How China’s growing power and ambitions are burning the bridges of global cooperation


This op-ed originally appeared in the SCMP on 9/27/20.


Illustration: Craig Stephens

In the past few weeks, China’s decades-long relationship with Europe has taken a significant hit as negotiations stalled over investment and human rights issues. Chinese fighter jets have flown dangerously close to Taiwan. And talks with India over their border dispute have reached a stalemate after the deaths of soldiers on both sides.

Add to this the continued trade war with the United States and a clear trend emerges. At no time since China’s reform and opening up that began over four decades ago has its relations with the world been so strained. Beijing has alienated practically every major power in the Asia-Pacific – JapanAustralia and India – as well as most of Western Europe, Canada and the US all at the same time.

China’s growing ambitions are bumping up against its neighbours with increasing frequency, calling into question attempts by Beijing to establish itself as the leader of a new multilateral order. The backlash to this more aggressive approach has begun, and will only increase if Beijing continues down this path. China will increasingly feel more isolated, not by any grand Washington containment strategy, but by its own policies.

. . . for the full op-ed head to the SCMP (limited free articles).


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US’ tougher stance on the South China Sea is part of Trump’s re-election campaign

This op-ed originally appeared on 7/20/20.

The United States finally said what the world already knew: China’s claims in the South China Sea have no legal basis. It took four years after an international tribunal ruled on the issue. This raises the question why, with only six months left in the current administration, US Secretary of State Mike Pompeo made this declaration now?

Two reasons stand out – US President Donald Trump campaign’s attempt to bolster its tough-on-China credibility ahead of the upcoming presidential election, and galvanising the growing regional distrust of China to reassert the US as a regional power. If Beijing misreads either of these powerful political forces and provokes a confrontation, its geopolitical overreach will face a backlash that has long been brewing in the region.With US election season in full swing, Trump attack ads air daily in battleground states with hundreds of millions of dollars in play. The campaign has decided to use China as one of several lines of attack against Trump’s opponent Joe Biden. It’s going to be a tough sell.

For the full op-ed head to the SCMP.


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China’s Loans at Risk as Coronavirus Spreads to Developing Countries

Illustration: Craig Stephens


A looming crisis in the developing world has caught the attention of major international lenders, including the Group of Seven, Paris Club and the World Bank, with a notable addition – China. For years, Beijing has resisted efforts to coordinate its lending with international financial institutions. And yet consensus has formed that temporary financial relief is essential for developing countries facing a mountain of debt, the spreading Covid-19 pandemic, and an impending global recession.

The larger G20 group of advanced economies, which China is a part of, have agreed to a debt moratorium for poorer countries in economic distress. Some finance ministers even insisted that their support for the relief package, which halts both principal and interest payments through at least 2020, was contingent on China agreeing to join in.

This is a sign, albeit limited, that not only is Beijing considered on par with the wealthy and powerful of the world, but that its interests coincide with a coalition of developed nations – at least for the moment. If China breaks ranks and pursues its own narrow interests, when many of these loans eventually default, it will lose the status it has long sought by developing its global soft power.

China has long preferred often secretive bilateral deals over coordinated lending efforts. These deals have included loose standards for projects of dubious utility, including transportation projects in Pakistan, Montenegro and Kazakhstan. National assets have been used as collateral. Actual loan amounts have often not been disclosed, making credit assessments by international institutions like the World Bank inaccurate.

This global lending spree, most recently through the Belt and Road Initiative, and China’s mishandling of the coronavirus outbreak, are largely responsible for the developing world’s recent economic dislocation.


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What the China Stock Market Crash Really Tells Us (and What It Doesn’t)

Monday morning headlines were more sobering than a double shot of espresso, adding anxiety to an already tumultuous few weeks in China. The Shanghai index dropped 8.5%, in one day, again. This after a see-saw struggle to regain momentum with similar drops from mid-June’s dizzying peak of over 5,000.

The consequences of such a serious correction, with a Monday close at 3209.91, are neither dire nor surprising and the ensuing panic will likely bring out a host of incorrect linkages.

