Is China Ready for Global Leadership? Not Really

Illustration: Craig Stephens

This op-ed originally appeared in the SCMP, 8/19/19

Where in the world has the United States gone? The Trump administration’s retreat from constructive global engagement is like matter at the edge of a black hole – only accelerating. President Donald Trump, in just the past week or so, has suggested that US-South Korea military exercises were “ridiculous and expensive”, while praising a letter from North Korea’s Kim Jong-un, to whom he gave another free pass on continued missile tests.

He has largely ignored the chaos that is enveloping Hong Kong, until tweeting praise for Chinese President Xi Jinping’s leadership last Wednesday and then suggesting Xi could meet the protest leaders. Any former US administration would have at least stood up in principle for democracy. And while South Korea and Japan are waging low-level economic war on each other, the good offices of US diplomacy remain closed.

Even global assistance is withering under Trump as he threatens to eliminate US Agency for International Development funding. Beijing, meanwhile, continues a worldwide Belt and Road funding spree.

With global expansion comes a global bill. Funding a worldwide military force does not come cheap. While estimates vary, the US continues to outspend China by at least two to three times.

On the surface, it looks like China is ready to step into the void created by an isolationist Washington, but is Beijing really up to the task? The burdens are already mounting on China both politically and economically, making any attempt at global leadership less likely.Take China’s lending spree, for example. The promise of US$1 trillion makes for great soft power projection across much of the developing world. There are port and rail projects in Africa, the Middle East, South and Southeast Asia, and even Europe.

Two years into a development programme to rival any other in more than half a century and the easy money is already coming to an end. Loan defaults are piling up. An overseas backlash is brewing over the alleged importing of Chinese workers for massive construction projects rather than using domestic labour.

And other countries now see the effects of Beijing’s political influence campaigns focused on their domestic politics. The Wall Street Journal’s revelatory reporting on the Chinese government use of Huawei to help Zambia and Uganda spy on their political opponents will only raise more concerns of meddling.

The new China development “model” barely got off the ground before being grounded. Beijing is learning a hard lesson about ignoring loan-to-gross-domestic-product ratios that can lead to some knotty financing problems.

For years, Beijing decried the unfair lending practices and onerous restrictions imposed by the International Monetary Fund and World Bank. It turns out that global financing standards, even when developed by “Western” institutions, are not easily avoided.

Already, Chinese officials are talking about tighter lending restrictions and a more cautious approach to new projects. Countries that may have believed in a new China model for economic growth will be disappointed with new lending terms that look increasingly like the old.

China’s massive infrastructure funding programme in Pakistan is a case in point. With US$19 billion out of US$62 billion used or in use, Islamabad already had to negotiate a US$6 billion bailout package from the IMF in May. The IMF forecasts Pakistan’s real GDP to drop to 2.4 per cent in the 2019/2020 fiscal year, down from an estimated 5.5 per cent in 2017/2018. With that kind of weak activity, additional loans will almost certainly need restructuring.

Defaults are piling up elsewhere, from Kenya to Venezuela and Sri Lanka, with some countries rescheduling their debt or losing their collateral. In Colombo’s case, that meant giving up the strategically well-positioned Hambantota port that bridges South and Southeast Asia with the Middle East.

China Real GDP Growth (2010-2019)

China’s economy is also slowing as domestic debt rises and defaults loom. The days of unbridled lending will come to an end well before China spends US$1 trillion in belt and road money to claim the mantle of lender of first resort.Following a well-worn historical path, China’s growing commercial interests around the world are also being followed by an increased global military presence. At the urging of Trump, Beijing may start protecting Chinese ships transiting the Straits of Hormuz, a critical energy shipment choke point and site of multiple Iranian seizures of tankers.

China also has potential naval access to ports in CambodiaPakistanSri Lanka and Djibouti, with more expected. Last month, leaders from 50 African nations met in Beijing for the first China-Africa Peace and Security Forum, where China pledged to fund their military training. That same month, Wang Yi, China’s foreign minister, signed a defence and military cooperation agreement with the United Arab Emirates at an economic forum.

With global expansion comes a global bill. Funding a worldwide military force does not come cheap. While estimates vary, the US continues to outspend China by at least two to three times. The US was able to fund forever wars and military expansion through massive federal debt spending.That was possible because the US dollar dominated global financial markets. China’s tightly managed currency does not enjoy that kind of global access or appeal. While government bonds have opened up to foreign investors, concerns over currency restrictions and transparency continue to linger.

