CoverStory

Red capitalism

Perceived American decline has encouraged China’s aggressive posture in the region

By Stefan Halper

What seemed impossible five years ago is a reality today; China has risen more rapidly and in different ways than most had anticipated. This has profoundly affected the region, the West and the concept of the West. China has chosen its own path; it will not become a member of the club as Roosevelt had hoped for Stalin. The market will not lead, inexorably, to pluralism and certainly not to democracy, as many in Washington have believed since the 1980s. Rather, China, a developing nation approaching the pinnacle of world power, has legitimised authoritarianism in our time.

Reflecting the view that, ‘it’s not whose army wins, it’s whose story wins,’ China will not confront the West on the battlefield, but rather in the markets and in the global information space where Beijing seeks to cast the American enterprise as in decline and frame the public’s understanding of events in a China-friendly way. Here, success for Beijing would mean de-legitimising the West’s version of events and enfranchising China as a respected and authoritative arbiter of global affairs, particularly among those in the world beyond the West.

China’s challenge arrives in several dimensions. It includes a range of economic and security questions and, importantly, an ideational challenge. There has emerged a battle of ideas about governance that will have far-reaching consequences.

The Chinese have refined the Asian growth model to develop fast-growth, stable, market-authoritarian governance that is admired in the world beyond the West and particularly among Third World leaders. That China has crafted a distinct posture since the Soviet collapse—neither conforming to the US world view, nor confronting, until recently, the US-led system—begs the question of what these trends mean for the West and the idea of the West. 

Regime leaders in Africa, Latin America and elsewhere see governance without contentious legislatures or challenging media. It provides people with employment, housing and the hope of a better future—but not an open public square or the rights of speech, belief or political association. The public is asked to respect the authorities and stay out of politics. Non-Western views of China’s example are important; the words envy and admiration come to mind. With China’s rise, a developing country is demonstrating how, in the 21st century, authoritarian governments can use the market to accelerate growth. China offers not just an alternative path to development; it offers an alternative to the Western-authored, liberal, international order, rejecting a range of values and principles that sustain representative government, including the freedoms of speech and assembly and universal human rights.

The People’s Bank of China—now several times the size of the World Bank—is financing infrastructure and energy development with low-interest loans across Africa, Latin America, Central Asia and the Near East, including loans to outliers and pariah states. With these hard-currency loans, China, in effect, provides a path around the West, making Western standards and institutions less relevant.

TURNING POINT 

For 30 years the Chinese have been our economic partners. Now they are our political—and rising military—rivals. Successful market reforms over the past two decades indicate the Chinese Communist Party is not about to crumble. And it is certainly not melting into democracy. In fact, it is doing quite the opposite.

In 2008 the recession brought a new assessment of China. Double-digit growth, trade surpluses, huge and growing hard-currency reserves, moderate inflation, a growing middle class and a generally improving quality of life—it seemed China’s market-authoritarian system was managing the global crisis remarkably well.

Moreover, from America’s distress, there arose an uncomfortable new norm in the way Washington perceived its relationship with Beijing. Economic interdependence muted America’s voice on certain values and issuessuch as minority rights, rule of law and free speech—that had underpinned the US-led liberal order.

Hillary Clinton told journalists in 2008 that pressing China on “other issues”–like transparency, Tibet and human rights–“must not interfere with addressing the global economic crisis.” The same message was conveyed in November 2009, when President Obama visited Beijing, and in his low-key, non-televised meeting with the Dalai Lama at the White House in February 2010.

In the long tradition of Chinese strategic thought stemming from Sun Bin and others in the fourth and fifth century bce, leaders of the Chinese Communist Party and the People’s Liberation Army analysed Washington’s changed posture and concluded that there was potential for gain. The chairman of the People’s Bank of China captured the moment when, referring to the housing bubble and poorly regulated banks, he announced in London, “Now the teachers have problems”—but as Sun Tzu emphasised (also in the fourth century bce), such strategic judgments must be “accurate in every factor,” and this time the Mandarins may have read too much into the moment.

