January 5, 2016
When China becomes No. 1, what then?
by Kishore Mahbubani*
ALBERT H. GORDON LECTURE AT THE GREEN ROOM, KENNEDY SCHOOL OF GOVERNMENT,CAMBRIDGE, MASSACHUSETTS, APRIL 8, 2015
In introducing this lecture, the Harvard Kennedy School said that for the first time in more than 200 years, a non-Western power, China, will have the largest economy in the world. China’s emergence will change our world order. To understand how China will behave when it becomes number one, this lecture by Kishore Mahbubani will introduce several questions: What are the priorities of the Chinese leaders? What impact have American policies had on China? Will China behave as America does when China becomes number one?
It is truly a great honour to be invited to deliver the Albert H. Gordon lecture this year. The hardest part is deciding how to start. Asians always start with an apology. Americans always start with a joke. Sadly, I could not find a good joke, certainly not one as good as the joke that Richard Fisher started with when he delivered this lecture in February 2009.
This is what he said: “Yesterday morning, as I got on the plane to fly up here, I turned to Nancy and said, “In your wildest dreams did you ever envision me following in the footsteps of Mikhail Gorbachev, George H. W. Bush, David Rockefeller and Ban Ki-moon in giving the Gordon Lecture at the Kennedy School?” And she replied, “I hate to let you down, Richard, but after 35 years of marriage, you rarely appear in my wildest dreams.”
My wife Anne and I recently celebrated our 30th wedding anniversary in Greece just before coming here. I am sure she would say the same as Nancy. Anyway, as a good Asian, let me apologise for the fact that I have no joke.
It is also no joke that we are probably living through the greatest transformation in human history we have seen. This was the underlying theme of my two most recent books, “The New Asian Hemisphere” and “The Great Convergence”. However, to illustrate this point more clearly, let me cite three spectacular recent developments whose profound implications have not been adequately noticed. In the spirit of the Albert H. Gordon Lecture series, let me pick three examples from the financial sector.
We all know that the world experienced a global financial crisis in 2008-09. We also know that the Fed launched a series of unorthodox monetary policy measures, most notably quantitative easing (QE), to avert a deep recession. What few noticed was what the Fed’s decision meant for Beijing.
Until the onset of the crisis, Chinese leaders were happy that the US and China had settled into a comfortable pattern of mutual dependence. China relied on the US markets to generate exports and jobs. The US relied on China to buy US Treasury Bills to fund US deficit spending. Tom Friedman, in his usual brilliant way, captured this interdependence with a simple metaphor. He said, “We are Siamese twins, but most unlikely ones – joined at the hip, but not identical.”
This Chinese belief that the US government depended on China was further reinforced when President Bush sent an envoy to Beijing in late 2008 to request Beijing not to stop buying US Treasury Bills to avoid rattling the markets further. The Chinese leaders readily agreed and probably felt very smug as this confirmed that the US was also dependent on China.
This smugness was shattered when the US Fed announced the first round of QE measures in November 2008. The Fed’s actions demonstrated that the US did not have to rely on China to buy US treasury bills. The Fed could create its own money to do so. This decision had profound implications for the world. Axel Merk, the president of the investment advisory firm Merk Investments said, “The US is no longer focusing on the quality of its Treasuries. In the past, Washington sought to promote a strong dollar through sound fiscal management. Today, however, policymakers are simply printing greenbacks.” Merk said that by relying on the Federal Reserve’s printing press, the US has effectively told other nations that ‘it’s our dollar – it’s your problem’.
It was clearly a mistake for the Chinese leaders to believe that they had created a relationship of mutual dependence. When China decided to buy almost a trillion dollars of US Treasury bills, it had to do so from export revenues earned from the toil and sweat of Chinese workers. However, if the US wanted to repay this trillion dollars, all the Fed had to do was to increase the size of its balance sheet. This is why several leading economists have said that the US enjoys an “exorbitant privilege” in being able to repay its debts by increasing money supply. The term was coined by Valery Giscard d’Estaing and the French economist Jacques Rueff explained its workings. Barry Eichengreen famously wrote a book on the topic in 2010.