Here are three misconceptions of what the crash seems to mean, but doesn’t.

1. The China market crash will destroy the U.S. economy

U.S. exports to China totaled a mere 7% of total U.S. exports year to date. Canada and Mexico represent a combined 34%.

Exports in general make up an extremely small percentage of the U.S. $18 trillion economy (about 8%) and exports to China represent an even smaller amount.

Over two-thirds of all U.S. economic activity is driven by consumers. The biggest impact on that activity is whether people feel they have more money to spend today than yesterday, not on whether day traders in Pudong are pulling their money out of Sinopec shares.

2. Shanghai and Shenzhen stock markets represent the broader Chinese economy  

Usually a broad-based stock market sell-off represents a belief that the underlying economy isn’t going to do as well going forward as it has in the past. That’s the rational explanation assuming near perfect knowledge of economic conditions. Even the U.S. market doesn’t work that efficiently (there are sell-offs even without new negative economic information.)

In China, knowledge of the broader economic slowdown has been around for a while. If the markets were rational they should have been dropping when the government announced lower growth targets back in March. They should have dropped as alternate economic measures hinted that the official 7% growth rate might not be reached.

Instead they continued to climb based primarily on two non-economic beliefs. The self-fulfilling prophecy that the market could only go up and that the Chinese government would prop up any market weakness. Win-win.

Since domestic savers have very limited choices of where to put their money, once the real estate two-step dance was over (buy one to live-in, buy one to hold) the stock market became the only game in town attracting a flood of capital. That rush caused prices to rise which attracted even more investment, much of it borrowed on margin. Thus the illusion of a perpetually rising market.

The Shanghai composite has now dropped below the magical 3,500 level where many believed the Chinese government would step in with massive buying to push prices back up. The illusion of invincibility appears to be faltering. Meanwhile online sales in the real economy continue to expand.

In this market there is no irrational exuberance with Chinese characteristics, just irrational exuberance as rationality returns to the market.

3. The China sell-off is similar to previous Asian financial crises   

In 1997 the Thai Baht came under heavy pressure resulting in large scale contagion throughout the region. A heavily reliance on trade with a market-determined exchange rates drove this spread. China has neither.

China’s yuan, despite recent changes, remains a managed currency. The government still decides on its opening daily price. That means speculators cannot significantly alter its value beyond a government imposed trading band of +/- 2 percent per day.

China’s economy is also far less reliant on trade than in the past as government investment in infrastructure as well as real estate development have become main drivers of growth. Of those industries dependent on trade China’s recent devaluation made Chinese exports cheaper (a dollar or euro buys more today than in the recent past).

What does the recent sell-off really tell us?

The Chinese government is going to have an increasingly difficult time trying to stop the carnage. Despite conventional wisdom, it does not have unlimited power. By even trying to manage the sell-off, policymakers have placed themselves in an extremely difficult situation.

If they can’t right the market as people expect the government looks weak. If they impose even more draconian rules to stop sellers from liquidating they may kill interest in the market as a whole. Lose-lose.

Apple’s Tim Cook, for one is not that concerned about purchasing habits in China. Let’s hope that the nascent middle class has more cash stashed at home that they’re willing to spend than most people think.

Meanwhile the China market crash has caused a flash sale on a host of solid U.S. equities.

China Devaluation Latest Sign of Market Weakness

The People’s Bank of China (PBOC) devalued the renminbi yesterday in the latest sign that market forces continue to weaken in the world’s second largest economy.

Exports have fallen. Growth is likely far slower than the official 7% rate. Electricity usage is down. Steel production has declined. Infrastructure investment yields less impact. Even demographics highlight a shrinking workforce (enter the robots). And then there’s the stock market, largely divorced from the underlying economy and gyrating like hips at a hula hoop competition.

Currency devaluation will do little to reverse these trends.

