China in the Xi Era


November 20, 2018

China in the Xi Era

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by: David Shambaugh, George Washington University

Xi Jinping is widely viewed as the strongest leader China has had since Deng Xiaoping or Mao Zedong. But six years into his perhaps indefinite tenure, what has Xi actually accomplished? And where might China be headed under his rule?

 

Like all Chinese leaders since the 1870s, when Qing dynasty rulers launched the Self-Strengthening Movement, Xi also seeks ‘the great rejuvenation of the Chinese nation’. The quest has been consistent for 150 years: for China to acquire the material attributes of a major international power and the commensurate respect from others. The legacy of the country’s former weakness and humiliation continues to haunt Xi and his generation.

So too does the collapse of Communist Party rule in the former Soviet Union. Now having ruled almost as long as their Soviet counterparts, Xi and his peers in the Chinese Communist Party (CCP) live in regular trepidation of a similar meltdown. These two issues — augmenting China’s strengths while rectifying the Communist Party’s weaknesses — are intertwined in Xi’s thinking and dominate his agenda.

Xi believes in the absolute power of the Communist Party. As Xi told the 19th Congress of the CCP in October 2017: ‘The party controls all’. Unlike Deng Xiaoping, who launched China’s reforms four decades ago and sought to relatively reduce party power, Xi wants to bring the party-state back into all aspects of national life.

The CCP under Xi is also reaching back to the Maoist era by constructing a massive personality cult around Xi’s own persona. Maoist rhetorical throwbacks such as zhuxi (chairman), lingxiu (leader), hexin (core), even da duoshou (great helmsman) are again commonly used to refer to Xi. The official ideological canon of ‘Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era’ has now been enshrined in the party constitution too. Xi personally chairs all central Leading Groups and party and military organs. He has also emasculated the authority of Premier Li Keqiang.

Xi is systematically rolling back many of the core elements of Deng’s reforms that guided China’s leaders for the past four decades: no personality cult around the leader, collective leadership and consensual decision-making, bottom-up ‘inner-party democracy’ rather than top-down diktat, active feedback mechanisms from society to the party-state, relative tolerance of intellectual and other freedoms, limited dissent, some de facto checks and balances on unconstrained party power, fixed term limits and enforced retirement rules for leaders and cadres, a society and economy open to the world, and a cautious foreign policy. These and other norms were all central elements of Deng’s post-1978 reform program and they were all accepted and continued under Jiang Zemin and Hu Jintao — but all are being systematically dismantled and rolled back by Xi Jinping.

So dominant is Xi that Chinese politics have become a sycophantic echo chamber. Xi is trying to run the party like a military, with orders given and to be followed — rather than as an organisation with feedback mechanisms and procedures to curtail dictatorial practices. Xi is very much a mid-20th century Leninist leader ruling a huge country in the globalised, early-21st century era. There is thus a contradiction between Xi’s modality of rule and the realities of the modern world and China’s developmental needs.

Since coming to power in 2012, Xi has sought to relatively close China’s doors rather than further open them. There has been a significant tightening of the foreign investment and corporate operating environment, a sweeping suppression of civil society and foreign NGOs, stepped-up study of Marxism and an assertion of ideological controls over the entire educational sphere, and xenophobic campaigns against ‘hostile foreign forces’.

Meanwhile, the party continues to enforce strict media controls, carry out pervasive public security surveillance, tighten control over Xinjiang and Tibet, and persecute Christians and other organised religions. Xi has also cracked down on corruption in the party (and government and military), and presided over the most draconian purges and political repression in China since the 1989–92 post-Tiananmen period.

These actions have more in common with Maoism than Dengism. To be certain, Xi has definitely succeeded in strengthening the party institutionally over the past five years — but it is fair to wonder whether he has not actually weakened it in the longer term? How long can such retrograde and repressive actions endure in an increasingly globalised, wealthy and sophisticated society?

Xi’s economic impact is mixed. GDP growth remains very respectable at 6.9 per cent. Xi has also launched programs to eliminate poverty by 2020, spur innovation and high-tech manufacturing under the Made in China 2025 program, increase urbanisation and build eco-cities, expand coverage of social services, attack pollution and transition to a green economy, decrease desertification and increase forestation, deleverage China’s ballooned debt while expanding domestic consumption and services as drivers of growth. These are all commendable goals and initiatives — but they are all just that. Time will tell whether they are achieved.

On the other hand, Xi’s administration has significantly failed to meet the benchmarks or implement the policies of the Third Plenum economic reform plan of November 2013. The significance of this shortfall is that the Chinese economy is not making the structural adjustments needed to navigate through the middle-income trap and up the value-added chain to become a developed economy over time. Structural maladies and overcapacity continue to plague economic efficiency, the stock market has plummeted, while dangerously high debt levels loom overhead.