Let me quickly mention the two other developments whose implications have not been fully noted. It is well-known that in recent years, the US has prosecuted several foreign banks, including HSBC, RBS, UBS, Credit Suisse, and Standard Chartered. For example, Standard Chartered Bank was fined 340 million dollars for making payments to Iran. Most Americans reacted with equanimity to the fine paid by Standard Chartered Bank and thought it was just that the Bank was fined for dealing with the “evil” Iranian regime. However, few Americans noticed that Standard Chartered Bank, domiciled in the UK, had broken no British laws. Nor had they violated any mandatory sanctions imposed by the United Nations Security Council. However, since almost all international payments have to go through the United States payment mechanism, the Standard Chartered Bank was fined for violating American laws.
To put it simply, what the US was doing in this case was to say that American laws applied to non-American citizens and non-American corporations operating outside America. This is called extra-territorial application of domestic laws.
The third development was the threat of the US to deny countries access to the SWIFT system. Since all international payments have to go through the SWIFT system, any country denied access to the SWIFT is thrown into a black hole and denied access to any kind of international trading and investment. In a recent column, Fareed Zakaria described well the Russian reaction to the possibility of being denied access to the SWIFT system. In Western media commentaries, Putin is often portrayed as the bad guy and his successor as well as predecessor, Medvedev, is portrayed as the good guy. Yet, it was the “good guy” who went ballistic when he was told of this threat. This is what Medvedev said, “Russian response – economically and otherwise – will know no limits.”
I begin with these stories for a simple reason. Events such as these will have a deep impact in determining the answer to the biggest question of our time: what happens when China becomes number one in the world? Clearly, the answer to this question will determine significantly the course of the 21st century. Hence, we should study this question carefully.
Let me begin with what I hope you will agree are three incontrovertible facts. First, China will become the number one economic power in the world. Second, most Americans, like most Westerners, view China’s rise with great foreboding. Third, the role that China will play as the number one economic power has not been cast in stone. How the world, especially America, reacts to China’s rise will help to influence China’s behaviour in the future. If we make the right decisions now, China could well emerge as a benign great power (even though most Americans find this virtually inconceivable).
This is why it is timely to address the topic of what happens when China becomes number one. It is always better to prepare for the inevitable than to pretend that it will not happen. So far, on balance, America has reacted wisely to China’s rise. However, it is always easier to be wise when a power assumes that it will be number one forever. When the reality sinks in that the number one power is about to become the number two power, it is conceivable that fear may replace wisdom as the dominant driving force in American policy towards China. It would be perfectly normal for this to happen. My goal in this lecture is to try to persuade my American friends to continue to react wisely to China’s rise.
To achieve this goal, I will make a three-part argument. First, I will try to explain what I think are the goals and ambitions of China’s leaders as China emerges as number one. Secondly, I will explain how several wise American policies have so far managed to allow the relatively peaceful emergence of a new great power. Thirdly, I would like to conclude by recommending that America can protect its long-term interests by reacting even more wisely to China’s rise.
Let me begin with the first question: what are the goals and ambitions of China’s leaders as China emerges as number one? Since China is still run by the Chinese Communist Party (CCP), it is conceivable that the goal of China’s leaders could be the same as the leaders of the Soviet Communist Party (like Lenin, Stalin and Khrushchev): to prove the superiority of the Soviet Communist System. As Khrushchev famously said on November 18, 1956, “Whether you like it or not, history is on our side. We will bury you”.
One of the biggest sources of misunderstanding between America and China arises from China’s decision to retain the term “Communist” in the name of its party. This may clearly signify a commitment to Communist ideology. Yet, even a brief survey of China’s deeds rather than China’s words will show that China has effectively walked away from Communist ideology. Deng Xiaoping encapsulated this shift with his famous remark, “It doesn’t matter whether a cat is black and white. If it catches mice, it is a good cat.” Effectively, Deng was saying: “It doesn’t matter if the ideology is communism or capitalism. If it helps us, we will use it.” Effectively, China behaves more as a capitalist country rather than as a Communist country, but for complicated internal political reasons, it cannot abandon the term “Communist”.