That China has not had to do much to displace the US in regional and international affairs should come as no surprise. Trump’s retreat from global leadership is a self-inflicted wound. But even with this wide opening to increase China’s global influence, Beijing will remain limited by its weakening domestic economy and a more sceptical world abroad.

For op-eds and flash commentary direct to your in-box sign up for the DecisionAnalytics newsletter above. Also @brianpklein on Twitter.

Hong Kong Protestors Face Dilemma of Demonstration Fatigue

Hong Kong demonstration July 1, 2019. Reuters: Tyrone Liu

Yellow-hatted protestors took to the streets of Hong Kong on July 1st, with some marching to the Legislative Council (LegCo) building and breaking in. With windows smashed and graffiti sprayed on the walls the young remained until Hong Kong police announced they were coming.

Tear gas followed the protestors as they emptied into the streets and riot police built human barricades around the building. News reports show footage of the protestors facing off with them late into the night.

Hong Kong demonstrators clash with police early morning July 2nd. Photo: Anthony Wallace AFP/Getty images

After tempers calm the protest movement will be faced with the same dilemma that all social movements face – demonstration fatigue. Without another inciting incident — this time it was the anniversary of the British handover to China and a continuing fight to eliminate a proposed extradition bill with Beijing, the protest movement may have a hard time maintaining momentum.

Source: Bloomberg

The Hong Kong movement galvanized around opposition to a proposed extradition bill on June 12th with an estimated over one million people taking to the streets. That bill has been temporarily suspended from consideration in the legislature, but not withdrawn. Other long standing grievances include China’s heavy hand in limiting voter choices during Hong Kong election and stacking the legislature with Beijing appointees.

Carrie Lam, Chief Executive of Hong Kong is at risk of losing her position if demonstrations continue, though what substantial gains come next remains an open question. More freedom for the island seems unlikely as the the “One Country, Two Systems” formula post UK-hand-over has already been weakened.

China is playing the long game and demonstrations mainly add short-term pressure in a system tilting more and more towards Beijing.

Sign up for DecisionAnalytics email updates above.

“Brand America” Falls Out of Favor With Foreign Investment

Trump understands that brand matters, and the latest version of brand America is failing badly. At this year’s World Economic Forum in Davos, business executives expressed not only concern, but outright dismay, over the investment climate in the U.S. And they aren’t just sitting on their capital waiting for better days.

Investors are voting with their money and heading for other countries. The statistics for Foreign Direct Investment in the U.S. (FDIUS) show a troubling trend. In the second quarter of last year FDI turned negative, a reversal of fortune not seen in years. That followed a drop of 41% year-on-year to $277 Billon in 2017, after peaking at nearly $472 billion 2016, according to U.S. government data.

Cyclical Decline in Foreign Direct Investment to the U.S.

Companies including Tesla, Unilever, and Foxconn are looking elsewhere to invest due in part to the uncertainty around the U.S.-China trade war. Imports and exports have been hit along with supply chain disruptions. While the upcoming trade talks in Washington were bathed in a positive light from governments on both sides of the Pacific, the outcome has been thrown into serious doubt after the Department of Justice announced criminal charges against Huawei and its CFO Meng Wanzhou. 

She is currently detained in Canada on an extradition request that is now sure to move forward. Trump has said he may intervene in her case if it serves the trade talks and U.S. national security. What he can actually do, politically or legally, remains unclear.

Trump Has Few Options
on Huawei Sanctions Trouble

The souring on brand America isn’t just about China trade disruptions. Trump’s immigration policies, his tacit acceptance of jingoistic and racist dog whistling by his most ardent supporters, and the perception that the U.S. is retreating from global affairs is turning away international students that might otherwise invest in a coveted U.S. education.

Enrollment in undergraduate programs dropped for the second year in a row with a 6.6% fall for 2017-2018. That’s putting new strains on colleges and universities that have grown accustomed to full-tuition paying foreign students.

The longer term cost to the U.S. will show up in worker shortages, primarily in science, technology, engineering, and math disciplines. These professions are already woefully short on trained graduates and unfilled jobs create a drag on economic growth.

While the administration touted $1.5 trillion dollars in corporate tax reductions that began in 2018, a survey by the National Association of Business Economics shows that companies are not in fact spending more. Trickle-down economics didn’t work under Reagan and it certainly isn’t working now even with a new, slick cover promising to make America great again.

A brand is only as good as what it delivers and so far Trump’s promises made continue to be promises broken. The U.S. accumulated a lot of good will over the decades. That hard-earned reputation is now at risk of being destroyed in only a few years.

For commentary and analysis straight to your inbox subscribe above and connect via Twitter: