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China as the centre of gravity

  • Published at 12:52 pm March 11th, 2017
China as the centre of gravity

The emergence of Trump on the other side of the Pacific has underlined more than ever the importance of China and its economy being the centre of gravity within the Asia-Pacific region.

Analysts are also noting that after three decades of rapid economic growth fueled by low-cost exports and state-led infrastructure investment, China is presently facing the early stages of a shift toward a different kind of economic growth model based on private consumption and high value-added manufacturing.

Economists are also hoping that increased consumption will hopefully reduce the economic burden for the rest of 2017 that is being caused by relatively stagnant exports and weak growth in the construction sector.

They are consequently underlining that Chinese leaders will have little option but to use state-led infrastructure investment -- not only to maintain the country’s economic health but also to ensure its social and political stability. The world will consequently wait and watch President Xi Jinping’s forthcoming efforts to consolidate power over the communist party and over the state’s institutions ahead of the 19th party congress, which is expected to take place around October.

Xi’s administration in this context will obviously take all necessary measures that they feel will help to contain any social or economic instability that might threaten his political objectives and status within the party.

This might mean sidelining some of his potential rivals and moving allies into key government posts. This equation will assume greater importance because five of the seven members of the Politburo Standing Committee may retire this year.

Sinologists are mentioning that the effort to control the dynamics might see the president’s followers using the anti-corruption drive to remove rivals and threats to the president’s power.

It would however be foolish to think that such political maneuvering would be at the expense of economic reform. In all likelihood they will also continue to encourage consolidation in heavy industries.

It is being expected that the government will also use credit creation and robust state-led spending on infrastructure and other construction-related industries to maintain growth. Creating stability through such a measure will help the president to gain greater control over the political system.

Western economists are however pointing out that such a mixed economic strategy will not be without risks. They are drawing attention to the fact that corporate debt in China has climbed to dangerous heights and is presently disproportionately concentrated in resources, construction, and other heavy industries that suffer from overcapacity and now constitute the major share of nationwide nonperforming loans.

Economists generally believe that targeted protectionist measures would have a marginal impact on China’s economic trajectory

It is also a matter of great concern that corporate debt is maturing more quickly than ever across all industries, especially heavy industries and the construction sector. This is forcing companies to take on even more debt to invest and to cover old debt.

This matrix has taken on a more awkward situation because, despite unprecedented credit creation and robust government spending in 2016, the real estate sector -- on which many of the above industries depend -- saw continued decline in completed investment and construction starts in the recent past.

Nevertheless, despite growing difficulties in its efforts towards macroeconomic management, Beijing still has the resources for maintaining its economic status quo in 2017.

However, the above scenario is one facet among the many other daunting external challenges that China will have to face and overcome towards its continued economic stability.One should not forget that Trump, during his presidential campaign, accused China of being a currency manipulator and threatened to impose across-the-board tariffs on US imports of Chinese goods.

The new US administration has already walked out of the TPP and if it so wants might end up imposing tariffs and anti-dumping restrictions on imports of goods -- such as steel from China.

Many consider that such measures would severely impact China. Such a scenario, however, appears to be unlikely and some are even terming that it would be fairly inconsequential.

Economists generally believe that targeted protectionist measures would have a marginal impact on China’s economic trajectory and would only encourage corporate supply chains to diversify in other parts of Asia with cheaper labour and large consumer markets.

This dynamic would then create tensions between the two economic superpowers -- and this could spill over into other spheres of US -- China relations.

We have already seen Trump taking steps that indicate that he is willing to transcend diplomatic norms governing US-China relations.

Through this, he has affirmed that he intends to use the question of Taiwan’s status as a bargaining chip in negotiations with China on other fronts, including cyber security, North Korea’s nuclear program, and trade.

Beijing is however unlikely to make any concessions on Taiwan, and Washington knows this. Instead of fundamentally re-evaluating Taiwan’s status, the Trump administration might then try to use the Taiwan issue to enhance more open confrontational actions in the South China Sea or elsewhere.

It is also clear that Beijing will also try, overtly or otherwise, to ensure that there is less instability in Hong Kong.

In this context, it is certain that they will try to ensure that a favorable candidate prevails in Hong Kong’s forthcoming Chief Executive Election, which is set to take place in March.

It is also certain that throughout 2017, eager to boost the economy’s slow but steady shift up the industrial value chain, China will attempt to promote overseas investment into sectors such as high-tech manufacturing and information and communications technologies.

It will most certainly also try to capitalise on the opportunity created by the Trans-Pacific Partnership’s demise.

Japan, Vietnam, and South Korea have already observed that China is now trying to promote its own alternatives that it has been endorsing through the Regional Comprehensive Economic Partnership and the Free Trade Area of the Asia-Pacific.

It would however be pertinent to mention that China will try its best to combat economic weakness at home through strong government initiative aimed at curbing illicit capital outflows. This in turn might somewhat slow the momentum of Chinese outbound investment but it is unlikely that it will halt its efforts to enhance infrastructural, economic, and security ties to Central and Southeast Asia.

China might however face some obstacles in this context with regard to its grand initiative “One Belt, One Road” -- the massive development and infrastructure strategy aimed at better connectivity between China to the rest of Asia, Europe, and East Africa.

This might include challenges arising out of local opposition and security risks in places such as Central Asia, Afghanistan, and Pakistan.

Muhammad Zamir, a former Ambassador and Chief Information Commissioner of the Information Commission, is an analyst specialized in foreign affairs, right to information and good governance, can be reached at [email protected]

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