A Note by the Director Ditchley 15/07
18-20 June 2015
The last conference of the 2014/15 season saw Ditchley – in balmy weather – taking a look at the future of China, and how far continued rapid economic growth did or did not depend on political reform. We had a diverse group around the table, though in an ideal world we would have liked more Chinese and other Asian participants. The range of views and perspectives helped produce a particularly rich discussion, but did not necessarily aid consensus in some areas. Nevertheless the debate, and expert chairmanship, helped bring out where the alternative possibilities for the future of China are to be found, while alerting us to the perils of too many easy generalisations about such a vast and diverse country.
The Chinese economy was in a period of slowdown, for a mixture of structural and cyclical reasons, and could even be growing by as little as 4% at the moment, despite the 7% official number. Another monetary stimulus would not be a good idea, but targeted fiscal stimulus might be needed at some stage. Many reforms were under way, but many more were still needed – the transition to a consumption-led economy had not yet happened, and the dangers of overinvestment and overcapacity were clear. Corporate and local indebtedness was also particularly high, though views differed on how serious a problem this was. The main challenge was to reduce the role of the state and increase that of the market. A key part of this would be State Owned Enterprise (SOE) reform, but there were still internal disagreements about the details, and resistance from vested interests. Other major issues were corruption, inequality, the impact of demography, the high costs of environmental damage, financial sector reform, and changes to the tax system.
We did not expect a short-term crisis or hard landing, but the future challenges for an economy in transition were probably harder than those already successfully tackled, and it was not clear that China would be able easily to escape the middle income trap. One key question for the conference was whether its current political system was better-placed to achieve this than other possible future variants. Meanwhile, many in China were beginning to worry more about the quality of growth than the quantity.
Our discussion about political reform was not made easier by different definitions. We were agreed that reforms to make the Chinese government work better were required, but the issue was whether political reform in the wider sense of loosening the party grip, and greater democratisation, was necessary to allow the Chinese economy to go on growing at the rates it needed to; and/or whether growing prosperity would in any case lead to irresistible pressure for such loosening and greater involvement by Chinese citizens in how they were governed. For now the movement was in the other direction, with a clamp down on possible dissent of any kind except in economic/social areas considered ‘safe’.
Some thought that the economy could not continue to modernise and innovate in the absence of more freedom of expression and thought, including in political areas. Top-down change could not be enough, and a rigid one-party system would not be well-placed to cope with inevitable shocks to come. Others took the opposite view: the economic and social challenges to come were so significant that China could not afford the distraction of democracy. The dangers of chaos and disintegration in a country so vast and diverse were in any case too great, certainly at this stage in the country’s development. We could not resolve this disagreement, but there was nevertheless a view that a watertight wall between the economic and political worlds would be impossible to maintain over time, particularly as Chinese companies and individuals interacted increasingly with the outside world and its different standards and norms. The Chinese people had never had it so good in living memory, but eventually comparisons would be made less with what had gone before, and more with what happened elsewhere.
Which international trends or developments could make a big difference to China’s economic trajectory? China needed a peaceful and prosperous region and outside world to continue her own development, and should therefore be interested in not rocking any boats too hard. There was little sign that China wanted to blow up the existing system and replace it with one more to her liking, though she wanted greater weight within current institutions and was also ready to create parallel structures where necessary. The Asian Infrastructure Investment Bank and One Belt, One Road initiatives should be seen as at least as much driven by domestic economy needs as geopolitical calculations. This did not mean economics would always trump politics, as we could see from Chinese assertiveness in the East and South China Seas. But China would probably continue to be an evolutionary, not revolutionary power. The one element which could change this was poor management of the hugely important but highly tricky relationship between Beijing and Washington. Avoiding the ‘Thucydides trap’ was crucial, but resentment, misunderstanding and fear in either or both capitals could lead to bad outcomes. Opinion in Washington seemed to be hardening in favour of a thesis of inevitable strategic rivalry. This was risky. A policy which sought to constrain China’s rise rather than accommodating its legitimate aspirations could easily be counterproductive.