As a short term fix it may help exporters whose goods are now cheaper to buy abroad, slow capital flight (it costs more to convert renminbi into other currencies) and potentially attract more foreign investment into the country (a U.S. dollar today buys more renminbi than a dollar yesterday).

But the underlying economic uncertainty in China’s partial transition to domestic led growth will continue to weigh heavily on the minds of international investors and policymakers alike.

If China truly wants to make the renminbi a global reserve currency the PBOC will have to reverse itself and let the currency float freely like the yen, euro and pound. That requires giving up managing a trading band around a fixed daily rate. Economic conditions would have to improve significantly before moves in that direction resume (almost certainly a gradual step-by-step process).

None of this means a hard landing for China’s go-go economy, but resorting to a currency devaluation highlights the limited policy options left for a government navigating increasingly choppy waters.

Remaining moves (and ones largely ignored to date) include government heavily investing in a social safety net, improving health care coverage and promoting more affordable housing. That will allow households to free up some of their savings to spend and spur new business creation.

Until this happens expect more partial solutions and continued volatility.

Does Anyone Really Know What Time It Is In North Korea?

Update 2018 – Relations between North and South Korea have improved over the past year to the point where North Korea has now re-set its clocks to be in sync with its southern neighbor.

World_Time_Zones_MapIn yet another bizarre move by North Korean dictator Kim Jong Un, official time in Pyongyang will officially roll back 30 minutes on August 15th. While not unheard of in the annals of geopolitics (New Delhi and Islamabad diverge by half an hour as well), the move is a decidedly cold war maneuver that matters little to the rest of the world.

Re-jiggering airport information will be relatively easy with so few flights in and out of the capital. Train schedules need little adjustment considering the extremely limited service with China, its only ally (loosely defined).

Why is Kim asserting his right to bend the space-time continuum above the 38th parallel north to the Yalu and Tumen rivers? After executing high ranking leadership and family members it appears that he still needs a symbolic boost to assert a Kim 3.0 leadership. Harkening back to a World War II propaganda cliché he’s freeing North Koreans from the legacy of Japanese imperialism.  Little else seems to have changed in the isolated and perpetually dark-after-dusk hermit kingdom.

If waking up to best of 1960’s-styled patriotic music on the government-controlled radio station weren’t enough, the capital’s citizens now sacrifice a ceremonial 30 minutes so the country can exist in a time zone of Kim’s own making.

Unfortunately this will do little to counter endemic poverty, international isolation and the ignominious title of being the only country left in the world still fighting a last century war (if the Iran nuclear deal actually goes through).

Arm-chair criticism aside some change is in the air. Reuters has an official Pyongyang bureau and even the North Korean embassy in Beijing, once a mysteriously inaccessible outpost, has opened its doors to journalists (no questions allowed during press briefings, however).

It looks like Kim wants to engage with the outside world, if only on his own terms and largely with the same missile-rattling and provocations marking over half a century of mistrust. Most recently North Korean soldiers planted wood cased landmines on the South Korean side of the demilitarized zone resulting in two serious injuries to ROK soldiers.

And yet the Kaesong Industrial Complex keeps churning out near slave labor-produced goods where workers, despite agreements to the contrary, receive wages only from the North Korean government and not their South Korean employers.

Manic engagement remains the norm. Hard currency continues to flow north while the DPRK attacks one of its only business partners, no matter what time it is.

In homage to the title of this blog post here’s the 1969 hit by Chicago.

U.S. Needs an Asia Re-Pivot

Legacy must be on Obama’s mind these days as his two-term presidency nears an end. It might seem early, but the approaching 2016 election cycle starts in earnest as soon as Hilary Clinton announces her candidacy. That could be only months away. Then the media cycle fills with coverage of every presidential hopeful’s latest utterance and Congressional paralysis settles in.

Little can be done in twenty months that hasn’t been accomplished in six years save for some much needed focus on longer-term policy. This positioning was supposed to include an “Asia Pivot”, loosely defined and broadly conceived. So far it has lived up to its conception.

