What a Chinese superpower would look like

China aims to expand its influence from one polar cap to the other, but debt, demographics and a middle-income trap stand in the way

By Marc Champion  /  Bloomberg

Sun, Sep 09, 2018 - Page 7

What struck Wang Wen (王文) about Antarctica, beyond the brutality of the December cold, was the scale of US operations in such an inhospitable environment, and the US flag fluttering by the sign that marks the geographic South Pole. Observing the academic mission of hundreds of US scientists in a region rich in resource potential, he was determined that China must catch up.

The report Wang, 32, wrote this summer for the Chongyang Institute for Financial Studies at Renmin University of China in Beijing, where he is executive dean, reflects China’s growing dilemma as it muscles its way into an international system it did not create.

For the first time in its long history, China has in President Xi Jinping (習近平) a leader with a truly global vision. So, inevitably, Beijing looks to the US, the sole superpower, for a yardstick as to what that requires — be it a blue-water navy or more research stations in Antarctica.

Yet Chinese Communist Party leaders also recoil at being seen as the next global hegemon and are reluctant to shoulder the expense that goes with it. They studiously avoid the word “superpower” and see the US version of it as ideologically unacceptable and spent.

Whether China does become a superpower and whether it could sustain the costs involved are questions that will affect the world for decades. They will shape terms of trade, a changing global order, and issues of war and peace.

“We don’t know,” Wang said over dinner a few floors below his institute, when asked what Chinese great power would look like. “Anything but America.”

Yet to misquote Leon Trotsky, even if China is not interested in becoming a superpower, superpower is interested in it.

The US, too, began its journey on the world stage determined not to replicate earlier colonial empires. Today, 11 carrier groups and a network of military bases span the globe to protect its interests.

China might be heading down a similar path. An aircraft carrier construction program is under way. Its first overseas military base opened last year, in Djibouti on the Horn of Africa. Spending for diplomatic service is up sharply. Xi’s “Made in China 2025” economic project aims to displace the US as the world’s technological power, while another plan calls for dominance in artificial intelligence by 2030.

The country raised defense spending from US$21 billion in 1990 to US$228 billion last year — more than three times Russia’s budget, the Stockholm International Peace Research Institute said.

The ease with which it did so — the military’s share of overall government spending actually fell — suggests that China can be any kind of power it wants.

Already there are signs a Chinese model for development, based on an authoritarian political system and state-directed market economy, could gain traction against the more liberal ideals long promoted by the US and post-war institutions like the IMF.

Some countries, such as Cambodia, now follow Beijing’s direction, attracted by China’s deep pockets.

Still, Beijing’s crackdown on free speech and other social liberties does not suggest a self-confident regime. A budding trade war with the US has helped shave about 20 percent off Chinese equities since January, triggering a domestic debate over whether Xi has already overreached by bidding so openly to challenge the US.

Consider, too, that the average Chinese remains less wealthy than the average Mexican at a time when the population is already starting to age. Some investors wonder about the health of big Chinese banks, whose lending for decades provided the investment-led growth on which the party relies for its legitimacy.

If this is a superpower in the making, it might be a fragile one.

To former Australian deputy secretary for Strategy and Intelligence Paul Dibb, it is telling that Beijing spends more on internal security than defense.

“China will have to choose not between guns and butter, but between guns and elderly care,” he said.

Wang is among the loyalists who have come to prominence since Xi took power in 2013. Like his boss — Wang is also the Chongyang Institute’s party secretary — he exudes limitless confidence in China’s future.

An ice sheet with a mean depth of 2.6km has protected Antarctica’s resources from exploration. Still, Wang’s report says that below the surface is an estimated 500 billion tonnes of coal, as much as 100 billion barrels of oil, and 5 trillion cubic meters of natural gas.

Despite a 1959 treaty that freezes all territorial claims, at least for now, Wang sees a “fierce” geopolitical struggle under way. He fears that, without a stronger voice and presence, China will lose out.

“President Xi Jinping has repeatedly emphasized that China must participate more actively into rule-settings in new areas, including deep sea, polar regions, outer space and the Internet,” his report concludes.

In practice, that would mean building infrastructure to accommodate tourists and beefing up Beijing’s research presence, the key determinant of influence in Antarctica’s multinational administration.

The US budget request for the Office of Polar Programs next year is US$534 million.

Wang’s report said that from 2001 to 2016 China invested 310 million yuan (US$45.3 million) in its Antarctic program.

Beijing could easily afford the difference, but Antarctica is just one challenge China faces.

In January, China published its first white paper on the other pole, the Arctic, outlining its ambition for a “Polar Silk Road.”

It proposes designing and building new icebreaker vessels and bases, essential tools in an area with fewer barriers to territorial claims than the southern polar cap.

Silk Road is another name for the Belt and Road Initiative, into which China has already sunk hundreds of billions of dollars. In Africa alone, China loaned about US$86 billion between 2000 and 2014 to governments and state-owned enterprises, and in 2015 Xi pledged another US$60 billion under the initiative.

To match the US on defense spending, China would need to find another US$400 billion a year. Even for China, these are large costs.

Xi grasps the core lesson of the former Soviet Union’s failure — its over-reliance on military strength, said David Shambaugh, a professor at George Washington University and author of numerous books on China.

