Valdai Club

Xi Jinping, in common with many Russians, is saying that a global order based on growing consumption, inequality and moral vacuum is a “grave threat from within” – even an existential threat.

The Singaporean Ambassador at large, Bilahari Kausikan, earlier this month put his finger on an issue that will affect us all. It will shape the politics of Europe and America: “The CCP [Chinese Communist Party] is today confronted with fundamental questions about itself as it embarks on complex second phase of reforms. These reforms must square the circle: give the market a larger role in crucial areas of the economy to maintain competitiveness, while preserving central political control by the Party. Can it be done? No one really knows. Social and labour unrest are endemic at the local level. The anti-corruption campaign has unsettled CCP cadres in every sector. But we should not assume failure.”

“President Xi Jinping has termed the CCP’s role as leading the ‘Great Rejuvenation’ of the Chinese nation after a century of weakness and humiliation. But the outcome of reforms, even if completely successful, will be slower growth, as the CCP has itself acknowledged.” (emphasis added – and if not completely successful, implies falling GDP).

In fact, it seems a decision to make a major policy switch has already been taken at the end of April Economic Politburo meeting (and now authoritatively leaked on 10 May in the Peoples Daily). China's authorities it seems, are no longer happy with credit and leverage-driven GDP ‘growth’. They see ‘areas of risk’, and for the first time, mention is made of (property) ‘bubbles’: “High leverage will bring higher risks. If we cannot control leverage well, it will heighten systematic financial risk, lead to negative GDP growth and swallow normal people’s saving. We cannot rely on high leverage to boost GDP”. And therefore the policy will shift to a conservative structural reform: “China’s economy will run as a L shape, not a U shape or V shape. L shape is a long process, but not just a one or two years’ period.” Indeed, it seems that the authorities are serious: Market News reports that combined new loans in April issued by the Chinese Big Four state-owned banks, were more than halved from March’s level.

Of course, once the pain begins to be too great, no doubt there will be another splurge of credit, and then the next leg down. But what is effectively being signalled here is that the biggest source of global growth (i.e. China’s huge (over-) investment spree) is about to hit the wall. China is intentionally slowing.

And ‘intentional’ it is. Yes, the CCP does want, and need economic growth, but not at any price. In his article in the New Yorker Magazine, Born Red, Evan Osnos quotes Chinese historian Zhang Lifan, answering the question as to what is the message Xi hoped to promote from China around the world, he replied, “Ever since Mao’s day, and the beginning of reform and opening up, we all talk about a ‘crisis of faith,’” - the sense that rapid growth and political turmoil have cut China off from its moral history -- “He is trying to solve that problem, so that there can be another new ideology.”

“Xi believed that there was a grave threat to China from within”, Osnos writes, “according to U.S. diplomats, Xi’s friend the professor described Xi as “repulsed by the all-encompassing commercialization of Chinese society, with its attendant nouveaux riches, official corruption, loss of values, dignity, and self-respect, and such ‘moral evils’ as drugs and prostitution.” If he ever became China’s top leader, the professor had predicted, “he would likely aggressively attempt to address these evils, perhaps at the expense of the new moneyed class.”

The author of the anonymous article in Peoples’ Daily implying that massive ‘easing’ has been part of China’s problem, rather than a solution, is thought to be Liu He, President Xi’s economic guru. ‘Anonymous authorities’ articles are taken very seriously in China. This one seems to signal that the proponents of massive, easing-driven growth have lost the argument in the Economic Politburo meeting that concluded at the end of April – at least for now.

What does this mean in political terms? It says that the biggest source of global growth – China – is not going to help stand Europe or America up, when they both are hovering at the very point of kissing recession. ‘Growth’ is our western mantra -- indeed, the global response to to the 2008 Great Financial Crisis of ‘extend (debt) and pretend’ (the debt will be repaid sometime), is wholly contingent on resumed growth. But we may have to get used to living without it for quite a while. The debt supercycle of massive credit expansion is ending: renewed surges of credit are being created, yet with little or no effect on the economy. (It seems that China's Politburo members are readier to acknowledge this fact, than either the Federal Reserve or the ECB).

Which European political parties will be able to live without growth? Xi’s answer is that the CCP might be able to do so, but if it does, it will only be because of tight party discipline, and social regimentation. If that breaks down, the CCP will be in trouble. If he is right, the implications for Europe are clear: it has neither.

