Friday, October 26, 2018

Have the Chinese Reached a Tipping Point? - Todd Royal

by Todd Royal

Thanks to Donald Trump, a dramatic change in China's position in the world may be approaching.

The Tipping Point by Malcolm Gladwell asserts that "Little Things Can Make a Big Difference." This year, small, innocuous events are building toward possible big changes for the Chinese government, its citizens, and Southeast Asia, and globally as well if geopolitical and economic events continue down this path. With the United States forging a new path confronting China, financial markets and geopolitics could be in for turbulence that hasn't been seen since the Cold War.

President Trump's early October speech to the United Nations and Security Council, where he accused the Chinese of "attempting to tamper with U.S. elections" and stated, "It's not just Russia; it's China and Russia," caused a stir at the U.N. While the U.S. media were fixated on the Judge Kavanaugh confirmations and the burgeoning U.S.-China trade tussle, the Trump administration is taking a harder stance against Chinese intelligence encroachments against U.S. businesses. A report in early October from Bloomberg BusinessWeek exposed "a sprawling multi-year investigation into China's infiltration of US corporate and defense infrastructure." The report also "confirmed that, in addition to efforts designed to sway US elections, China's intelligence community orchestrated pervasive infiltration of servers used to power everything from MRI machines to drones used by the CIA and US army."

The day before Trump's U.N. address, a 27-year-old Taiwanese national in Chicago was arrested for attempting to turn eight U.S. defense contractors who could reveal "sensitive defense-related technology." Then, in a first for U.S.-China relations, Yanjun Xu, deputy division director for the Ministry of State Security (China's main spy agency), was arrested in Belgium and extradited to the U.S., where he will stand trial in open court for attempted "stealing of trade secrets from companies including GE Aviation." The New York Times asserted that the arrest was "a major escalation of the Trump administration's effort to crack down on Chinese spying." This could mean that the U.S. is leveling the global manufacturing field to earn the goodwill of global lower-educated employees and blue-collar workers in emerging and mature markets. But this rankles Beijing, where the Chinese have enjoyed a comparative trade advantage for decades that has lifted hundreds of millions of Chinese out of crippling poverty.

Columnist Walter Russell Mead in the Wall Street Journal wrote about Vice President Mike Pence's speech to the Hudson Institute in which Pence outlined a new "Cold War" against China. Pence denounced China's "whole of government" approach with its rivalry against the U.S. Pence then blamed the Chinese for suppressing Tibetans and Uighurs, the "Made in China 2025 plan for technology supremacy," and using the Belt and Road initiative (BRI) as "debt diplomacy" for economic enslavement. Pence, moreover, "detailed an integrated, cross-government strategy to counter what the administration considers Chinese military, economic, political and ideological aggressions."

As bad as these issues are for global financial and geopolitical stability, it's internal Chinese discontent that should be causing greater concern. Highlighting the BRI's destructive affects, Pakistan – one of the largest beneficiaries of BRI largess – has requested a bailout from the International Monetary Fund (IMF) "amid growing concerns that Beijing's program is pushing recipient countries into financial crisis." The Pakistanis are now being forced to court the Saudis to avoid additional crippling Chinese debt associated with the BRI and "pushing China to realign goals in its Belt-and-Road initiative." Now Europeans and Asians have joined "Washington's fight against Beijing's" state-run capitalism model that uses BRI as a weapon against lesser countries like Sri Lanka, Pakistan, and Malaysia. Free-market countries have a vested interest in blocking China's ascendancy and see real opportunities to gain market share from China. The "pushback" against China is real and ongoing.

China is also releasing over $175 billion of state credit to enhance commercial banks lending and pay down short-term borrowing debt. These actions are in response to the slowing economy resulting from the trade war, escalating with U.S. tariffs on $250 billion on Chinese goods and possibly taxing another $257 billion of products. To counter the U.S., the People's Bank of China has lowered reserve requirements for many commercial banks by one percentage point effective October 15. This is Beijing's latest effort to assist its ailing economy.

The Financial Times reported:

Chinese state-owned enterprises (SOE) have nationalized at least 10 privately owned groups this year, prompting warnings that the trend risks sucking the vitality out of China's economy.
Private groups in China instead of SOEs have suffered from Beijing's push to eliminate "debt and financial risk over the past 18 months upsetting the social and economic fabric of society that has enjoyed un-paralleled success since former President Deng's "Four Modernizations" program. But these actions also illustrate China's unwillingness to allow open trade and political freedom. The Chinese's recent actions in Hong Kong (a city in real trouble) – using the bullet train coupled with large infrastructure projects to tighten their grip and banning the city's Pro-Independence Party – demonstrate that the communist government is confronting serious issues.

Now Mexico, Canada, the E.U., Japan, and the United Kingdom have all agreed under the revised NAFTA agreement and in separate negotiations with the U.S. to "cut China out of trade deals with partners." This new "pivot" means that all countries have to notify the U.S. before trade negotiations with a "non-market economy" take place. This new NAFTA is a major setback to Beijing, trying to co-opt the U.S.-led post-World War II liberal order for its Marxist-capitalistic system. The world is confronting China using trade instead of guns for this new battle, and if Beijing doesn't change course there is the real possibility of economic, cultural, and political stagnation for decades ahead.

What from Washington is causing this new Cold War stance? As talks with North Korea falter and the South China Sea continues militarizing, Washington believes that it is challenging China in preparation for the multilateral summit in November between Trump and Xi. It seems to be working – from the Chinese economy's overreliance on exports to Xi's newfound respect for the U.S. under Trump – the U.S. is rewriting the global, geopolitical rules in a far-reaching campaign against Xi and Beijing.

What China understands about this U.S.-led fight is the wide disconnect taking place in the U.S. and its allies. China can still bully US allies at-will – evidenced by its recent deal with the Philippines – to control oil and gas resources in their waters. The U.S. has incredible job growth and a booming economy, but its political economy is fragmented and in tatters. But according to Foreign Affairs, "China's Return to Strongman Rule" under Xi's presidency for life means that badly needed reforms, political realignment, and ending systemic corruption won't be taking place in the near or distant future. Yet there is a striking dissonance and pessimism that fatigued Western leaders and their countries don't have the stomach for a new Cold War. What will win geopolitically is anyone's guess when it comes to China versus the world, with Trump at the forefront of this fight.

Todd Royal


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