China as a
Great Power
Remarks to China Renaissance Capital Investors
Ambassador Chas W. Freeman, Jr. (USFS, Ret.) | http://chasfreeman.net/china- as-a-great-power/
7 November 2014 Macau S.A.R. of China
7 November 2014 Macau S.A.R. of China
In 2012,
China’s now-paramount leader, Xi Jinping, invited President Barack Obama to
collaborate with him in developing a “new type of great power
relationship.” It wasn’t clear to anyone
what he meant by that. Perhaps he
himself didn’t know and was just calling for dialogue about how best to manage
a newly polycentric world order. But
whatever else it signified, Mr. Xi’s initiative was an announcement that China
– in its own eyes – has achieved the status of a great power and expects to be
treated as such. This change in
self-perception has been accompanied by a notable retreat from China’s previous
modesty about its status in both regional and global affairs. And this, in
turn, is altering foreign perceptions of China.
China’s growing
weight in global economic affairs is undeniable. A couple of months ago, the International
Monetary Fund (IMF) declared that China’s gross domestic product (GDP) had
passed that of the United States if adjusted to purchasing power parity
(PPP). Beijing immediately denied
officially that it was number one. After
all, at nominal exchange rates, China’s GDP is still just three-fifths of the
European Union’s (EU) and America’s. (It
could pass both as early as the end of this decade.) PPP equations are not very compelling when
you’re on the cheap, discounted end of them.
For now, the Chinese yuan doesn’t buy much that’s priced in either euros
or dollars. Chinese officials must also
have feared that accepting the status of the world’s top economy would
encourage some foreigners to stick their hands out in anticipation of giveaways
while others demanded global leadership China did not want to provide.
Demure as China
may be about its achievements, it is now a very big factor in the world
economy. It accounts for about one-fifth
of global industrial production. (Within
a decade, this could rise to one-fourth.)
One-fifth of the world’s internet users are in China. Their numbers are growing fast. By 2020, China is expected to have a middle
class population of 600 million. It will
have the world’s largest online market.
For the past decade, the Chinese economy has contributed one-third or
more of global growth. A 1 percent rise
or fall in China’s rate of growth now adds or subtracts 1/2 of 1 percent from
the entire world’s growth rate.
Despite its
remarkable achievements in recent decades, if China fails to carry out the
reforms it is currently attempting, its growth rate will fall significantly and
its future power will diminish accordingly.
It cannot hope under any circumstances to grow at ultra-rapid
rates. But, assuming its proposed
reforms take hold, China’s economy should continue to expand faster than any
other of its size and complexity. By the
centennial of the founding of the Chinese Communist Party (CCP) in 2021, it may
well have resumed its millennial station as the largest in the world in
absolute terms. And, given China’s
investments in developing its scientific and technological workforce and in
research and development, its qualitative impact on the world is likely to be
equally impressive.
Chinese spending
on R&D is now about two-thirds that of the United States but growing very
fast. It should overtake U.S. levels by
2022, when it will amount to about $600 billion yearly. By 2025, the Chinese scientific and
engineering workforce is projected to total at least 5.5 million persons. That is the equivalent of the S&T
workforce of all of the OECD countries today.
The total for “China” does not include the S&T workforces of Taiwan
and Hong Kong, which are increasingly integrated with those of the China
mainland. What’s more, over the past
three decades, China has exported a huge number of bright young people to be
educated in the West. Many have stayed
abroad and become major contributors to international science and
technology. (Any English-language
scientific journal one looks at today has a lot of cutting-edge articles
written by individuals or teams with Q, X, and Zh in their surnames.) These specialists may not live in China, but
they are in touch with colleagues there. Meanwhile, many foreign firms are
relocating their R&D facilities to China to take advantage of the
engineering and technical talent there.
Money plus
manpower combined with openness to international collaboration generally yields
results. It is too soon to judge what
China’s official focuses on biotech, information technology,
telecommunications, energy, lasers, materials science, robotics, space,
pharmaceuticals, and infrastructure will produce. The Chinese Communist Party (CCP) places its
hopes on China’s state-owned enterprises (SOEs). But that’s a mistake. China’s SOEs are, for the most part,
unregulated monopolies, with all the inefficiencies and management difficulties
that status implies.
The Party
slights the Chinese private sector for ideological reasons. Outsiders underestimate it because they
misunderstand the Chinese economy. In a
triumph of preconception over reality, both imagine that the mainspring of
Chinese growth and innovation is state rather than private enterprise. But it is the private sector that has been
driving Chinese economic expansion, job creation, business modernization, and
the development of new kinds of goods and services for both domestic and
foreign markets. Venture capital and
entrepreneurship in China’s private sector are now accelerating innovation in a
widening range of fields. Just ask cell
phone and other telecoms manufacturers
about this.
The
Indo-Pacific has over half the world’s population. It has already become the global center of
economic gravity. Its economies consume
more than two-fifths of the world’s energy and produce about one-third of its
exports. In PPP terms, the region
accounts for about 40 percent of global GDP, dwarfing the EU’s 23 percent and
America’s 20. Within the region, India
is now larger than Japan, contributing almost 17 percent of its economic
output. But China’s economy is over
twice as large as India’s, with more than 40 percent of the region’s
output. China has a great deal less to
be modest about than it once did.
China seems to
be on the way to resuming its historic status as a major source of the world’s
new technology, joining Japan and south Korea in this role. India is coming along too. But in terms of economic and technological
dynamism as well as supply chains, China is and will, for the foreseeable
future, remain the region’s hub.
This is in part
why one now seldom hears references to Deng Xiaoping’s recommendation that
China 韬光养晦 (“taoguang
yanghui.”). This is a phrase that has been mistranslated to sound sinister: “to
hide one’s capacities and bide one’s time.”
It’s actually a line from a poem by a 2nd century official
who advised colleagues retired by the emperor to “shroud their brilliance and
cultivate obscurity.” In other words,
strive to be unobtrusive. That’s always
been a good way to stay out of trouble.
But it’s hard to remain self-effacing when you’re on a roll.
And it’s even
harder for China to continue to sit humbly on the sidelines when its peers –
the world’s established economic powers – are unable or unwilling to address
issues that matter greatly to its present and future prosperity. The Chinese have become key participants in
the so-called “free world” – the capitalist economic order created by the Pax
Americana. But the United States is now
afflicted with unprecedented partisan gridlock and political paralysis. America’s domestic dysfunction has infected
the international institutions it created and for long led. Like the government in Washington, these
institutions are now unable to set priorities, make strategic choices, or
manage change. Europe is almost as
stagnant, stodgy, and self-absorbed. Mr.
Abe’s “three arrows” of domestic Keynesian stimulus and regulatory reform
notwithstanding, Japan is no better. The
resulting international leadership vacuum has made it impossible for China to
remain disengaged from key questions of global and regional governance.
Institutions
like the exchange rate and reserve management systems of the IMF and the
lending programs of the World and regional development banks need to evolve to
remain competent, relevant, and responsive to the massive changes now underway
in the global economy. But the
governance of these institutions no longer reflects the actual distribution of
global capital and commerce. Existing arrangements
exclude the largest and fastest growing stakeholders in these institutions from
roles in decision-making commensurate with their shares in the global
economy. As a result, the international
system lacks the capacity either to adapt to altered circumstances or to react
effectively to emergencies. The key
institutions of the Pax Americana have not met the changing demands of a world
no longer dominated by the developed economies of the West. The United States retains the strength to
lead the world in making necessary adjustments.
It still claims pride of place in shaping the evolution of affairs at
both the global and regional levels.
But, so far this century, it has lacked the inventiveness and strategic
vision as well as the decisiveness and capital to do so.
China is in the
midst of yet another major reordering of its economy. The difficulty of accomplishing this amidst
a recession in the Organization for
Economic Co-operation and Development (OECD) countries has underscored to
China’s leaders how dependent on the continued growth and prosperity of global
markets their country has become. China
is the world’s greatest trading power.
It is not only the world’s greatest exporter of manufactured goods but
its largest importer of commodities. It
has a big stake in the soundness and efficiency
of global transportation infrastructure.
China’s prosperity is linked to the growth of other so-called “emerging
markets” as much or more than it is to the established markets of the developed
world.
Outbound
investment from China now exceeds the flow of foreign direct investment to
it. China has a vital interest in
continued global growth and an expanding role in the world economy. It needs a prosperous international
environment as much as it needs a peaceful one. China cannot afford to remain
aloof from the reshaping of international arrangements to support these
objectives. Chinese have been frustrated
by the American default on reform of existing arrangements to meet the emerging
challenges of the 21st century.
The Chinese are not alone in their exasperation at this.
China and other
newly powerful participants in the globalized economy of the 21st
century have not given up on legacy institutions, but they have lost patience
with U.S. procrastination and have begun to supplement existing arrangements
with their own. The Asian Development Bank (ADB) has estimated that to optimize
growth the region needs at least $800 billion in annual investment in
infrastructure. In early May, China
took the lead in establishing an Asian Infrastructure Investment Bank (AIIB) to
address infrastructure modernization and expansion requirements that the ADB
has been unable to meet. The AIIB came
into being on October 24. It has an
initial capitalization of $50 billion – most of it contributed by China – that
is expected fairly quickly to grow to $100 billion, making it two-thirds the
size of the ADB. The AIIB’s
second-largest shareholder is India. A
similar bank is contemplated to serve the members of the Shanghai Cooperation
Organization (SCO).
World Bank
lending has lagged as the United States, Europe, and Japan – which dominate it
– have proven unable or unwilling to expand it.
In July, China joined with Brazil, India, Russia, and South Africa – the
so-called BRICS countries – in chartering a New Development Bank (NDB) to
supplement World Bank investment in infrastructure with authorized lending of
up to $34 billion annually. Each of the
founding countries will contribute an initial $10 billion in capital, for a
total of $50 billion, rising later to $100 billion. Each will have one vote. Unlike the World Bank, where the United
States has a veto, no member of the NDB will have veto power.
From the
perspective of the so-called “emerging markets,” the Fed’s on-again off-again
program of “quantitative easing” has been indistinguishable from currency
manipulation. So in July, the BRICS also
created a Contingent Reserve Arrangement (CRA),
This is a framework to limit the impact of domestically dictated U.S. monetary
policies on developing country economies and to provide protection against the
economic volatility these insouciantly cause.
The CRA parallels and supplements the IMF. Its initial capitalization is $100 billion,
of which China is contributing $41 billion.
It will start lending in 2016.
Meanwhile, in part due to
obstruction by India, the World Trade Organization (WTO) is no longer able to
achieve the liberalization of global trade and investment regimes. This has led to efforts to accomplish this at
the regional level. As a case in point,
Beijing has stepped up efforts to establish a Regional Comprehensive Economic
Partnership (RCEP) for the Indo-Pacific.
RCEP would bring together Australia, China, India, Japan, south Korea,
New Zealand, and the ten member countries of the Association of Southeast Asian
Nations (ASEAN) in a single free-trade area.
It would include 46 percent of the world’s population, 40 percent of its
GDP, and most of its fastest-growing large economies. China would, of course, be the heavy hitter
in RCEP. The United States would not be
part of it.
China is also pressing for a Free
Trade Area of the Asia Pacific (FTAAP) that would embrace all members of the
Asia-Pacific Economic Cooperation (APEC), including the United States and
Canada. The U.S. has resisted this
proposal as a distraction from Trans-Pacific Partnership (TPP), which excludes
China despite its status as every other participant's largest trading partner. China has pushed to make its inclusive
proposal a main topic of discussion at the current APEC summit in Beijing.
These initiatives meet real needs
that existing institutions have not met and have no prospect of meeting. In taking remedial action, China is acting
like the "responsible stakeholder" in the international system it has
become. The official U.S. reaction has
nonetheless been churlish. American
lobbying appears to have delayed Australia, Indonesia, and south Korea
decisions to join the AIIB. All will eventually
do so in order to avoid strategic isolation in an increasingly Sino-centric
Asia. U.S. opposition and dissociation
from Chinese-led institutions just deprives Americans of influence and
participation in investment programs of great importance to global and regional
development. It erodes rather than
reinforces the standards and lending criteria the United States has
traditionally favored. Of course, there
is also no reason to rule out the eventual merger of the new institutions with
the old.
Washington’s peevishness about the
creation of institutions that it and its allies do not dominate and cannot
control is understandable if not a little pathetic. The locations and leaders of the new
institutions clearly symbolize both a trend toward Indo-Pacific leadership in
global finance and the emerging centrality of China in global and regional
affairs. The ADB may be headquartered
in Manila but it has been dominated by Japan and the United States. The European and American-dominated IMF and
World Bank are based in Washington. The
AIIB has its headquarters in Beijing but includes members from South, Central,
and West Asia as well as the Asia-Pacific.
It will be led by an experienced Chinese financier. The main office of the NDB will be in
Shanghai. Its first president is to be
from India. After a couple of bad
centuries, the Indo-Pacific is back at the center of global affairs.
Meanwhile, the deterioration of
U.S. and EU relations with Moscow is driving Russia away from Europe and closer
to China. This too underscores the
extent to which a Sino-centric order is emerging on the Eurasian landmass. This nascent order is not structuring itself
the way the post-World War II Pax Americana did.