At first it seemed China had miscalculated. Having bet on America’s decline as the 2008-2009 recession swept over the US economy, China then saw US equity markets grow by 11 per cent in 2010, productivity increase and inflation remain moderate. Meanwhile, China fought rising debt, bank weakness due to poor lending practices and inadequate loan loss reserves, a property bubble and the growing fear that its export-driven economy could, if not changed, lead to a Japanese style lost-decade. Then the tables turned. In 2011 the US saw little increase in property values, continued high unemployment at 9.1 per cent, Congress’ failure to agree on debt reduction and the Standard & Poor’s downgrade of US debt from AAA to AA—the first such downgrade in American history. This led naturally to a spate of triumphalism in Beijing. The US was now finally and firmly in decline—or was it?

It is well to remember that American declines come just slightly less often than leap years. In the 1950s Americans themselves believed they had lost the Cold War when the Soviets put Sputnik into orbit. In 1956 Khrushchev remarked, “We will bury you.” In 1964 he referenced a Marxist saying, ‘The proletariat is the undertaker of capitalism’, which remains a triumphalist theme running through today’s Chinese commentary. In the 1970s, twin oil crises in 1973 and 1978 brought the US economy to a standstill; president Carter talked of “malaise”, the Republicans talked of a “misery index” that combined inflation (then 18 per cent) and unemployment, which reached 11.3 per cent. America was said to be in decline again when president Nixon took the US off the gold standard, and again when president Reagan was thought to have failed in his effort to make the transition from an industrial economy to an information-based economy. Joseph Nye makes the point that the then senator Paul Tsongas, running for president in 1992, flirted with the idea of decline, saying, “The Cold War is over and Japan won”. 

A decade later the decline theme is alive and well. On 22 August 2011, the Beijing Daily informed us that: “The downgrade of the US credit rating from AAA is an historic and symbolic event. It should be viewed as a major turning point in the decline of the country's national development. The East Wind prevails over the West Wind.”

And so the declinists have accented America’s ongoing cycles of growth and consolidation.

Nye draws our attention to the World Economic Forum at Davos, which produces the Global Competitiveness Report each year. Here the US ranks number 2 with “very flexible labor markets, high investment in R&D, high investment in education (twice as much per capita on higher education than Europe)”, and in the forefront on nanotechnology and biotechnology. Switzerland ranks number 1.  China ranks number 29. Thus, the picture of America’s decline is no longer so clear.

And, of course, as 2011 has unfolded China’s own difficulties were confirmed: a possibly uncontrollable property bubble, spiralling local and provincial government debt, inadequate bank reserves against bad loans and inflation linked to an artificially low renminbi estimated to be between 6 and 10 per cent.

During his January 2011 Washington visit, President Hu discovered that Beijing’s more aggressive tone had had a profoundly negative effect in Washington. Attitudes toward China had hardened. China’s transition from the late Deng Xiaoping’s taoguang yanghui, which can be translated as “biding our time and building up our capabilities”, to the “aggressive, muscle-flexing, triumphalism” described in former US ambassador to China Jon Huntsman’s cables, now framed Washington’s view of the relationship

Rather than the “stakeholder” in the global commonweal described by World Bank President Robert Zoellick, we now find China’s role more complex. China has been helpful on certain matters—North Korea, piracy in the Gulf of Aden, providing UN peacekeepers in many places—and has been a spirited, though often difficult, participant in the World Trade Organisation and the United Nations. But over time, it has become clear that China’s actions are guided by a distilled pragmatism that serves Beijing’s direct interests rather than an embrace of global norms or the ethics that have informed the post-World War II global architecture. This phenomenon has become pronounced in China’s dealings with the resource-rich developing world, where Beijing has revealed a particular sensitivity. The August 12th editions of the International Herald Leader (an organ of Xinhua) admonished:

Be on Guard against the West's insistence on 'China's Responsibility’. With the rise and global influence of China, the so-called 'China's international responsibility' has become a new weapon and a new means for the West to suppress China.

