Decline causes lash-out and war with the U.S.

So far, China’s high level of economic growth has meant that widening social cleavages have not presented a serious threat to the rule of the CCP, which has managed to bolster its legitimacy by positioning itself as a regime capable of delivering prosperity to its people.14 However, it must be kept in mind that China’s developmental model is predicated on economic growth and positive relations with the USA, the country that its rise is supposedly threatening to unseat as hegemon of the international system. Despite the global economic downturn, the USA remains China’s most important export market, making up close to 20% of China’s foreign trade in 2010.15 There are two major reasons why this is the case. The frst has to do with the value of the Renminbi vis-à-vis the US dollar. By comparative standards, China’s currency is pegged well below its US counterpart, providing an immediate economic incentive to American consumers to buy Chinese goods. The second has to do with the low wages paid to Chinese workers. Although the wages of China’s urban workforce have increased over the past decade, they still remain extremely low by American standards. These low wages decrease production costs, which further lowers the price of goods and encourages US consumption.16 As a result of these factors, Washington has been placing pressure on China to revalue the Renminbi, arguing that it provides an unfair advantage to Chinese producers while at the same time hindering domestic production and consumption.17 Beijing’s resistance to this pressure stems from its fear that increasing the value of the Renminbi too rapidly could serve as a disincentive for investment, slowing exports to the USA and leading to unemployment to China. Since a major downturn in the economy could lead to protests and riots against the ruling party, as well as reducing the resources available for programs designed alleviate China’s social ills, the Chinese government remains dependent on US consumer demand in order to provide the prosperity that it uses to justify its rule. One consequence of China’s reliance on American consumption to ensure its own economic prosperity has been willingness of the Chinese government to invest heavily in US debt. Throughout the 2000s, Americans were able to borrow massive sums of money at low interest rates without having to worry about a negative reaction from fnancial markets, and much of that money was provided by Chinese banks. The Chinese were willing to invest in American debt for a number of reasons, the most important being that US Treasury bonds were seen as a safe investment, but also because buying up these assets allowed American consumers to keep spending money on Chinese goods. The trillion dollar obligation the US owes the Chinese places Washington in a weakened position, and on the surface, it does seem as if China holds a great deal of economic leverage over the USA. However, China’s vast exposure to American debt is a double-edged sword. The Chinese are too invested in the USA to withdraw their fnancing, which in turn decreases any leverage Beijing might have over American economic policy. This reason behind this entrapment has to do with several important pathologies of Chinese development. Stateowned enterprises continue to be a key component of China’s domestic economy; they depend upon growth in China’s privately owned foreign investment for growth and proftability (Vermieren 2014). This has led to a broad penetration of the use of fxed assets in both state-owned enterprises and in private enterprises that rely upon exports (Ibid 2014). Deleveraging itself from the USA would be diffcult. Even if the government slowly started selling off Treasury bonds, it would shake the confdence of international investors, leading to an increase in interest rates as the USA struggled to fnance its defcit and avoid default.18 Higher interest rates would also slow US consumer spending, hurting Chinese exports and its state-owned enterprises and leading to unemployment as factories close and workers are laid off. In addition to the domestic repercussions, any remaining US debt held by the Chinese government would decline in value, since it would become harder to sell off bonds as US interest rates rose. China’s economic future is therefore tightly bound to that of America, since any action that undermined the US economy would have dire consequences for the Chinese economy as well. Also, China has not completely insulated itself from domestic and international economic turmoil. It has started to reach a development plateau with its low-wage workforce requiring higher value-added industries in order to keep up its economic growth.19 Similar to other Asian countries, China must diversify its economic and political system if it wants to continue to develop. This does not suggest China will democratize in the near future, however, China’s continued development requires increasing the value of the Renminbi to lower the cost of purchasing foreign technology and reducing the intervention of the Chinese government in order to better meet domestic and foreign consumer demand.20 Thus far, the CCP has been willing to gradually increase the Renminbi but has been far more reluctant to withdraw its control from the economy—a testament to a regime that is highly