If there is one policy area where Xi does deserve better marks, it is in foreign relations. China is now widely seen as a global power. Xi has taken a personal interest in global governance. As a result, China under Xi is contributing much more to the United Nations operating budget, global peacekeeping, overseas development assistance and the Millennium Development Goals. And it is more active in a range of areas from combatting public health pandemics to disaster relief, energy and sea lane security, counter-terrorism and anti-piracy operations.

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Xi’s signature Belt and Road Initiative (BRI) is also noteworthy. An infrastructure development initiative unparalleled in history, the BRI will build rail lines, pipelines, telecommunications networks, electric grids, deep-water ports, highways, cities and other needed infrastructure from Asia to Europe. While the BRI is encountering criticism of late, it is nonetheless illustrative of China’s new foreign policy activism under Xi.

To be certain, China’s international relationships are not all rosy — but they are, on balance, positive. Only with the United States — and perhaps Australia, Japan and India — are China’s bilateral ties strained. Everywhere else they are sound.

The same must also be said about China’s military and defense — probably Xi’s No. 2 priority (after strengthening the party) over the past five years. Under the new title of Commander-in-Chief of the armed forces, in January 2016 Xi launched a sweeping reorganisation — the most comprehensive ever — of China’s military and paramilitary forces. The restructuring is but one part of systematic efforts to build a world-class military and, in Xi’s repeated exhortations, to ‘prepare to fight and win wars’.

Like all leaders, Xi’s tenure has so far achieved mixed results. But this variegated verdict is at variance with the overwhelmingly positive portrayals proclaimed in China’s official media. In Beijing’s rendering, Xi can do no wrong. This in itself may prove to be his Achilles’ heel. No leader is infallible. The subterranean grousing about Xi’s ‘imperial’ leadership style now increasingly heard in China (and from Chinese when they go abroad and speak with foreigners), may be a harbinger of difficulties to come.

Having constructed a caricature of an infallible Xi Jinping, the regime will find it very difficult — if not impossible — to deconstruct this image of China’s new ‘great helmsman’. And there are many constituencies in China that are suffering from Xi’s policies — including the party and state cadres and military officers who have lost their positions and privileges as a result of Xi’s anti-corruption purges — all of whom lie in wait for him to trip up.

David Shambaugh is the Gaston Sigur Professor of Asian Studies, Political Science and International Affairs at The George Washington University, Washington, DC.This is an adapted version of an article originally published here in Global Asia.

 

Asia Needs Pence’s Reassurance


November 16, 2018

Asia Needs Pence’s Reassurance

By Patrick M. Cronin

He should confront Trump’s mistakes and put forward a positive agenda.

U.S. Vice President Mike Pence at the ASEAN summit in Singapore on Nov. 15. (Roslan Rahman/AFP/Getty Images)

In Asia, anxieties about the United States’ role in an increasingly China-centered world are palpable. While some fear that the United States is retreating from its international obligations, other worry that it is bent on instigating conflict.

.As U.S. Vice President Mike Pence visits Southeast Asia and the South Pacific this week to attend the Association of Southeast Asian Nations (ASEAN) and Asia-Pacific Economic Cooperation leaders’ meetings, he should make clear that the United States remains a stalwart partner for the region with a vision for peaceful cooperation and development.

No U.S. retreat

The United States is not withdrawing into fortress America. It remains actively engaged in global affairs and is focused on strengthening the economic and military foundations of its power. The country’s central aim is to stay competitive in a world driven by a dynamic Indo-Asia-Pacific region. That goal, of course, derives from a real concern that China is challenging the postwar order and an understanding that the United States needs to find new ways to renew its diplomatic, economic, and military competitiveness.

The United States is not withdrawing into fortress America. It remains actively engaged in global affairs and is focused on strengthening the economic and military foundations of its power. The country’s central aim is to stay competitive in a world driven by a dynamic Indo-Asia-Pacific region. That goal, of course, derives from a real concern that China is challenging the postwar order and an understanding that the United States needs to find new ways to renew its diplomatic, economic, and military competitiveness.

But as U.S. President Donald Trump said last November in Da Nang, Vietnam, the United States has been “an active partner in this region since we first won independence ourselves,” and “we will be friends, partners, and allies for a long time to come.” U.S. Secretary of State Mike Pompeo has likewise been a forceful advocate for diplomacy in the region. Meanwhile, Congress is on the cusp of passing a bipartisan bill designed to bolster U.S. engagement there. The Asia Reassurance Initiative Act would authorize $1.5 billion in new funding over the next five years for regional diplomacy, development, and defense programs. In short, rumors of America’s disengagement miss the mark.

No Cold War with China

Pence also needs to reassure the region that when it comes to China, the United States is not seeking a war—trade, cold, or hot.

Pence also needs to reassure the region that when it comes to China, the United States is not seeking a war—trade, cold, or hot.

Instead, the U.S. administration wants a fair, open, and cooperative relationship. That doesn’t mean ignoring China’s attempts to compete with the United States, including through grey-zone operations like muscling the Philippines out of Scarborough Shoal and militarizing artificial islands despite pledging not to do so. And America will not shy away from meeting challenges directly. But on a fundamental level, the Trump administration would like to channel competition toward cooperation where possible.

In fact, the Trump administration rejects the idea of Thucydides’s Trap: that conflict between a rising power and a status quo power is inevitable. Leaders have agency, and it is up to them to determine the future course of relations. And for its part, the United States seeks to remain a force for good, not to contain or curb the China’s peaceful rise.

Of course, it would be useful for Pence to clarify that Washington will not tolerate coercion or the use of force against allies and partners in the region. But the vice president should also reiterate what he said last month at the Hudson Institute: “America is reaching out our hand to China. We hope that Beijing will soon reach back with deeds, not words.” That sentiment is broadly shared, even among Democrats, who do not agree with some of the administration’s tactics. (As Joaquin Castro, a Democratic representative from Texas, said last month, China should “compete, not cheat.”)

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US Vice President Mike Pence has confronted Myanmar’s de facto leader Aung San Suu Kyi at the ASEAN summit about what is being done to hold those responsible for the persecution of the Rohingya ethnic minority in her country to to account.

This will be a difficult balance to strike. And here, China’s approach to the South China Sea is instructive. It alone pursues claims there based in part on historical rights rather than contemporary international law. It showers the region with promises of infrastructure investment, but it fails to deliver transparent, equitably financed, high-quality development. It promises to follow an ASEAN Code of Conduct for the region but seeks a veto on the right of ASEAN members to extract natural resources from the South China Sea or hold military exercises there with Australia, Japan, the United States, and other non-ASEAN states.

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But the fear that a major confrontation, or even war, will play out in Southeast Asia is greatly exaggerated. China seeks to advance its goals by means short of war, and the United States aims to cooperate where it can but compete where it must. The resumption of the Diplomatic and Security Dialogue—a U.S.-China working group involving top defense and diplomacy officials—is thus a good sign.

 

Yes to an affirmative agenda for Asia

Beyond dispelling myths about U.S. retrenchment and bellicosity, Pence should also put forward a positive agenda for Asia. Here, he will have to confront some of Trump administration’s mistakes.

Many in the region question the United States’ predictability, because Trump has reversed major U.S. initiatives, from the Trans-Pacific Partnership to the Paris Agreement on climate change. Meanwhile, he has escalated tariff wars without articulating a coherent strategy for achieving results, and his uneven application of penalties has rankled allies and competitors alike. Nor has the administration deployed soft power well, often ignoring U.S. values like democracy and human rights, turning the country’s back on refugees, using unbefitting language, papering over conflicts of interest rather than cracking down hard on corruption, and being far too comfortable with authoritarians.

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Despite these missteps, Pence can use the trip to Asia to burnish four cornerstones that should be the foundation of the administration’s free and open Indo-Asia-Pacific strategy, especially in Southeast Asia and the Pacific Islands. Those four elements are a rules-based order, sustainable economic development, inclusive diplomacy, and effective security cooperation.

First, upholding and peacefully adapting the set of rules chosen freely by strong and independent sovereign states will be the foundation for U.S. engagement with the region. The United States has enduring interests in the South China Sea: stability, freedom of navigation, and resolving disputes peacefully and without coercion.

Although ensuring the rule of law will require far more than freedom of navigation operations, the United States will continue to help maintain the openness of the seas by sailing, flying, and operating anywhere international law permits. Importantly, seafaring nations from Asia and Europe are also demonstrating their commitment to the same cause by conducting similar operations.

Second, for growth to be sustainable, it has to be fair and reciprocal. It should be pursued in a manner that is transparent, non coercive, and environmentally sustainable, especially when it comes to the global maritime commons. There is nothing wrong with China’s Belt and Road Initiative that sunshine and high standards of accountability cannot fix.

Meanwhile, the United States should go even further to mobilize public and private support for trade, investment, and development. Eventually, the country can create a whole constellation of allies and partners that can invest in energy infrastructure, digital connectivity, transportation, and more. For instance, the United States is in active discussions to leverage the BUILD Act to expand joint efforts with allies and partners in the Philippines, Thailand, Cambodia, Indonesia, Malaysia, Vietnam, and elsewhere. In doing so, it can set a gold standard for development in the region.

