“API Geoeconomic Briefing” is a weekly analysis of significant geopolitical and geoeconomic developments in the post-pandemic world. The briefing is written by experts at Asia Pacific Initiative (API) and includes an assessment of burgeoning trends in international politics and economics and the possible impact on Japan’s national interests and strategic response. (Editor-in-chief: Dr. HOSOYA Yuichi, Research Director, API & Professor, Faculty of Law, Keio University)

This article was posted to the Japan Times on November 26, 2020:

https://www.japantimes.co.jp/opinion/2020/11/26/commentary/world-commentary/west-china-future/

API Geoeconomic Briefing

November 26, 2020

Why the West continues to get China’s future wrong

TOKUCHI Tatsuhito,
Senior Fellow, Asia Pacific Initiative (API)

 

 

 

A book by Michael Pillsbury, the leading American authority on China, drew attention around the world when it was published in 2015, serving as a wake-up call on China’s supposed secret strategy to replace the United States as the global superpower.

In the book, “The Hundred-Year Marathon,” Pillsbury writes that Washington has helped Beijing catch up on the world stage for more than 40 years, believing that the nation will emerge as a democratic and pacifist superpower. But the U.S., in fact, has been seduced into helping China implement a secret strategy to overtake the U.S. as the world’s dominant power by 2049, the 100th anniversary of the founding of the People’s Republic.

While this notion has since become a common view in the U.S., it is something of a misapprehension, as no particular era or incident in history is inevitable.

To see the reason behind this, we must take the long way around and look back on the history of China’s reform and opening-up policy since the 1966-1976 Cultural Revolution.

 

Reform 1.0 (1979-1992)

China’s first stage of reform was launched to rebuild its economy, which was devastated by a decade of upheaval during the Cultural Revolution.

The reform initially began by giving greater authority to state-owned enterprises, but it had little effect at a time when commodity markets didn’t exist. Then-Chinese leader Deng Xiaoping, therefore, shifted the focus of the reform to rural areas.

What happened in rural farming villages was use of the household responsibility system — allowing farmers to produce by themselves and be responsible for their own earnings and losses. It was similar to the system introduced to aid farmers who were worn out under the Great Leap Forward campaign in the 1950s, and resulted in a sharp productivity increase in rural villages.

The government also promoted the establishment of collectively-owned township and village enterprises (TVEs), leading to numerous TVEs springing up in sectors that matched the needs of the local economy, such as agricultural machinery, food processing and civil engineering and construction.

Such enterprises are said to have absorbed surplus labor totaling 100 million in a decade, occupying 35.6% of the nation’s total industrial output in 1990, or 45.4% including production by the private enterprises, foreign firms and joint venture companies that were gradually approved.

Such a trend differs from the situation in the former socialist economies of Eastern Europe.

Deng also set up special economic zones in coastal regions such as Shenzhen in Guangdong province and Xiamen in Fujian province, where incentives were offered to attract investment by foreign firms and overseas Chinese.

In the early 1980s, Hitachi Ltd. built a television assembly factory in Fujian and Sanyo Electric Co. established an electrical appliances manufacturing plant in Shenzhen, drawing much attention.

There was no specific guideline for the reform, but there was a basic strategy, reflected in Deng’s three famous dictums — “Hide your capacities and bide your time,” “Cross the river by feeling the stones” and “It doesn’t matter whether a cat is black or white, as long as it catches mice.”

It is a practical strategy. In short, it means a nation should not have ambitions that don’t match its abilities because a stable external environment is necessary for economic growth. It also means that it should try everything it can, but with caution.

Deng’s reform can best be characterized as a “planned economy with something extra,” with the government starting from areas easier to work on and avoiding conflict by using incentives.

As a result, China created a dual-track economy in which two systems ran parallel to each other — the existing socialist planned economy, in which the government controlled production plans, financing and purchasing of manufactured goods, and the market economy under a new market mechanism.

The Chinese economy grew significantly under the dual-track system, but it also brought about contradictions.

