China is Facing Challenges in 2017

05.02.2017 Author: Vladimir Terehov

4334324232017 will be the year that sees the onset of radical changes in the world order and they will be comprehensive. In one way or another they will affect the domestic and foreign policy, as well as economic development strategies of all countries.

The events of recent months in the leading world power have been the clearest evidence that the problems that have long been accumulating have finally provoked the process of global change.

As always, these processes bring the people that are necessary for future work to the surface. In this respect, Donald Trump is just the first of those several key players who will have to perform the next historical task.

Among the ‘others’, Xi Jinping deserves special attention: he is a Chinese leader without any reservations (in contrast to D. Trump), and he became the focus of attention of the last Forum in Davos, which took place on January 17-20, 2017. He delivered a keynote speech at one of the most prestigious international venues (https://www.weforum.org/agenda/2017/01/full-text-of-xi-jinping-keynote-at-the-world-economic-forum), in which he developed the basic provisions of his own speech at the APEC meeting, held two months earlier in Lima.

The genre of Xi Jinping’s speech was akin to a poetic ode to the process of economic globalization. He noted that sometimes the process runs into gales, and stated that the Chinese Government’s ‘ship’, put out to sea in the global economy almost 40 years ago (that is, since the beginning of the reforms of Deng Xiaoping), has successfully rode them out.

Modern-day China’s willingness to pick up the banner, under which globalization was developed in recent decades, could be read between the lines of the Xi Jinping’s Davos speech.

It should be noted that it was apparently the Japanese Prime Minister Shinzo Abe who was the first of the world leaders to have pointed towards the threat of the banner falling. It occurred during the last Summit of the member-countries of the Trans-Pacific Partnership (while it was still showing signs of life), which took place on the side-lines of the APEC in the aforementioned Lima. Back then, he named Brexit and the decision of D. Trump to withdraw the United States from the TTP as evidence of a new protectionism in the development of world economic relations.

In terms of the key indicators, China rightly claims its continued position as the largest ‘driving force’ behind global economic development.

As the second world economy, in 2016 China has increased its GDP by 6.7% (the United States – by 1.6%, EU – by 1.7%, Japan – by 0.9%).

However, this is the lowest rate of Chinese economic growth over the past 26 years  and further decline (to 6.5 %) is expected for the current year. In fact, it is the slowdown of the Chinese economy, growth in corporate debt and problems in the financial sector, along with turbulence in global politics that has provoked the mood of ‘impending horror’ among some participants of the Forum in Davos

In this regard, Xi Jinping’s Davos speech served (almost specifically) as verbal therapy in order to discharge panic among potential investors in the Chinese economy. However, the serious problems already identified that may worsen during the radical economic restructuring that started in 2016 have already been widely discussed in China itself.

The severity of the situation is emphasized by the fact that the processes of deep economic reforms may not be postponed. An almost constant muggy smog over major industrial regions of the country, as a result of decades of developing ‘cheap’ coal power, is the most striking evidence of the exhaustion of the potential for extensive growth and of the Chinese economy’s need for a qualitative makeover.

Today, the meme ‘Industry 4.0’, invented a few years ago in Germany, is fashionable in China. It is used along with other memes, such as ‘cyber-physical systems’ that reinvent the images of human life already drawn up by social dreamers of the past.

However, the side effect of the continuous modernization of production processes, such as humans being rendered redundant, is being discussed in Europe. This effect appeared in the late 18th century with the beginning of the ‘Industrial Revolution’ and gradually intensified at all previous ‘industrial’ stages. However, if ‘Industry 4.0’ may be a source of serious social problems even for Europe, then what about China with its 1.3 billion population?

Meanwhile, even today, that is, long before the ‘Industry 4.0’ stage, there are social tension areas in China due to the closure of unnecessary industrial capacities (for example, in the steel and coal industries).

However, again, there is no way not to eliminate them as they ‘supply’ the international markets with products no one needs (like the aforementioned steel), provoking the implementation of the very protectionist measures on the part of the China’s leading trading partners and discrediting its claims to the leadership role in the current phase of the globalization of the world economy.

There are signs of various trends present in all strata and sectors of the political landscape of China. Therefore, there are organized forces ready to take on leadership of any mass discontent in case of economic and social problems worsening (due to transition process costs, or just due to errors in its management).

This risk is quite well recognized by the Chinese leadership and that is why, first of all, in the last two or three years the need to enhance the role of the CPC in Chinese society has been constantly postulated, and the strengthening of the personal rule of Xi Jinping has been observed. However, this trend may come into conflict with the constantly emphasized intention (in particular, at the very same Forum in Davos) to drastically increase the importance of market mechanisms in the future development of the Chinese economy.

2017 also offers serious challenges to Chinese foreign policy. They are related mainly to the uncertainty of the US foreign policy (the key geopolitical opponent of China), which is currently under formation by the new US administration.

Meanwhile, the signals coming from overseas are rather contradictory in nature. There are both definitely bad, and relatively ‘good’ news in the sphere of economy. The bad news involves measures of a protectionist nature that were a key point to Trump’s entire election campaign.

The United States’ refusal to join the TPP should also be ranked among the same protectionist measures, although in some ways it can be considered ‘good’ for China, mainly for political reasons.

Beijing should hardly expect any positive signals from Washington in the military-political sphere. The new Secretary of State Department Rex Tillerson has voiced caution about the ‘excessive military activity’ of China in the South China Sea.

The first country, which the new Defense Secretary James Mattis is going to visit, will be South Korea, where there will almost certainly be promises of military support made to this US ally in Asia and the confirmation of the decision to deploy the THAAD missile defense system in the territory of South Korea, which was adopted by the previous administration.

No particular problems are expected in the relations between China and the three other major regional players, i.e. Russia, India and Japan. However, the current relatively smooth-Russian-Chinese relations is rather a consequence of the lack of large-scale ‘common goals (which is hardly due to the PRC), equal to those which China has with the US, Japan or EU.

As for the political component in China’s relations with India and Japan, then is no significant mitigation to be noticed there. In this regard, it is noteworthy that the main opponent represented by the new American President is making overtures primarily to Delhi and Tokyo in particular. Narendra Modi was one of the first foreign leaders with whom D. Trump had a conversation on the phone after his inauguration, inviting him to visit the United States on an official visit. A visit to the US (also official) by the Japanese Prime Minister has already been set for February 10.

All of the complex internal and external problems specified above (which will only intensify in the coming year), as well as the measures for their solution will be at the top of the agenda of the next 19th CPC National Congress, scheduled for this autumn.

Vladimir Terekhov, expert on the Asia-Pacific region, exclusively for the online magazine “New Eastern Outlook.”