Take Indonesia for example. China aside, a prosperous, democratic, and stable Indonesia is in the vital interest of the United States. Yet few in Washington are aware of the opportunities that await in Southeast Asia’s most populous country. The U.S. government’s Millennium Challenge Corporation has just completed a successful economic investment in Indonesia. Pence should ensure Washington starts negotiating a follow-on compact while simultaneously using BUILD Act funds to facilitate new U.S. private sector entry into Indonesia.

A third tenet of U.S. policy in Southeast Asia is inclusive diplomacy, including trust-building with competitors and partners alike.

ASEAN deserves broad support for its unique convening authority. Certainly, that is a major reason why the United States embraces the body having a loud unified voice in Indo-Pacific engagement. It also is in favor a strong, binding Code of Conduct—not one that unfairly limits the freedom of action of Southeast Asian states.

Inclusive confidence-building measures, such as plans to extend the voluntary Code for Unplanned Encounters at Sea to include coast guard vessels and efforts to protect rapidly depleted fishery stocks, deserve action. The United States should signal its support for promoting a new framework of “Resilience, Response, Recovery,” which is one of several useful concepts being put forward by ASEAN under Singapore’s chairmanship. At the same time, ASEAN members are pragmatic. The United States will often have to cooperate with them on a bilateral or trilateral basis to find effective responses to real challenges.

In terms of diplomacy with China, it might be worth creating a new crisis avoidance mechanism—perhaps mirroring the 1972 Incidents at Sea agreement. The bilateral pact did not prevent all U.S.-Soviet mishaps, but it helped avert major disasters, something that is even more important in a region where intermediate-range cruise missiles, hypersonic weapons, and the military use of cyberspace and outer space are unrestricted.

Finally, the United States will continue to support effective security cooperation centered on information sharing, capacity building, and interoperability. The United States should buttress such efforts by firming up its commitment to respond appropriately to threats of coercion and the use of force.

Boosting the ability of allies and partners to see better what is happening in their maritime backyards will help them become more resilient. And assistance with capacity building, especially for coast guards and other law enforcement agencies, will give nations a better ability to protect their sovereignty. Bilateral, “minilateral,” and larger multilateral exercises can also help create a readiness for dealing with future contingencies.

In sum, a confident but not boastful United States is neither stepping away from Asia nor trying to provoke wars there. Rather, it aims to ensure stability in the region so that all countries there can advance both sovereign interests and regional cooperation.

Patrick M. Cronin is senior director of the Asia-Pacific Security Program at the Center for a New American Security in Washington. @PMCroninCNAS
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ASEAN — finding middle path in the US-China conflict


 

November 9, 2018

Opinion

ASEAN — finding middle path in the US-China conflict

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Despite local uncertainties, the region must be bold in shaping its own future

For almost a decade, the basic strategic issue for Southeast Asia has been how to respond to the changing dynamics of the Sino-American relationship as it enters a new phase of heightened long-term competition.

The U.S. and China will not quickly or easily reach a new modus vivendi. Southeast Asia will have to navigate a prolonged period of unusual uncertainty.

U.S.-China rivalry in the South China Sea has emerged as something of a proxy for their competition. Strategically, the situation is a stalemate. China will not give up its territorial claims and the deployment of military assets. But neither can China stop the U.S. and its allies operating in the area without risking a war it does not want because it cannot win.

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The Trump administration has given the 7th Fleet more latitude to conduct Freedom of Navigation Operations in the South China Sea. Japan and other U.S. allies are beginning to push back against China’s claims. The U.S. has signaled its intention to conduct even larger shows of force. This raises the risk of accidental clashes. Still, that risk does not at present seem unacceptably high.

A premeditated war is improbable. China will feel it must fight only if the U.S. supports Taiwan independence. This is unlikely. If an accidental clash should occur in the South China Sea or elsewhere, both sides will probably try to contain it. The Association of Southeast Nations ought to be able to cope with situations short of a U.S.-China war. ASEAN has previously managed far more dangerous circumstances. But this will require greater agility, unity and resolve than ASEAN has shown recently.

 

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The most obvious manifestation of increased Sino-American competition is U.S. President Donald Trump’s “trade war.” Trade is the means; the objective is strategic competition. China accuses the U.S. of using trade to hamper its development. China is not wrong.

Although attention has focused on the tit-for-tat tariffs, the more significant aspect is new U.S. legislation to limit technology transfers to China, which sets new rules that future administrations will find hard to change.

Trump’s attitude toward China is no aberration, but reflects a bipartisan view — widely shared in business as well as politics — that the U.S. has been too accommodating to Beijing. Whoever succeeds Trump will likely stay tough on China.

The Trump administration has often been described as isolationist, but this is a distortion. Rather, it believes that this is an era of great power competition and is determined to compete robustly, with a preference for bilateralism over multilateralism, and a return to “peace through strength.”

