A Forecast for China

By Nathan Heinrich and Jon Formella.

With regards to forecasts for the PRC trajectory, China will attempt to languidly muddle through reforms but succumb to the middle income trap amidst debilitating structural issues will prevail; predictions of a Thucydides trap and major conflict are misguided and impractical with regards to PRC policies of win-win generosity, economic coexistence and cooperation as well as the realist tendencies towards self-survival and aversion of a major power war with the U.S.

The two level game exceedingly demands the PRC's prioritization of domestic hurdles to maintain performance legitimacy through sustained economic development. In light of China's lingering microeconomic structural issues and macroeconomic instability, ...the term 'middle-income trap', which stands for the stagnation in GDP per capita in some middle-income countries, has become a buzzword among scholars, the media and policy makers.(Tian). Many PRC elites even have come to believe that China is marching into stagnation: Chinese Premier Li Keqiang is the first official in China's central leadership to have publicly addressed the concern that China, the world's largest developing nation, is facing the risk of falling into the middle-income trap... and, 'The only way to move from the global mean, the level of China, Brazil, Mexico and Russia today, to a rich-country status is by a systemic change in social structure, in the way society is structured, operated and governed...(Tian). China's ability to implement economic reforms for continued growth is pivotal, not only to its legitimacy, but also in its engagements with its neighbors who seek to benefit from its economic dynamism. Most scholars seem to acknowledge that Xi Jinping is cognizant of the need for reforms: By now it is relatively clear what Xi is aiming to do. He is trying to steer a complex economy... He is doing this in unprecedented conditions for such a party, consciously trying to combine the "invisible hand" of the market with the "visible hand" of the party-state...'To reignite a nation, Xi carries Deng's torch,' declared a commentary from the official news agency Xinhua.(Ash).

The dire need for reforms contests the performance legitimacy essential for the PRC's rule and implementation of the two level game. Dan Lynch outlines how an economic slowdown threatens the authoritarian regime's legitimacy: At the same time, elites and the general public continue constantly to be bombarded with exogenous messages from the global culture telling them that an authoritarian political system is illegitimate...and that China must, and will, inevitably change. Elites could...reject this logic and resist global culture's socializing pressures when...China's economy was growing at double-digit rates. They may find it significantly more difficult to resist in the event of a sustained economic slowdown. They might even decide more affirmatively that political liberalization could become a core part of the solution for China as it seeks to return to the track of a rising great power.(Lynch 255). Additionally, the largely untouched and inefficient state-owned enterprises (SOEs) jeopardize the necessary economic transition: ...these partial economic reforms have not yet gutted the economic foundations of the CPC rule: state ownership of most productive assets, such as land, natural resources, power-generation, telecom, banking, financial services, and heavy industries. What is holding the Chinese economy back is not its dynamic private sector, but its inefficient state-owned enterprises, which continue to receive subsidies and waste precious capital.(Pei). China's economic infrastructure is rife with deep-rooted instabilities, and its Soviet era foundations thwart its continued modernization necessary for its rise and suggest future stagnation. The Soviet model outlining state ownership of key defense industries inhibits further privatization and growth, as despite modest reforms of state-owned enterprises (SOEs), they remain a damper on the hopes of any increase in productivity: ...SOEs still consume the vast majority of societal resources. Chaotic management and lack of competitiveness are fairly common... Quite the opposite is the case for private enterprises... but private enterprises are for the most part kept out of the stock and bond markets and cannot easily obtain loans... private enterprises are starved for finance and often must turn to the shadow banking system for credit... resources are thus constantly being directed away from efficient producers to the wasteful SOEs...(Lynch 31). While these outdated SOEs benefit from policy favors and are able to secure financing necessary for survival and prosperity, private enterprises must turn to a unregulated quasi-legal shadow banking sector, which threatens China's macroeconomic stability in its finance sector: From mid-2012 until at least mid-2013, the shadow banking system's so-called social financing-which represents the gap between total loans and bank loans-began to grow at a much higher rate, doubling the apparently acceptable 3 to 4 percent spread between bank loans and total credit to a far more worrisome 7 percent. Given the opacity of many shadow banking system transactions, which makes them difficult to regulate... China's regulators and establishment financial institutions became concerned... that money and credit expansion were escaping their control.(Lynch 28). Moreover, the severity of this financial vulnerability has alarmed officials such as the Bank of China's chairman Xiao Gang, who in a statement in October 2012 professed that shadow banking was, in speed and nature, developing to the point that it could eventually pose a systemic risk to China's macroeconomy...(Lynch 28). Local governments' sale of land use rights for large scale real estate developments to fund disproportionate spending projects for sustained growth is yet another deep-rooted flaw: Wang Lina, reports that in 2009, some 40 percent of the Beijing and Shanghai municipal governments' general revenues came from property auctions... local governments will always want to sell land use rights to the highest bidder, and the highest bidder is likely to be a developer with plans to construct expensive residential or commercial real estate projects...(Lynch 52).