We did not reach neat conclusions about the future but we were clear that China’s continued success was in all our interests, uncomfortable though it might be for the West in some respects. It was also clear that a China which continued to be successful held up an awkward mirror to western observers through its apparent challenge to western models and values, even though Chinese soft power was likely to remain limited as long as its current political system remained in place. Could China in fact develop a unique model, not very positively characterised as ‘responsive authoritarianism’, allowing it to combine economic modernisation with sufficient popular consent? Most around the table seemed to doubt it, particularly in the longer term, but the experiment would be worth watching. Meanwhile, was contemporary China in fact becoming more like a middle kingdom dynasty of the past, with a light sprinkling of socialist rhetoric? The difference was that today’s China was increasingly integrated into the rest of the world, which made resisting change much harder.
China’s economic prospects
We started by examining the Chinese economy – where it was now and where it might go next. There was no doubt that it was in a period of slowdown, but to what extent had it already slowed, and how long might this period last? And how much was the slow-down due to structural problems and how much cyclical? Views differed widely. But there was little or no expectation that growth rates would go back up to 10% per year, and a perception that 10% or more would in any case take the country straight back to overheating. The present official growth aim, and claimed current rate, of around 7%, seemed sensible and reasonable. Growth of between 7% and 9% would enable national wealth to go on rising fast enough to continue to reduce poverty, and keep most incomes moving upwards. However, it was suggested by some participants that current growth could already be no more than 4%, whatever the official statistics might say, to judge by what seemed to be happening in terms of debt, imports and exports, and chronic overcapacity in some sectors. If this were true, how far should it be seen as a problem? Should it be regarded as a positive sign that growth had in fact slowed well below the magic 7% figure, without provoking the catastrophic social and political consequences some had foreseen if this were to happen? Or did the current political crackdown on any signs of dissent reflect the party’s concern that China was already in a potentially difficult period where strong discipline and control at the centre would be especially important?
We had no easy answers to these questions, but it was clear that the necessary shift from investment-driven growth, focussed on infrastructure and industrial/export capacity, to the consumption-driven model everyone agreed was needed, had still not really happened, and that structural changes were required, given the stage the Chinese economy had now reached. The default mode, if trouble threatened, especially at local level, was still to throw more money at big projects and real estate, to keep the wheels turning, even though everyone knew the returns were diminishing all the time. Meanwhile the Chinese population continued to save, even though per capita income remained low. Would the government be tempted to resort to further monetary stimulus if growth really was slowing or had already slowed below 7%? The experts seemed to think not. The stimulus of 2009 was now widely seen as a mistake which had created the asset bubbles now visible in the economy. If further stimulus was thought to be needed at some stage, it was likely to be fiscal stimulus, based on helping particular industrial sectors, for example in the environmental field.
In any case, there was agreement that further policy reforms were needed and that current reforms needed to be implemented. The current government was determined to drive through its programme of change, and seemed to be strong enough to do so. The biggest single challenge was probably the reduction of the state’s control over much of the economy, so-called marketization. Although there was certainly now a thriving private sector, with 70% of new jobs coming from private companies, the hand of the state was still felt over most of the economy, which did not help advance change through the discipline of market mechanisms, or innovation. The weight of the State Owned Enterprises (SOEs) was in practice greater than the 30% of GDP they represented in principle, because of the key sectors they occupied. Overall the SOEs remained loss-making, but it was a varied picture and some were doing well. Change was under way, through divestment of some shares to asset management companies, and the creation of cross-holdings, but full-scale privatisation remained unlikely for now, except perhaps in some of the smaller SOEs as pilots. The large so-called natural monopolies were not likely to be challenged for now. Governance standards were still a problem, but improvement was visible in those more exposed to international markets and international norms. There was still a debate going on within the government about the real aim of reform of the SOEs, and exactly how to go about it. What was more important: ownership or control? Or could the state manage without either in many areas? Vested interests were clearly part of the problem here. Current monopolies needed to be broken down, and more genuine competition introduced.
There were other major challenges, of which the most obvious was debt. Corporate debt and local government debt in particular were at historically high, and worrying, levels, and still rising. Relatively high interest rates meant the cost of servicing this debt was also very high, particularly compared to the rate of return of the infrastructure which the debt had mostly financed. Some thought this boded ill for the economy’s growth prospects, but others thought the problems were manageable. The debts had after all been incurred to fund practical projects which would benefit the economy. Demographics and the ageing of the population were also fundamental issues. They would lead to greater investments in areas like health and pensions, but extending welfare coverage to all those who needed it in principle was unaffordable in present circumstances. The relaxation of the one child policy had not so far seemed to have much effect on the birth rate but it was still very early days. The retirement age needed to rise, but this was not likely to happen soon. Meanwhile another worrying demographic consequence of the one child policy was the gender imbalance of men over women.
Reform of the financial sector was well under way, but much more was still needed. The banking sector needed more reform, to reduce the dead hand of over-regulation, but it was difficult when the state was often both owner and regulator. The domestic capital market needed an overhaul. This had helped the rise of the shadow financial sector, which was compensating for the weaknesses of the official sector, for example by lending to private entrepreneurs. A lot of innovation was now under way, with new financial products emerging every day. How much of a problem was the fact that the shadow sector largely escaped regulation? This was hard to say. Much of their activity was above board, helping mobilise official funds, but there were undoubtedly some bad apples and scary proposals around. One problem was that the success of shadow financial vehicles often depended on access to senior officials, which in turn tended to favour corruption and lack of transparency, and the cronyism which some saw as one of the system’s biggest weaknesses. More fiscal reform was also badly needed, to enable the state to be able to count on tax receipts from normal VAT and corporate tax, rather than relying on money taken from the SOEs, but again this was a slow process.
Renminbi internationalisation was proceeding apace, with the RMB now said to be used for over 30% of trade between China and the rest of Asia, and new centres for RMB use being set up around the world all the time. The acceptance of the RMB into the SDR basket was being actively pursued by the Chinese government. However, there was still a major question hanging over the process: would the Chinese authorities accept full opening of the capital account, with the attendant risks of volatility in flows both into and out of China? The answer seemed to be no, at least at this stage, which in turn raised questions about whether the RMB could become a genuine international reserve currency in the short term.
One big threat to economic growth was the impact of environmental degradation across the country. This went far beyond air pollution in Beijing or Shanghai, serious though this was, covering for example food scandals, pollution of ground water, continued insensitive urban expansion, and rising cancer rates. It was estimated that the current cost of environmental problems could represent up to 7% of Chinese GDP. The risks of long-term water shortage in the northern provinces were now especially high. Increased weather-related disasters because of the effects of climate change were already a reality.
We asked ourselves to what extent China was losing its international competitive edge in traditional manufacturing, as cost structures rose, traditional sources of extra labour from the countryside dried up, and the demographic tipping point was reached. There was no doubt in general that this was happening, and that there was a move both towards reshoring to developed countries, worried about higher costs and long, vulnerable supply chains, and towards transfer of some basic manufacturing to lower cost countries, mainly elsewhere in Asia. Views differed on how far this would be a serious problem for the Chinese economy, with Chinese participants confident that it would not, not least since Chinese companies were increasingly investing abroad themselves.
Against this background, what were the chances of some kind of short-term crisis or a hard landing? The possibility could not be excluded, but most around the table thought it unlikely. The Chinese leadership had shown itself capable of managing huge challenges in the last thirty years. Why should we think it would not be able to manage the challenges of the next thirty as well? Some cautioned that the future challenges would be much more difficult than those of the recent period. New sources of growth were needed, which meant different kinds of reforms and more subtle and nuanced approaches. Pronouncements about policy from the top in an apparently arbitrary fashion, and a continued monopoly of power by one party, did not look well-placed to cope with the more complex challenges of the modern economy China now was. Others pointed out that policy announcements were in fact based on research and intelligent consideration, and that there were feedback mechanisms to allow for correction when policies were not working.
How likely was China to be able to break out of the middle income trap? There was no easy answer to this question. The countries which had done so successfully and peacefully so far were relatively few, and the most obvious examples such as Singapore were much smaller and more manageable than China. In any case we should continue to remember that, whatever the size of China’s overall economy, its size per capita remained far behind even that of modestly successful developed economies. China still had a huge distance to go.
An issue which we looked at but did not consider in depth was the nature of economic growth. The key thing for many Chinese people now was not the percentage of annual growth but its quality. Did it lead to better living standards, increased equality, less corruption, and an improved environment? These were much harder to measure than quantitative changes but no less important for that. Not everything could be judged by numbers and the fulfilment of five year plan targets, or plenum pledges.
Links between political reform and economic growth
This was the heart of our discussion. But debate was plagued by the lack of an agreed definition of political reform. Chinese participants were inclined to talk in terms of administrative change and policy reform, to make things work better – in other words improved governance. There was no doubt that such change was needed, and that the government were determined to effect it in various areas. There were questions about how far necessary change would prove possible when it involved taking on vested interests, as it often did, but this could in a sense be regarded as a question of political will by the leadership.
Other participants were more inclined to talk about political reform in a broader sense, i.e. the loosening of the monopoly of the Chinese Communist Party (CPC), the opening up of personal freedoms, greater transparency, and greater involvement of people in how they were governed. There was no one definition of such reform, even in the West, and change in China would not necessarily, or probably, lead to anything resembling western-style democracy – we should be careful not to judge what happened in China just by western criteria. But any such change would mean a major shift from the current approach. We noted that, far from any loosening up, President Xi Jinping was now presiding over a crack-down on any kind of dissent or thinking different from that of the party, except in a few ‘safe’ economic/social areas, which cast into severe doubt previous assumptions that China would gradually open up politically as it became more prosperous.
We did not spend much time debating the nature of President Xi Jinping’s own position, or what kind of power struggles were going on at the top level. There seemed little point in our doing so. However, there was an interesting side-debate about the extent to which the current President’s apparent accumulation of power meant he was now in a much stronger position than any of his recent predecessors, or alternatively represented a step back from the previous model of collective leadership and therefore left him more vulnerable to political or economic shocks in the future.
The crucial question for our purposes was whether China could continue rapid economic progress without some kind of political change which would, for example, allow and encourage more independent and creative thinking in the economic sphere as well as politically. A related but rather different question was whether the Chinese people, or at least a significant portion of them, would begin to demand greater freedom and involvement in their government as they became better off, and as they began to lift their eyes from economic survival and the acquisition of basic consumer goods towards other desirable aims in their lives. Another way of putting the same question was whether, and if so when and in what circumstances, the tacit social contract between the people and the party – namely that the people would tolerate the continued monopoly of political power by the party as long as the party were producing the economic goods – would break down; and whether, if China did face a serious economic slow-down, that might begin to spark discontent which might involve demands for political change as well. Part of the problem of the discussion here was always that some western commentators and analysts were seen as confusing the objective reality of China and what they wanted to see, i.e. a more politically open China. Those who had been predicting chaos and/or a hard economic landing for years had obviously lost a lot of credibility.
We were also conscious that it was dangerous to generalise too much about China as a whole (it was too large and diverse to allow that), about the Chinese government and the party (even they were not monolithic), or the Chinese people (different groups wanted different things and had different priorities).
Against this background, how far had China already engaged in political reform which went beyond moves towards more effective economic policies? We noted that there was not a coherent or holistic government/party narrative about this. However in some key economic areas China had in effect followed western-style examples, for example over the decentralisation of decision-making, a greater share of the market for private sector companies, and a weaker role for the state. Indeed the general acceptance by the CPC that the market was what counted was an extraordinary revolution in thinking. Open debate about further economic reform was now allowed and normal, in a way inconceivable in the past. All these steps inevitably had political implications. There was also implicit recognition in official statements that there were political as well as economic constituencies which had to be satisfied in some areas. The most obvious example was in the area of the environment, where a certain degree of freedom of discussion and transparent publication of data had been allowed, to reflect the extent of public concern. However there was currently no scope for open discussion of wider political reform, even if it could be discussed in private, and this looked unlikely to change in the short term.
One question this raised concerned the state of public opinion in China on issues such as political reform, about which we knew very little, and perhaps could know very little in an authoritarian system like that of China. There was little outward sign of dissent on a significant scale, or evidence of widespread frustration at the role of the party. Yet the party seemed very nervous about allowing any debate, or any kind of demonstration of dissatisfaction. What did they know which we did not? We did know that there was a lot of discontent at local level with certain kinds of decisions, for example about land, including demonstrations which occasionally turned violent, and a lot of criticism of practical problems in social media, despite the restrictions. We also knew that the party and government monitored this very closely and responded to it, up to a point, while making a clear distinction between poor or corrupt implementers of central policy, and the benevolent nature of this policy and its creators.