self-conscious. Though China’s growth since 2008 had been mainly due to domestic consumption, there are limits on how protracted this recovery can be if the EU and America fall back into recession. Despite a burgeoning middle class, China still relies on foreign exports in order to keep its job market growing. If another major fnancial crisis hits a major trading partner, despite the resources of the CCP, it could hamper China’s economic growth. There are also fears China could experience a housing market collapse similar to the USA and Europe. Since the crisis occurred in 2008, the CCP introduced a series of stimulus measures coupled with low interest rates on loans from Chinese banks.21 The intent of these policies was to prevent a protracted economic recession from threatening China’s growth and ipso facto the legitimacy of the regime. Similar to the USA in the early 2000s, many Chinese people took out cheap loans and began to speculate on the value of their property.22 This has led to a housing market boom in areas of China, but has led many to worry that a collapse of the market may harm the Chinese economy. The government has begun to raise interest rates to lower demand, but a correction in the value of the market of this scale could represent the loss of the billions in equity for many Chinese people. While China’s banks have considerable government oversight—preventing a similar bankruptcy to Lehman Brothers in the USA—there is potential for a major recession to hit the Chinese economy. So, despite its institutional barriers in place by the CCP, the liberalization of the economy has made China vulnerable to fnancial markets. This could have massive potential consequences on the stability of the Chinese regime and on global economic stability. More recently, China’s economy has experienced a stock market crisis in 2015, though this has not translated into a broader economic downturn in the economy. There is, of course, some diffculty in relying upon government-based reports, since the government has a political incentive to promote data favourable to the regime. Nonetheless, despite the lack of reliable information there has been a slowdown in private-sector investment, from growth of more than 40% in 2011 to just 2.8% in the frst half of 2016 (Economist 2016). Rather than an anomaly, the lack of private-sector investment is indicative of other worrying signs in the economy. Although the Chinese economy is still growing, there are other sign of underlying economic strain. The credit market in China is on a sharp increase compared to nominal growth, growing at 16% this year, meaning loose monetary policy set by the central bank is allowing for both private and state-owned enterprises to leverage at a rapid pace. Moreover, China’s debt-to-GDP level has exploded—from roughly 150% before the 2008 global fnancial crisis to more than 250% in 2016 (Economist 2016). This puts it similar to countries such as Spain and Japan, both have long-term structural economic problems that will undermine growth for the foreseeable future. In a period of eight years since the onset of the fnancial crisis, China has gone from a country that was praised for its resilience, to one of the most in debt large economies in the world. While it would be premature to suggest China will face similar economic problems, the sheer amount of debt in China has led the IMF to publish a working paper on how to ease China’s debt problems before they lead to a crisis that will affect the domestic and international economy. The IMF report identifed several measures to ease China’s debt burden and aid its economy to transition from a middle-income country to a higher income country. The paramount recommendation is that the Chinese government must recognize and cease supporting, through favourable loans and government-backing, failing and bankrupt companies (IMF 2016). The Chinese government has long protected industries that have close ties to the party. Though there has been a recognition by the Chinese government to tackle corruption within state-owned enterprises, there is still a reluctance by offcials to let companies go bankrupt if they face signifcant economic problems. There is excessive corporate debt and a reluctance among the political establishment to lift the implicit guarantees on SOEs and make the necessary structural changes to reform China’s economy including the privatization of telecommunications and energy sectors (Economist 2016). While these economic recommendations may be necessary to avoid a crisis in China’s economy by providing some “short-term pain for long-term gain”, the political will to implement them is lacking (IMF 2016). There is a reluctance within the Chinese political establishment to accept policies that may undermine economic growth for fear of causing political strife in the country, even if in the long-term it may be benefcial to the country. These economic problems have not gone unnoticed by the people of China—there has been an exponential increase in the quality and quantity of strikes and protests from Chinese workers and social groups. As economic growth has slowed, wages and job growth have declined as well—many workers have been denied wages, leading to strikes and labour protests erupting across the country (Hernandez 2016). A labour rights group based in Hong Kong—the