Reliance on these unsustainable economic practices jeopardizes the PRC's future trajectory. Indeed, many seem to be coming to the general consensus that China will encounter years of low growth and close to stagnation in the near future: The muddle-through scenario seems even more likely... structural reform, and especially SOE reform, has been lack-lustre for many years. In other countries with a very large share of state-owned corporations, the system has tended to perpetuate itself until the countries' financial situation has become totally unsustainable...Zhang Shuguang says that historical experience shows that reform can only be pushed through during a crisis... citing as an example the Chinese reform in the 1990s.(Garcia-Herrerro). Reforms have become less of a reality and more and more of a distant "Chinese Dream" as the numbers indicate that Progress on implementing other parts of Xi's agenda has been patchier... Caijing, an influential independent business magazine, has found that of 133 categories of reform, only 23 are on track and the rest are in the slow lane. Much of the action has focused on modernizing the country's still rudimentary financial system... slimming down bloated and inefficient state-owned industries, strong resistance by vested interests, political obstructionism and fear of large-scale job losses have resulted in a more cautious approach.(De Jonquieres). The growth at any cost model is dead; as environmental issues continue to become an ever more striking externality, demanding cooperation with the international community on this nontraditional security issues as pollution levels in the capital reach new thresholds, preventing fundamental economic activities for households and firms: Across Beijing, thousands of other schools...were in a similar state of almost total shutdown after...a three-day state of emergency because of the pollution. Building sites and factories were forced to close; millions of cars were ordered off the roads; and teams of environmental inspectors fanned out across the surrounding region to ensure that coal-fired power stations and steel mills were not secretly churning out even more filth into the already putrid atmosphere.(Phillips). Economic reforms more or less have rolled to a halt; environmental issues, macroeconomic stability in the finance sector, and inefficient, wasteful SOEs are quietly guiding the PRC into the middle income trap it had previously vowed to escape.

Though many theorists sensationally point towards the likelihood of a Thucydides Trap, economic and military realities render a major power war highly unlikely and undesirable considering the realist, self-serving tendencies of the CCP. Regarding the economy during the recent Sino-US summit, Wu Zurong states, 'both countries' eagerness to seek cooperation was on full display...Economic Dialogue similarly placed a premium on global cooperation....Thanks to globalization, the economies of China and the U.S. have become extremely interrelated. If the economy of China stagnates or slides into a recession, the U.S. economy cannot avoid being affected, and vice versa. That situation between the established world power and the rising power has never existed before.(Wu). Regarding the military entanglement scenario, With advancements in science and technology, as well as in military strategy and equipment in recent decades, the destruction inflicted in a modern large-scale war would be many times greater than in those of past centuries. The use of weapons of mass destruction in war will be even more horrible and damaging. Undoubtedly, peaceful co-existence is the best choice for China and the US...With continuous efforts by both countries, China and the U.S. could manage to avoid miscalculation and misjudgment about each other's strategic intentions, as well as refrain from setting the so-called Thucydides trap for themselves.(Wu). Chinese researchers like Wu perceptively observe that both the unprecedented economic ties and ominous lose-lose outcome of a major power war and MAD realistically render a Sino-American War inconceivable.