China has misread the implications of the global financial crisis of 2008-2009 by believing its own propaganda about the U.S. being in irrevocable decline. It missed the souring mood of U.S. business toward China, mainly over intellectual property theft and forced technology transfers. These concerns are shared by businesses in other developed economies, which support Trump’s goals although they may disagree about his methods.

President Xi Jinping’s 19th Party Congress speech a year ago abandoned Deng Xiaoping’s approach of “hiding light and biding time.” But his main focus was domestic. Xi said China’s new “principal contradiction” was between “unbalanced and inadequate development and the people’s ever-growing needs for a better life.” This poses a fundamental challenge. Unless those needs are met — which will require immense resources — Communist Party rule could be at risk.

To find a new growth model, the party must balance control and market efficiency. An enhanced role for markets implies a loosening of control.

It remains to be seen what Xi will do. So far he seems to have opted for stronger control, and may have sharpened the problems he faces.

The Belt and Road Initiative is as much about this domestic challenge as China’s global ambition. The BRI exports the old growth model based on state-led infrastructure investment. The BRI buys time to find a new balance between the market and the party.

But the BRI rests on the foundation of U.S.-led globalization. Can it succeed if the world turns protectionist? China may well be the main loser if that global order frays. China cannot replace U.S. leadership. An open international order cannot be based on a largely closed Chinese model. BRI partner countries are pushing back, including in Southeast Asia, and implementation will be problematic.

China is not happy with every aspect of the post-Cold War order based on U.S.-led globalization. China wants its new status acknowledged. But Xi has championed and profited from globalization. The trade war is now hurting China and slowing growth. China may seek to become more self-sufficient technologically, but this will take time while the pressures are immediate.

Some have speculated that there may be opportunities for ASEAN if foreign companies shift production from China. This is possible. But doing so is easier said than done and no one will forgo the Chinese market. ASEAN members must also resist temptations to act as a backdoor into the U.S. for Chinese companies.

A prolonged trade war and concerns that China may have compromised the security of supply chains, are likely to upend existing supply links. This could seriously complicate ASEAN members’ efforts to move up the value chain, for example if U.S. groups relocate business back to America. In response, ASEAN must attract higher grade investments by improving infrastructure and skills, and assuring investors their technology is secure.

Low labor costs and a potential market of 700 million consumers are no longer sufficient to make Southeast Asia an attractive investment destination. The attitude of ASEAN members toward China and the extent to which they are beholden to it are likely to become important considerations in investment decisions.

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BALI, Oct 12 — Tun Dr Mahathir Mohamad has lamented ASEAN for not fully tapping its potential as an economic powerhouse, despite having abundant resources and a consumer market of nearly 700 million people.

ASEAN needs to move decisively to hedge against long-term uncertainties, while taking advantage of available opportunities.

Reforms such as the removal of non-tariff barriers and harmonization of ASEAN’s approach toward services and labor mobility could help make Southeast Asia a common production platform. Member states meanwhile should implement plans to upgrade skills and infrastructure. But internal political changes in some member countries could undermine the goal of closer economic integration. Unfortunately, ASEAN has, in recent years, become too timid for its own good.

 

 

Ambassador A Large Bilahari Kausikan, a former Permanent Secretary at Singapore Ministry of Foreign Affairs, is Chairman of the Middle East Institute at the National University of Singapore.

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China’s Foreign Policy under Xi Jinping


October 24, 2018

China’s Foreign Policy under Xi Jinping

by Neil Thomas, University of Chicago

http://www.eastasiaforum.org/2018/10/21/chinese-foreign-policy-under-xi-jinping/

  …”contrary to some recent commentary, it seems unlikely that ‘world power’ or ‘world domination’ are China’s priorities. The CCP observed the Soviet errors of external overreach and antagonism toward the US-led system during the Cold War. China now interacts with the international order like other major states: it complies with the order because to do so serves its interests and tries to influence this order where it does not”.–Neil Thomas

There is a risk of a ‘new Cold War’ between the United States and China. After decades of bilateral engagement and multilateral collaboration, the Trump administration’s first National Security Strategy (NSS) branded China a ‘revisionist power’ that seeks to ‘displace the United States in the Indo-Pacific region’ and ‘shape a world antithetical to [US] values and interests’ in an age of renewed ‘great power competition’.

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Rising powers like China rattle ruling powers like the United States because their ascendance creates tension within existing structures of global power. US power lies in its unmatched military capabilities and the ‘international order’ of multilateral institutions, interstate rules and global norms that promote economic openness and rules-based dispute resolution. The charges of ‘revisionism’ levelled in the NSS show that the Trump administration fears that China will replace the United States as global hegemon and threaten the basic tenets of international order.

China has indeed become a more active participant in global affairs under the leadership of Xi Jinping, who took office in November 2012. Signs of China’s rising power, though, are a natural result of its growth. More important is what China intends to do with its newfound capabilities. Does Xi want to revolutionise Chinese foreign policy? Stop opening China’s economy? Overturn the international order?

