Remarks to China Renaissance Capital Investors
In 2012, China’s now-paramount leader, Xi Jinping, invited President Barack Obama to collaborate with him in developing a “new type of great power relationship.” It wasn’t clear to anyone what he meant by that. Perhaps he himself didn’t know and was just calling for dialogue about how best to manage a newly polycentric world order. But whatever else it signified, Mr. Xi’s initiative was an announcement that China — in its own eyes — has achieved the status of a great power and expects to be treated as such. This change in self-perception has been accompanied by a notable retreat from China’s previous modesty about its status in both regional and global affairs. And this, in turn, is altering foreign perceptions of China.
China’s growing weight in global economic affairs is undeniable. A couple of months ago, the International Monetary Fund (IMF) declared that China’s gross domestic product (GDP) had passed that of the United States if adjusted to purchasing power parity (PPP). Beijing immediately denied officially that it was number one. After all, at nominal exchange rates, China’s GDP is still just three-fifths of the European Union’s (EU) and America’s. (It could pass both as early as the end of this decade.) PPP equations are not very compelling when you’re on the cheap, discounted end of them. For now, the Chinese yuan doesn’t buy much that’s priced in either euros or dollars. Chinese officials must also have feared that accepting the status of the world’s top economy would encourage some foreigners to stick their hands out in anticipation of giveaways while others demanded global leadership China did not want to provide.
Demure as China may be about its achievements, it is now a very big factor in the world economy. It accounts for about one-fifth of global industrial production. (Within a decade, this could rise to one-fourth.) One-fifth of the world’s internet users are in China. Their numbers are growing fast. By 2020, China is expected to have a middle class population of 600 million. It will have the world’s largest online market. For the past decade, the Chinese economy has contributed one-third or more of global growth. A 1 percent rise or fall in China’s rate of growth now adds or subtracts 1/2 of 1 percent from the entire world’s growth rate.
Despite its remarkable achievements in recent decades, if China fails to carry out the reforms it is currently attempting, its growth rate will fall significantly and its future power will diminish accordingly. It cannot hope under any circumstances to grow at ultra-rapid rates. But, assuming its proposed reforms take hold, China’s economy should continue to expand faster than any other of its size and complexity. By the centennial of the founding of the Chinese Communist Party (CCP) in 2021, it may well have resumed its millennial station as the largest in the world in absolute terms. And, given China’s investments in developing its scientific and technological workforce and in research and development, its qualitative impact on the world is likely to be equally impressive.
Chinese spending on R&D is now about two-thirds that of the United States but growing very fast. It should overtake U.S. levels by 2022, when it will amount to about $600 billion yearly. By 2025, the Chinese scientific and engineering workforce is projected to total at least 5.5 million persons. That is the equivalent of the S&T workforce of all of the OECD countries today. The total for “China” does not include the S&T workforces of Taiwan and Hong Kong, which are increasingly integrated with those of the China mainland. What’s more, over the past three decades, China has exported a huge number of bright young people to be educated in the West. Many have stayed abroad and become major contributors to international science and technology. (Any English-language scientific journal one looks at today has a lot of cutting-edge articles written by individuals or teams with Q, X, and Zh in their surnames.) These specialists may not live in China, but they are in touch with colleagues there. Meanwhile, many foreign firms are relocating their R&D facilities to China to take advantage of the engineering and technical talent there.
Money plus manpower combined with openness to international collaboration generally yields results. It is too soon to judge what China’s official focuses on biotech, information technology, telecommunications, energy, lasers, materials science, robotics, space, pharmaceuticals, and infrastructure will produce. The Chinese Communist Party (CCP) places its hopes on China’s state-owned enterprises (SOEs). But that’s a mistake. China’s SOEs are, for the most part, unregulated monopolies, with all the inefficiencies and management difficulties that status implies.
The Party slights the Chinese private sector for ideological reasons. Outsiders underestimate it because they misunderstand the Chinese economy. In a triumph of preconception over reality, both imagine that the mainspring of Chinese growth and innovation is state rather than private enterprise. But it is the private sector that has been driving Chinese economic expansion, job creation, business modernization, and the development of new kinds of goods and services for both domestic and foreign markets. Venture capital and entrepreneurship in China’s private sector are now accelerating innovation in a widening range of fields. Just ask cell phone and other telecoms manufacturers about this.
