Watch Out For Falling Ice

“With the rise of China, we are observing the geopolitical equivalent of the melting of the polar ice caps. Slowly the ice thins, cracks appear and one day a large sheet of ice spectacularly peels away. If captured on cameras the world momentarily sits up and pays attention before CNN returns our gaze to the drama of the Islamic State’s most recent atrocity.”

The author of this China metaphor is former Australian Prime Minister, Kevin Rudd. He penned it earlier this year in a study he was commissioned to write on China-American relations for a Harvard institute.

Corruption and treason leads to incarceration

However, the metaphor is certainly apt for a political system that has recently jailed for life one of China’s most powerful figures, Zhou Yongkang.

Zhou had for years occupied a prime spot on China’s Politburo Standing Committee; the elite group at the top of the country’s government pyramid.

His incarceration was briefly revealed in the official newspaper this month after sentence had been passed. No details of the charges have been released.

All that we know is that he was charged with corruption, while his life sentence was for treason – to which he had pleaded guilty.

Zhou is the largest “sheet of ice” so far glimpsed in what has to be one of the most politicised and extensive anti-corruption campaigns in history. 

Tigers and flies 

The targets in this drive are what President Xi Jinping described as the “tigers and the flies”; that is the high and lower level officials in the Communist Party, the People’s Liberation Army (PLA) and the state enterprise system. Wednesday 17 June 2015.

In 2014 alone, 68 top officials and over 70,000 lower level officers were investigated for violations of anti-graft rules.

Around 36 tigers have been brought to trial.

Among those arrested were senior officials regarded as being close to former Party General Secretary, Jiang Zemin, who at 88 remains a figure of considerable influence.

Jiang supported Xi for the presidential post.

No signs of purge slowing 

The anti-corruption purge has maintained its momentum into 2015. In the first three months the chief of military intelligence was removed from office. Dozens of PLA officials including 16 generals were placed under investigation.

At the same time President Xi has moved to centralise his power by establishing additional policy groups in charge of national defence and the military, state security, cybersecurity and information, and one rather cryptically referred to as being “responsible for deepening reform comprehensively.”

President Xi heads each of these new groups.

George Magnus, formerly the chief economist at UBS and a long term China watcher, observed on his blog that the last of the groups mentioned above is “perhaps the most significant because it has a comprehensive portfolio, and unprecedented scope of power and responsibility.”

Another powerful Chinese leader 

One obvious conclusion to draw from Xi’s centralisation of power in his hands is that he is the most powerful Chinese leader since Deng Xiaoping, perhaps even Mao Tse-tung.

At one level, the need for structural reform of China’s economy actually requires a powerful leader capable of taking on the vested interests that have flourished under the protective umbrella of the Communist Party for the last 60 odd years.

Xi was well known and respected as a technocrat as he climbed the slippery ladder of Chinese politics.

What has come as a surprise has been the methodological way in which he has implemented his political strategy, which appears to have outflanked the complex, bureaucratic and interconnected political structure assembled over the last sixty years.

One of the primary drivers of this political system has been to prevent the emergence of a Mao-like dictatorship.

It would be easy to dismiss Xi’s anti-corruption drive as being a convenient vehicle with which the President is rounding up his political opponents.

While there is doubtless more than a grain of truth in that description, there is also the reality that institutionalised corruption imposes an enormous brake on a Chinese economy that is struggling to avoid the middle-income trap that, if sprung, would condemn China to “developing economy” status. 

Export success?

Japan, South Korea and Taiwan are the only three nations in the last 60 years to lift their per capita GDP to 70 per cent of the developed-country average.

They exported their way to success.

As Adair Turner, the former chairman of the U.K’s Financial Services Authority whose latest book “Between Debt and the Devil” will soon be published points out, Japan is simply too large to depend solely on export-led growth to catch up with the developed economies – the necessary demand is simply not there. China did remarkably well on the export front up to 2008. But that success was largely attributable to credit fuelled booms in the emerging economies.

China will need to forge a different growth path and that will require more difficult reforms than those on which attention is often focused. 

Looming labour management problems

In recent years, real estate investment kept the China economy ticking but that is no longer the case.

Adair Turner points out real estate investment now accounts for 15 percent of China’s GDP compared with less than 5 percent in 2000.

Add in related industries like steel and cement and you are looking at one-third of China’s GDP. Almost 60 million Chinese workers are employed in construction today, up from 20 million in 2007.

That’s a serious labour management problem looming.

When considering the role that construction has played in China’s growth since 2007 we should also add in the importance of local government credit growth, much of which can be attributed to borrowing against land ear-marked for prospective growth.

The credit bubble is now deflating rapidly. 

The Silk Roads project

Given that the domestic economy of China is now suffering a severe case of capacity indigestion it is not surprising that it is turning to external projects such as the Silk Roads project, which is recreating the ancient Silk Road and maritime trading routes connecting China with Europe.

More ominously China is expanding its military capacity and its territorial claims.

A Soviet-like containment policy

According to Kevin Rudd, China is convinced that the US is pursuing a policy of containment similar to that directed at the Soviet through the years of the cold war.

In his Harvard study Kevin Rudd summarised Beijing’s perception of US goals in four bullet points:

  • Contain it
  • Diminish it
  • Internally divide it; and
  • Sabotage its political leadership. 

You do not have to agree with Rudd to acknowledge that the once solid Washington consensus that defined the US-China relationship as “constructive engagement” has changed. Paradoxically, President Obama who has re-written US foreign policy with his “pivot to Asia” doctrine that has upset the Chinese remains supportive of “constructive engagement”.

But he is increasingly a lame duck President.

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Max Walsh

Contributor

Max Walsh was for many years one of Australia’s top economic and political commentators, highly regarded as a journalist, author and broadcaster. Throughout his career, Max was involved in all dimensions of the media industry, which has encompassed positions with two of Australia’s largest publishing companies and television networks.

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