One might ask why Beijing’s planners have not taken steps to avoid this vulnerability. The answer is rooted in what has been called China’s growth trap. China must grow at a minimum of 8 per cent to ensure stability and provide jobs and housing to migrant workers flooding into and out of the east coast cities (and to recent university graduates as well). Failure to achieve this growth rate carries the risk of chaos—a nightmare in a country of 1.5 billion.

To grow, Beijing must find and secure steady, long-term sources of energy, copper, iron, zinc, cobalt and timber. A latecomer to these markets and spurred by unprecedented demand, China must offer better terms than the established players, which it does in several ways. Beijing uses its $3 billion in hard-currency reserves to provide low- or no-interest, long-term loans or grants to resource-rich governments. It normally commits to road and rail construction to move the resources to a port; sometimes agrees to build schools and hospitals that otherwise might not be built; and makes large, private payments to chiefs of state, to be sure that all goes smoothly. 

Most importantly, Chinese decision-makers pledge noninterference in internal affairs. They are not concerned about Western ethics and norms, good-governance issues, the rule of law, transparency, environmental questions, or labour conditions. They are concerned about one thing: extracting the resources needed for growth and stability in an efficient and timely way. And because ensuring growth and stability conditions the party’s survival, China will not become a stakeholder, contrary to Zoellick’s prediction, in the norms and ethics of the global community—except when it benefits them.

THE CHINA MODEL

The so-called China effect is seen in several dimensions; it is quietly remaking the landscape of international community and politics, and it is doing so in ways that progressively limit the projection of Western influence beyond the NATO bloc. This process is most pronounced in the Third World, but Second World nations like Syria, Indonesia, and Iran also have regional influence (I call them pivot powers), and are also adopting elements of China’s example.

Over time, one effect of China’s embrace among Third World nations has been to marginalise the principles that have informed Western governance and progress. This is seen in China’s assiduous support for a number of authoritarian regimes across sub-Saharan Africa (Zimbabwe, Sudan, Angola, etc) and its support of authoritarian rulers, such as Gadaffi and Syria’s Assad, opposing the Arab Spring. China exports military equipment and technical antidotes developed by its police and military research centres that are used to identify and locate China’s 420 million internet users. Authorities across the Middle East are using these technologies to disrupt twitter, emails, Facebook and texting—social media that have proven vital in mobilising challenges to authoritarian regimes. 

In people terms, the China effect means that for those ruled by governments admiring or seeking to replicate China’s market-authoritarian example, the prospects of a democratic civil society are remote, perhaps nonexistent. Reflecting China’s domestic standards, workers rights and safety and environmental standards are largely ignored by Chinese corporations operating in Africa, prompting many Africans to ask whether the Chinese are making their lunch or eating it.

China is, in effect, catalyst-in-chief for a profound and far-reaching process. Just as globalisation is shrinking the world, China is shrinking the West—its values, principles, and standards—a point underscored in yet another realm by its success in persuading 19 countries to skip the Nobel ceremonies for Liu Xiaobo in 2010.

These developments place China at the forefront of global trends which embrace a form of capitalism that brings wealth without democracy. Put simply, many leaders in the world beyond the West are replacing the free-market, democratic model. They are substituting it with a market-authoritarian model that opens the economy to investment and market development and allows the ruling party to control the government, the courts, the military and information.

These developments—new centres of economic autonomy beyond the West and the growing appeal of illiberal capitalism—are the dual engines for the diffusion of power away from the West. When added to Beijing’s continuing currency manipulation, they are the key force-multipliers in the global rise of China.

THE EXIT OPTION 

The failure of the Washington Consensus in the late 1980s and early 1990s in Africa and Latin America left nations worse off for following the World Bank and International Monetary Fund one-size-fits-all prescriptions for growth. Lax oversight and poor management left many countries with stagnant literacy rates, job losses and declines in per-capita income. As disillusion rose, the door was left open for China to gain traction using policies that adroitly combined the timely provision of hard-currency support and noninterference in internal affairs. Here, China has essentially provided an ‘exit option’ for Third World governments seeking loans and relief from World Bank and IMF moralising and hectoring demands for government reform—and has greatly benefited from it.

