NOTE: This is the third in a five part series.
PART I: American Adventurism, Non-Interventionism, Trumpism and Afghan Chaos
PART II: The Misunderstanding of Vladimir Putin
PART III: China Awakens Under Xi Jinping
PART IV: Crony Capitalism and the West’s Achilles Heel
PART V (September): The New World (Dis)order
PART III: China Awakens Under Xi Jinping
“If the U.S. side does not put on the brakes and continues down the wrong path, no amount of guardrails can stop the derailment and rollover into confrontation and conflict.”
—Chinese Foreign Minister Qin Gang
From 2008-2013, there was one particular leader who was closely studying America’s actions and lack thereof. Xi Jinping became vice president in 2008, around the time Barack Obama became president.
Xi’s rise was meteoric after being named chairman of the Communist Party and Central Military Commission in 2012. Holding the reins to the party apparatus and military, he began consolidating power by launching anti-corruption probes to purge the military and party ranks of rivals and non-loyalists.
As Mr. Xi consolidated his grip on the party we began to see a bolder China emerge onto the world stage. It is not a coincidence that this transpired around the time the world started to perceive a weaker, divided and non-interventionist America.
For most of the last century Chinese leaders have followed Deng Xiaoping’s strategy of "hiding our capacities and biding our time.” The idea was to avoid provoking hostility until China had the military and economic strength to challenge US hegemony. Xi Jinping’s China didn’t simply come out of hiding but has embraced a far more aggressive and muscular posture at home and abroad.
During Covid-19 Mr. Xi implemented a zero-Covid policy which involved forcibly locking up residents and publicly shaming those who broke quarantine. He authorized a genocide against Uyghurs in China’s Xinjiang region and oversaw a brutal crackdown in Hong Kong, a territory to whom China had promised press and other freedoms until 2047 under the ‘one country, two systems’ handover agreement with the British in 1997.
In the last few years, China has provoked India with the Chinese military violating agreements along their shared border, leading to deadly clashes. Beijing packed Hong Kong’s legislature with loyalists and passed a draconian national security law. This law applies not only to local residents but to “people outside [Hong Kong] - who are not permanent residents”. China openly threatened the UK with dire consequences for offering residency to fleeing Hong Kong citizens.
In 2012, China launched their first aircraft carrier, after spending years modernizing their navy. Soon after they started to flex their muscles in the South China Sea, laying claim to disputed territories and territorial rights.
A year later, they consolidated bureaucratic control over multiple maritime agencies to create a State Oceanic Administration that would match the size of Japan’s coast guard, the largest in the world. That same year they announced the creation of an East China Sea Air Defense Identification Zone over disputed territories and demanded that all non-commercial aircraft submit air plans prior to entering the area or risk being shot down.
A 2015 Pentagon report found that China had reclaimed more than 3,200 acres of land in the southeastern South China Sea and were “weaponizing these man-made islands”. The report concluded that in addition to building facilities on disputed islands, China was “increasing its role and power around the world, while continuing to modernize and build up its military and inventory of ships, missiles and aircraft.”
In March 2022, the U.S. Indo-Pacific Commander confirmed to the Associated Press that China had fully militarized at least three islands in disputed areas of the South China Sea. They armed these islands with anti-ship and anti-aircraft missiles, laser and jamming equipment and fighter jets. This happened despite the fact that Xi Jinping had made public assurances that China would never convert these islands into military bases.
Last year, the Solomon Islands shocked the world by signing a security pact with China. It allows the Chinese navy to dock warships on the island and allows the island to call in Chinese security forces, to restore “social order”.
The agreement also gives Chinese forces the authority to “protect the safety of Chinese personnel and major projects.” Both Australia and America sent high-level delegations to dissuade Solomon’s PM from signing the agreement but failed to change his mind.
Why all the fuss over six small islands with a population of less than 700,000 people?