Economic disparity grew between urban and rural areas and between coastal and inland regions. Widespread “rent seeking” — companies lobbying the government for investment approvals, loans or use of land, and officials profiting by selling access to land and other resources — and serious corruption involving senior bureaucrats and members of the Chinese Communist Party, as well as their families, were seen.

In the latter half of the 1980s, the Chinese government lifted price controls, causing hyperinflation that triggered increased public dissatisfaction with the government.

That was when the June 1989 Tiananmen Square protests occurred, which led to the suspension of those reforms. It is not easy to evaluate the incident in one word, but it is clear that it was caused by differences in the leadership’s views toward political and economic reforms.

 

Reform 2.0 (1992-2012)

Even though Beijing forcibly brought back social stability after the Tiananmen incident, its economic growth remained stagnant.

All eyes were on whether or not the nation would continue its policy of opening up and reform. Contrary to the expectations of many Western countries, Deng, who was 87 at the time, decided to conduct full-scale reform to shift to a market economy to achieve a breakthrough in the deadlocked situation.

At the beginning of 1992, Deng delivered a series of speeches during his famous tour to southern China, inspecting the cities of Wuchang, Shenzhen, Zhuhai and Shanghai. The series of talks was known as the South Tour Speeches.

“Development is the absolute principle,” Deng said.

“Whoever doesn’t reform will have to step down,” he went on, stressing his determination to quell the influence of conservatives in the Chinese Communist Party and press for further reforms.

His remarks again boosted nationwide momentum for reform and opening up. In October 1992, at the Chinese Communist Party’s 14th National Congress, the formation of the socialist market economy was designated as a national goal, with the government, companies and society working together to promote reforms in fiscal and taxation systems, financing, foreign exchange control, state-owned enterprises and social welfare.

While the party retained socialist development rhetoric, its reforms, in fact, pushed the transition toward a full market system.

Seeing China making a major turn toward a market-based economy since 1992, countries such as the U.S. resumed negotiations on China joining the World Trade Organization.

In order to join the WTO, a nation has to agree to a number of obligations, including market liberalization, deregulation on direct investments, strengthening the protection of intellectual property rights and enhancing its legal systems.

A bilateral agreement between the U.S. and China, in particular, included a number of numerical targets to open up the latter’s market and a roadmap to achieve them, effectively signifying China’s commitment to the international community.

In that sense, the significance of China joining the WTO is equivalent to Deng’s South Tour Speeches.

After joining the WTO, China’s economy became more open to the outside world, causing large growth in its GDP, trade and investment, leading it to become known as “the world’s factory.”

Although there were obviously obstacles and some opposition, the first half of China’s second phase of reform proceeded more or less smoothly, thanks to: a relatively clear consensus among the leadership on the need to conduct reform to get out of the crisis; a team of talented pro-reform bureaucrats with theory and passion led by Zhu Rongji and the need to work toward an international commitment to join the WTO.

However, reform efforts dwindled in later years when Hu Jintao was in power, from 2002-2012, especially after the 2008 global financial crisis, even leading to the “state companies advance and private firms retreat” phenomenon, in which state companies became so big that they hindered the business of private companies.

One reason was because most of the reforms had been put into practice, bringing about high economic growth. But the biggest reason was because vested interest groups existed everywhere, pinning down government agencies and leaving political reform behind.

This led to various problems. Chinese authorities had believed that if the economy grew, the gap between the rich and the poor, as well as urban and rural areas, would narrow. Instead, it widened. The problems of an insufficient social welfare system, worsening environmental pollution and massive debt — more than twice as much as the nation’s GDP — caused by excessive investments in infrastructure also surfaced.

The structural issue of a rapidly aging population also became prominent.

Wu Jinglian, an influential Chinese pro-market economist, pointed to such structural problems in the early stages of the reforms and proposed the so-called “top-level design for China’s reforms,” taking direct aim at the political system.

In a 2004 book on Chinese economic reform, Wu said there were two prospects for China’s reform: a market economy under the rule of law, and a new class of people colluding with power and monopolizing wealth.

His warning reflected the need to return to Deng’s idea of “It doesn’t matter whether a cat is black or white, as long as it catches mice.”