China has built on these commercial relationships to exert political leverage in international bodies, creating a group of grateful and compliant acolytes, but not in the Cold War sense. There are no voting blocs within the United Nations or in other global institutions that take instructions from a bloc leader. Rather, we see nations loosely connected by an admiration for China, a desire to capture the power of international markets and an equal desire to remain autonomous from Western concepts of global civic culture and liberal development economics.

While there is no Chinese model per se that can be replicated in, or exported to, places like Latin America or sub-Saharan Africa, there are a complex set of developments and reforms in China over the last 30 years that owe their success to China’s unique culture, demography, geography and governing philosophies. In this sense, while there is no model to speak of, there is some kind of recognisable format. In ideational terms and in terms of global impact, those within China’s orbit—foreign and domestic—are subject to a set of governing values distilled from the modern Chinese experience that is simple, and indeed corrosive to Western preeminence. This is the basic idea of market authoritarianism.

Strategic planners in Washington and in Beijing understand that we live in a time when unprecedented domestic economic and political challenges in either country could compromise national power. Such events—a debt or banking crisis, for example—could alter the status of either country in global affairs and certainly reset the US-China relationship.

Given the uncertainties, it is not surprising to find a 12 July 2012 article in Red Flag Manuscript (Hong Qi Wen Gao) arguing that two strategic opportunities in the world today are favourable to China's global ambitions. One is that the US and other Western countries continue to suffer from the global financial crisis. The other strategic opportunity is that challenges in Libya, Iraq and Afghanistan, not to mention concerns about regional stability, have prevented the US from focusing on East Asia and containing China. The Red Flag Manuscript article suggests China should take full advantage of these two opportunities to enhance its power during America’s ongoing financial and political crisis.

It is dysfunction in Washington that has encouraged China’s aggressive posture in the region. China has advanced territorial claims from the Ryukyu Islands to the South China Sea to Arunachal Pradesh (which Beijing calls Southern Tibet) on the Indian border. China’s new Blue Water navy is of particular concern to the Philippines, Vietnam, Singapore and Taiwan, all of whose disputes with Beijing centre on the South China Sea. And it is with reference to China’s claims that the US and nations throughout the region invoke international law and custom to underscore their commitment to freedom of navigation and transit of the South China Sea. And, of course, currency, debt, trade, transparency, intellectual property and many other issues can be considered a part of the unfolding confrontation between Washington and Beijing.

It is within the context of the ongoing crisis that Henry Kissinger observes that China’s nationalism tends to be inflexible and confrontational, particularly on questions of sovereignty—and driven by a determination to regain the global influence that China enjoyed in the 14th and 15th centuries. 

Referring to pre-WW I Europe, Kissinger asks in his recent book, On China, if history will repeat itself. “No doubt, were the United States and China to fall into a strategic conflict, a situation comparable to the pre-World War I European structure with the formation of blocs pitted against each other could develop in Asia.” He continues, “A key question is whether the crisis that led to WWI was…caused by German capabilities or German conduct?” Here he turns to Eyre Crowe, a British Foreign Office official: “Crowe concluded it made no difference what role Germany avowed. Whichever course Germany was pursuing…once Germany achieved naval supremacy, Crowe assessed, this in itself—regardless of German intensions—would be an objective threat to Britain and incompatible with the existence of the British Empire.

Kissinger makes the point that historical parallels are by nature inexact. Moreover, “the American debate adds an ideological challenge to Crowe’s balance of power approach”. To this Kissinger adds a message of hope that US-China relations need not and should not be a zero-sum game and that there is ample room for diplomacy to smooth the most difficult edges and find common ground. 

CHINA'S CHALLENGE

China’s claims, challenging statements and aggressive naval deployments along its east coast and southern borders have alarmed its neighbours—from Korea to Vietnam to India. Among the results of China’s new posture has been an express welcome of President Obama’s ‘return to Asia policy’ by those facing a less predictable China. Beijing has sought to balance this by emphasising its strong trading relations within the region (of China’s 10 largest trading partners, six are regional neighbours), its role as an engine for growth and infrastructure development and as a source of hard-currency investment, while refusing to discuss ongoing territorial disputes.