Australia is concerned about having the Chinese military stationed less than 1,200 miles from their shores and America is worried about reduced freedom of navigation in the South Pacific because the Solomon Islands sits at a major trade transit point through which massive amounts of global cargo flow.
This agreement was a startling reversal for a country that had been both a diplomatic partner of Taiwan’s, and a long time Western ally. It can in part be explained by the 2016 election of President Tsai Ing-wen, in Taiwan, and her refusal to endorse the “one-China principle”. After the Taiwanese elections, Mr. Xi’s administration went into overdrive to persuade countries to sever ties with Taiwan.
Today, only 13 countries, many of them small, less-developed nations, have formal relations with Taiwan. China recently persuaded Honduras to sever ties with Taiwan. This was a major rebuff to Washington, who had been working hard to get Central American countries to support the island nation.
China is reported to be building a secret naval base for its military in Cambodia, though both countries have denied this. If true, it would be their second such outpost outside their territory, and first in the strategically significant Indo-Pacific region. Australia's Defense Minister recently warned in a speech that China’s "military buildup in the region was occurring at a rate unseen since World War II”.
Last year, the US Commander of Strategic Command, Vice Adm. Chas Richard, issued a more ominous warning. He said America’s military edge, which has thus far provided a deterrence against China, “is slowly sinking.” He added that China is putting capacity in the field faster and that if this continues, “it isn't going to matter how good our [operating plan] is or how good our commanders are, or how good our forces are—we're not going to have enough of them. And that is a very near-term problem."
Even as China flexes its military might, Mr. Xi understands something previous Chinese premiers failed to see: that military might and financial muscle alone will never allow China to rival America on the world stage. They also need to build soft power.
With soft power in mind, in 2013 Mr. Xi launched the Belt Road Initiative (BRI). The BRI is modeled after The Silk Road created 2,100 years earlier by the Han Dynasty to build trade routes linking Europe to Asia. However, Mr. Xi’s ambitions go far beyond trade. By investing in developing nations and making their economies co-dependent, it allows him to bring them into China’s sphere of influence.
Within seven years of launching the BRI, 139 countries have signed cooperation agreements. This includes 39 countries in sub-Saharan Africa, 34 in Europe and Central Asia, 25 in East Asia and the Pacific, 18 in Latin America and the Caribbean, 17 in the Middle East and North Africa, and 6 in South Asia. Currently, the BRI, including China, accounts for 40 percent of the world’s GDP and 63 percent of its population.
To put the scale of BRI in perspective, over the last decade, China has doled out more than $1 trillion across Asia, Africa and Latin America. This makes China the largest government lender to the developing world, almost equalling the total loans of all other governments combined.
In Africa, more than 60% of the revenue major international contractors collected in 2019 went to Chinese companies, according to a 2021 paper by Johns Hopkins University. In 2022, China’s trade with Africa was five times greater than that of the US. This, in addition to the fact that the Russian Wagner Group, a private military contractor, has been providing security assistance in several African countries.
These ties to China and Russia are a large part of the reason why many African nations, including South Africa, have been reluctant to condemn Russia’s invasion of Ukraine. After neglecting the continent for many years, the US is now playing catch-up to try and blunt China’s influence with recent high-profile visits by the US Treasury Secretary and one by the Vice President.
In 2014 China launched the Asian Infrastructure Investment Bank (AIIB) to rival the Asian Development Bank (ADB), which lends money for infrastructure projects to Asia. According to China it was necessary because unlike the ADB, which funds projects ranging from environmental protection to gender equality, the AIIB would be focused on building infrastructure in poor Asian countries. Most world watchers believe the true reason was to expand China’s influence in the region at the expense of Japan and America, who hold more sway at the ADB.
Over the last decade, China has been increasingly using its economic clout to bully and punish nations that act in ways it deems unacceptable. In 2011, China blocked salmon imports from Norway after they awarded the Nobel Peace Prize to Chinese dissident Liu Xiaobo. In 2020, they blocked agricultural, beef and other imports, after the Australian government supported a global inquiry into China’s early handling of Covid. As the war of words escalated with Australia, China even threatened them with a missile attack.