The Indo-Pacific has over half the world’s population. It has already become the global center of economic gravity. Its economies consume more than two-fifths of the world’s energy and produce about one-third of its exports. In PPP terms, the region accounts for about 40 percent of global GDP, dwarfing the EU’s 23 percent and America’s 20. Within the region, India is now larger than Japan, contributing almost 17 percent of its economic output. But China’s economy is over twice as large as India’s, with more than 40 percent of the region’s output. China has a great deal less to be modest about than it once did.
China seems to be on the way to resuming its historic status as a major source of the world’s new technology, joining Japan and south Korea in this role. India is coming along too. But in terms of economic and technological dynamism as well as supply chains, China is and will, for the foreseeable future, remain the region’s hub.
This is in part why one now seldom hears references to Deng Xiaoping’s recommendation that China 韬光养晦 (“taoguang yanghui.”). This is a phrase that has been mistranslated to sound sinister: “to hide one’s capacities and bide one’s time.” It’s actually a line from a poem by a 2nd century official who advised colleagues retired by the emperor to “shroud their brilliance and cultivate obscurity.” In other words, strive to be unobtrusive. That’s always been a good way to stay out of trouble. But it’s hard to remain self-effacing when you’re on a roll.
And it’s even harder for China to continue to sit humbly on the sidelines when its peers — the world’s established economic powers — are unable or unwilling to address issues that matter greatly to its present and future prosperity. The Chinese have become key participants in the so-called “free world” — the capitalist economic order created by the Pax Americana. But the United States is now afflicted with unprecedented partisan gridlock and political paralysis. America’s domestic dysfunction has infected the international institutions it created and for long led. Like the government in Washington, these institutions are now unable to set priorities, make strategic choices, or manage change. Europe is almost as stagnant, stodgy, and self-absorbed. Mr. Abe’s “three arrows” of domestic Keynesian stimulus and regulatory reform notwithstanding, Japan is no better. The resulting international leadership vacuum has made it impossible for China to remain disengaged from key questions of global and regional governance.
Institutions like the exchange rate and reserve management systems of the IMF and the lending programs of the World and regional development banks need to evolve to remain competent, relevant, and responsive to the massive changes now underway in the global economy. But the governance of these institutions no longer reflects the actual distribution of global capital and commerce. Existing arrangements exclude the largest and fastest growing stakeholders in these institutions from roles in decision-making commensurate with their shares in the global economy. As a result, the international system lacks the capacity either to adapt to altered circumstances or to react effectively to emergencies. The key institutions of the Pax Americana have not met the changing demands of a world no longer dominated by the developed economies of the West. The United States retains the strength to lead the world in making necessary adjustments. It still claims pride of place in shaping the evolution of affairs at both the global and regional levels. But, so far this century, it has lacked the inventiveness and strategic vision as well as the decisiveness and capital to do so.
China is in the midst of yet another major reordering of its economy. The difficulty of accomplishing this amidst a recession in the Organization for Economic Co-operation and Development (OECD) countries has underscored to China’s leaders how dependent on the continued growth and prosperity of global markets their country has become. China is the world’s greatest trading power. It is not only the world’s greatest exporter of manufactured goods but its largest importer of commodities. It has a big stake in the soundness and efficiency of global transportation infrastructure. China’s prosperity is linked to the growth of other so-called “emerging markets” as much or more than it is to the established markets of the developed world.
Outbound investment from China now exceeds the flow of foreign direct investment to it. China has a vital interest in continued global growth and an expanding role in the world economy. It needs a prosperous international environment as much as it needs a peaceful one. China cannot afford to remain aloof from the reshaping of international arrangements to support these objectives. Chinese have been frustrated by the American default on reform of existing arrangements to meet the emerging challenges of the 21st century. The Chinese are not alone in their exasperation at this.
China and other newly powerful participants in the globalized economy of the 21st century have not given up on legacy institutions, but they have lost patience with U.S. procrastination and have begun to supplement existing arrangements with their own. The Asian Development Bank (ADB) has estimated that to optimize growth the region needs at least $800 billion in annual investment in infrastructure. In early May, China took the lead in establishing an Asian Infrastructure Investment Bank (AIIB) to address infrastructure modernization and expansion requirements that the ADB has been unable to meet. The AIIB came into being on October 24. It has an initial capitalization of $50 billion — most of it contributed by China — that is expected fairly quickly to grow to $100 billion, making it two-thirds the size of the ADB. The AIIB’s second-largest shareholder is India. A similar bank is contemplated to serve the members of the Shanghai Cooperation Organization (SCO).
World Bank lending has lagged as the United States, Europe, and Japan — which dominate it — have proven unable or unwilling to expand it. In July, China joined with Brazil, India, Russia, and South Africa — the so-called BRICS countries — in chartering a New Development Bank (NDB) to supplement World Bank investment in infrastructure with authorized lending of up to $34 billion annually. Each of the founding countries will contribute an initial $10 billion in capital, for a total of $50 billion, rising later to $100 billion. Each will have one vote. Unlike the World Bank, where the United States has a veto, no member of the NDB will have veto power.
From the perspective of the so-called “emerging markets,” the Fed’s on-again off-again program of “quantitative easing” has been indistinguishable from currency manipulation. So in July, the BRICS also created a Contingent Reserve Arrangement (CRA), This is a framework to limit the impact of domestically dictated U.S. monetary policies on developing country economies and to provide protection against the economic volatility these insouciantly cause. The CRA parallels and supplements the IMF. Its initial capitalization is $100 billion, of which China is contributing $41 billion. It will start lending in 2016.
Meanwhile, in part due to obstruction by India, the World Trade Organization (WTO) is no longer able to achieve the liberalization of global trade and investment regimes. This has led to efforts to accomplish this at the regional level. As a case in point, Beijing has stepped up efforts to establish a Regional Comprehensive Economic Partnership (RCEP) for the Indo-Pacific. RCEP would bring together Australia, China, India, Japan, south Korea, New Zealand, and the ten member countries of the Association of Southeast Asian Nations (ASEAN) in a single free-trade area. It would include 46 percent of the world’s population, 40 percent of its GDP, and most of its fastest-growing large economies. China would, of course, be the heavy hitter in RCEP. The United States would not be part of it.
China is also pressing for a Free Trade Area of the Asia Pacific (FTAAP) that would embrace all members of the Asia-Pacific Economic Cooperation (APEC), including the United States and Canada. The U.S. has resisted this proposal as a distraction from Trans-Pacific Partnership (TPP), which excludes China despite its status as every other participant’s largest trading partner. China has pushed to make its inclusive proposal a main topic of discussion at the current APEC summit in Beijing.
These initiatives meet real needs that existing institutions have not met and have no prospect of meeting. In taking remedial action, China is acting like the “responsible stakeholder” in the international system it has become. The official U.S. reaction has nonetheless been churlish. American lobbying appears to have delayed Australia, Indonesia, and south Korea decisions to join the AIIB. All will eventually do so in order to avoid strategic isolation in an increasingly Sino-centric Asia. U.S. opposition and dissociation from Chinese-led institutions just deprives Americans of influence and participation in investment programs of great importance to global and regional development. It erodes rather than reinforces the standards and lending criteria the United States has traditionally favored. Of course, there is also no reason to rule out the eventual merger of the new institutions with the old.
Washington’s peevishness about the creation of institutions that it and its allies do not dominate and cannot control is understandable if not a little pathetic. The locations and leaders of the new institutions clearly symbolize both a trend toward Indo-Pacific leadership in global finance and the emerging centrality of China in global and regional affairs. The ADB may be headquartered in Manila but it has been dominated by Japan and the United States. The European and American-dominated IMF and World Bank are based in Washington. The AIIB has its headquarters in Beijing but includes members from South, Central, and West Asia as well as the Asia-Pacific. It will be led by an experienced Chinese financier. The main office of the NDB will be in Shanghai. Its first president is to be from India. After a couple of bad centuries, the Indo-Pacific is back at the center of global affairs.
Meanwhile, the deterioration of U.S. and EU relations with Moscow is driving Russia away from Europe and closer to China. This too underscores the extent to which a Sino-centric order is emerging on the Eurasian landmass. This nascent order is not structuring itself the way the post-World War II Pax Americana did.
So far, Chinese-sponsored amendments to the existing state system are taking the form of loose associations rather than alliances. They have no leadership hierarchy, weighted voting, or great power vetoes. They are not supranational organizations. The SCO, which is the closest thing to an alliance that China has contracted, acts as a club directed at countering terrorist and secessionist activities. It conducts military exercises but has no agreed command structure and embodies no mutual defense commitments. Its members share no political philosophy other than the principle of non-interference in each other’s internal affairs.
