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Policy is a quarterly publication of The Centre for
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This year marks the 40th anniversary of the historic decision by the Communist
Party of China under Deng Xiaoping to allow market forces to play a greater
role in the economy, permitting private enterprise to emerge and opening up to
foreign trade and investment after decades of Maoist isolation. The result was stunning:
sustained double-digit growth and an unprecedented eradication of poverty, transforming
China from an inward-looking and backward country into a global economic powerhouse.
But the era of ‘miracle’ growth is over. The economy has slowed, with China reaching a
fundamental turning point in its development. There are three main views on its future
trajectory: (1) it is still growing but naturally slowing as it gets richer; (2) it is teetering
on the brink of financial collapse; and (3) it is stagnating. In the first of our two special
features in this issue of Policy, Derek Scissors argues that China is neither thriving nor
collapsing. The evidence points to a process of stagnation.
China faces well-known challenges including resource constraints, a rapidly ageing
workforce and crippling recent debt. Deleveraging would improve prospects, but the
PRC also needs to return to Deng-style market reforms to become rich before it comes
old. Most indicators point in the opposite direction. The Party has become progressively
less reformist, promoting state-owned banks and enterprises as the main driver of
growth and then launching a massive domestic stimulus during the 2008 GFC that led to
rising debt not the productivity gains reaped under previous market reform.
The politics of reform are evident in Xi Xinping’s efforts to offset declining growth and
head off unrest by rallying around the ‘China Dream’ of national rejuvenation and regional
integration via the trillion-dollar Belt and Road Initiative (BRI). On land, the economic
‘Belt’ connects the Chinese hinterland to Europe through Central Asia whilst the maritime
‘Road’ links Southeast Asia to its southern provinces through Chinese-built ports and
railways. State-owned banks and enterprises will be the main drivers.
In other words, having exhausted the post-GFC domestic stimulus of state-directed,
investment-led growth through infrastructure building, the BRI can be seen as a massive
international stimulus package that seeks to absorb chronic industrial overcapacity while
addressing the deepening development gap within China by connecting poor provinces
to neighbouring countries. But the Party is chasing new growth with little regard to costs
rather than driving much-talked about market reform.
Geopolitical ambition is also indisputable. As David Martin Jones argues in our second
special feature, the BRI can be seen as the roadmap to the ‘China Dream’ of regional if
not eventual Eurasian hegemony based on China’s market power and capital investment,
with the ultimate aim of creating a Sinocentric trading area to rival the transatlantic one
dominated by America. European infrastructure projects follow a pattern road tested in
Southeast Asia, where countries are either sanctioned or rewarded with (promises of)
Chinese investment in return for political support for Chinese positions on issues like the
South China Sea.
ASEAN has been an early casualty of this ‘carrots and sticks’ realpolitik, with China not
only fragmenting ASEAN but also causing a ‘sea change’ in the regional strategic balance
with its island reclamation in the South China Sea and dismissal of the 2016 Hague ruling
that condemned it. This change has coincided with President Trump’s dissatisfaction
with the postwar system of alliances and US-led multilateral trading order that have
underpinned regional stability and prosperity for seven decades.
As Trump turns inward to ‘make America great again’, Beijing looks outward to ‘make
China great again’ by seizing a window of opportunity to lock in whatever advantages it
can grab before being consigned to low growth. We are thus entering an extended period
of maximum risk in a rapidly changing region bristling with tensions as US influence
wanes whilst China’s power grows.
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