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Perspectives

Combining the expertise, access and networks of Strategy International and its affiliated companies, Perspectives takes a positive, outward-looking stance on the UK’s overseas trade and policy interests.

Why China's rise is far from a foregone conclusion

Why China's rise is far from a foregone conclusion

The contest between America and China for global dominance is fast becoming the biggest geo-political issue since the Cold War. Much of the tension is founded on the often-cited belief that there is an inevitability to China’s economic hegemony; hence, amongst other things, Washington’s refusal to give an inch in the ongoing trade war, despite the adverse effect the dispute continues to have on companies and consumers alike.

For some commentators, this assumption of Chinese dominance is precisely that: an assumption. In an editorial for The Times on Tuesday, George Magnus, the economist and commentator, stressed exactly this point, pointing to four major pitfalls that could scupper Xi’s march to the summit of global relations. For Magnus, it is to the domestic sphere that we should look if we are to understand why China may be in considerably more trouble than we think, especially in economic terms.

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Two of these traps are finance-based: the level of China’s sovereign debt, and the semi-pegged relationship of the Renminbi and the dollar. The latter situation is, according to Magnus, “unlikely to last, and when pegs go they tend to do so in style”. In terms of the former, the unofficial level of Chinese debt against GDP is around 350%, up from 120% at the beginning of 2008 (according to official sources, the rate is a far lower 47.6%). Furthermore, much of this debt is structured on dodgy credit injected into the economy on the back of the financial crisis. The risk is further compounded by the government’s role as borrower and lender, creating the potential for a systemic collapse.

These economic issues are exacerbated by fundamental social problems. First, China has recently become the world’s fastest ageing population, with a quarter of people estimated to be over 60 by 2030. By 2050, that figure is expected to rise to 35% - or more than the total combined populations of France, Germany, Japan and the UK. Combine this with insufficient social welfare programmes, and the lack of an industrial framework to raise China from its status as a middle-income country, and the result is a nation increasingly hampered by its own baggage.

The extraordinary scenes in Hong Kong over recent weeks have only added to the sense of strain. Chief Executive Carrie Lam’s suspension of the extradition bill after immense public pressure represents the largest climbdown of XI’s tenure, and is unlikely to pass without some kind of repercussions from central government. With the G20 meeting only days away, China will for the time being seek to deflect attention away from the issue, but some kind of clampdown seems inevitable.

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In foreign policy terms, the Belt and Road Initiative is under increasing scrutiny. Although Xi Jinping’s self-styled “project of the century” has seen some memorable successes in recent months, including the indorsement of G7 member state Italy and the resumption of a $10.7bn rail project in Malaysia, in recent months there has been an increasing sense that China’s ambitions have been scaled back. Xi’s keynote speech at the 2019 Belt and Road Forum was notable for its lack of bravado, at least compared to the inaugural edition. A multitude of countries – Turkey, Argentina, Spain, Poland and Sri Lanka amongst them – did not attend the forum, citing a range of geopolitical factors.

Perhaps the most pressing of these is the vocal criticism that the government has faced for its treatment of the Muslim Uighur minority in Xinjiang, China’s westernmost province and the launchpad for the infrastructure initiative. The motivation behind the treatment is unclear, but the Western reaction to this egregious attempt at Sinicization suggests that it is far less tolerant now of such an agenda than during the Tibetan riots in 2008.

This lack of tolerance picks up on a critical and recent change in Western attitudes. The Obama administration’s attempts at negotiation are long gone, and in the rhetoric now China has shifted from a strategic partner to a systemic rival. The ongoing dispute over Huawei could be the tip of the iceberg which sees the West subject Chinese FDI to far greater scrutiny, a further blow to an economy that is already fragile.

Xi has made no secret of his desire for China to be the regional power of Asia. The problem is that Modi’s India has serious designs on achieving the same status, putting the two on a potential collision course. 2022 marks 75 years since India became independent, and presents the perfect opportunity for Modi to make a decisive statement of India’s position as a global actor - New Delhi will host the G20 summit, and there is talk of both India claiming a permanent seat on the UN security council and putting a man in space.

Given the environment, it’s no surprise that there have been calls from some quarters for a comprehensive decoupling of America and China. Despite the leaps that it has made in recent years, total self-reliance remains a long way off, not least in terms of Chinese dependency on American technology. On critical elements, such as semi-conductors, China lags far behind its great rival.

The challenges, then, are many, even excluding the war of attrition that seems to be developing over trade. Without a comprehensive response to its domestic problems, and, crucially, some means of kickstarting a rapidly slowing economy, China’s claims to global hegemony remain merely claims. In an increasingly hawkish world, XI’s next moves will be critical.


The views expressed in this article are those of the author and do not reflect the views of Strategy International.

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