China: gearing up for a Stride

As China steps up its international expansion to ensure stability and get ready for another breakthrough, its frightened neighbours and competitors, with the US at the forefront, are trying to respond. Beijing’s success would mean a Chinese-style reglobalisation under its leadership, suggests Aleksey Maslov in an article for the BRICS Business Magazine.

In February, the CPC’s Central Committee voted to amend the constitution to allow both the President and the Vice President to remain in office for an indefinite time. It means that Xi Jinping may hold the reins even after 2023, essentially becoming a leader for life.

What does that undoubtedly landmark event mean for China? Three things should be noted. First, the country effectively restores a quite traditional and natural political model it had back in the times of the Empire and, to a significant extent, Mao Zedong. Xi’s attempt to introduce a Western-type system of two consecutive terms failed to gain traction.

Second, he wants to establish himself as a new leader of the reinvigorated China. But his goals cannot be achieved within the next five–seven years. A great number of Chinese development programmes has a 2035 or later deadline. President Xi wants to kick-start all changes in his country personally.

Third, it turns out that a long-term and largely authoritarian regime has become a popular instrument to spur economic growth. This political model is not unique to China. Similar trends are seen in Asian countries ranging from monarchies such as Thailand and all the way to Japan, North and even South Korea, where abandoning the five-year presidential terms has been a hot subject recently. Vladimir Putin has been Russia’s leader, directly or indirectly, for almost two decades. In this context, Xi Jinping understands that China should have a lasting President to keep its goals consistent.

CORRUPTION AND PATERNALISM

Another important effort made at the same Plenary Session was the establishment of a high-level anti-corruption commission. This has come as a further demonstration of Xi’s commitment to fighting the cause within the party and the political system in general. In fact, it is an extension of a large-scale anti-corruption campaign that has been in progress for quite a while now. Despite claims that Xi’s just trying to purge the political field of potential opponents – which actually may not be unfounded – the campaign is justified. At least, its goals and motives are not limited to pure political rivalry. Its strategic long-term objective is to avoid the country’s disintegration that may be caused by rifts within its elites.

A remarkable fact is that once Xi took over in 2013 from Hu Jintao the latter was no longer mentioned as a political figure in China despite his ten-year tenure in office. He did not even become an official with nominal powers. This is rather unusual as both his predecessor Jiang Zemin and Deng Xiaoping moved on to head the Central Military Commission for years to come. In other words, a gradual handover of power took place. That was a signal that the government and its ruling style were to remain unchanged. Hu’s disappearance from the political scene was seemingly an acknowledgement of serious mistakes he made during his ten years as the President. The most severe was obviously to accelerate the paternalistic trends and allow the establishment of regional elites.

That was also the period when the Chinese economy adopted an extensive development model, starting to accumulate public debt. It means that its exceptional growth was largely a result of the borrowing ramp-up fueled by virtually irrecoverable loans to state-owned enterprises. Probably, Hu was afraid to launch serious reforms. During his tenure, the economy became inefficient and relied fully on the previously gained momentum.

Over the recent years, important political figures have become somewhat less loyal to state institutions. Many have sent their children to study abroad, while their spouses have been busy opening boutiques and salons in Europe. This phenomenon is quite similar to the one we have seen in Russia. The much-needed development boost Xi wants to bring about is simply impossible with that kind of elite.

Corruption itself is not so much of a problem for China. The real problem is thoroughgoing paternalism that riddled its society under the previous leader and eventually limited the economic development to the previously gained momentum, with almost no incentives to move forward.

Another thing is that newly acquired financial strength has prompted many large corporations to adopt a policy of partial independence from the government. A notorious example is Bo Xilai, a former Governor of Liaoning who received a life sentence after being officially charged with abuse of power and corruption back in 2013. The fact of the matter was that the emerging elite was a political and ideological one, not only economic. What is happening, as the Chinese history suggests, is a phase of plunging into chaos. Xi Jinping is just doing his utmost to break that ‘tradition’ by fighting any regionalism within administrative and financial elites.

Corruption or paternalism, whatever you call it, poses serious risks to China’s integrity. Xi is well aware of it and is acting upon historical analogies. Whenever regional elites became autonomous and started ignoring the central government, albeit recognising it formally, China collapsed. In other words, the elites separated from the official authorities. And that would make Xi’s goals simply unattainable.