When Lithuania, an EU country of less than 3 million people, let Taiwan open a trade office in Vilnius, China halted its own exports to Lithuania to starve their manufacturing industry of components and raw materials. Then they took their vindictiveness to a new level by letting Chinese goods, that had been paid for by Lithuanian companies, get mired in new red tape and endless inspections delays.
China even pressured EU countries to stop importing Lithuanian products. They halted shipments of auto components to German, French and Swedish companies from ports in China, because some parts were manufactured in Lithuania. The Lithuanian spat exposed the limits of power of a massive trading bloc like the EU, against the growing might of China. Apart from filing a complaint with the Word Trade Organization (WTO) and offering words of solidarity, EU was reluctant to do anymore, for fear of upsetting China.
The fact is that the EU is reliant on China for their supply chain and China used Lithuania to send a message to the bloc. Theresa Fallon, Director of the Center for Russia, Europe, Asia Studies in Brussels summed it up saying,“Many European leaders look at Lithuania and say, ‘My God, we are not going to do anything to upset China.”
Prior to Russia’s invasion, China and the EU’s economic ties were mutually beneficial, and a way for both sides to limit their reliance on the US. However, after China’s bullying of Lithuania and support for Putin’s invasion, these ties have begun to fray.
At the 2023 Munich Security Conference, China’s top diplomat received a cold reception when he tried to woo Europe, by bashing the United States. His audience was aware that even as he spoke, in the background European security officials had discovered that official Chinese channels were hard at work spreading disinformation all over Europe.
Despite these tensions, it is worth noting that the EU’s largest economy, Germany, continues to have deep ties with China and is still their largest trading partner. At the end of 2022, the German Chancellor made a high-profile trip to Beijing. For now, Sino-German relations remain “cold politically and hot economically” as the Director of European Studies at Fudan University put it.
Meanwhile on the home front, Mr. Xi has been walling China off from the world. He aims to make China self-reliant and less dependent on the West. From the time he came to power Mr. Xi has feared “infiltration” of dangerous Western values, like democracy, press freedoms and judicial independence.
One of his first acts as premiere was to accelerate policing and censorship of the internet by banning anonymity and making internet providers responsible for deleting content deemed offensive or politically sensitive. He systematically clamped down on foreign NGOs and churches, and issued rules restricting the use of Western textbooks, banning any texts that promote “Western values”.
To understand why the man who once said in 2017 “Openness brings progress, while self-seclusion leaves one behind,” seems to be ignoring his own advice, we need to understand that Mr. Xi never embraced “openness” in the way we define it in Western democracies. Instead. Mr. Xi always viewed “globalisation” as a series of risks and rewards, enacting reforms in piecemeal ways to ensure that the Party never cedes control of the economy and is able to protect citizens from dangerous outside ideas.
Even prior to the Covid_19 lockdown, which closed China’s borders for two years, by every measure China’s global isolation had been growing. Foreign films accounted for less than 16% of box office revenue, down from over 50% in 2012. In 2021, the value of imported books and periodicals fell to their lowest level since 2017. The number of Chinese students leaving to study in Australia dropped dramatically last year. Even foreign remittances fell by more than half compared to figures for 2019.
In Mr. Xi’s vision of China the state plays a central role in guiding the economy, the private sector is loyal and aligned with the Party’s policy goals, and he is the leader who restores China’s power on the world stage. He envisions China as the center for global innovation, aided by government investment into domestic research and technology, which will help power productivity and propel growth. China as a self-reliant nation, no longer meek, or beholden to the West.
Over the past decade, the state has shuttered or taken control of many private businesses, absorbing them into state-owned enterprises, but the tech sector managed to escape Mr. Xi’s increasingly visible hand on the private sector. However, this changed three years ago, after Mr. Xi personally intervened to block the Ant Group’s IPO.