Enter news of a China-led3-23_aiib_2 Asian Infrastructure Investment Bank (AIIB) featuring participation of major allies the UK, France, Germany, Australia, South Korea and now Japan*. Glaringly absent, the U.S.

What’s stopping U.S. involvement? Partly an inherited pride from post-World War II institution-building that created the IMF and World Bank. Opponents highlight the risk of the bank becoming a potential instrument of Chinese regional soft power, a potential lack of transparency and less stringent lending standards that may erode development criteria created over the past several decades. These include social imperatives, environmental standards and labor protections.

While these remain reasonable concerns, China already lends heavily throughout the region. No amount of outside pressure has influenced how this aid has been disbursed or under what terms.

Only involvement with this new multilateral institution opens the door to engagement with China and the region on development issues.  With little cost, potentially none at first except for some diplomatic formalities, the U.S. could play an influential role in the first round of serious regional economic institution building since the 1966 formation of the Asian Development Bank (ADB).

Foregoing a role, even a limited one, pivots the U.S. further away from Asia signaling that the U.S., while espousing support for regional integration, does little to back-up those ideals.

As regional trading patterns increasingly revolve around China’s economy a new constellation of partners will define the regional development agenda, with or without U.S. involvement. Avoiding the AIIB risks forfeiting hard won gains. Asia will then see the U.S. primarily through a narrow security lens.

Refusing to work with China and the rest of Asia, even when the terms are not ideal, is not a legacy worth leaving.

* Note: After publication Japan changed course and announced it would not be joining the bank at this time.

@brianpklein

For more on the issue see:

Image: Xinhua/Li Xin

India Poised to Gain as China Troubles in South China Sea Escalate

The recent Philippine-Vietnam announcement on a coordinated response to China’s latest ocean drilling marks a significant shift in regional relations. Strains have been growing for some time. An unenforceable territorial dispute process has failed to resolve competing claims and anti-foreign sentiment is on the rise (in both Vietnam with riots against foreign factories and changing attitudes in China against buying foreign-made goods.) Any natural gas discovery will only exacerbate tensions.

This unprecedented level of public cooperation highlights a growing regional consensus. Years of China’s “peaceful rise” have ended and Southeast Asian countries appear to be gaining less and less from their trade-and-appease policies of the past.

Enter India, long the economic giant in waiting. While still a good two decades behind China in terms of overall development, the recently elected Modi government has pledged business reforms that could transform the country into a regional power. Re-kindling GDP growth rates of 7-10% could be a boon to resource rich southeast Asia eager to offset a slower-growth China.

With a near super majority Modi’s control over parliament can push change in ways that previous administrations could not. If he delivers, then significant trading and investment opportunities will follow. Average trade growth between Asean and India has already accelerated faster than Asean-China trade (25.5% vs. 15.1% from 2007 to 2011, the latest year available via Asean).

Still there are pitfalls along the way. Modi will need to steer the BJP party clear of its ultra-nationalist tendencies and historical anti-Muslim and anti-minority sentiment. His unresolved response to the slaughter of Muslim Indian citizens in 2002 while he was State Minister of Gujarat will surely be on the minds of Indonesia’s leaders. Competition may also hinder some opportunities where firms go head-to-head with each other (e.g. Thailand’s auto industry vs. southern India’s).

If India’s leaders can finally overcome decades of inertia and liberalize the economy they will find a region eager for a trade partner that doesn’t threaten their territorial integrity.

 

What Does Xi Want?

South China SeaFor so many years now the rhetoric coming out of China was “peaceful rise” and “non-intervention”. And then by stealth, diplomacy and economic might a shift occurred turning a policy of biding one’s time into action. This new muscular foreign policy, under President Xi Jinping’s leadership, increasingly fractures a status quo that has maintained stability in Asia for over half a century.

Gaining control over the Spratley Islands and laying claim to the greater South China Sea have re-drawn long established boundaries and defied international norms. This is the new China order.

While countries throughout the region, including the U.S., continue to express their diplomatic discontent in press releases and regional gatherings, an unimpeded land and sea grab expands. Other nations talk. China takes.