A CUP OF COFFEE TO THE BLOOD OF THE CHINESE NATION

Xi Jinping has done a great job over his five years in office. He acted decisively to restore the integrity and homogeneity of the Chinese political elite and showed that the government would have no mercy even on its inner circle. Nearly a million officials, including members of Deng Xiaoping’s family, were affected by anti-corruption inquiries. Regional political elites took a hit. Some of the largest companies also came under scrutiny. But most importantly, the campaign inflicted blows on top officials, including members of the Politburo. That way Xi showed it was a true campaign and course of development rather than a game.

He seriously cut non-core expenses across institutions ranging from Communist Party commissions to state-owned enterprises, making the country more disciplined and far more concentrated in that territory. China is gearing up for a stride – and what is happening now is only a hint of it.

Xi was the first to actually, not rhetorically, push the country’s interests beyond its borders. While his predecessors said that its external influence was limited to economic matters and did not extend to the politics, he introduced One Belt, One Road – a political initiative basically envisaging a Chinese-style reglobalisation. It was during his rule when Chinese companies embarked on their quest to acquire entire sectors of foreign economies, not just to enter the global market.

He gave the nation the Chinese Dream concept. Although the term has not been defined officially and is more of a declaration, it is essentially the core of the national idea, which is extremely important for the country’s further development. China is fed up with money. But people’s loyalty won’t last forever if there is nothing but income growth behind it – you will need some ideologeme.

Of course, China will always have a communist ideologeme. But it will not trigger a breakthrough. The Chinese Dream in that situation is basically a cup of strong coffee poured into the blood of the Chinese nation. Most importantly, this term is generally used in connection with the dream of restoring the national dignity after two damaging centuries rather than in an economic context.

Xi Jinping has managed to make the entire world dependent in many ways on the Chinese ‘health’. For example, he suggested switching the foreign trade from the dollar to the renminbi and investing in large-scale transport infrastructure projects to bring transportation under the country’s control.

He was the first to clearly highlight the world’s bias against China and some other countries and, as a result, the need to provide everyone with equal access to financial and energy resources. Obviously, that was criticism of the US. A number of countries has been uniting around him, viewing China as a political icebreaker.

Finally, Xi offered the idea of a ‘community of common destiny’. It was neither elaborated on nor formalised. However, it seems natural to suggest that he was talking about the countries that joined the ‘One Belt, One Road’ project and, following an old political model, are ready to recognise the leading roles of China and its political ideas in exchange for unconditional economic support. Russia is not among them as yet.

NEW SILK ROAD AS A CONDITION OF SURVIVAL

One Belt, One Road is the most important of the planned infrastructure projects. One reason behind those plans is the significant, 15–50% increase in domestic production costs over the recent years. As a result of this important economic development, Chinese goods became less competitive globally.

In pursuit of lower selling prices, China is trying to take control of the major transit arteries. This is very important, as whoever controls transportation controls trade.

Hence the almost mythological notion of a New Silk Road. It should be reminded that the original Silk Road did not belong to China and extended to other territories as well. The most common language along the Silk Road was Farsi.

But the desire to reduce export prices is not the only reason behind the initiative. Due to domestic market saturation and the numerous imbalances mentioned above, China needs to export capital for it to work more intensively.

The country is also faced with a number of actual food supply difficulties arising from accelerated urbanisation. Its level is now approaching 60%, while at the onset of Deng Xiaoping’s reforms it did not exceeding 20%. So China needs food supplies.

Another factor is energy resources, which are needed for industrial development and a breakthrough in that area. Or, more precisely, reasonable energy prices. Heavily relying on oil and natural gas imports, the country has yet to gain real bargaining power in this market. Therefore, it wants to control hydrocarbon production in other countries instead of simply buying from them.

China’s new economic model – economic expansion for the sake of internal stability – seeks to address precisely those challenges. An important thing is that it is not determined by Xi Jinping’s or any establishment faction’s bias or expansion interests. It is a condition of China’s survival as such.

In order to further its agenda, from environmental to economic, China has to maintain strong growth (5–6% at least). Otherwise, a slowdown would prevent it from generating enough money to support all planned projects, both domestic and international. In turn, that would result in a) internal imbalances, or, simply put, social discontent, and b) a loss of confidence among its immediate neighbours.

To sum everything up, the country must generate a lot of money for investment. Oddly enough, this model dates back almost to the third century, when China spent more on the periphery than itself (one of the reasons behind the Han dynasty’s crisis). So it is a traditional model of the Chinese political culture. The economy is doing its utmost not to slow down.

THE GROWTH HUNT

China has been implementing a range of strategic projects that require huge financial investments.

First, it is focused on building railways and transport corridors. The Eurasian transport corridor, bypassing Russia so far, along with the China–Pakistan–Afghanistan and Mongolian corridors are the largest. Each will include both railways and roads. Another group of projects, technically not corridors, encompasses railways and roads in Europe and Latin America.

Infrastructure costs are so high that in some cases even Chinese companies cannot afford them. A good example is the Nicaraguan Canal, a potential alternative and competitor to the Panama Canal. The decision to build it was made and the construction itself began in 2012. But as it turned out this year, the project operator – private multinational company HKND Group, which was founded by Chinese businessman Wang Jing and had its headquarters in Hong Kong – encountered some difficulties. Essentially, it became insolvent. The construction has been frozen, causing massive disappointment as almost half of the Nicaraguan economy had been reoriented to make use of the future canal, with its commissioning scheduled for 2019 and the revenues included in the budget. In Nicaragua and other Latin American countries, the project has attracted strong criticism focused on the Chinese investors. This case was a matter of money. However, the problems go far beyond. And that is against the backdrop of China being in complete control of the Panama Canal through an investment company.

Another eloquent example is CEFC’s recent failure to acquire a 14% stake in Rosneft – albeit money was not the case. Rather, it was side effects of the rapid Chinese growth, such as the emergence of quite strange companies with fast-growing finances. CEFC is a shady company. Last year, it was revealed that it had been involved in some fraudulent schemes. An agency established by the company at the UN was used to directly bribe African leaders. Formally independent from the Chinese government, CEFC was also an active player in the Czech Republic, where it had been taking over important economic segments. More than that, the Chinese government officially rejected any connection to the company. However, it is highly unlikely that a company with such capital worked for so many years independently from the government. What happened to CEFC and its Chairman must be a result of some conflict between the central and a regional elites.

Second, China has been tirelessly implementing its huge space programme, planning such things as landing the first Chinese on the Moon.

Third, an enormous investment programme has been adopted for the North West, which is still seen as underdeveloped. The technologically subsidised beneficiaries marked out for a maintenance and modernisation boost include Inner Mongolia and the Xinjiang Uyghur Autonomous Region.Other large-scale initiatives focus on revamping the education system and improving employee technology skills, to name a few.

Finally, consider the country’s mind-blowing digitalisation programme. Despite its great technological development progress, China is facing a serious challenge here as the world embraces the Fourth Industrial Revolution, which implies a universal production robotisation as a way to bolster labour productivity. Although rapidly gaining ground, the Chinese robotisation remains at a significantly lower level than in any industrially developed European country, with just one robot per 10,000 employees (the German ratio, for example, is one to twenty).

Beijing is well aware that under the new economic order no real breakthrough would be possible without robotisation, hence the worries. If the government achieves its robotisation and digitalisation goals, the Chinese labour productivity is likely to increase by approximately 30%, while operating expenses are set to fall by 20%. This would see China follow hard on the heels of the global productivity leaders and diversify from cheap labour as its sole advantage.

The commitment is simply eye-watering. State funds alone are expected to contribute roughly $25 billion to the Made in China 2025 programme – and that is only the beginning.

A WAR OF CIVILIZATIONS

One of the declared goals of the new US sanctions policy against Beijing is slowing down the Made in China 2025 program.

It is a well-known fact that over the recent years, China has made tremendous progress in building its own technological base. For example, a 100% Chinese supercomputer was created. Just like the US, the Asian country is a global leader in artificial intelligence, genetic engineering, and a number of other technology fields tipped as the core of the new technological order.

Add to that China’s status as one of the world’s largest technology exporters. It does not mean, however, that it is ahead of America. But the threat is well recognized on the other side of the Pacific. Donald Trump is trying to tame the Chinese technology sector so it does not grow at such high rates. Of course, it will slow down the scientific progress in China due to restrictions for joint laboratories and ventures. Washington will take a hit, too. Chinese laboratories, for example, have been doing a lot of pharmacological work for America. Had those products been made in the US, the costs would undoubtedly be higher.

But the rivalry is broad between the two countries, going well beyond technology. The much coveted prize is global dominance. Although the tension has always been there, it is only now that it has become so clearly defined and articulated, including through the mutual trade restrictions.

So, what is happening? The problem is, the US have really recognized how dangerous China is as a competitor, possibly also understanding its logic in respect of those processes. Hence, their way to hold it back: isolating China within its own economy, even if partially, thus impeding its quest for an international identity. It means blocking imports, which is actually what the sanctions are trying to achieve. Washington’s efforts are aimed at forcing China to sort out its problems within a domestic economic agenda. Strategically, it is justified.

It should be understood that China is not simply expanding its economic footprint. It is offering a new model for the global economy – one that contradicts that of its American counterpart. But many countries that have joined the ‘One Belt, One Road’ initiative hardly consider the robustness of the Chinese model. They are just willing to take Beijing’s investments in exchange for loyalty and involvement in its projects, which is another significant concern for the US.

So, Trump is hitting China in its weakest spots. Aside from raising tariffs on its goods, his tools include restrictions on Chinese investments and business acquisitions abroad. Where European countries did nothing but complain (which, for example, led to the port of Piraeus being bought by a Chinese company). the US did not hesitate to impose restrictions – in a straightforward and forceful manner, immediately.

This increasingly intense trade conflict will have serious consequences for the entire world, with economic flows likely to be redistributed. But the main effect will be higher prices for Chinese goods across the globe. Just as Trump wants.

NO MORE ILLUSIONS

The recent exacerbation of the relationship between the US and China prompted some observers to suggest that it might again drive Moscow and Beijing closer together.

Obviously, the proverbial ‘pivot to the East’ made by Russia after the well-known events of 2014 has failed to provide the expected boost to economic relations. While the political cooperation between our countries has been on a very high level and quite effective, their mutual alignment over the past four years has had more disappointments than any real improvements.

It is largely a result of the excessively high hopes Moscow pinned on this route after its relations with the West had worsened.

First, Russia was absolutely wrong to think that China should become sort of a trade and economic substitute for America or Europe. The second thing it had wrong was that Beijing had some reason to support a lot of its political initiatives. If you look at China’s history or political culture, it has always avoided involvement in foreign political campaigns, acting solely in its own interests.

What is also very important is that many of the ambitious joint ventures announced by Russia and China – including a high-speed railway, the Power of Siberia gas pipeline, a wide-body airliner and a heavy-lift helicopter – have unfortunately been mostly declarative and image-focused while a lot of aspects of their real economic cooperation have been left unattended, possibly due to being less effective in image terms. Some examples are SME ties and investment in the medium segment in general.

Chinese investments in the Russian economy were another empty hope. Instead, Russia should have sought to manufacture goods that could be exported to China, such as food or high value-added petroleum products.

It was as late as the end of 2016 when Russia started adopting a more realistic approach to its cooperation with Beijing. A very important step in that direction was an overhaul of the Russian Export Center restoring the once justified policy to avoid dumping by Chinese buyers and support trade.

Another important thing undermining the bilateral economic relations is the existence of numerous business councils, associations and similar institutions in Russia. The idea itself is not bad. But their quest for hype has been creating the illusion of real cooperation. In most cases, it was good for China, allowing it to discreetly implement its policy. Now, we are going back to a relationship model that is more realistic.

The problem is further exacerbated by the fact that, over the past few years, the core agenda for cooperation with China has been purportedly shaped by people with very poor knowledge of that country. Their suggestions, such as the Pacific Thrust or the Big Eurasia, looked interesting and good on paper but completely ignored the Chinese political and economic perception. It was only natural that those initiatives reached a standstill – and yet kept people distracted from major tasks.

Some of Russia’s failures were purely technical. For example, it did not concern itself with promoting its very reasonable idea of advanced development territories in China. The practical use of its economic projects has been profoundly lacking coverage in Chinese media.

Furthermore, Moscow has yet to recognize that the Chinese market is very competitive. In other words, it is extremely hard for a Russian company to enter it alone, especially if it is an SME. Systemic government support is needed here. The situation has been improving gradually, but that improvement is well overdue.

A CLOSE FIT?