In a speech a few days before the IPO, Jack Ma publicly criticized the government’s financial regulation, blaming it for holding back technology development. It is said that Mr. Xi was infuriated by this, but the likely reason is the complex ownership structure behind the Ant Group. A number of well-connected political families were shareholders, and could have posed a challenge to Mr. Xi’s leadership because they stood to collect billions from what would have been the world’s largest ever IPO.
Since then Mr. Xi has singled out the tech sector, blaming it for widening inequality in China. Mr. Xi knows that if this inequality is left unchecked, it will lead to social unrest.
A few months after launching antitrust investigations into big tech companies and announcing new rules to restrict overseas listings by Chinese companies, Mr. Xi gave a speech about pursuing a “common prosperity agenda,” in which he vowed to adjust excessive incomes and redistribute wealth to tackle growing inequality.
However, I believe the main reason for the tech crackdown has to do with the fact that a handful of entrepreneurs and companies have attained such great market dominance and influence over the economy that they threatened the clout of the Party. Chinese tech giants account for a much larger portion of the economy than their counterparts in the US and Europe, and I suspect that Mr. Xi’s began to view them as a threat.
To give you an idea of the dominance Chinese tech companies have, Alipay, a mobile payments app owned by Jack Ma’s Ant Group, is used by roughly 70% of China’s population. Ant has issued loans to 20 million small businesses and nearly a billion individuals. 80 million businesses use their apps and they run China’s largest mutual fund. Ant’s focus on serving the unbanked has made it a dominant force in finance.
Also, unlike in America and Europe, a small handful of Chinese companies have a multi-tentacled reach. They have built super apps with walled gardens, offering services that span e-commerce, payments and delivery, to social media, gaming and entertainment. This power over the economy and populous was likely viewed as a long-term threat to Mr. Xi’s leadership and the Chinese Communist Party dominance.
The tech sector was the last remaining threat to Mr. Xi having absolute power, ahead of being anointed de facto emperor of China, at the 2022 CCP Congress. At the last congress, the party amended its constitution to enshrine Mr. Xi as the “core of the party and his political thought as its underpinning ideology”, clearing the way in March this year for the National People’s Congress to unanimously vote to rubber stamp Mr. Xi’s norm-breaking third term, putting him on track to be in premier for life.
While it may appear that Mr. Xi and China are at the pinnacle of their power, there is trouble brewing on the long horizon.
A slowing global economy coupled with rising interest rates and inflation are leading to an increasing number of debt defaults by developing nations which are struggling to repay loans received through the Belt and Road initiative.
As a result other issues have emerged with these loans, from a lack of transparency and rampant corruption to labour violations and predatory lending practices. It has resulted in a number of countries finding hidden debt that was never officially disclosed on government balance sheets.
Additionally, completed infrastructure projects are falling apart due to poor quality equipment and construction flaws. These problems threaten to leave developing nations in worse shape because in addition to repaying loans, they will now need to spend money to repair these defects.
Cracks were found in Ecuador’s Coca Codo hydroelectric plant, the country’s biggest power source. In Pakistan, officials had to shut down the Neelum-Jhelum hydroelectric plant after finding cracks in a tunnel, just four years after it went online. In Uganda officials identified more than 500 construction defects in a Chinese-built hydropower plant that has suffered frequent breakdowns since going online in 2019. The World Bank estimates that hydropower plants should have a lifespan of up to 100 years.
Also, China’s economy can no longer rely on easy growth through technological transfers.For much of the 1990’s and 2000’s foreign firms that set up factories brought advanced technologies that were forcibly transferred to local Chinese firms, or reverse-engineered at little cost.
However, these transfers are increasingly being restricted, even though China continues to be accused of hacking and theft of intellectual property. The US put tough new export controls on advanced technologies, like semiconductor chips, in a bid to slow down China’s technological and military advances through illegal transfers.