So far, Chinese-sponsored
amendments to the existing state system are taking the form of loose
associations rather than alliances. They
have no leadership hierarchy, weighted voting, or great power vetoes. They are not supranational organizations. The
SCO, which is the closest thing to an alliance that China has contracted, acts
as a club directed at countering terrorist and secessionist activities. It conducts military exercises but has no
agreed command structure and embodies no mutual defense commitments. Its members share no political philosophy
other than the principle of non-interference in each other's internal
affairs.
The BRICS and the Conference on Interaction and Confidence
Building Measures in Asia (CICA) are egalitarian consultative groupings rather
than organizations. They facilitate but do not require cooperation and embody
no client state or satellite relationships.
They also have no ideological identity or aspirations to develop
one. They include almost every variety
of political system – from China’s Leninism with Confucian characteristics to
India’s rowdy democracy, the presidential dictatorships of Central Asia, the
sultanates of Arabia, and everything in between.
The groupings in which China has
begun to involve itself are classic examples of cooperative diplomacy. They connect participants to China but have
none of the attributes of spheres of influence.
They emphasize the sovereign independence and equality of states,
consistent with the Chinese and Indian-formulated “Five Principles of Peaceful
Coexistence.” China does not claim or
assert primacy within them. The new
financial institutions Beijing has helped create are consistent with this
pattern of ideological neutrality and decision-making by consultation rather
than at Chinese direction.
China is, in effect, working toward
new patterns of relationship with other powers, great and small and near and
far. President Xi Jinping’s proposal for
“a new kind of great power relationship” appeared initially to be directed only
to the United States. But it soon became
apparent that the concept was unworkable unless it was applied to China’s
relations with other great powers as well.
China’s not-unreasonable objective is to reshape the international order
to ensure that it is responsive to its concerns.
China has shown no desire to
dominate emerging institutions and arrangements. Still its size and dynamism are such that it
is a preeminent presence in any grouping it joins from which the United States
is absent. That makes other participants
uneasy. In the case of a country as
colossal as China, the distance between being dominant and being perceived by
smaller neighbors as domineering is not very large.
China is the new heavyweight in the
Western Pacific. It is in this context that its recent activities in the East
and South China Seas have alarmed Filipinos, Japanese, and Vietnamese. Chinese see themselves as belatedly reacting
to inroads by others into places they have claimed without challenge since
ancient times. Others see China as
trying to bully them into leaving places they currently control and believe are
rightly theirs.
China’s recent patrol-boat
diplomacy on these disputes in the East and South China Seas has altered its
image in the region and around the world.
In the past, China was often represented abroad by the symbol of a panda. Now it is invariably shown as a dragon. This is not a friendly image. Even the best-intentioned of dragons is
intimidating to those smaller than it.
Not surprisingly, China’s smaller neighbors have begun to band together
to constrain it. Most have also actively
sought American support to balance it.
Some Americans are eager to
respond. Their motives vary. Some wish to hang onto the politico-military
supremacy the United States has enjoyed in the Asia-Pacific since the defeat of
Japan in World War II. Many see it as a
matter of national honor to answer requests for back-up by allies and client
states. Some are gratified that, despite
many troubling changes in the global situation, the United States is still
recognized as indispensable to regional order.
And some see China as a potential global rival whose power must be
curtailed in its region before it becomes irresistible. They seek to assure that Chinese power
remains checked by a continuing robust military presence in the region. Many are in denial about the shifting
balances of economic power, military prowess, and political influence that have
marked the post, post Cold War period.
By any measure, the return of China
to great power status is a momentous development. It is not surprising that it has raised many
questions about how China will behave and what kinds of relationships it will seek with others in its
region and beyond. Politics in the
Indo-Pacific region have never been so intensely nationalistic. China’s neighbors must learn to live with a
China that is no longer weak, poor, or vulnerable. Beijing must learn to deal sensitively with
neighbors who are outspokenly apprehensive about China’s new military strength,
economic power, and occasional hauteur.
None of this will be easy.
China’s interactions with its
neighbors have a decisive effect on its relationships with countries farther
away. In this context, China has an
urgent need to craft a “new type of great power relationship” not just with the
United States but with other potential partners or adversaries, like India,
Indonesia, Japan, the Koreas, Russia, the EU, and Brazil. What sorts of
relationships will these be? Will the
new, polycentric world – in which China will inevitably sit on the board of
directors – operate under rules or without them? If there are rules, who will make them? We do not yet know the answer to these
questions, but they are important. If
there are no rules, every country, including China, will have no choice but to
derive its political power from the barrel of a gun. The norms of international law have been much
violated in the early years of this century.
We must hope that the new relationships being forged among the world’s
and the Indo-Pacific region’s great powers will help to bring about the
reinvigoration of these norms rather than their final passing.
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