Nevertheless, Russia and China actually need each other – and there are a great number of reasons for that. Let us start with three key factors determining our country’s motivation. First, China is our most important political partner. Without Beijing, Moscow will have no major ally in the global politics. Second, China is obviously our largest trade partner. There has been some interest in selling Russian goods to its market recently. Third, we have been partners in addressing the most pressing geopolitical issues to ensure a multipolar, fair, and adequate world.

It goes without saying that Russia is important to China as a major supplier of commodities and energy resources. But above all, it is important as a potential seller of reserves – as I mentioned above, Beijing seeks to buy fields instead of end products. Russia is also the only non-Asian country to fully support the Chinese campaign for a fair world order. Finally, the onshore route to Europe has far more advantages technically, and therefore is crucial to China – provided, of course, that the regions’ respective positions are aligned. Thanks to its geographical position, Russia could play a significant role in the corresponding Chinese initiative, including the ‘One Belt, One Road’ strategy. The problem is, we have yet to fit into this division of labor. Being a mere bridge for Chinese exports is not that compelling.

Here, Russia has been trying to engage China’s interest with some initiatives, including the Polar Silk Road and advanced development territories near the border. So far, the mission has failed, as Beijing has never supported an initiative unless it was fully consistent with its own predefined plan. That is why we have not seen and, chances are, will not ever see any progress in this area.

In order to kick-start the implementation of joint projects, Russia will have to make a fundamental decision on whether it is willing to follow the Chinese plan and, if yes, to what extent. The government has conveyed no clear vision thus far.

Another aspect where Russia has to choose quickly is strategically important to both its cooperation with China and own role in the broader global context. Beijing has put forward a comprehensive ideological and infrastructural model for the world. Like it or not, it is here – you can either accept or reject it. There is also an American model but no Russian one. For us, it is a very big, essential problem. While Russia is addressing its internal issues, China is focused on the global agenda, albeit with varying degrees of success.

The Russian government has enough will to improve the situation. At least three things need to be approached seriously.

First, a new generation of experts has to be nurtured. Those should be people with professional knowledge of the Asian problematics, not only Chinese. Along with many other things, an overhaul of curriculums and training programs, including in-service ones, is needed.

Second, we have to understand that the Sino-Russian relationship is often shaped by local officers and officials in charge of the matter at hand as opposed to the national leaders. Unfortunately, many of them have no idea whatsoever on how to deal with China. It means we need a new generation of experts in that field.

Finally, Moscow has to look beyond natural resources and pipelines and come up with some conceptual model for the overall role of Asia and Eurasia in today’s world. That should be a real model based on real reasoning instead of an abstract and declarative one.

The new concept could draw on the idea of sustainable development in Asia and, if suggested by Russia, could enjoy an enthusiastic reception from South Korea and Japan, who have had some fears about China, as well as Southeast Asian countries, which also have been wary of their big neighbor. Central Asia would probably support the initiative, too. However, it is largely a matter of understanding the Asian mentality rather than of mere declarations.

RUNNING OUT OF TIME

In the near future, China will continue its international expansion initiated under Xi Jinping, increasing its pressure on the outside world to a maximum. Its entire political concept is focused on that, and the funds have been allocated already. The global response to the Chinese expansion is also quite predictable: The country will likely face rapidly escalating criticism and have no choice but to move forward. That, in turn, will likely further exacerbate the relationship with Washington, prompting another exchange of blows. However, no large-scale conflict will happen as the economies are still tightly interconnected. China will experience an economic slowdown, while its political influence will be on the rise. In pursuit of the latter, Beijing will establish numerous multilateral institutions as their leader. Where Russia is a member – consider the Shanghai Cooperation Organization and BRICS – its role may also increase significantly. The ‘New Silk Road’ community of countries will, too, take a clearer shape.

All of this is the necessary preparatory work for things like Xi’s big economic boost. His ultimate goal is to formalize the new type of the world community suggested by China. That will also require a financial infrastructure revamp, including promotion of the renminbi as an international currency and establishment of own cash and settlement centers. Large-scale projects focused on extracting energy resources and reducing energy costs for China, securing commodity supplies, and creating the infrastructure for exports will go on with the same intent.

Beijing’s success would make it the holder of the global economic and political idea – the role currently played by the US.

If Russia fails to come up with a viable development concept, it will have to accept either the American or Chinese political and economic model. The time is alarmingly short: The move was to be made yesterday.