In late 2022 and early this year, foreign investors pulled more than $100 billion out of China’s bond market and there was a dramatic slowdown in investments in the country’s stock market. But these investments are likely to bounce back because many investors sold for fear of getting caught up in sanctions aimed at Chinese entities, due to the country’s support for Russia's invasion, and because of Mr. Xi’s reluctance to lift the strict zero-Covid policies which were hampering economic growth.
In the early part of this year, after Covid restrictions were lifted, China’s economy has shown signs of a strong rebound with manufacturing showing the biggest improvement in more than a decade, services sector activity climbing and signs of stabilization in the troubled housing market.
These figures were released ahead of the National People’s Congress in March, where Mr. Xi shared plans for “deepening structural reform” in the financial sector and tightening controls over science and technology in strategic areas like chips.
However, troubling systemic issues lurk beneath this short-term buoyancy. For years Chinese cities accumulated vast amounts of debt in a bid to boost GDP, by spending on wasteful infrastructure projects.
Already struggling to pay off debt, these cities experienced a further strain on coffers to implement Covid restrictions. The situation is so bad that some cities are struggling to deliver basic services. Recently, a city went viral after announcing they could no longer provide bus services.
China’s housing market remains on tenterhooks after property owners suspended mortgage payments last year, over delayed and stalled projects. It is too soon to tell if this eroded confidence in home buying more broadly. Also, analysts expect that further government bailouts will be necessary to help debt-stricken property developers.
In 2022, China’s population declined for the first time in 60 years. This demographic crisis will result in a shortage of labour while simultaneously increasing healthcare and other social security costs. Aware of the looming crisis, the government has been trying to incentivize couples to have kids, raising the limit from 2 to 3 in 2021, but they have not succeeded in reversing declining birth rates.
They even tried paying couples but got pushback with people saying that the main issue is that the country has become one of the most expensive in the world to raise a child. They say that these government incentives do nothing to help with supporting ageing parents and dealing with the rising cost of education, housing and healthcare.
A related problem is the high rate of youth unemployment. One in five urban youth were unemployed at the end of 2022. The latest figures for June this year show the unemployment rate among 16-24 year olds rising to 20.8%, which is four times the overall national jobless rate. This means China is now facing its worst unemployment crisis in four decades. Young people unable to find jobs and income are delaying plans for marriage and having kids, which is putting further negative pressure on the country’s birth rate.
While China says they have reopened for business and foreign investment, official figures show that the number of foreigners living in Shanghai and Beijing has been in steady decline over the past decade, and there is likely to be a mass exodus in the future.
A 2022 survey by the European Chamber of Commerce found that 85 percent of expats living in China said that the government harsh Covid policies and inhuman lockdowns, had caused them rethink their future in the country.
It is not only foreigners who are fleeing Mr. Xi’s harsh policies. Wealthy Chinese faced with the prospect of income redistribution have been fleeing in greater numbers after Mr. Xi’s promise to narrow ‘inequity’, according to data compiled by firms which track the movement of the rich. They expect many wealthy families more to leave in 2023.
It is not just wealthy Chinese who are fleeing. The US has seen a marked increase in Chinese citizens willing to risk life and limb to pass through the treacherous jungle between Panama and Columbia, to seek asylum in America. Panamanian government data shows that in the first two months of this year, more Chinese migrants crossed into Panama than all of 2021 and 2022 combined.
More recently the government banned a prominent finance writer and two of his peers for “spreading negative and harmful information” because they had written about the country's spluttering economy and unemployment rate. While all this does not bode well for China, in the end their biggest threat might be the impacts of Mr. Xi’s desire both to remake the economy based on his ideology and to secure the Party’s grip on power.
By giving the Communist Party even greater say in managing the economy, replacing tech leaders with academics and internationally respected economic officials with politicians loyal to Mr. Xi, he threatens to further erode the lines between party, government and private sector in ways that will have dangerous and unintended consequences for China and the rest of the world.
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