In any case there were underlying questions about the advisability of western-style political reform in a vast and diverse country like China. Could any loosening lead quickly to chaos and disintegration, as was implied by official attitudes in China? Had economic progress so far happened precisely because of the absence of democratic constraints and debate, not despite them, and the resulting ability to think long term, and build necessary infrastructure quickly? Were the future challenges so serious that the country could not allow itself the luxury of greater democracy, like wartime restrictions on certain kinds of debate even in a country like the UK? The argument was that, at China’s current stage of development, the country could not afford to be distracted by the kind of political discussion implied by any moves in a more democratic direction. Weak, populist governments would not necessarily be well-placed to effect the kind of major changes needed in China in many areas, and could easily turn in dangerously nationalist and centrifugal directions. The evidence that democracies were better at taking hard economic decisions was certainly weak. Should observers in the West therefore not be much more cautious about what they wished for? However uncomfortable a partner present-day China might be, with little respect for individual rights, a China plunged into economic stagnation, and riven internally, would be a hugely more difficult challenge from all points of view.
Alternatively, was all this too gloomy a view, given the ability of, for example, India to maintain its democracy and grow economically (albeit much more slowly than China hitherto) without falling apart? Why should the Chinese people not be trusted more to take a part in their own government? A system which lacked internal checks and balances or the freedom of information needed for rational debate of alternatives was not well placed to avoid major errors, and particularly unlikely to cope well with the unexpected. The latter point might prove to be the most important. The current system was strong but essentially brittle. The development of any country was never linear, and it was unrealistic to expect that even a relatively well-governed country like China could continue to proceed smoothly on the upward path of rapid economic growth without major shocks, or black swan events. Many participants were not confident that the Chinese system would be well-placed to deal with such shocks effectively.
We were of course well aware that western wishes were not what counted in China. The Chinese would decide for themselves their future course. For now there was little chance of systemic change, and our bet was that the CPC would still be in charge of the country in 2030 – though there was less confidence on this point looking further ahead to 2049. It was possible that the party would have changed its name, since the communist label now seemed largely irrelevant and inappropriate (and unnecessarily alarming to outsiders), but not its nature.
Was the absence of freedom of expression in political areas meanwhile affecting the progress of the Chinese economy, for example by stifling innovation, creativity and entrepreneurship in the economic field, as it had clearly done for example in the Soviet Union? There seemed little or no evidence of this so far. While the capacity of the Chinese economy to encourage innovation might need improvement, this seemed more linked to the still too large role of the state than to the absence of political freedom. Start-ups were an increasing feature of the Chinese scene, including in the IT sector. R and D spend was increasing rapidly, and was not confined to the big existing industries.
Nevertheless it was hard to imagine that there could be any kind of watertight wall between the economic and political worlds. Relative freedom in the economic and business world would normally be expected to produce a desire for something similar on the political front. Could a modern economy co-exist with a pre-modern political system? Political repression was ultimately hard to square with a private sector free to develop as it wished. Lack of transparency of information in some areas, for political reasons, was ultimately not good for sound policy-making. As the Chinese economy and Chinese companies continued to internationalise and reach outwards, they would increasingly come into contact with others used to operating in different and freer ways, and would not be able to impose their own rules and standards.
Similarly, what kind of influence on the political scene would be exercised by the rapidly increasing numbers of Chinese who had studied or worked abroad, or indeed just been there briefly as tourists, and then returned to China? Would they inevitably bring back with them a taste for greater freedom of information, and fewer restrictions on their political aspirations? Most thought that was bound to be the case in one way or another in the longer term, though the impact was hard to measure or be sure about. On the other side it was pointed out that Chinese students were now so numerous that they tended to mix less with others and become less closely acquainted with the societies in which they lived. Moreover some tended to resent criticism they heard about China while they were outside the country, and to react by becoming more nationalist themselves. The influence on their thinking from outside might therefore be less than commonly supposed.
One area where economics and politics overlapped was clearly corruption. The government had recognised that the current extent of corruption was not only bad for the economy, but also undermined the political legitimacy of the elite, and fuelled problems of huge income inequality, which in turn courted unpopularity. The steps they had taken against corruption were therefore both popular and necessary, and no doubt having some deterrent effect. However, the present anti-corruption campaign, like its predecessors, had significant weaknesses: because it was focussed on rooting out ‘bad’ individuals, it was not tackling the root causes of corruption, i.e. a system where rent-seeking was the norm and was well rewarded; the methods used were not consistent with any normal interpretation of the rule of law; and its use by President Xi Jinping against his political enemies (no-one associated with him had so far been touched) could not escape attention. In other words, for all its severity, some thought that the current campaign did not look different in essence from previous party rectification campaigns. Moreover, the fear it had instilled was having a very noticeable effect not only on sales of luxury goods, but also on decision-making at every level, because officials feared being caught up in investigations.