The second point that emerges concerns the global order. Throughout 2014 and 2015, China's exports and imports were dropping, but this was occurring precisely at the time that American and Europeans were claiming they were right on track with higher growth. How could that be happening – if China’s exports were not being bought, and if its imports were declining too. If America was growing, how had it suddenly forgotten to buy from China? It hadn’t, of course. It is clearer now that the open world of financialism and unrestricted credit has created a global systemic problem. The 2008 trauma was not just a symptom confined to Europe and America, the distortion and the systemic problem has been global.

America is in the middle of a contentious Presidential election. It has never been so heated. And one of the core points of contention has been between those advocating for America’s continued guardianship of the global political order, and those who say that the cost of this role has been too great in terms of ‘rickety American bridges’ and ‘educationally malnourished’ American children.

But what then will be the basis to the global order? The Singaporean Ambassador, Bilahari Kausikan, again:

… Values diplomacy? … [we now cease to talk about them] perhaps because the values in question, democracy, freedom and human rights, are protean terms, essentially contested concepts, where a superficial consensus often only of vocabulary -- masks basic and sometimes irreconcilable differences of interpretation. More fundamentally, values diplomacy seems itself a euphemism for a diplomacy whose primary focus is concern about China. This is not a game that any Southeast Asian country will regard with great enthusiasm. I do not mean to suggest that we are not concerned about China. We are of course concerned as our region is contiguous to China, perhaps even more so than big countries. China poses unique challenges to Singapore. But our responses are different.

There is a school of thought that believes concern about China’s increasingly assertive behaviour will make ASEAN naturally gravitate towards the US and its allies. This is true, but only to a degree. You will misinterpret developments in Southeast Asia if you lose sight of this fact… But for small countries fated by geography to live in the midst of great power competition which has been the situation of Southeast Asia for centuries, balancing, hedging and band-waggoning are not alternatives. We see nothing contradictory in pursuing all three courses of action simultaneously. To do so is built into our diplomatic DNA by centuries of sometimes bitter experiences.

Some years ago, I asked a senior Vietnamese official what leadership changes meant for Vietnam’s relations with China. Every Vietnamese leader, he replied, must be able to stand up to China and get along with China and if anyone thinks this cannot be done at the same time, he does not deserve to be a leader. To various degrees this is true of all Southeast Asian countries".

One may say that as the countries of ASEAN stand in relation to China, so too, do those countries of Central Asia, contiguous with Russia, stand in relation to Russia. Kausikan again:

"The Cold War had one virtue: clarity of structure. Irrespective of where we stood on the ideological divide, and even if we pretended to be non-aligned as Singapore did, there was never much doubt as to how to position ourselves. The post-Cold War international system lacks such stark definition. China is not an enemy. But is China a friend?

What kind of power is China? There is no clear answer. To be sure, China has no strong reason to love an international order that it regards, not without justification, as heir to the order it holds responsible for what every Chinese schoolchild knows as ‘a hundred years of humiliation’. It was never very realistic to expect China to passively be a ‘responsible stakeholder’ in an order it had little say in establishing".

It used to be said that China (and Russia) have no strong reason to kick over the table of the global order from which they were beneficiaries. But is not that precisely what is changing? If ‘values diplomacy’ now seems hollow even to a suave Singaporean diplomat, what then is the benefit of the American-led global order, from which they now are profiting? Well, America’s overwhelming military strength has been a fact, but it was never exactly a welcome guest. It was western countries’ affluence which everyone desired – including the Chinese and Russians.

What events in China are telling us is that this last aspect is changing: the western debt-driven neo-liberal economic model is no longer wanted because it destroys markets, misdirects resources – and because the promised affluence turns out to be illusory (except for the 0.01%). But Xi, in common with many Russians, is saying that a global order based on growing consumption, inequality and moral vacuum is a “grave threat from within” – even an existential threat. They now plan to make their own dispositions to tackle that ‘threat’. In sum, the very basis for an American 21st century (its allure of affluence for all) is slipping away – even as its pros and cons are being so fiercely debated in the US presidential campaign. This will be unsettling to many, but as they say, ‘reality is a bitch’.