Last week may be remembered as the week in which the narrative of a “reforming and opening” post-Mao China died. Below we highlight the key events driving that perceptual shift, remembering that one key to interpreting new information is to keep on the lookout for response bias. As we’ve covered repeatedly on this blog, bias concerning China news tends to pull interpretations toward one of two poles: 1) China’s political economy is in dire trouble, 2) China is en route to surpassing the United States as the world’s preeminent power. News from the previous week saw both narratives in “strong attractor” mode, pairing visions of economic collapse with the recurrent specter of unchecked expansion of China’s interests–and thus corresponding U.S. weakness–in the South China Sea.
POLITICS AND GEOPOLITICS: Chinese irridentist nationalism stayed in the news with reports of censorship of Tibetan entries to an arts summit held in Bangladesh, and reports coming in of increasing patriotism, and anti-Taiwanese sentiment, among one of China’s most influential internet subcultures. Neither trend seems likely to subside. New assessments of “Xi Jinping’s China” emphasize the desire of Xi and many ordinary Chinese to play a greater role on the world stage, and cease acting as a junior partner to the United States and Europe (including Russia). Nationalism and national pride continue to function as key legitimacy resources for Chinese leaders.
One means of fostering legitimacy at home, then, has been to visibly reject international norms, particularly those associated with U.S. interests, in areas where China’s leaders are confident that they will not be upstaged. The unannounced installation of H-9 surface-to-air missiles and related radar systems on around February 17 grabbed international attention and elicited outcries from American leaders over China’s ongoing militarization of the South China Sea region, but likely did little to change the status quo (the deployment of missiles to Woody Island was not a first, and the island itself has long been under Chinese control) or the balance of power in the Paracel Islands.
We observe the following:
- China remains committed to, and embedded in, the major institutions of the international system.
- News concerning the South China Sea, though of great symbolic importance to those favoring an international order in which the U.S. remains the dominant power (or, equally, an order that is more multipolar and/or in which China is steadily “rising”) has again tended to overshadow other significant international developments involving China, such as grand strategy in the Middle East (focusing on Iran); an uncooperative relationship with Japan over issues involving North Korea; reorganization of the PLA and China’s military “pivot” to Africa via Djibouti; and an increase in loan activity connecting China with Latin America.
- Moreover, while focus on China’s economy has suggested that slowdown will be bad for global commodity prices, the key to China’s grand strategy over the medium to longer term may come down less to “nationalism” in the abstract, and depend more on how leaders seek to solve issues of resource scarcity and sustainability.
- Like other great powers, China may be shifting toward a more trade- and influence-based approach to foreign policy, bordering on global “commercial frenzy.”
Instead of favoring arguments for a fundamental shift in China’s international posture toward greater aggression, a more realistic hybrid perspective would also include elements of cooperative and trade-based relations, though with the caveats that China is indeed likely committed to challenging the United States in the South China Sea both for perceived security reasons and to bolster legitimacy at home, and, as illustrated by the militarization of countries in South and Southeast Asia, China’s ongoing expansion is far from uncontested. Indeed, with respect to the latter point: the recent U.S.-ASEAN Sunnylands summit, and previous signing of the 12-country TPP trade agreement, provides one example that most countries in the region see multipolarity, rather than Sinocentrism, as the most desirable future for the region.
THE ECONOMY AND RISK: By far the biggest story in this space has been the prediction that China’s $34 trillion banking sector will suffer heavy losses on non-performing loans (NPLs), capital flight, rapid decline in FX reserves, shadow banking strain, declining exports, and slowing growth. Even as it surfaced this letter drew numerous rebuttals, including a published interview with Chinese central bank governor Zhou Xiaochuan suggesting that savings, investment, and comparative advantages in the manufacturing sector would combine to pull China through. While the value of the yuan has declined steadily–with occasional bouts of volatility–since August 2015, the value of the decline (from roughly 6.2 to 6.6 in USD/CNY terms , currently fixed at just above 6.5) has been smaller than expected, and a range of competing investor narratives foregrounding less visible gains in bank and fiscal reform, state plans for urban renewal, and commitment to increasing consumer demand as evidence of prospects for continued growth.
The pessimist case is also being supported by stories–the validity of which is debated among those who follow new data releases closely–that reporting of negative economic news will no longer be permitted. For those seeking to defend a more positive consumption-driven narrative, the crux of the issue seems to be whether vigorous competition for achieving scale in Chinese markets will lead to sustainable breakthroughs in reaching an increasingly mobile-savvy and expanding generation of upwardly mobile urban Chinese. However, proponents of this case may soon be forced to demonstrate that new markets exist in which households are not already heavily indebted by increasingly aggressive bank lending (here and here). The struggle for innovation and scale is also leading to greater frequency of cyberattacks in targeted sectors with high economic value, such as health care, potentially leading a vicious and risky cycle in which deal-making is increasingly compromised by corporate and government concerns over competitiveness and national security.
In sum, the past week highlighted volatility in perceptions of China as much as it brought forth new evidence suggesting the likelihood of greater volatility. Both anecdotal and measurable evidence (e.g. concerning capital outflows) do suggest a growing consensus that the business and investment climate in China is worsening, and this is an issue that certainly bears monitoring going forward, especially for those seeking to link evidence concerning China’s growing consumer class–much of which seems persuasive–with a solid case that they remain well-positioned to profit from the state-managed shift toward an economy based on innovation, services, and household spending.