This led us onto the wider question of the rule of law. The government had announced reforms to improve the quality of justice, which were necessary and welcome. A fairer, quicker, and more efficient system would benefit everyone, and help to reassure investors. However these reforms could not lead to what would be regarded in the West as the rule of law, as long as the party essentially regarded itself as above the law. Both internal and external investors were therefore likely to remain nervous about the risk of arbitrary treatment by the authorities. External investors were in any case beginning to wonder how welcome they were in China, in the light of recent cases of apparent discrimination. Business representatives around the table cautioned against the view that all international companies were feeling the same way. It varied by sector. But there was no doubt that there were problems which had not been there before.
If China was bound to find its own way for the future, could it evolve a system of what had been called responsive authoritarianism, which would be successful both in ensuring continued economic growth and going some way to meeting the political aspirations of its people, even if it looked nothing like western democratic models, and did not draw on so-called western values of individual rights and freedoms? In the past such a notion would have been dismissed, not least in the west. However the West had lost a good deal of confidence in its own model in recent years, particularly in the light of the 2008/9 financial crisis, and was much less ready now to believe it had all the answers, or to lecture others. There was therefore a degree of readiness at least to contemplate the possibility, and of interest in whether Chinese exceptionalism and talent could come up with something new, workable and genuinely accountable.
Nevertheless many round the table were reluctant to accept that there was or could be a unique Chinese model, based on so-called Asian or Chinese values. People round the world tended to want the same kinds of things when they were given any kind of choice. It was noteworthy that virtually all the other countries of East Asia, including the successful economies, had gone down, or were going down, a route involving a much looser model of central control, and political models which were recognisably democratic, in response to the demands for greater freedom from their peoples, and an acceptance that power always corrupted and therefore required serious checks and balances. Why would or should China be an exception to this? Moreover references to western values were misleading, and set up a kind of false choice. They were better described as modern values, which the Chinese would aspire to in due course as much as anyone else, and to which they would be drawn by their engagement with the outside world.
We noted that it was right to say that many Chinese had never had it so good, in economic terms, and that levels of prosperity were higher for more people than ever in Chinese history. Those who had run the country for the period in which these achievements had been made deserved a lot of credit, and were no doubt given a lot of credit by many Chinese. There would therefore be a good deal of natural tolerance for the system which had brought this about. There were also more safety valves in the system than ever, in the shape of a lot of freedom in personal life, and perks for members of the elite such as foreign travel, sabbaticals abroad, and special access to otherwise banned internet tools such as Google. Moreover the Chinese had a lot of national pride and wanted their country to be strong externally, which implied strong internally too.
Nevertheless, as time went on, many participants believed that the Chinese would begin to compare their lives less to what they and their forebears had known before, and more to what obtained in other countries round the world, including in the region. Not even the Chinese authorities could shut out access to this kind of information. No-one could predict when or how such forces might become strong enough to make a difference, and we had to expect the unexpected, as always in China. But it was hard to believe that they would not make an appearance at some stage, as they had for example recently in Hong Kong, for all the prosperity there.
Chinese participants denied that there was a particular, well-defined political model which the Chinese were attempting to move towards. They were simply trying to continue to make progress, and continuing to try to learn from others, as they had long been ready to do. For the moment President Xi Jinping’s aim was to put China back in its rightful place in the world, the route to which largely went through economic success, and to restore Chinese pride. This was an aim to which all Chinese could subscribe. Those in charge knew very well how far they had to go in virtually all areas. It was often said that it was the middle class in any country which demanded political change and more democratic involvement as it became more prosperous. China did not yet have a middle class worthy of the name, and was still largely divided between those at the top, who were doing well but who remained a small group, proportionally speaking, and the mass of the still poor and poorly educated at the bottom.
We obviously could not resolve these debates. Time would begin to provide us with the answers. Change would come from within, not without. An interesting side-thought was whether one factor which might begin to change the political dynamics in China was fiscal reform. As more people and companies began to pay more normal levels of tax themselves, both direct in the form of income or corporate taxation, or indirect in the form of some kind of widespread VAT, they were likely to become more demanding about the state services which this tax bought them, and about their ability to challenge them and the policies which lay behind them. “No taxation without representation” was a cry which might eventually be heard in China too.