A second sensitive security issue for Beijing’s is the potential formation of a US-Japan-Korea military alliance; Beijing fears that potential chaos on the peninsula may cause the Japanese to rethink their security situation and revitalise their military capacity. Relations have been strained with South Korea, which, until the fall of 2010, had been a rapidly expanding market for Chinese exports and direct investment. Moreover, the unpredictable Pyongyang regime invited a larger US military profile by attacking the South Korean frigate Cheonan in international waters and by shelling a nearby South Korean island. Beijing declined to support the UN condemnation of the attack.

Third, China has claimed the mineral and energy rich Ryukyu Islands, which have been a part of Japan since 1879. The United States conquered the islands during World War II and returned them to Japan in May 1972. Washington has reiterated its support for Japan’s claim to the Ryukyu Islands underscoring this with naval exercises in the Yellow Sea.

Thus the renewed American presence in the Western Pacific is, in large part, a consequence of aggressive Chinese claims and actions.  China opened the door in the Western Pacific and the United States stepped through.

As if rising tensions along China’s east coast were not enough, tensions in China’s west—namely, East Turkestan (Xinjiang) and Tibet—along with the very long border with Islamic Central Asia, are growing problems. They are not flash points today, but smoulder zones. They receive little coverage, but Islamic militants are active in Central Asia and in confronting Han oppression in China itself. Afghan veterans—some al Qaeda-trained, others former Taliban jihadists—are gradually filtering into the Uyghurs community in Xinjiang. They are embittered, alienated and militarily able to pose real problems, as will the weapons flow from Tajikistan, Uzbekistan, Iran and elsewhere.

And finally, fresh border disputes and troop build-ups on the Indian border at Kashmir and Arunachal Pradesh have alarmed Delhi and opened the way to strengthened military and diplomatic relations between the US and India as well as India and Japan and Vietnam.

WHITHER CHINA?

Beijing’s planners know that in this time of multidimensional change, China must frame the Asian story going forward. China will either be seen as Asia’s engine of growth, delivering growth, investment, trade and markets to smaller Asian nations, or be defined as a hegemon—a large nation seizing oil, gas, and mineral deposits, a rogue requiring obeisance from others—asserting its interests wrapped in a muscular diplomacy.

To be sure, the China story ‘wins’; Beijing invested $6.8 billion in 2010 to create a global network with daily news and commentary in 56 languages on television, radio and in print. The objective is to frame developing stories in a China-friendly way. Beijing is determined to move beyond the days when global opinion could blame China for the collision of a Chinese fishing boat and a Japanese Coast Guard vessel in the Ryukyu Islands, or allow the Tibet story to diminish and embarrass China on the front pages of the world’s newspapers on the eve of the Olympics.

Li Congjun, the president of Xinhua in Beijing, announced that “CNC will present an international vision with a Chinese perspective.” He emphasises that the focus is on “improving our ability to guide international opinion.” Significantly, this initiative is not simply a public relations effort. It derives from Beijing’s strategic calculation that the relative strength of nations in the 21st century will be determined in the global information space where China’s story must win.

We conclude with the thought that China is determined to benefit from the US debt crisis. Beijing will question the continued value of US Treasury bonds. It will blame stalled markets and slow growth on the US and highlight the dysfunction in the US Congress. Beijing will hope to use these issues to mis-position the US on both geopolitical issues and ideological questions where reliability and strength are critical.

Kissinger is right to ask if the crisis that led to World War I was caused by German capabilities or German conduct. And Eyre Crowe was correct in observing it made no difference what role Germany avowed, that once Germany achieved naval supremacy, this in itself, regardless of German intentions, would be an objective threat to Britain and incompatible with the existence of the British Empire. Would Chinese naval supremacy in the Pacific have the same effect on Washington?