China -- the fragile superpower

The US-China Strategic and Economic Dialogue, which recently took place between the world's superpowers was preceded by a period of great tensions. China remains, however, a very fragile superpower.

The US-China Strategic and Economic Dialogue, which recently took place between the world's superpowers, was preceded by a period of great tensions. China is clearly trying to assert itself as the great power of East Asia, and is challenging the position of the US and its allies.

China remains, however, a very fragile superpower, some seven years after Susan Shirk published a book of the same title, just before the Lehman shock. Shirk argues insightfully that China's leaders display a pattern of political insecurity and that China's internal politics could derail its peaceful rise.

Why are China's leaders so insecure?

The Communist Party regime remains deeply scarred by the 1989 Tiananmen Square incident, as was evident from its recent fierce security crackdown on the occasion of the 25th anniversary. They regarded this protest movement as an existential threat to the regime, and are still haunted by the fear that their own days may be numbered, like Europe's former communist regimes.

If the Party falls, China's leaders and their families could lose everything. They are very conscious that the Qing dynasty and the Republic of China both fell due to popular discontent.

China's current leaders lack the prestige and legitimacy of iconic figures like Mao Zedong and Deng Xiaoping, even if Xi Jinping carries much greater authority than his predecessor. This makes controlling both the Party and the population much more difficult.

Moreover, three and a half decades of economic reform and opening to the world have turned Chinese society upside down and created latent political challenges to communist rule. The Party can no longer keep track of the population, much less control it.

Chinese citizens now have much more access to information, especially through the Internet. They also travel much more, as students, tourists and businessmen. So despite their paranoid media censorship, Party leaders cannot keep people ignorant of news from either inside or outside China.

Inequality is a major political anxiety, as the gap between rich and poor has widened, especially since the Chinese people know that the really wealthy people invariably got their money through corruption and official connections.

Since Tiananmen, the Party has pumped up popular nationalism, especially vis-a-vis Japan, to improve its control of power. But this can be a hot potato, as there is always the risk that the unruly crowd could turn on the Party. And China's nationalism is encouraging nationalistic responses from neighbours like Japan, the Philippines and Vietnam.

Shirk recommended a number of strategies for continued survival of the Communist Party, namely, co-optation of opposition leaders, increasing freedom, or increasing repression. At various times, Chinese leaders have employed all three means, but the inclination of current President Xi Jinping is to ramp up repression.

For its part, the US may at times seem weak in its responses to China. But it tries to be careful to prevent China's internal fragility leading to international conflict, which is neither side really wants.

A flourish of hubris

When the Lehman crisis struck in 2008, the Chinese government responded with perhaps the biggest fiscal stimulus the world has ever seen. Despite the show of decisiveness, and widespread praise it received, this was also a sign of fragility.

With China's economy highly dependent on exports to the US and other Western markets, the government feared that economic growth would plummet -- growth is of course critical for maintaining employment, the key to social stability.

This stimulus resulted in a few years of very high economic growth in China, and fed a mood of Chinese economic triumphalism. It also played an important role in keeping the world economy afloat, as Yuen Pau Woo from Canada's Asia Pacific Foundation has argued. In particular, China's Asian neighbours and resource exporters like Australia and Canada benefited greatly.

The crisis period was also a turning point in the perception of China as an economic power. In 2010, China's total GDP overtook Japan's. It became the world's second biggest economy, and Asia's biggest. And with continued strong growth, it is just a matter of time before China overtakes the US. According to some estimates this may happen this year.

China also became the world's biggest exporter. It is now the biggest trading partner for some 127 countries, whereas the US is the biggest trading partner for only 76 countries. And it has been during this same period, with "dollar-pessimism", that China has pursued a policy of internationalization of its currency, the RMB, and opening its capital account.

The 2008 financial crisis was also a turning point in China's positioning in the world. "The Chinese have come to see the status quo of the international economic system as one which may not be conducive for China's aspirations, and may run counter to China's interests", argues Yuen Pau Woo. China has been proposing a "new type of great power relationship" with the US, with the recognition of China as a great power.

With the US economy in crisis and in apparent decline, and Chinese economic power in the ascendancy, China began to behave in a "more assertive manner", including on questions of territorial disputes and cyber-espionage. Yuen Pau Woo interprets "the aggressive statements and actions by Beijing concerning the South China and East China Seas to be as much about Sino-US relations as about disputes with Japan, Vietnam, Philippines, and other Asian neighbours".

In a very recent speech, Xi said that "the law of the jungle" was a thing of the past, where one nation sought to dominate international affairs. He called for a "new security architecture for Asia".

It is ironical because in reality China has been a major beneficiary of the international system, created by the US and other Western countries, and which is based on open markets, international rules of the game and freedom of navigation -- especially since China does not have open markets, nor the rule of law.

Chinese reality-check ("fragility-check")

When XI Jinping assumed the Presidency of China last year, he took over an economy that was unstable, unbalanced, uncoordinated, and unsustainable -- a characterization made a few years before by China's former Premier Wen Jiabao, but which is even more pertinent today.

China's massive stimulus package has created problems of its own in the form of dubious projects which are resulting in a mountain of bad debt in the financial system that now threatens to destabilize the economy. By some estimates, China's domestic debt would have risen from 130 to 220% of GDP these past five years.

