Moment of reckoning for Mr. Xi

Moment of reckoning for Mr. Xi


The past decade had seen the phenomenal rise of China as a dominant economic and military power and its efforts at asserting its place on the world stage. This was triggered by Mr Xi Jinping’s gradual taking control of the powerful Peoples Liberation Army (PLA) and the equally powerful Communist Party apparatus. His push to the economy has been aided by the near monopoly of their electronic goods segment and their capture of the markets worldwide. This has benefited the Chinese urban middle class and the educated majority of young professionals. Their aspirations also increased thereby and their wanting to have a say in the decision-making processes. The grand schemes like the ‘Belt and Road' initiative and sea girdle have all been part of that plan.

Along with it also emerged China’s desire to have a say in global governance and its impact on the national security situation. A repressive autocracy and an inconclusive effort to re-engineer its economic model can be a heady concoction. This has resulted in China’s worsening relations with its neighbours and the escalating rivalry with the other economic super power, the United States. On the other hand, China has not been able to bolster its ties with neighbour and ideological partner Russia. All this seem to happen in an environment of global economic uncertainty and chaotic conditions worldwide and the environmental changes that these powers are unaware of.

These must have been in his mind when Mr. Xi told a seminar of top provincial leaders and ministers in Beijing recently of the need to maintain political stability and greater efforts to ‘prevent and resolve major risks’. This was indeed a fresh sign that the ruling party is concerned about the social implications of the slowing of the economy.

‘The party is facing long-term and complex tests in terms of maintaining its rule, reform and opening-up a market-driven economy, within the external environment,' Mr.  Xi explained.  'The party is facing sharp and serious dangers of a slackness in spirit, lack of ability, distancing from the people, and being passive and corrupt. This is an overall judgment based on the actual situation.'

Although Mr. Xi has issued similar warnings earlier, including in February 2018, the recent statements contain signs of greater urgency. The mention of the 'serious' threats to the party's 'long-standing rule' appeared new. He specified areas of concern facing the leadership that ranged from politics and ideology to the economy, environment and the external situation.

Chinese leaders have also now to cope with a more confrontational US under Mr. Donald Trump, who has slapped tariffs on hundreds of billions worth of dollars of Chinese goods and turbulent financial markets around the world. Mr. Xi faces added pressure to personally resolve the issues after obtaining a constitutional change that allows him to rule indefinitely.

These factors have led top investors from the world over once again to turn their worried gaze toward China. And for good reason, because its economic growth in the third quarter sank to 6.5 per cent, the slowest pace since the depths of the global financial crisis in 2009.This has never happened before, as China had survived the Lehman Brothers moment that had its impact the world over.  Automobile sales fell last year for the first time in more than two decades and Apple’s warning in early January that iPhone sales in China were sagging alerted the world to how a slowing Middle Kingdom would drag down global growth and corporate profits. To be sure the locals had figured that out a while ago. Even after a recent revival, the stock market in Shanghai plunged by more than a quarter from its 2018 high. The outlook is not at all rosy. Tariffs on Chinese exports to the US imposed by Mr. Trump are starting to pinch the country’s factories. A steep and unexpected plunge in imports in December signaled just how sharply the economy is decelerating.

There is also concern that the turmoil might have implications for the surrounding areas and outlying parts of the mainland, like Hong Kong and Taiwan. There are also worries that such economic collapse might destabilise the whole of Eurasia. China seems again to be back to a future of uncertainties and crises and the danger of cross-Strait conflict is no longer receding. Naval games in the East and South China Seas nurture possibilities of even armed conflict between China and Japan and the US.

In all these what goes widely unnoticed, however, is that China is already in deep crisis. It is not the sort of dear-life collapse the US had experienced in 2008 or the surprising collapse of the ‘Asian Tiger’ economies in 1997. Nonetheless, it’s a crisis, complete with gutted banks, bankrupt companies, and state bailouts. Since the Chinese distinguish their model as 'socialism with Chinese characteristics’ it could be called a 'financial crisis with Great Han attributes.'