International policymakers must study Xi’s words because he, as the Chinese Communist Party’s (CCP) General-Secretary and head of the Central Foreign Affairs Commission, is pivotal in setting the overarching orientations and strategies of China’s foreign policy. The most authoritative articulation of Xi’s policy agenda is his ‘Report’ to the 19th CCP National Congress in October 2017.

An analysis of Xi’s foreign policy discourse suggests that there may exist more continuity than often assumed between the strategies of Xi and his predecessors. This intersection between past and present is captured neatly in the foreign policy section of Xi’s Report: ‘Following a path of peaceful development and working to build a community of common destiny for humankind’.

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What’s new is that Xi stamped his authority on CCP foreign policy under his signature formulation of ‘building a community of common destiny for humankind’ — although Hu Jintao had used the phrase previously. The ‘community of common destiny’ is basically an international system in which deeper economic integration and political dialogue eases conflict and bolsters security. Xi is proactively ‘building’ this future through an intense focus on the Belt and Road Initiative (BRI) and global governance.

What’s not new is that Xi retains the ‘peaceful development’ strategy articulated by Hu in the mid-2000s, which derives from the CCP’s ‘basic line’ of ‘peace and development’ in international relations that Deng Xiaoping introduced in 1985. In the Report, Xi framed the foreign policy achievements of his first five-year term, including the BRI and the Asian Infrastructure Investment Bank, as ‘new contributions to global peace and development’. He has told Party leaders that the ‘peace and development’ strategy is ‘aligned with the fundamental interest of the country’ and is a ‘fundamental foreign policy goal’.

This ‘peace and development’ strategy reflects the belief that China’s economic development requires a peaceful external environment and cooperative relations with major powers. It replaced the Maoist creed of inevitable conflict between the capitalist and socialist worlds as the CCP’s official ‘assessment of the international situation’. Deng believed this strategy would help China ‘exert a much greater influence’ in a global system that the CCP perceived as dominated by Western powers.

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Xi’s policy statements imply that the overarching concern of China’s foreign policy remains the creation of a ‘more enabling international environment’ for China’s continued development. As China’s interests continue to expand, so too does its desire to participate in global affairs.

But contrary to some recent commentary, it seems unlikely that ‘world power’ or ‘world domination’ are China’s priorities. The CCP observed the Soviet errors of external overreach and antagonism toward the US-led system during the Cold War. China now interacts with the international order like other major states: it complies with the order because to do so serves its interests and tries to influence this order where it does not.

Xi’s Report also reaffirmed Deng’s ‘opening to the outside world’ as a ‘basic national policy’. ‘Opening’ for Deng meant China would integrate into the global economy, enter international institutions and improve living standards in a manner that sustained CCP control.

Xi has insisted that China ‘absolutely must not waver’ from ‘reform and opening’ because it is the ‘propelling force’ behind China’s ‘international status’. He even framed his signature economic policy — a ‘new normal’ focused on consumption, services and markets — as a ‘new structure’ of reform and opening that ‘improves its quality and level’.

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Xi’s continuation of key strategies like ‘peace and development’ and ‘reform and opening’ suggest he may not have changed China’s objectives so much as the means by which the CCP pursues them. Xi’s China is ‘revisionist’ in the narrow sense of hoping for changes that reflect new realities but not in the existential sense of wanting to supplant the current order or global hegemon.

Until recently, White House views on China were quite consistent: the United States would ‘welcome the rise of a stable, peaceful, and prosperous China’ and ‘reject the inevitability’ of ‘confrontation’ if China acted within the international order. But the latest NSS said the ‘engagement’ strategy had ‘failed’.

The endurance of ‘reform and opening’ and of ‘peace and development’ in Xi’s foreign policy discourse imply that engagement is not such a failure. The continuance of these two key foreign policy concepts intimate that, while Xi’s CCP does want to project China’s power, it is still constrained by a belief in the benefit to China of global order and stability.

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US relative power in global affairs is declining, but this trend is mostly the result of other countries’ embrace of the international order built by the United States, which nonetheless retains significant advantages in military, diplomatic, commercial, technological and cultural power. It would best advance its national interests by accepting but proactively managing China’s rise within an improved iteration of this order. We should avoid a ‘new Cold War’.

Neil Thomas is Research Associate in the Think Tank of The Paulson Institute at the University of Chicago.

This article appeared in the most recent edition of East Asia Forum Quarterly, ‘Asian crisis, ready or not’.