The international dimension
We spent some time on the possible impact on the Chinese economy and Chinese policy-making of what was happening elsewhere in the world, and China’s interaction with the rest of the world, politically and economically. Our starting point was the degree to which China was satisfied with the way the world was currently organised and run. The conventional wisdom was that she had benefitted considerably, and continued to benefit considerably, from the existing set-up, and therefore had little or nothing to gain from trying to blow it up and replace it with something more of her own making. We thought that this remained largely the case, although China often chafed at the extent to which it had to conform to rules and institutions which it had not had much to do with creating, and in which its weight did not represent its current political and economic status in the world. This did not of course prevent China from attempting to create parallel structures where it thought they were needed. The Asian Infrastructure Investment Bank (AIIB) was a case in point, partly triggered by the refusal of the US Congress to ratify the increase in Chinese voting rights in the IMF.
Some wondered whether we might not be near a tipping point where the Chinese authorities would start to become more demanding about change. President Xi Jinping had said things publicly in recent months which implied a greater activism in this field, though for the moment such pronouncements were largely content-free. But the consensus was that China would in any case be an evolutionary, not revolutionary power (ironically, given the history of the CCP).
China’s overwhelming interest for now was to make sure that the international context helped, and certainly did not obstruct, its economic rise. This meant that China had a vested interest in regional and international stability, and in cooperation not confrontation with its neighbours and the big global players. This was reinforced in the case of its neighbours by the huge extent of mutual trade and investment, including integrated supply lines, and in the particular case of the US by China’s massive holdings of US treasuries (though these were now being deliberately run down, albeit at a relatively slow pace). China was also heavily dependent for its exports on western markets – the EU even more than the US. Did this mean that economics would always trump politics, at least in present circumstances? History suggested that this was a risky and potentially incorrect conclusion. In the current Chinese case, it was hard to see how a rational calculation of its economic interests would have led China to be as assertive as it had been recently in the South and East China seas. But this was to reckon without the power of nationalism and history on all sides, and what China saw as the need to protect its territorial rights when they were under active challenge from others.
Notwithstanding the dangerous tensions with some of its neighbours, and indeed partly because of them, we saw China’s relationship with the US as the one area which could badly impact China’s economic strategy if it went off the rails. So far, despite occasional hiccoughs, the relationship had been relatively well managed by both sides. There were dialogue mechanisms in place, including at the highest level, to handle misunderstandings and disagreements. The so-called “Thucydides trap” of an inevitable clash between a previously dominant power and a rising one had hitherto been avoided.
However there was no guarantee that this would last. The sentiment in Washington that China was a strategic rival to be contained if possible seemed to be spreading, and was certainly highly present in most Congress thinking. The next President, whoever it was, was likely to want to be tougher on China than Obama had been perceived to be. The growing military rivalry in the western Pacific was a particular concern. Concern in Washington about strategic competition was no doubt matched by similar thinking in parts of Beijing, for example in the ranks of the PLA. There were no doubt hard-liners on both sides. All this would need very careful and wise handling in the coming years.
In this context, to what extent was a genuine strategic partnership developing between China and Russia? We were not inclined to take this very seriously. Russia needed China at the moment because of its relative isolation over its policy in Ukraine, and the desire to make sure it had a market for its east Siberian gas. To that extent there was a Russian pivot to Asia. But Russia was deeply suspicious of China because of the vulnerability of its empty Siberian regions, and of Chinese opportunism in Central Asia. For their part, the Chinese were content to play along for the time being, and were happy to join Russia in opposing ‘western values’ where it suited them, not least in tweaking US tails. But they were also suspicious of Russia, and regarded Russia as unsuccessful economically and unlikely to be of huge help to them or a serious alternative market to the west.
Meanwhile important initiatives like the AIIB and One Belt, One Road should be seen to a large extent not so much as geopolitical moves as attempts to help the opening up of the Chinese west, to find a productive home for Chinese financial surpluses, and to help solve the chronic overcapacity of some Chinese infrastructure-related industries, notably the steel industry. These initiatives were still very much work in progress, and it was for example far from clear to what extent the private sector, Chinese and foreign, would be expected and encouraged to take part in the resulting projects. It was also far from clear how large-scale infrastructure projects of the kind proposed, which the international private sector had not regarded as able to produce a decent rate of return, could suddenly turn in a sufficient profit to make the investments commercially worthwhile. Such initiatives also risked producing a political counter-reaction, as Chinese motives could easily be seen as suspect by others along the proposed land and marine routes. The Russians were certainly highly suspicious in the Central Asian context, though they had decided, largely for wider political reasons, to join in for now. In any case we thought it made sense for other countries, including in the West, to seek to take part in such initiatives, to help shape them, rather than to try to block them.