So if the Chinese leaders are not defending or promoting Communist ideology, what cause are they trying to achieve? The answer is simple and direct: they would like to revive Chinese civilization. If there is one thing that motivates China’s leaders, it is their memory of the many humiliations that China has suffered over the past 150 years. If there is a credo that drives them, it is a simple one: “No more humiliation”. This is why they want to make China a great and powerful nation again. Xi Jinping explained this goal well in his address to UNESCO on March 27, 2014. He said, “The Chinese people are striving to fulfil the Chinese dream of the great renewal of the Chinese nation. The Chinese dream is about prosperity of the country, rejuvenation of the nation, and happiness of the people. It reflects both the ideal of the Chinese people today and our time-honoured tradition to seek constant progress. The Chinese dream will be realized through balanced development and mutual reinforcement of material and cultural progress. Without the continuation and development of civilization or the promotion and prosperity of culture, the Chinese dream will not come true.”
The revival of the great Chinese civilization is something we should welcome. If the CCP could change its name to ‘Chinese Civilisation Party’, it would do a lot to assuage Western concerns. It has already transformed itself into a meritocratic talent-seeking mechanism that is constantly searching for the best leaders to rule China. Despite the many ups and downs in the history of the CCP, this is what the CCP has become. If the Chinese have finally succeeded in finding the right mechanism to revive Chinese civilization, we should, in theory, welcome this development.
In practice, it is a fact that the West will not rest easy till China transforms itself into a liberal democracy. The Economist, a leading Western magazine, reflects these views. The Economist said in its issue of September 20-26, 2014 that Xi “has become the most powerful Chinese ruler certainly since Deng, and possibly since Mao.” It then calls on Xi to use this enormous power for the greater good and change the system.
The Economist assumes, as most Westerners do, that if China’s system is changed and a Western-style democracy emerges in China, this will be an unmitigated good. This is a dangerous assumption to make. A more democratic China is likely to be a more nationalist China. A more nationalist China could well be a more assertive and aggressive China. Such a China would launch a “popular” war against Japan and act in a far more belligerent fashion over territorial disputes, like those in the South China Sea.
In this sense, the CCP is delivering a major global public good by restraining nationalist forces and voices in China. From time to time, it has to allow some of these forces to be expressed; it has to allow its people to vent nationalist sentiments. However, the CCP also knows when to draw back from volatile situations, as it did with Japan, India, the Philippines and Vietnam in recent years. The West should be careful about wishing for early democracy in China. Its dream could become a nightmare.
At the same time, the West must recognise and respect that China is different; that it is not going to become “Western”. Therefore, the wisest course for the West to adopt would be to allow the present system to continue and to allow it to evolve and change at its own pace.
This brings me to the second part of my argument. As I said earlier, wise American policies have allowed China to emerge peacefully. Some of this wisdom arose out of historical necessity. At the height of the Cold War, when America genuinely feared Soviet expansionism, it reached out to China to balance the Soviet Union. Indeed, America reached out to China when China had emerged out of one of its most brutal phases. Human rights were not a factor in American policy towards China then. This paved the way for Deng to use America as an example to persuade Chinese people to switch away from central planning to free market economies.
In the 1990s, official US-China relations went through a series of ups and downs. Despite the efforts of President George H.W. Bush to keep the relationship on an even keel, the Tiananmen Square episode on June 4, 1989 assaulted American sensibilities and constrained his ability to improve relations. Tiananmen could have derailed US-China relations. When President Clinton took office in January 1993, after having described the leaders of China as the “butchers of Beijing”, one could easily have predicted a far bumpier road. Fortunately, Bill Clinton reacted wisely. I was present at the first Asia-Pacific Economic Cooperation (APEC) leaders meeting at Blake Island in November 1993 and saw with my own eyes how Bill Clinton and Jiang Zemin made an enormous effort to reach out to each other. By the end of the day, their mutual wariness was replaced by a significant degree of personal bonhomie. This episode demonstrated that the United States had been wise in welcoming China into the APEC in 1991. Such a move not only garnered the US diplomatic goodwill but also ensured that China adopted the membership of yet another international forum whose rules and regulations it agreed to abide by. Later, the US also worked with China in the East Asia Summit. In addition, the US and China collaborate daily in the UN Security Council to manage the “hot issues” of the day.