Water cannon volleys between Chinese and Vietnamese ships have now escalated to hard objects and ramming hulls (water cannons were also used by Chinese “enforcement” ships against the Philippines back in February). An oil rig planted its drill within Vietnam’s internationally recognized economic zone without consequence. Chinese construction has begun on a hotly contested island chain also claimed by the Philippines.

All of these actions contradict in word and deed the pronouncements of the Xi government through APEC speeches, bilateral conversations, and international gatherings that no unilateral actions would upset the status quo. Consultation, not force, was meant to guide resolution of historical tensions.

What does the Xi government really want? — A reckoning with history to re-write the past and lay claim to what was “taken” decades and even centuries ago under a selective reading of China’s place in the region and the world.

And yet China has developed at remarkable speed, largely because of this very international system that provides it access to the world’s resources and markets. In a different time, a country would have needed to field a global military presence to keep the peace, maintain the shipping lanes and facilitate international trade.

These latest confrontations and a weak international response sets a dangerous precedent for the system that has long been welcoming China’s rise. President Xi doesn’t want to embrace a world not of his own making. He wants to re-write the world’s terms to reap even larger benefits at the expense of his neighbors. That includes re-drawing boundaries of influence throughout Asia.

Until countries take heed and begin working with concerted action, China will continue to free ride and impose its considerable economic influence to mold the world in its own image. A region not united will eventually be divided.

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“Road to Fame” Explores China’s Youthful Aspirations and Angst

Six pairs of eyes follow each single child in China says a teacher at Beijing’s prestigious Central Academy of Drama – parents and two sets of grandparents. That puts a lot of pressure on them to succeed.

In an economy undergoing dramatic change and slowing growth, the culture of competition long thought to be an artifact of western decadence and decline, quickly becomes the new norm. The striving for opportunity and material comforts has now become a common global culture.

Director Hao Wu’s documentary “Road to Fame”, which screened to a sell-out crowd at IFC Center as part of the DOC NYC film festival, explores these themes and more as he details the first ever Broadway-China collaboration on a student production of “Fame, the Musical”.

The subjects of the documentary reflect the hopes and fears of students faced with the daunting prospects of making a living for the first times in their lives – relatively sheltered university life colliding with class distinctions and the advantages wealth brings to any budding artistic career.

RoadtoFame

China’s “Generation Now” wants what it wants and expects to get it sooner rather than later – a not unfamiliar theme in modern “20-something” generations. At some point China will have its own version of “Friends” where the lyrics “my job’s a joke, I’m broke , my love life’s D.O.A.” will resonate as loudly there as it did for a decade and more in syndication in the U.S.

The film itself, in parts sympathetic and brutally honest about the future of performing artists chasing stardom reflects much of the musical’s own messages. Not everyone makes it. Talent takes you only so far. And who you know counts for more than anyone really wants to admit.

Perhaps most striking is the film’s acceptance in China itself as Hao hinted at a major broadcast sell in the mainland during the Q&A (the film received crowd-funding via Kickstarter and several grants). Xi Jinping’s “China Dream” rhetoric not withstanding, domestic interest in China’s own aspirational classes headline even state-run publications, a stark difference to the steel manufacturing output numbers of only fifteen years ago.

Potentially sensitive political undertones, including corruption and China’s one child policy, seep through in moments. But over the five years from original filming to final editing, China has changed. Luxury-goods sales are on the decline, attributed to the crack down on corrupt politicians, though cash cards are now the preferred currency of influence. The latest Communist Party conclave announced relaxed family planning restrictions, ostensibly an end to government forced abortions, clearing the way for officially recognized multi-child families.

Here “Road to Fame” captures those moments when youthful exuberance tempers with time as students face the brink of adulthood. One can only hope that China’s “gen now” matures into the next generation of reform where widening the door to opportunity for a broader spectrum of society becomes more the norm than the rhetorical exception – something the U.S. still struggles with itself.