Though authors like Wang Zheng hope to point to the escalatory tendencies of the CCP as a major threat to peace, in reality the evidence clearly demonstrates that the CCP uses escalation and historical memory to mobilize the population and reinforce legitimacy. Though Wang cautions that historical memory and Chinese self-perception leads to dangerous escalatory tendencies, Wang's evidence actually demonstrates that the CCP is quite skillful in manipulating media portrayal of incidents with the United States and other countries to make itself look tough as the firmest, the most thoroughgoing patriot(Wang 136), as opposed to actually starting a war. It is important to realize that the CCP has become less ideologically based since the 1980s, evolving from a revolutionary party of worker-peasants into a nationalist party of elites in recent years. Any person interested in the study of Chinese foreign policy should pay particular attention to this background.(Wang 237). Unlike the irrational populist nationalism of the Mao era, the party under Deng and Hu has moved to embrace realism, not suicidal jihadism. The Chinese Communist Party maintains tight control of all the media in China. Public awareness of a particular international incident therefore is largely dependent on whether the party allows the media to report the event or not.(Wang 194). Realism and the two-level game accurately forecast that the CCP will maneuver to maintain power by manipulating historical memory through media, not threaten its own destruction by serious overtures of war with the United States.

Evidence of this realist manipulation of events can be seen in its differing reactions to the U.S. and its Asian neighbors. During this period of time, China had territorial disputes with some ASEAN countries, especially with the Philippines and Vietnam. In 1998, there were massive anti-Chinese riots in Indonesia...The ethnic Chinese were targeted in the bloody Jakarta unrest in May 1998. According to Indonesian government sources, more than 1,000 Chinese people died, many women were raped...it seems as though China treated various countries differently when dealing with conflicts, and this factor affected China's approach to conflicts and disputes. One would expect huge waves of nationalism to touch off zero-sum conflict behavior from both the state and the people.(Wang 198-199). The CCP will change the media narrative to suit its purposes. It looks good to act tough against the U.S. but the realist self-preserving instincts of today's CCP leadership makes its bark far worse than its bite as the occurrences in Indonesia had little ground for arousing historical memory: The Chinese government's handling of the disputes with Indonesia, the Philippines, and Vietnam indicate that the Chinese were not that sensitive and tough compared with their approach in handling the three U.S.-China crises...The differences in degree of public awareness indicated that the Chinese government was less likely to overreact when the event was not the focus of domestic attention and when the issue had not activated Chinese people's sensitive historical memory.(Wang 199).

Although Wang himself succumbs to the CCP's escalatory threats at face value, the evidence demonstrates that the CCP can tone down incidents in countries ...which are considered China's Asian neighbors and Third World 'brothers'...If the situation were reversed—the United States or Japan had anti-Chinese riots, say, or seized and attacked Chinese fishermen and fishing boats-the response would likely be very different...(Wang 198-199), and China would use these incidents laden with historical memory as imperialist predators to to bolster their own legitimacy, promote their own interests, encourage a nationalistic spirit, and mobilize mass support for social conflicts.(Wang 26), and maintain their own domestic power. Evidently, today's CCP leadership cleverly manipulates historical memory and media to continue their status as China's "most thorough-going patriots" with luxurious Ferrari-riding with the 小姐 lifestyle instead of seriously aiming for nuclear showdown with Japan and the United States, which would negate their realist tendencies towards self-survival.