The tragedy of 9/11 further solidified US-China cooperation. Apprehensions about the rise of China were replaced by a focus on the War on Terror. East Asia stopped being a priority for the United States for several years. This allowed China to rise peacefully and for the two countries to avoid the “Thucydides trap”.
America made several wise decisions during this time. Firstly, America proceeded to admit China into the World Trade Organisation (WTO) in 2001. Although the admission was made on the basis of stiff conditions, these conditions ironically benefited China and forced it to open up to world trade – leading to its current pre-eminent position as the largest economy in the world in PPP terms.
Another judicious call was to pay attention to China’s sensitivities on Taiwan. China had always regarded Washington’s policy towards Taiwan with suspicion, as they feared that the US could use the Taiwan issue as a means to destabilise China. Instead, America reacted wisely when in late 2003, the Taiwanese President Chen Shui-bian suggested that a referendum be held to assess the views of the Taiwanese people on independence. In response, President George W. Bush made it clear that the United States did not approve of his move. He said: “The comments and actions made by the leader of Taiwan indicate that he may be willing to make decisions unilaterally to change the status quo, which we oppose.” This was wise statesmanship, even if it was partly the result of Washington’s dependence on Beijing’s support for other more pressing issues, such as Iraq and North Korea.
Some of these wise policies emerged out of America’s selfish interests, especially during the Cold War. However, it is possible that few Americans are actually aware how wise America has been. And even fewer Americans understand that it is in America’s national interest to continue these wise policies towards China. For example, since Deng Xiaoping opened up China in 1978 American universities have educated hundreds of thousands of Chinese students. In the years 2005 to 2012 alone, 788,882 Chinese students studied in American universities. This number has risen steadily – in the 2013-2014 academic year, 275,000 Chinese students were enrolled at American universities . This is an enormous gift from America to China. Future historians will be puzzled by this massive act of generosity as many of these students then return to China to build up the Chinese economy and to create innovations in many different spheres of science and technology that propel China forward in areas ranging from space exploration to defence.
China has also contributed to the maintenance of friendly relations between the two countries. Firstly, China has “swallowed bitter humiliation” time and again and has reacted prudently to America’s mistakes. These mistakes included the bombing of the Chinese embassy in Belgrade in 1999 and the downing of a US spy plane in Hainan Island in China in April 2001. The tact and restraint demonstrated by China in both situations averted military action between the two countries.
I have described these events in some detail as they help to explain a contemporary geopolitical miracle. Normally, when the world’s largest emerging power is about to pass the world’s greatest power, we should be seeing a rising level of tensions between the two (with the historical exception of one Anglo-Saxon power, the US, replacing another Anglo-Saxon power, the UK). It would therefore be perfectly normal to see rising tensions between the US and China today. Instead, we see the exact opposite: perfectly normal and calm relations between the US and China. This is a miracle.
However, miracles are by definition historical aberrations. They don’t last. Soon, we will revert to the historical norm and competition and tension could rise between America and China. To prevent this from happening, both sides will have to make a special effort to continue on their extraordinarily wise courses.
On the part of China, this means that it will have to learn lessons from the mistakes it has made in recent years in its dealings with its neighbours, especially Japan and Southeast Asia. For example, it completely mishandled an episode in which a Chinese fishing boat collided with Japanese Coast Guard patrols near the disputed Senkaku Islands on September 7, 2010. China unwisely demanded an apology from Japan after having publicly humiliated Japan into releasing the fishing boat. Similarly, China also mishandled the Korean crisis of 2010 by not condemning North Korea’s shelling of the South Korean island of Yeongpyeong. China also made aggressive statements and adopted more aggressive positions on the South China Sea in 2010 and 2011. When China submitted to the UN Commission on the Limits of the Continental Shelf a map including the nine-dotted-line territorial claim in the South China Sea on May 7, 2009, the Philippines lodged a diplomatic protest against China. Vietnam and Malaysia followed. Indonesia also registered a protest, although it had no claims on the South China Sea. In the face of this opposition, Chinese officials refused to back down.