The BRICS and the Conference on Interaction and Confidence Building Measures in Asia (CICA) are egalitarian consultative groupings rather than organizations. They facilitate but do not require cooperation and embody no client state or satellite relationships. They also have no ideological identity or aspirations to develop one. They include almost every variety of political system — from China’s Leninism with Confucian characteristics to India’s rowdy democracy, the presidential dictatorships of Central Asia, the sultanates of Arabia, and everything in between.
The groupings in which China has begun to involve itself are classic examples of cooperative diplomacy. They connect participants to China but have none of the attributes of spheres of influence. They emphasize the sovereign independence and equality of states, consistent with the Chinese and Indian-formulated “Five Principles of Peaceful Coexistence.” China does not claim or assert primacy within them. The new financial institutions Beijing has helped create are consistent with this pattern of ideological neutrality and decision-making by consultation rather than at Chinese direction.
China is, in effect, working toward new patterns of relationship with other powers, great and small and near and far. President Xi Jinping’s proposal for “a new kind of great power relationship” appeared initially to be directed only to the United States. But it soon became apparent that the concept was unworkable unless it was applied to China’s relations with other great powers as well. China’s not-unreasonable objective is to reshape the international order to ensure that it is responsive to its concerns.
China has shown no desire to dominate emerging institutions and arrangements. Still its size and dynamism are such that it is a preeminent presence in any grouping it joins from which the United States is absent. That makes other participants uneasy. In the case of a country as colossal as China, the distance between being dominant and being perceived by smaller neighbors as domineering is not very large.
China is the new heavyweight in the Western Pacific. It is in this context that its recent activities in the East and South China Seas have alarmed Filipinos, Japanese, and Vietnamese. Chinese see themselves as belatedly reacting to inroads by others into places they have claimed without challenge since ancient times. Others see China as trying to bully them into leaving places they currently control and believe are rightly theirs.
China’s recent patrol-boat diplomacy on these disputes in the East and South China Seas has altered its image in the region and around the world. In the past, China was often represented abroad by the symbol of a panda. Now it is invariably shown as a dragon. This is not a friendly image. Even the best-intentioned of dragons is intimidating to those smaller than it. Not surprisingly, China’s smaller neighbors have begun to band together to constrain it. Most have also actively sought American support to balance it.
Some Americans are eager to respond. Their motives vary. Some wish to hang onto the politico-military supremacy the United States has enjoyed in the Asia-Pacific since the defeat of Japan in World War II. Many see it as a matter of national honor to answer requests for back-up by allies and client states. Some are gratified that, despite many troubling changes in the global situation, the United States is still recognized as indispensable to regional order. And some see China as a potential global rival whose power must be curtailed in its region before it becomes irresistible. They seek to assure that Chinese power remains checked by a continuing robust military presence in the region. Many are in denial about the shifting balances of economic power, military prowess, and political influence that have marked the post, post Cold War period.
By any measure, the return of China to great power status is a momentous development. It is not surprising that it has raised many questions about how China will behave and what kinds of relationships it will seek with others in its region and beyond. Politics in the Indo-Pacific region have never been so intensely nationalistic. China’s neighbors must learn to live with a China that is no longer weak, poor, or vulnerable. Beijing must learn to deal sensitively with neighbors who are outspokenly apprehensive about China’s new military strength, economic power, and occasional hauteur. None of this will be easy.
China’s interactions with its neighbors have a decisive effect on its relationships with countries farther away. In this context, China has an urgent need to craft a “new type of great power relationship” not just with the United States but with other potential partners or adversaries, like India, Indonesia, Japan, the Koreas, Russia, the EU, and Brazil. What sorts of relationships will these be? Will the new, polycentric world — in which China will inevitably sit on the board of directors — operate under rules or without them? If there are rules, who will make them? We do not yet know the answer to these questions, but they are important. If there are no rules, every country, including China, will have no choice but to derive its political power from the barrel of a gun. The norms of international law have been much violated in the early years of this century. We must hope that the new relationships being forged among the world’s and the Indo-Pacific region’s great powers will help to bring about the reinvigoration of these norms rather than their final passing.
Ambassador Chas W. Freeman, Jr. (USFS, Ret.)
Macau S.A.R. of China