The Sino-Vietnamese conflict over the South China Sea aptly illustrates how Beijing's economic charm offensive has overridden many of the hawkish tendencies on both sides. VCP policy is, ...anyone who respects our independence and sovereignty, establishes and expands friendly, equal, and mutually beneficial relations with Vietnam is our partner.(Thayer 12). China's charm offensive has some merit in its attempt to form a Sino-Vietnamese capitalist peace and override Vietnamese nationalism. Vietnam has shown an adherence to realism since its 1979 conflict with the PRC, Vietnam would now 'diversify and multilateralize economic relations with all countries...'(Thayer 5). The situation is especially complex as Vietnam economically cannot afford to lose China as a trading partner. A recent joint Sino-Vietnamese Joint Statement declares, The Chinese side encourages...Chinese firms investing in Viet Nam while being ready to create more favorable conditions for Vietnamese businesses to expand their market in China.(Thayer 12). Demonstrably, the charm offensive and the economic aspects of realism cannot allow anti-Chinese fervor in Vietnam to fully take shape. The Sino-Vietnamese relation shows that economic relations can help soothe tensions, while there still exists a perceived national struggle against Chinese hegemony which is ultimately preeminent in the game of IR realism making it inevitable for Vietnam to pivot with the United States and India against China as a strategic threat. Despite this tilt, however, China's neighbors discover that economic interdependence with the economic giant of China is close to being inevitable.

Furthermore, it is evident that the post-2008 assertiveness policy has given way to Xi Jinping's charm offensive as the hawks became discredited:

It is an increasingly clear and major goal of China's foreign policy is...to enhance power and influence in Asia and the Western Pacific... The main policy tools serving this goal can be divided into... the 'Strategic Military' and the 'Strategic Economy.' ...China has been predominantly implementing a generalized 'Military strategy'... This is epitomized in...its violent confrontation with Japan, and its tough attitude and intensive military and paramilitary activities in the South China Sea and East China Sea disputes. These are essential...when it comes to boosting its 'hard power,' including dramatically and consistently enhancing its strategic military strength...and firming up its claims to maritime territorial sovereignty/maritime rights and interests...this has also hampered its international 'soft power' to some important aspects...It has complicated its relations with its neighbors in East and Southeast Asia, and significantly increased the risk of conflict with Japan and the United States. Thus, it is possible that from now on China will rely more heavily on its 'Strategic Economy,' based on its huge economic and financial strength...(Shi).
. Evidence of China's willingness to avoid war and negotiate can be seen ...in a rare move to avoid further isolation in a region where it has territorial disputes with nearly all of its maritime neighbors, China made a major concession last week by publicly clarifying and acknowledging Indonesia's sovereign right to the Natuna Islands in the South China Sea... To publicly recognize Indonesia's sovereign right to the Natunas means China's acknowledgment of Indonesia's legitimate claim to an EEZ inside China's self-claimed Nine-Dash-Line.(Yu). Seeking to assure other Asian nations about China's broad interests, Mr. Xi said the idea of peaceful development is the inner gene of Chinese culture.(Wong). Xi's leadership so far demonstrates that he and the leadership of the central government hope to use economic ties to avoid war despite the interests of the hawks and provisional governments. China now seeks to compete with the United States economically for allies in Asia.
Although the Myanmar government remains cozy with China -- as demonstrated by the 2013 opening of a gas pipeline constructed by the China National Petroleum Corporation that connects the Bay of Bengal to China's southwestern Yunnan province -- its relations with the United States have warmed considerably... Myanmar is not alone. Singapore, Taiwan, South Korea, the Philippines, Vietnam, and others have all strengthened their economic and political-military ties with the US even as they benefit from economic integration with China... the robust export sector and the rising reserves it brought made a debt-financed investment spree possible in China between roughly 2000 and 2008 without falling into the economic malaise...(Hung).
China still desperately needs export markets to sustain its economy; its leaders in power know that a major power war with Asian neighbors their American ally would destroy the PRC in one way or another.

Besides the factors of economic cohesions and mutually assured destruction which make war the most unlikely scenario, recent areas of cooperation in the energy sector allow for non-traditional security cooperation between the two superpowers. As Obama and Xi met this past fall, the ...common enemies the two countries face this time is no longer Japanese militarism, but instead, economic uncertainty and climate change... Collaboration on clean technology, energy-sector reform, and energy security could provide new impetus to China's economic transition, but also provide more support for the U.S. economic recovery, and at the same time contribute to the stability of the world's economy and efforts in tackling climate change.(Tao). Just as WWII brought a successful Sino-American alliance so too can a coalition ...together with the development of [Obama and Xi's] personal relationships, provide impetus to build mutual trust and set a clear strategic direction for the Sino-U.S. relations(Tao) on issues such as climate change.