Gearing Up for the next Financial Crisis


October 22,2018

Gearing Up for the next Financial Crisis

by Andrew Sheng

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http://www.eastasiaforum,org

In July 2018, the Bank for International Settlements (BIS) asked whether the world was heading towards a perfect financial storm, with the US stock market heading for record highs even as emerging markets like Argentina and Turkey were running into foreign exchange problems. Twenty years after the Asian financial crisis of 1997–98 and the global financial crisis of 2007–08, storm clouds are gathering once again.

Conventional economic models failed to predict the last two crises because the technical definition of financial risk is measured volatility. The global financial crises proved that current models of financial risk, largely used by banks and financial regulators, are totally blind to Black Swan or Grey Rhino events of unmeasurable uncertainty.

This time round, the consensus is that the Grey Rhino (an event with high probability and high impact, but where the trigger is uncertain) is the looming rise in US interest rates in response to a domestic economy that is running at nearly full capacity, with low unemployment levels and signs of creeping inflation. As the BIS has warned, non-financial borrowers outside the United States owe US$11.5 trillion dollars, of which US$3.7 trillion is owed by emerging markets.

Turkey’s recent currency woes are symptoms of domestic policies badly managed, aggravated by the US threat of economic sanctions. Turkey alone has US$467 billion of foreign debt. As global risks rise, capital is flowing back to the booming US stock market and potentially higher interest rate yields. Emerging markets have no alternative but either to allow exchange rate depreciation or defend themselves with higher interest rates that depress their own growth potential. Recently both Indonesia and Hong Kong had to defend their exchange rates through higher interest rates and intervention, respectively.

The tricky thing about US interest rates is that economies with high domestic and foreign debt are vulnerable to tighter liquidity and financial fragility, because their interest rates and credit-risk spreads rise non-linearly. Doomsayers of East Asia’s financial collapse argue that China’s debt of 250 per cent of GDP is the tipping point.

Financial risks are rising not just in China, but globally. Dun and Bradstreet’s Global Risk Matrix, published in May 2018, suggested that US interest rate rises could trigger a fresh debt crisis, sending the global economy into contraction. Echoing this sentiment, the International Monetary Fund’s July 2018 World Economic Outlook argued that rising trade tensions are threatening growth recovery in Europe, Japan and Britain more than predicted. Any overheating in the United States would trigger currency crises for some emerging markets.

In short, we cannot separate financial risks from geopolitical risks. Any unforeseen event arising from a geopolitical miscalculation, climate change disaster, war or cyber-induced disruption could trigger another round of financial crises.

Global financial fragility comes from two structural imbalances. First, the United States is the leading deficit country in terms of trade and debt, owing the world a net US$7.7 trillion, or 39.8 per cent of GDP. This amount is growing because of rising fiscal debt and the low level of national savings. Second, below-par global growth since 2008 has been underwritten almost completely by central bank unconventional monetary policies, which have brought interest rates to an unsustainably low level.

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Market fears that the large central banks will withdraw quantitative easing — QExit — threaten to jeopardise the current frail recovery, which is why US President Donald Trump is also against the Federal Reserve raising interest rates.

If geopolitical risks trump financial risks, what could go wrong in the coming months?

Western analysts think that the trigger will be a Chinese debt meltdown. But Chinese debt is internal debt, as China has foreign exchange reserves equivalent to 188 per cent of its foreign debt and still runs a current account surplus. China’s debt problem is an internal debt issue, very much like that of Japan. While Japanese debt is owed largely to Japanese households, Chinese debt is largely owed by state-owned enterprises and local governments to state-owned banks. In such a situation, China is well positioned to rewrite its national balance sheet, a privilege not possible for more privately dominated markets.

A possible Black Swan (a low probability but high impact event) is an unexpected sharp increase in the yen–dollar exchange rate. Japan is the third largest economy after the United States and China and has been increasing its overseas assets since the 1990s. Between 2007 and July 2018, the Bank of Japan has grown its assets the most among the major central banks (to US$4.9 trillion, or just over 100 per cent of GDP). By the end of 2017, Japan’s gross foreign and net assets grew to US$9 trillion and US$2.9 trillion respectively, equivalent to nearly one quarter of US growth in gross foreign liabilities during the same period.

US trade deficits have been sustained by foreign inflows (which had central bank origins) in which Japan is a major player. During the Asian financial crisis, sharp volatility in the yen–dollar exchange rate caused a dramatic withdrawal of Japanese bank loans from Asia, aggravating a regional liquidity crisis that was already spurred by speculative currency attacks.

What complicates today’s financial fragility is Trump’s attempt to control the US trade deficits. He assumes that bilateral negotiations can reverse the unsustainable growth of national debt, which tripled in the last decade and may grow to 100 per cent of GDP in another decade. But tariffs only increase inflation for the consumer, which would trigger higher interest rates and jeopardise the fragile financial stability achieved through unsustainable monetary policies.