Chinese Labour Bulletin— recorded more than 2700 strikes and protests in 2015, more than double the number in 2014; the strife appears to have intensifed in the early months of 2016, with more than 500 protests in January alone (Ibid). Yet again, we get a signifcant tension between the top-down policy from the Chinese government and the response from people who are faced with precarious working conditions and less pay. If the Chinese government does implement structural reform to the economy, it will lead to the failure of many SOEs that have been propped up through favourable conditions by the Chinese government. However, if they are allowed to fail, more protests with erupt from angry workers who are either unemployed or must continue to accept less wages. Despite the sophisticated mechanisms for repression from the Chinese government, the protests are becoming increasingly better organized and sophisticated. Since protests have become widespread, protesters have been using social media as an organizational tool (Minter 2016). The response of the Chinese government to these protests across stateowned and private enterprises has been the same: to arrest dissidents, clamp down on social media and delete news reports on strikes (Ibid). In particular, the Chinese government has devoted more resources to limiting social media and quickly deleting protests and anti-government riots from dissenting workers. The Chinese government has a long-standing policy to block platforms that may be used to organize dissent or spread messages that threaten its legitimacy. For example, some of the largest social media sites used in the West, like Facebook and Twitter, have been blocked by the Chinese government and politically sensitive phrases are often quickly deleted from blogs and other websites (Bamman 2012). Even with these obvious impediments, labour groups use social media platforms to organize and spread their discontent. Some of the largest and well-organized protests, typically numbering in the thousands though diffcult to confrm, have come from China’s north-eastern state-owned coal industry, which has been hit by the slowing of the Chinese economy. The demands of the workers are commonplace payment of wages and better working conditions. However, the state-owned coal industry is caught in a bind: demand for coal has declined by 6% in 2015, while the industry must provide the supply at below market prices to keep energy prices low for other Chinese industries and for growing cities (Hornby 2016). The case of the coal worker strike highlights a growing tension within China: between the economic restructuring that is necessary to prevent a widespread recession throughout the country and the expedient political and economic policies that maintain control for the Communist Party. Indeed, the crackdown on worker protests and censorship is not a sign of strength, but speaks to the fragility of the regime: Despite appearances, China’s political system is badly broken, and nobody knows it better than the Communist Party itself. China’s strongman leader, Xi Jinping, is hoping that a crackdown on dissent and corruption will shore up the party’s rule. He is determined to avoid becoming the Mikhail Gorbachev of China, presiding over the party’s collapse. But instead of being the antithesis of Mr. Gorbachev, Mr. Xi may well wind up having the same effect. His despotism is severely stressing China’s system and society—and bringing it closer to a breaking point. (Shambaugh 2015: 2) The actions of the Chinese party against dissent are not a testament to its power, but a sign of its weakness. Unlike democratic countries, where people can voice their dissent and periodically vote their leaders out, the Chinese government is unwilling to tolerate political opposition to the regime. While the methods to combat protesters are getting more sophisticated, every time the Chinese government intervenes, it shows the vulnerability of the government: it is a self-conscious regime that is aware that its own legitimacy may be threatened. The actions of the business elite in China are another sign of discontent with the regime: 64% of 393 millionaires and billionaires polled by the Hurun Research Institute are currently emigrating or planning to leave China, and they are sending their children to study abroad (Shambaugh 2015). While it is far too premature to tell if the regime is threatened, the protests from industrial workers and the reluctance of elites to commit to the country’s future offer worrying signs for the regime. Moreover, China’s rapid development has not gone unnoticed by the American security establishment. Currently, two contradictory streams of thought about the relative rise of China are common among Washington policy-makers. First is that a prosperous China will be a positive outcome for regional and global security and development.23 Some policy-makers argue China has already integrated peacefully into the international institutions and a wealthier China could be a large market for imports from the USA. Thus far, at least, Beijing has been relatively accommodating to Western interests and open to Western investment. Even when tension has occurred in the past, such as when the Americans bombed a Chinese embassy in Kosovo, the close economic ties have been a stabilizing force in China’s relationship to