Download as PDF - John C. Hulsman Enterprises

Eyes on the Prize: Beyond the Stock Market Tumult, What Xi Jinping is aiming for
in China
By Eva Hulsman-Knoll
Introduction: An Over-Hyped Crisis
If the overly bizarre has intellectually thrown political risk analysts since time
began, the other extreme—ignoring long-term, well-ordered strategies and strategists—is
the mirror image mistake. Too often such chess players are seen as something less, with
the day-to-day noise of the world obscuring long-held and highly rational patterns of
thought and the goals of highly disciplined political actors. The key to first-rate analysis
is spotting them early on. And, despite the undoubted fumbling of the recent stock market
crisis, Chinese paramount leader Xi Jinping is one such chess player, with a clearly
defined and diligently applied strategy for the transformation of his country.
Saying this, there can be no doubt the Communist Party Leadership has made a
mess of the present equity crisis. Desperate to avoid looking in the mirror, it has
scapegoated stock analysts for reporting the bad news, punishing 197 people for
spreading ‘rumours’. As the market has continued to tumble, Beijing has commanded its
giant government-controlled State-Owned Enterprises (SOEs) to buy shares to support
prices. It has also doled out cash to large brokerages to do the same. Further, The Wall
Street Journal reported that, in July 2015, Xi Jinping himself issued an otherworldly
executive order that Chinese stock markets must go back up. None of this inspires great
faith that the mandarins truly understand how capitalism works.
But for all that China is hardly likely to go down the plughole, showing few signs
of heading towards a hard landing. China’s stock markets have indeed declined by more
than 30% percent this summer, but only after share prices doubled in the course of the
past year. The property market—a far more important indicator of the overall health of
the Chinese economy than is the equity market—has actually stabilised in recent months.
Adding on construction, it accounts for up to one-quarter of Chinese GDP, underpinning
the banking system.
It is a fact that the economy is slowing markedly, but even at 5% growth this year,
which is the bearish end of estimates, China’s growth in 2015 will add more to total
world output (given its now immense economic size) than the whopping 14% expansion
Beijing posted in 2007. For all the hysteria, Beijing is not about to economically collapse.
An Under-Hyped Challenge
All this white noise largely obscures what it is Xi Jinping—the single most
powerful Chinese leader since at least Deng Xiaoping—is trying to accomplish. His bold,
reformist agenda has three planks. First, Xi wants to purge the admittedly corrupt party
apparatchiks, and tame the vested interests within the leadership that stand in the way of
his ambitious economic reforms.
These political goals are the primary impetus for Xi’s unprecedented corruption
purge. In the seven months to the end of March 2015, 24 ministerial-level officials have
been detained for corruption, bringing the total to 69 in just over two years, more than
two times the number in the previous five years under Xi’s predecessor Hu Jintao.
Startlingly, the Politburo Standing Committee has endorsed the detention of Zhou
Yongkang, the former chief of domestic security who himself served on the committee
until he retired in 2012. Zhou is the first man of his rank to be charged with corruption in
the party’s history.
Such an all-encompassing programme has quieted Xi’s would-be critics, as well
as putting possible rivals in the local party leadership and SOE’s on notice that they may
be next. Easily the most popular of Xi’s initiatives, the anti-corruption drive has served
the vital political purpose of cowing possible opposition to the second plank of his
agenda, the fundamental economic reform of the country.
The second plank of the President’s programme is escaping the “middle-income
trap” and thus completing the country’s transformation. For the stock market ructions
have exposed China’s medium-term existential economic problem. Can they—as has
proven very rare in history—escape the middle-income trap? Can Beijing shift away from
its old economic model of easy credit and export-fuelled growth towards one based on
services and domestic consumer spending? Beijing’s authoritarian government has
proven itself adept at dramatically creating an export power out of a vast and heretofore
poverty-stricken country. But it is an open question as to whether it can move up the
value chain; such a transformation requires qualities of openness, creativity, and freedom
that don’t spring to mind when thinking of the People’s Republic.
Such a dramatic transformation, even if it is mastered, will be wrenching and take
decades to fully achieve. Along the way there are bound to be economic dislocations, as
the market more and more dictates economic outcomes (in line with recent party pledges)
and the state refrains from picking winners and losers. Such a sea change runs counter to
what powerful managers of SOE’s and local party bureaucrats have long grown used to;
despite the threats emanating from Xi’s corruption crackdown they are already emerging
as formidable opponents of his economic reforms. Further, growth rates as a whole are
bound to tumble to a more sustainable 5-7% of GDP per annum, still fantastically good
numbers, but a long ways from the breakneck 10% pace that so recently astounded the
world. Managing these changing expectations will take all of Xi’s considerable political
skills.
But the third plank of Xi’s plans—reshaping the very economic and political
order in Asia—is the prize following on from the success of the first two planks. For a
China that—as has proven the case with South Korea, Japan, Singapore, and Taiwan—
has successfully escaped the middle income trap will be the economic magnet of the
entire region; following on from this reality, political dominance may well follow. A
China that in a generation has successfully adopted Xi’s programme will be able to
challenge American dominance in the region from a position of strength. Once China has
become a fully-fledged great power—as Xi’s reforms would allow—it can then move
confidently to find its rightful place in the sun. Disconcerting as this is to Western ears,
this is the ultimate and frank goal of what Xi is aiming at.
Conclusion: The Fault is All His
But first China has to get there, successfully mastering Xi’s challenging reform
programme. Worst of all for both Xi and his allies, is that his success in accruing power
has left him with absolutely no one else to blame should things go wrong. The only safe
bet about China moving ahead is that Xi Jinping will emerge as a figure of true historical
importance. Whether he is seen as a major success or a colossal failure is all to play for.
The answer to this question will do much to determine the course of global foreign
relations over the next generation.