China has also made mistakes vis-à-vis its relations with ASEAN as a whole. The lowest point in China-ASEAN relations occurred in July 2012 at the ASEAN Foreign Ministers’ Meeting. Until then, for every year since August 1967, ASEAN had always succeeded in issuing an agreed joint communiqué after each Foreign Ministers’ meeting. However, in July 2012, for the first time in forty five years, ASEAN failed to do so. They failed because they could not agree on the paragraph referring to South China Sea. Nine of the ten countries agreed that ASEAN should reiterate the previously-agreed paragraph on this issue. However, the host country, Cambodia, refused to do so. It later emerged that Cambodia had come under heavy pressure from Chinese officials not to agree to these previously-agreed paragraphs on South China Sea. Clearly, China’s rise had made some Chinese officials arrogant.
While China should learn from the mistakes it has made, America should study its own recent deeds through a simple lens: would it like China to replicate these deeds when China becomes number one? The reason for using this lens is that when China clearly becomes number one, it is likely to replicate abroad America’s deeds, not its words.
Bill Clinton saw this coming long before any other American did. In a significant speech at Yale in 2003, he said the following:
“If you believe that maintaining power and control and absolute freedom of movement and sovereignty is important to your country’s future, there’s nothing inconsistent in that [the US continuing to behaving unilaterally]. [The US is] the biggest, most powerful country in the world now. We’ve got the juice and we’re going to use it. . . . But if you believe that we should be trying to create a world with rules and partnerships and habits of behaviour that we would like to live in when we’re no longer the military political economic superpower in the world, then you wouldn’t do that. It just depends on what you believe.”
Actually, as I document in The Great Convergence, Bill Clinton wanted to prepare his fellow Americans for the day when America becomes number two and China becomes number one while he was President. However, all his advisers firmly told him it would be politically suicidal for any sitting American President to talk of America becoming number two. Hence, he could only speak about it after he left office. Sadly, he has not said more on this issue after raising it in Yale. Hence, I fear that Americans are not psychologically prepared for the day when America will become number two.
All this brings me back to the three stories that I began the lecture with. America was able to and could threaten to act unilaterally in all three cases because it is clear that America is still the reigning Emperor of the global financial system. Indeed, like many strong ruling monarchs, it enjoys absolute sovereignty in these areas and is not subject to any checks and balances.
It unilaterally controls the global reserve currency, the US dollar. In theory, the US dollar is a global public good, but in practice, it is an instrument of American domestic and foreign policies. As former Treasury Secretary John Connally said in 1971, “It’s our currency but your problem”. Clearly, global interests are not taken into consideration when the US manages the US dollar. This is why many countries, besides China, were troubled by the QE measures.
Similarly, America acted unilaterally when it applied its domestic laws in an extraterritorial fashion to foreign banks. Its threat to use SWIFT, another global public good, to unilaterally punish Russia could have had even more devastating consequences for the global order.
And what would the devastating consequences be? To understand this, I hope you will look at my latest book, The Great Convergence. One reason why the world has been remarkably stable and peaceful over the past few decades is that the rest of the world, especially Asians, who have been passive for almost two centuries, had agreed to accept and work with the Western-created family of global institutions, including the UN, IMF, and the World Bank. They agreed to do so because they believed that these institutions were serving global interests, not Western interests.
This is therefore the big danger of the US using global public goods, like the US dollar, international banking transactions, and the SWIFT system, for unilateral purposes and ends. It will encourage the world, especially China, to work towards creating an alternative global order. If that happens, the world will become a far messier place.
This is why I was happy to deliver this lecture at this time. We stand at one of the most important forks in human history. I hope America will continue its wise policies of strengthening a global order that serves global interests, not just American interests. If America does this, China will do the same. If this happens, nothing will change fundamentally when China becomes number one. We will continue to live in a safe and predictable world.
Therefore the final question I need to answer is, “Will China emerge as a responsible stakeholder?” – to use the famous words of Bob Zoellick. My simple answer is this “China could emerge as a stakeholder that is as responsible as the United States”. Since America is still the number one power in the world, the big question that America should ask itself is a simple one: would it feel comfortable living in a world where China behaves just as America did when it was the sole superpower?
*Kishore Mahbubani, Dean of the Lee Kuan Yew School of Public Policy at the National University of Singapore, is the author of “The Great Convergence: Asia, the West and the Logic of One World.”