Beyond weapons, superpowers require technology, strong economies and soft power influence to sustain themselves.

“China understands that,” he said.

Beijing has modernized its army while spending a relatively small share of annual GDP — officially as little as 1.5 percent, or 1.9 percent according to the Stockholm International Peace Research Institute.

Either figure would see China risk criticism from the US for underspending, if it were part of the NATO alliance.

Even so, a scorecard run since 1996 by the Rand Corporation, a US research institute, found that last year, for the first time, China would have air power parity with the US in any conflict over Taiwan.

The latest budget increases spending on the diplomatic service at twice the rate of the military. More than 500 Confucius Institutes now teach Chinese language and culture across the globe.

For all that, China still has few real allies, Shambaugh said.

Its soft power is undercut by its militarization of the South China Sea and concerns its offshore infrastructure loans are just debt traps that will bind smaller nations to its will.

Its culture, while rich and deep, has little equivalent to Hollywood, or the ideals of individual freedom.

“Their military is still regional, they have almost no power projection capability,” said Shambaugh, adding that the same is true of diplomacy, where China has yet to take the lead on a major international agreement.

“They are really a very self-interested power,” he said. “They’re not interested in shaping the global order.”

That is not quite right, said Henry Wang (王輝耀), founder and president of the Center for China and Globalization in Beijing.

True, China does not want to destroy the world order that the US shaped, as it has benefited from it. However, it does want to create what he calls globalization 2.0, by adding new international structures including the Asian Infrastructure Investment Bank.

“People get scared” by China’s size, Wang said, adding that China just wants globalization that is more inclusive.

“There’s not a magnanimous bone in the Chinese body politic. It’s all about China,” said Jim McGregor, chairman for greater China at consulting firm APCO Worldwide. “Name a country that’s a true friend of China.”

More worrying for China’s global ambitions are signs its economic engine could stall. China would, for example, be the first superpower to start getting old before it got rich.

UN projections show that its 1.4 billion-strong population is likely to decline and age sharply from as soon as 2023.

The number of working age Chinese has already begun to shrink.

“I can’t find a single example of a superpower growing when its population was falling,” Peking University School of Government associate professor Zhang Jian (張健) said.

The British Empire and the US rose to prominence when their populations were exploding.

Xi “needs to take care about the domestic situation and worry less about being a great power,” Zhang said.

Nor is China as flush as commonly assumed. Adjusted for purchasing power parity, which accounts for the greater buying power of a dollar spent domestically, China has a larger GDP than the US.

However, that is a poor measure of international buying power, where dollars are just dollars, Bloomberg Economics chief economist Tom Orlik said.

“One way to measure the additional money China has to spend around the world is to look at nominal GDP in US dollar terms. In the five years before the financial crisis, that averaged close to 23 percent annual growth,” Orlik said. “In the last five years, it’s averaged 7 percent, including a year of zero growth in 2016.”

China’s GDP per capita is about US$9,000 compared with US$60,000 for the US. That could mean more room for catchup growth, but to get there China would have to avoid the middle-income trap that keeps many emerging economies stuck below a GDP per capita of about US$15,000.

To date, no large economy has made the transition without liberalizing.

Western economic laws do not apply, Xi loyalists have said; the strategic smarts of the party will let China blow through the middle income trap — even without the independent judiciary and property rights that fostered innovation elsewhere.

Xi has urged China’s scientists to trust a socialist system that stunned the world by producing nuclear and space programs during the 1960s.

“By tightening our belts and gritting our teeth, we built ‘two bombs and one satellite.’” Xi said in an April speech. “The next step is to do the same with science and technology.”

Under Xi, the party has swallowed the more technocratic government, taking over many of its functions.

Major companies have party cells within them. That is a good thing, in the view of the president’s followers, because it ensures control by a 90 million-strong organization that has developed as a relatively efficient meritocracy.

Criticism of China’s heavy corporate debt burden at home — about two-and-a-half times GDP last year — and potential defaults on white elephant infrastructure projects overseas are misplaced, the thinking goes. That is because clever party officials choose the projects that receive big loans.

The US itself even relied on central planning to supercharge its economy, in World War II, McGregor said.

“We’re kind of full of ourselves,” he said of the West. “We talk all this stuff about the superiority of free markets, but how did the US become an economic superpower?”

Xi’s consolidation of power has some worried that the scope for bad decisions that go unchallenged is growing.

At the National Museum of China in Beijing, a permanent exhibit tells China’s history since the 1839-1842 Opium War as a morality tale of colonial oppression, followed by uninterrupted party success.

It skips over Mao Zedong’s (毛澤東) Great Leap Forward and Cultural Revolution, which caused tens of millions of deaths and vast economic damage.

Sycophancy tends to grow with one-man-rule, said Joerg Wuttke, former president of the European Chamber of Commerce in Beijing.

He said he worries also that the party is draining talent from the very bureaucracy on which China’s leaders are depending to deliver sustained prosperity.

All of this, according to Wang Wen, is to fundamentally misunderstand China by trying to fit it into Western experience.

He cites the doom-laden warnings of Chinese over-leverage and over-planning that have proved wrong for decades.

“Our country has entered a very interesting phase that the Western social sciences can’t explain,” Wang said. “If you use Western theory, you cannot understand China’s foreign policy.”