With economic reforms stalled by inside political interests, and structural issues such as environmental degradation and macroeconomic instability in the finance sector, inefficient, wasteful SOEs are quietly guiding the PRC into the middle income trap it had previously vowed to escape. Though authors like Wang Zheng hope to point to the escalatory tendencies of the CCP as a major threat to peace, in reality the evidence clearly demonstrates that the CCP uses escalation and historical memory to mobilize the population and reinforce legitimacy. The post-2008 assertiveness policy has given way to Xi Jinping's charm offensive, and the hawks have become discredited. Economic and military realities render a major power war highly unlikely and undesirable considering the realist, self-serving tendencies of the CCP; furthermore, recent areas of cooperation in the energy sector allow for non-traditional security issues to prevail. China still desperately needs export markets to sustain its economy as it finds itself marching into the middle income trap, as it is unable to push through reforms necessary to maneuver itself to the cutting edge of innovation and to shift to a consumer-services based economy.

Works Cited

  1. Tian, Major. "Chinese Social Structure Holds the Key to a Richer Nation." CKGSB Knowledge. 15 April 2015. Web. 16 December 2015.
  2. Ash, Timothy Garton. "Xi Jinping's China is the greatest political experiment on Earth." The Guardian. June 1, 2015. Web. 16 December 2015.
  3. Lynch, Daniel C. China's Futures: PRC Elites Debate Economics, Politics, and Foreign Policy. Stanford University Press, 2015. Print.
  4. Pei, Minxin. "The Twilight of Communist Party Rule in China." The American Interest. 12 November 2015. Web. 16 December 2015.
  5. Garcia-Herrerro, Alicia. "Three possible scenarios for China's growth in the next five years." China Analyis: Hitting the Middle Income Wall December 2015: 10-12. Print.
  6. De Jonquieres, Guy. "Grand plans will test Xi's mettle." Nikkei Asian Review. 9 December 2015. Web. 16 December 2015.
  7. Phillips, Tom. "Beijing's 'airpocalypse': city shuts down amid three-day smog red alert." The Guardian. 8 December 2015. Web. 16 December 2015.
  8. Wu, Zurong. "No Thucydides Trap." China-U.S. Focus Digest October 2015: 17-19. Print.
  9. Wang, Zheng. Never Forget National Humiliation: Historical Memory in Chinese Politics and Foreign Relations. Columbia University Press, 2012. Print.
  10. Thayer, Carlyle. "The Present Role and Position of the Socialist Republic of Vietnam in the International System, 1976-2015." Presentation to the International conference on Viet Nam: 40 Years of National Reunification with the Cause of Reform (Doi Moi), Development and International Integration, Vietnam Academy of Social Sciences Hanoi, Vietnam, April 27, 2015. Print.
  11. Shi, Yinhong. "The Latest Transfer in China's Foreign Strategy: from 'Military Strategy' to 'Economic Strategy'". CIR, v. 25, n.2 March/April 2015. Print.
  12. Yu, Miles. "Inside China: China clarifies Natuna Islands sovereignty to Indonesia." The Washington Times. 19 November 2015. Web. 16 December 2016.
  13. Wong, Edward. "Xi Again Defends China's Claim to South China Sea Islands." The New York Times. 7 November 2015. Web. 16 December 2015.
  14. Hung, Ho-fung. "China Fantasies." Jacobin. December 2015. Web. 16 December 2015.
  15. Tao, Wang. "Time to Join Forces for Climate War." China-U.S. Focus Digest October 2015: 24-27. Print.

Essay by Nathan Heinrich and Jon Formella. Submitted on December 19, 2015