This resulted, for instance, in the selling off of a trillion of its USD reserves between 2014-2016.  The combination of currency illiquidity and over-management limits the ability of the renminbi to fuel Chinese economic growth.

Thirdly, the book mentions the so-called Middle Income Trap.  Once a country reaches a certain benchmark of development, it’s hard to maintain further momentum.  China’s already experiencing slowed growth due to factors such as increased global manufacturing competition.  As Magnus points out, China has already had its coming-out party to the world economy.  It can’t join the WTO again or eliminate mass hunger again.  Likewise, China has stalled in terms of rural development and education.  Rural China is increasingly falling behind the major cities and the hukou system of restricted movement and rights for migrant workers isn’t helping.  Students in China still attend far fewer years of school than students in developed countries like the US, especially in advanced fields like IT.  These issues of inequality and 21st-century education must be addressed if China is to fully develop.

Lastly, Magnus writes about the demographics crisis.  China has one of the highest ratios of elderly people in the world.  Combine this with China’s 1.45 birth rate and the gender disparity caused by the 1-Child Policy and you have a ticking time bomb.  The workforce is increasingly running out of youngsters who can take the place of retirees, causing a slowdown in economic output.  The higher the elderly population becomes, the more each working-age person will have to contribute to pensions and healthcare.  The economic burden that only-children will have to shoulder taking care of their aging parents will inevitably lower marriage rates and thus further lower the unsustainably low birth rate.

This is the most dire problem because there’s very little that society can do about it.  Xenophobia has prevented any meaningful amount of migration to China, but even if China were to let in tens of millions of foreign workers, that would be a drop in the bucket for a nation of 1.4B people.  Even after China ended its One-Child Policy, couples are still averaging well below 2 children, despite increasing prosperity.  The only real hope for China’s demography problem would be a literal ex machina: automation.  Robots may be able to generate untold wealth that could buoy a small nation like Singapore, but even an army of robots is unlikely to completely offset the gradual loss of hundreds of millions of working-age people to aging.  Even if AI is a magic bullet for all productivity woes, it take probably at least a century to meaningfully scale up, by which time China’s population will have substantially shrank.  It doesn’t help that China is, in many respects, barely keeping pace in the AI race with the US, Japan and the EU.  In the race for artificial intelligence, even being a year behind the competition can cost trillions of dollars; China’s tech sector will likely take a few decades to completely match Silicon Valley.  Lastly, it should be noted that not even innovation can overcome the limit resources of our planet.  We’re already running out of industrial resources like oil and lithium.  It would be foolish to place all of one’s eggs in the basket of a sci-fi utopia.

Red Flags is a very detailed and interesting book about the future of China.  Magnus isn’t anti-China by any means; he gives credit to China’s marvelous successes and doesn’t moralize.  If anything, the book was too generous by barely mentioning the unrest in Xinjiang and not mentioning the occupation of Tibet at all.  In an objective fashion, he succinctly explains China’s problems and offers possible solutions.  China has shown an unprecedented ability to adapt to change.  This flexibility may wind up being undone not external adversaries or limitations, but by increasing autocracy.  Dictatorship has rarely resulted in long-term, across-the-board growth.  One can look at a fellow Communist country for an example: the Soviet Union.  Though the USSR made impressive leaps in technology, manufacturing and agricultural output and human longevity, it was ultimately undone by its ideological rigidity.  A lack of accountability for its leaders meant that the USSR was forever a captive to bad policy.  Likewise, a lack of freedom stunted innovation.  If Xi is to avoid the pitfalls of the USSR, he must avoid letting his power get to his head and embrace a flow of ideas from both fellow Party members and private citizens.  Xi’s consolidation of control and crackdown on dissent would point otherwise, unfortunately.  Only time will tell if China will continues to beat the odds…

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