This crisis is not merely about the current slowdown in growth. It has been in the making for a while, and by the looks, is not going away anytime soon. On the surface, the whole idea that China is in a crisis may sound ridiculous. Growth has tapered off, but it remains relatively strong, assuming that you believe the government’s figures to be authentic. Banks are not tumbling into insolvency on a massive scale. While anxiety over the state of the economy has mounted, and the pullback by Chinese shoppers, the mood has not degenerated into the gloom that usually accompanies such upheavals. China may never have suffered the panicked fiasco that emanated from Wall Street in 2008 and this crisis is not taking the same course as most others. Rather than a sudden explosion that destroys banks and jobs, China’s version is moving so slowly that it can be hard to notice.

Till a few years ago, China watchers predicted the economy could tumble into a 2008-like collapse. All the warning signals were flashing bright red: a housing bubble, excess capacity in industries from steel to solar panels and most worrisome of all, a debt build-up of gargantuan proportions. Total debt relative to national output surged to 253 percent in mid-2018, from just 140 percent a decade earlier, according to the Bank for International Settlements. No emerging economy since the 1990's has had such a debt expansion and escaped financial calamity. China would have to defy history to dodge a debt disaster.

Analysts had been waiting and watching for China’s own ‘Lehman Brothers' moment’ but this never arrived. Some analysts have come to figure it never will and that indeed China is too big to fail. The Chinese government, the new argument goes, has so many levers of control over banks, big corporations, and capital flows that it can suppress the sort of crisis a more liberal economy cannot prevent.

Top investors from the world over are once again are turning their gaze towards China with anxiety.  And for good reason, because it’s economic growth in the third quarter sank to 6.5 per cent, the slowest pace since the depths of the global financial crisis in 2009.

This was not the case till a few years ago. China’s superpower status was on display in 2015 after a stock market bubble burst, fueled by shifty lending and bureaucratic ineptitude. Money flooded out of the country as the currency staggered. What would likely have laid other emerging markets low was just another day’s work for the country’s wily mandarins. The government organised a stock bailout and clamped down on capital outflows and the crisis was averted. That approach is representative of Beijing’s overall strategy toward its debt problem; the government, obsessed with social stability, isn’t allowing the debt bomb to detonate. The Lehman moments might be terrifying, but they are also cleansing, an opportunity for the market to scrub out the bad stuff and clear the air. Beijing, by stopping that from happening, is allowing the waste to rot.

But you cannot dismiss an old civilisation crumbling under the weight of such shifting market trends. Now the straws in the wind suggest China is offering to settle its trade dispute with the U.S., through an epic offer to buy more than 1 trillion dollars of goods. Though the U.S. federal investigators were acting against China's Huawei Technologies on allegations it stole technologies, a bipartisan group of lawmakers in Congress has put forward legislation that would limit what U.S. companies could sell Chinese telecom operators. It is a hard businessman’s world.

But what happens to Huawei matters, for China and the world. One of Beijing’s top goals is transforming China into a technology powerhouse able to innovate and control the vital know-how powering future industries, and to free itself from, and then challenge, the US. And here where Huawei, as one of the country’s most prominent global enterprises, will be a critical component.  Hence, its problems are China’s problems, and the fate of the company could foreshadow the fate of the country as well.

Meanwhile, the Chinese government granted 18 trademarks to companies linked to the U.S. President and his daughter Ivanka over the past two months, though these raised concerns about conflicts of interest. Earlier, China's Trademark Office granted provisional approval for 16 trademarks to Ivanka Trump Marks LLC, bringing to 34 the total number of marks China has cleared in the past year. These cover Ivanka-branded fashion gear including sunglasses, handbags, shoes and jewelry as well as beauty services and voting machines; all these with an eye on the new emerging class of Chinese consumers. Critics say the Trump family's worldwide intellectual property portfolio could set the groundwork for the President and his daughter to profit from their global brands when they leave office.

Apart from the mundane economic and foreign affairs problems, China is also seized with a major demographic issue, the ageing of its population due to the warped 'one child norm' that was forcefully implemented sometime earlier. The mindless development and expansion of not just the urban space but also projects like the Three Gorges have had begun to make their impact felt.

Mr. Xi seems to be sitting on just demographic and environmental time bomb apart from the floundering of the grand schemes like the 'road and belt' initiative and controlling the sea lanes. This is nothing unusual for the rulers of the Middle Kingdom, the ones who built the Great wall. Compared to this the wall Mr. Trump plans to erect to keep the Mexicans out seems like child’s play.