 

Reform 3.0 (2012-today)

Xi Jinping, then vice president, was calmly watching the severe situation, and the world was waiting to see how Xi would cope with it.

There were only two ways to break the status quo, either by conducting drastic political reform under the rule of law or by exercising authoritarianism. Xi chose the latter.

Xi, who was elected as the Chinese Communist Party’s new chief at the 18th National Congress held in November 2012, launched a fierce anti-corruption campaign, with the Central Commission for Discipline Inspection led by Wang Qishan working as the driving force, targeting officials in the party including both high-ranking officials (“tigers”) and low-level bureaucrats (“flies”).

In the five years after the congress, more than 50 senior officials — including Zhou Yongkang, a former security chief and member of the Politburo Standing Committee — as well as 57,000 party members of different levels were punished, contributing to the leadership winning public support.

The campaign was also a political reform in the sense that it came along with drastic restructuring to centralize power within the party. Xi conducted rectification of all of the party’s organizations nationwide, including the party’s Central Military Commission and Leading Groups.

In May 2015, when China was in the midst of the political reform, I met Wang along with Francis Fukuyama and Masahiko Aoki of Stanford University.

At that time, Wang described the severity of China’s ongoing political reform as the Communist Party performing a surgery on itself, offering as a likeness the case of a Russian surgeon who cut out his own appendix in Siberia (although in reality, it seems that it has happened in Antarctica). Wang must have been determined to carry out drastic reform.

Xi’s way to lead the country in “the new era” is based on nationalism and digital Leninism. He is aiming at realizing a highly controlled society that matches his “Thought on Socialism with Chinese Characteristics,” using AI and digital technology under the Communist Party’s top-down leadership to achieve the “great rejuvenation of the Chinese nation.”

While the targeted structure of the society is similar to China’s centralization of power and bureaucracy that lasted for 2,000 years after the Qin dynasty, it differs from past regimes in that it is backed by cutting-edge technology and economic power.

It is not easy, however, to implement such reform in today’s China, as people are now allowed to own assets and their way of thinking has largely changed.

As for its foreign policies, China is advocating common values, such as the Belt and Road initiative and Xi’s vision of building a “community with a shared future for humankind,” as well as multilateralism.

At the same time, China has increasingly been taking geoeconomic actions, offering aid to friendly nations while exerting economic pressure on countries it is dissatisfied with.

But such moves have not been working so well.

Following the COVID-19 outbreak, Western nations came to be strongly aware of their differences with China in terms of values and systems, and are rethinking their relationship with the country.

Geopolitical and geoeconomic threats posed by U.S.-China relations are leading to prolonged instability, and focus in international politics is shifting from international cooperation or value-oriented diplomacy to the balance of power.

It is not easy to precisely forecast the future of China. But it does not mean reforms under the rule of law, advocated by reformists, have died down.

Reforms in the past were made possible when the nation needed change and there was a leader who acted with a strong determination to change. Such cases occurred many times in the past and will definitely happen in the future.

Pillsbury says China will do anything for its clear ambition of realizing the “China dream.” His view is that although there are both hawks and doves in the country, they are just changing their stance externally and are essentially the same.

People in China have different dreams and different views on ways and principles to achieve them.

All the past reforms — reform 1.0 that emerged from the devastating Cultural Revolution, reform 2.0 built on the bloody legacy of Tiananmen Square and reform 3.0 of the new era, born from a country that has become gigantic — have experienced many twists and turns, and none of them went smoothly on a straight path.

Chinese writer Lu Xun said, “There was never a road, but when many people walk on it, the road comes into existence.” Usually, conditions and factors that make up an era have existed before the era started, but they were chosen by the people.

The path, or the direction, of an era was created as the 1.4 billion people and the leadership made choices through conflicts in beliefs, stances and interests, and as they continued to walk on that path.

We have to keep in mind that we are facing such a superpower. If we start from assumptions, our actions will definitely backfire. In such cases, we should be the ones to blame, not China.

 

Disclaimer:
The views expressed in this API Geoeconomic Briefing do not necessarily reflect those of the API, the API Institute of Geoeconomic Studies or any other organizations to which the author belongs.