the West.24 Thus China’s ascent could be peaceful if both sides are willing to continue compromising on economic and security matters. Indeed, thus far, the relationship between China and the USA has been called “interdependent hegemony”: the two powers have built a political and economic framework that provides accommodation and integrates China into the pre-existing hegemonic system where confict can be resolved through institutional channels (Christensen and Xing 2016). On the other hand, some in the security establishment believe it is only a matter of time before China becomes more assertive over Taiwan and scarce oil and other natural resources.25 They argue a rising China will displace the contemporary balance of power and instigate conflict with the USA. The past may not be indicative of the future and China is facing a series of domestic and international challenges moving from a middle-income to high income country. Also due to US pressure, China is facing growing pressure to realign its currency, a greater number of trade investment and intellectual property disputes, a more hostile security environment and exclusionary regional trans-Pacifc and transAtlantic trade agreements, such as the Trans-Pacifc Partnership (Glenn 2017). While US–China relations have been relatively stable for the past 40 years, it is not necessarily an indication that they will remain so inevitably as China continues to grow as a global power and the USA becomes more protectionist. With recent historical examples such as the ascent of Germany leading to the two world wars or the Soviet Union’s 50-year Cold War, they argue Washington should take precautions over a rapidly developing China. These policy-makers advocate heightened preparedness with increased military spending and stronger ties to allies in Southeast Asia.26 Washington should not be reluctant to take a hard line to defend its economic and security interests when they will be, inevitably, threatened by Beijing. This has led to a contradiction between those in the security establishment and those in the economic and business community. China is both a potential threat and a potential stabilizing force. As discussed earlier, China and the USA are highly interdependent with the Chinese holding trillions in US debt while relying upon the Americans to consume Chinese-made products. Many realists often point out Europe was highly integrated prior to the First World War, particularly Britain and Germany, but this did not prevent a catastrophic conflict from engulfing the continent.27 This ignores the fact many European leaders believed the war would be short and inexpensive, and not a long, protracted, violent affair that left millions dead and four empires in ruins.28 The war also displaced international economic integration for the next 50 years— not exactly a predictable outcome from a confict that was supposed to be over by the Christmas of 1914. Few, if any, scholars or policy-makers are under the illusion that a confict between China and the America would be cheap in terms of materiel or human lives or easily resolvable once started. Both Beijing and Washington recognize their mutual economic reliance and the advent of nuclear weapons, perhaps a key reason the Cold War did not cascade into a full out war, raises the costs of great power confict even further. Yet, many in Washington still view China as threat to American interests. While seemingly unaffected by the fnancial crisis, by 2015, China began to experience an economic downturn of its own. In many ways, China is a victim of its own economic model. Its stock market, which continued to grow after many in the West were mired in recession, experienced a rapid decline in the summer of 2015, losing almost $5 trillion in value. While stock markets are not the only, or even the best, test of a country’s economic vitality, there are other worrying signs China may be in for a diffcult period. The very industrial process behind China’s economic development—manufacturing goods for export—is being adopted by other countries in the region with cheaper labour markets, such as Vietnam. Though China is still a strong regional power, it seems to be experiencing a middle-income country trap. It is fnding the transition from middle-income status to high income, diffcult for a series of international and domestic economic problems. The rise of China could lead to tension with the USA, but conflict between these two countries would have dire economic consequences for the global economy. It is possible that domestic or international factors could lead Beijing to be more aggressive on issues such as Taiwan leading to a direct confrontation with the USA, but if the economic consequences of 9/11 or the fnancial crisis are any indication, fnancial markets will limit the policies of these countries. Both countries are reliant upon the free mobility of goods and fnance to maintain economic growth and prosperity. In China’s case, the regime depends on job creation for stability. The international economy in this case has conditioned the two countries to, at least thus far, peacefully co-exist with each other, with neither country willing to destabilize the global economy. Financial markets have the capacity to punish countries for acting contrary to the demands of capital and the USA and China are no exception.