The next global crisis will most likely be triggered by geo-political mistakes. In an age when politicians are proving fickle in their decisions, central bankers are perhaps the only professionals who appear able to do something about financial risks. But since Trump does not care much about professional advice, Asian markets worry less about measurable financial volatility than unmeasurable personality risks.

Andrew Sheng is Distinguished Fellow at the Asia Global Institute, University of Hong Kong. 

This article appeared in the most recent edition of East Asia Forum Quarterly, ‘Asian crisis, ready or not ’.

The Jungle Grows Back: America and Our Imperiled World


 

October 16, 2018

The Jungle Grows Back: America and Our Imperiled World

Reviewed by: Francis P. Sempa

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The “liberal world order” created by the United States after the Second World War is an historical anomaly that may be coming to an end, according to the Brookings Institution’s Robert Kagan in his new book The Jungle Grows Back.

Kagan, who served in the Reagan State Department in the mid-to-late 1980s, is the quintessential foreign policy neoconservative who believes that “the liberal order is like a garden, artificial and forever threatened by the forces of nature.” It can only be preserved, he writes, by a “persistent, unending struggle against the vines and weeds that are constantly working to undermine it from within and overwhelm it from without.”

The “vines and weeds” that threaten it today, according to Kagan, all come from the political Right—authoritarian foreign powers such as Russia, China, Iran, and North Korea and domestic conservatives who yearn “for order, for strong leadership, and . . . for the security of family, tribe, and nation.”

Kagan views authoritarianism as a greater threat to the survival of democracy than communism because in his view an unenlightened authoritarianism is more consistent with human nature. The United States and the countries of Western Europe, he writes, are retreating to nationalism and tribalism while moving away from the enlightened universalism that has supported the liberal world order since 1945.

He criticizes the foreign policy “restraint” of the Obama administration and the “America First” foreign policy of the Trump administration, yet he acknowledges that both appeal to many Americans who yearn to be a “normal” country and who recoil from being the world’s policeman.

For Kagan and some other neoconservatives, the end of the Cold War changed nothing. America’s global responsibilities remain the same, albeit with different adversaries and more diffuse threats. Those who today counsel restraint, Kagan warns, risk repeating the errors of the 1930s and the 1970s when America’s timidity enabled geopolitical threats to grow.

Kagan worries that as American power wanes in Europe and East Asia, the transformation of the global power structure accomplished by the creative statesmanship of the immediate post-World War II period will end. European geopolitics may return with a vengeance, while East Asian geopolitics will intensify. He even raises the specter of nationalistic Germany and Japan once more acting assertively on the world stage.

Although Kagan decries the “new realism” that emphasizes the limits of American power, it was, ironically, the success of Kagan’s worldview as practiced by the George W. Bush administration that produced the political environment for a more restrained American foreign policy.

The seemingly endless war in Afghanistan and the unsuccessful war in Iraq—waged to implant democratic values and practices in regions inhospitable to democracy—demonstrated for those not blinded by hubris the limits of American power.

In some parts of the book, Kagan confounds more than he informs. China and North Korea, as Kagan surely knows, are not rightist conservative powers; they are leftist communist regimes. Americans, despite Kagan’s claim to the contrary, did not exaggerate the risks communism posed to their way of life. A successful U.S. foreign policy does not require “a belief in the universalism of rights.”

Geopolitical restraint has a very rich tradition in American history—from George Washington’s wise policy of neutrality in the 1790s and his wise counsel to avoid sentimental attachments to foreign powers, to John Quincy Adams’ counsel to avoid going abroad to seek monsters to destroy, to Theodore Roosevelt’s “big stick” diplomacy, to Dwight Eisenhower’s strategic deterrence, to Richard Nixon’s triangular diplomacy, to Ronald Reagan’s “peace through strength.”

Those presidents succeeded by husbanding and deftly wielding American economic and military power to support American interests, not by dispatching American troops willy nilly to spread democracy or transform the world. America, John Quincy Adams said, is the well-wisher of freedom to all but the champion and guarantor only of her own.

While Kagan’s worldview contains some elements of Wilsonianism, he also writes persuasively about some eternal truths of international relations that should inform any U.S. administration’s approach to the world.

He understands that it is American military predominance, not “soft” or “smart” power, that ultimately supports the U.S.-led world order. He realizes that the struggle for power is a permanent feature of international relations.

He has a pessimistic view of human nature and notes that policy choices are frequently limited to bad and worse options.He knows that there are no permanent solutions to foreign policy problems and that containing or keeping a lid on trouble is often the best we can do.

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He recognizes that a rising China poses the greatest geopolitical challenge to the United States in the early 21st century.

Kagan cites Bismarck and Disraeli, both realists, as the most masterful statesmen in history. He might better appreciate counsels of restraint by remembering that it was Bismarck who wisely remarked: “Man cannot control the current of events, he can only float with them and steer.”