China's state-bank-dominated financial sector has spurned an enormous and very fragile shadow banking sector. Roughly half of all credit extended in China last year came from outside the formal banking sector. And despite China's massive foreign reserves, Chinese companies and banks have also been on a borrowing spree on international markets.

The Chinese economy shows many signs of weakness, especially in the housing sector which has been the locomotive of growth over the past decade. The message from Beijing is that today's lower growth of 7-7.5% is sufficient, and that the quality of growth is just as important. But while growth of around 7% may seem fine, the government is now launching further stimulus initiatives. In other words, 7% growth is not natural or endogenous growth. The economy has to be doped up by stimulus, and is heavily credit-fueled.

Looking ahead, the Chinese government knows that it must rebalance its growth model away from exports and investment towards more consumption-driven growth. But there has been little headway so far. And with each sign of economic weakness, the government's knee-jerk reaction is to pump up more investment expenditure, often adding to the country's infrastructure white elephants and excess capacity.

The government is also trying to transition to more innovation-driven growth, a key to improving productivity. It is very active pressuring foreign companies to transfer technology, and locate R&D facilities in China. But rampant cyber-espionage and other intellectual property theft only further undermines technology partnerships with the West. Overall, the innovation track record in China has been very modest, despite the large sums it spends on R&D.

XI Jinping has launched a campaign against China's endemic corruption, which is seen as an existential threat to the Party's fragile grip on power. This is a high risk strategy for several reasons. He is targeting high level Party officials like former security chief Zhou Yongkang, vice-chairman of the political consultative conference Su Rong, and retired military commander Xu Caihou ("tigers"), as well as lower level officials ("flies"), with former President Jiang Zemin already expressing concerns.

This anti-corruption campaign seems to be very much part of a power struggle (with the notable case of BO Xilai), as Xi eliminates rivals and enemies in order to consolidate power. Xi has been trying to reduce his own vulnerability by pushing some of his family members to sell off hundreds of millions of investments.

Another target is the "naked officials" -- these are Party members who stay in mainland China while their wives and children reside abroad. This is a great source of capital flight, and is also a ploy to be able to leave China quickly if ever politically threatened.

At the same time, the government has been jailing anti-corruption activists who are pressuring the government to clean up corruption and reveal the private wealth of Party officials. And the websites of the New York Times and Bloomberg, which have both exposed asset holdings of China's elite, have been blocked in China for many months. In other words, the Party is its own policeman, and there is no question of democratizing the fight against corruption. Indeed, the Party has made clear that Western-style democracy is not an option.

Assertive, confrontational behavior in the East and South China Seas has led to a dramatic deterioration in relations in the region. China clearly wants to displace the US as the regional power, and is very active in seeking to change the reality on the ground (or in the sea).

But in today's world, China could only become Asia's regional power with the consent and cooperation of its neighbors. And very few wish to take the side of an authoritarian bully. Thus, the affected countries are seeking stronger US presence in East Asia, and are supporters of Obama's "pivot" to Asia. Even where China buys off local elites, strong resistance from public opinion can be expected.

This is having knock-on effects on the Chinese economy, as Japan, a major investor in China, is now diversifying its investments away from China towards South East Asia and India.

China is also interfering more and more in the management of Hong Kong, and seeking to backtrack on commitments for democratization. This is stoking up a local protest movement, and could have adverse effects on the economy. In Taiwan, a coalition of students and NGOs ("Sunflower Student Movement") recently occupied the national parliament in protest at China/Taiwan services trade agreement that was being pushed through.

The US has been openly very critical of China's assertive behaviour in the East and South China Seas, and cyber-espionage, which has clearly violated China's earlier expressions of creating a new type of great power relations with the US, and has increased the already high level of strategic distrust. There have been public shouting matches between high-level US and Chinese officials at recent international conferences.

There are many more aspects of fragility that could be explored. Domestic Islamic terrorism. Growing social unrest in response to the country's environmental disaster and other problems. Labor unrest. Human rights abuses. Restrictions on freedom of expression, of Internet and the media. And so on.

China's growing fragilities do not in any way diminish its impressive achievements in economic development and poverty reduction. If anything, China's economic success opened up this Pandora's Box. Nor do these fragilities imply that China is on the verge of collapse or chaos -- though history shows that revolution can strike where and when you least expect it.

Further, all countries have fragilities, even the richest countries like the US. But advanced countries have institutions and processes for managing these issues, based on the rule of law. Despite its problems, there is a method to the madness of Washington.

Ironically, China's bete noire, the US, should be China's closest friend. Because the last thing that the US should want is a collapse of China. The global consequences could be immense. China is too big to fail. But China perceives the US as a threat and a rival, more than the US does.

In her book, Shirk quotes a former provincial Party head who said: "The Party's authority is gradually declining, and as a result, Chinese President HU Jintao is less confident and more insecure than the leaders before him. When a leader feels insecure, he tightens controls".

These same words could perhaps be said with even greater force today.

And what about the US-China Strategic and Economic Dialogue? Did it achieve anything?

In the past few days, China did remove an oil rig from waters which are contested with Vietnam, and have been a major irritant in relations. Beijing insists the move is due to work completion, rather than "external pressure".

We can only hope that East Asian relations are now moving from choppy to calmer waters.