As already suggested, there were significant differences of view around the table in key areas, which made neat conclusions difficult. It would in any case be presumptuous and probably counter-productive to try to formulate neat recommendations for the Chinese or other governments to follow. We were also conscious that anyone trying 30 years ago to predict where China would be now would almost certainly have been hopelessly wrong. There was not much reason to suppose we would do any better now. What we were clear about was that China’s continued success was very much in all our interests, however uncomfortable this might seem at times, because what happened in China now mattered enormously to us in a way which had certainly not been true 30 years ago.
One of the western sources of discomfort was that China in a way held a mirror up to the West. If China succeeded in the long term, without political reform of the kind the West assumed as both necessary and inevitable, and using economic tools the West regarded as discredited, such as five year plans, this posed some awkward questions about western political and economic models – questions westerners were already asking themselves after the 2008 financial crisis. Outsiders could legitimately criticise the waste and the inefficiencies in the Chinese system, and wonder whether current tools would really enable the necessary transformation of the Chinese economy in the coming years. But the overall results were incontestable for now. Continued Chinese success would also pose awkward questions about how the rest of the world could successfully co-exist with a major power operating apparently to different rules, in a more disordered world than we had recently been used to.
This dilemma should no doubt not be exaggerated. For all its economic success, no-one seemed to want to emulate the Chinese political system, and there were not queues of people trying to get into China to live, as there were for western countries, for all our failings. Chinese soft power was not great outside the immediate economic field. But westerners had to ask themselves nevertheless whether, with their usual assumption that political reform was bound to be in their image, they might not be missing something about Chinese political reform which made it more than just administrative tinkering, something which would enable the management of political discontent successfully in ways which did not involve individual human rights and the use of the ballot box. Elements of this included responsiveness to environmental concerns, to concerns about the quality as well as the quantity of economic growth, to the need for a better legal system, and to the need to reduce corruption, poverty and inequality. If the main concern of the CPC was ultimately to retain its monopoly of political power, that did not prevent it from having other laudable aims.
The counter argument was that top down reform was always unlikely to be enough to avoid and correct mistakes, and responsive authoritarianism would still ultimately be authoritarian: the current trend might be responsive in some areas, but it was downright repressive in others. Decentralisation and marketization were in any case already fragmenting central power. In the end the rising middle class would demand a more inclusive and participatory system.
All this also raised the question of whether outsiders, the West in particular, should be alarmed by China’s rise. What were westerners ultimately frightened of? China was certainly more assertive regionally and was spending more on defence. Cyber-attacks originating in China were genuinely worrying. But China still spent far more on internal security, which gave some indication of where its priorities and worries really lay. China was not traditionally an imperialist power, outside its heartland, and had usually tended to demand deference/tribute from those around it rather than trying to dominate them completely. It did not seem to want to export its ideology globally, or create a China-dominated world. China certainly wanted its place in the international sun, to be treated with respect, and to be accommodated where necessary. Was that so difficult to imagine?
The answer to this no doubt depended on what vision China had of itself as a modern country. Many Chinese would probably like a clearer answer to that question too. And it also returned us to the issue of future US-China relations. If the US were unwilling to accommodate legitimate Chinese aspirations, China might be much more inclined to challenge the existing order. The rest of the world, including the US, might not like that at all. Naturally, with increasing Chinese rights in the world would need to come more Chinese responsibilities, beyond simply defending its interests and protecting its access to economic resources. How prepared were the Chinese leadership for that?
It was tempting to suggest (and some round the table did not resist the temptation) that China today would come to resemble ever more closely China’s imperial, middle kingdom past, with an increasingly light dusting of socialist rhetoric. The question might then be whether the CPC’s rule, whether or not it changed its name, would be a 300-year dynasty, or a much shorter one. However there was one crucial difference. The outside world had not had much influence on the middle kingdom for most of its history. Modern China was now integrated into the rest of the world. That was bound to have a major impact over time.
This Note reflects the Director’s personal impressions of the conference. No participant is in any way committed to its content or expression.
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