China Dream:
Still Coming True?
Edited by Alessia Amighini
ISBN 978-88-99647-17-9
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Contents
Introduction
Paolo Magri..............................................................................7
1. Waking from the China Dream
Filippo Fasulo...........................................................................13
2. Beijing’s Economy: Dream a Little Dream of China?
Alessia Amighini.......................................................................33
3. Financial Markets: the Pain of Reform Before the Gain
Christopher Balding.................................................................49
4. Chinese Foreign and Security Policies:
Dream at Home, Nightmare Abroad?
Axel Berkofsky ..........................................................................65
5. China’s G20 Presidency: Coming at the Wrong Moment
Andrea E. Goldstein..................................................................81
6. Silk Road Economic Development: Vision and Path
Wang Wen and Jia Jinjing.........................................................95
Conclusions. Implications for the EU
Alessia Amighini.......................................................................115
The authors................................................................................119
Introduction
At a time when economic tremors in China are rippling through
world markets and the country – already the second-biggest military spender in the world – is further increasing military spending at double-digit rates, it is key to assess how far President Xi
Jinping has gone in fulfilling the China Dream. One of his main
slogans (somehow evoking the American Dream), it spells out a
specific doctrine of Beijing’s ascendance to cultural, economic and
military prowess by 2049, precisely 100 years after the founding
of the People’s Republic of China. As Xi’s plan unfolds, China has
already reached a series of symbolic milestones. The yuan’s inclusion in the IMF’s Special Drawing Rights (SDR) made it one of the
world’s reserve currencies; a new China-led multilateral institution
has been established (the Asian Infrastructure Investment Bank AIIB); China was recognized as a market economy by a number of
countries, and it keeps pressing the EU and the US to do the same.
Moreover, the China Dream laid the ground for the One Belt One
Road (OBOR) initiative, which aims at connecting existing and
planned global routes to and from various Chinese provinces. Last
but not least, the Chinese 2016 G20 Presidency may prove to be a
timely occasion for China to define its role in global economic governance. However, in a context of growing economic and geopolitical headwinds (sluggish economy, aging population, and political
opposition), progress on domestic political and economic reforms
is lagging behind expectations.
In a nutshell, will Xi be able to fulfill his promises and lead his
country to prosperity?
Xi’s policies are meant to deal with the inevitable transformation China has already been going through over the last few years.
8
China Dream: Still Coming True?
All the multiple facets of his strategy are directed towards a Chinese renaissance – or, in his words, rejuvenation – that should turn
the most populous country in the world back to central stage both
at the regional and world level. However, today’s China is still a
country ripe with contradictions. Skyscrapers and innovative industries abound along with dramatically poor peripheries and rural areas. Despite greater and greater attention to its international agenda,
China is still positioned somewhere between a regional and a global
power. Besides, its political system still appears far from concluding its journey from a revolutionary party-led system to a stable and
institutionalized structure.
The China Dream raises several questions about China’s political
and economic identity in the 21st century. The main is whether China
will succeed in developing its own model or have to fully embrace
the Western liberal order. In the meantime, China’s international aspirations also seem to have reached a turning point. When Xi Jinping
came to power he adopted a more assertive approach that shook up
the status quo among international economic governance institutions
and scaled up tensions with the United States and most of the countries within the Asia Pacific region, mainly due to maritime disputes.
The future evolution of China’s international role will be highly
dependent on Xi Jinping’s ability to balance China’s revisionist demands – which, according to the China Dream, are simply requests
for recognition of its natural and historical position as a great power
– with the inevitable reaction and containment they provoke.
When moving to the domestic level, the main question is whether Xi’s China Dream will turn out to be the country’s dream or his
own. Political power struggles are heating up and the General Secretary is facing growing resistance within the Party. He quickly attained the rank of most powerful leader since Deng Xiaoping or
even Mao Zedong, but he still has to strike a final deal between the
interests of the political and economic elites and those of the people, also in light of the rising social costs that the ongoing economic
transformation will soon bring about.
Against this background, the purpose of this volume is to highlight the viability and major challenges of the China Dream. The
Introduction
9
opening chapter by Filippo Fasulo places the spotlight on the genesis of the China Dream and its links to earlier policies in traditional and Communist China. Indeed, Xi Jinping developed the China
Dream recalling past policies and putting the narrative of “national
rejuvenation” at the heart of his agenda. In concrete terms, China
should be “great again” and, to this aim, economic reforms need
to be implemented. Unfortunately, Xi’s reformist agenda implies
political costs for economic and political stakeholders at the local
and the national levels who are attempting to downsize the reach
of the reforms. To contrast this opposition, since the 3rd plenum in
2013, Xi has outlined clear-cut policies: political centralization,
implementation of the rule of law, ideological radicalization and
a sweeping anti-graft campaign. The China Dream’s middle goal
of doubling 2010 GDP per capita by 2020 (thus reaching the status of moderately prosperous society) forces Xi Jinping to achieve
substantial economic success in the short term. Should he fail, Xi’s
China Dream might be questioned even more.
In Chapter 2, Alessia Amighini points out that, despite artfully
evoking the American Dream, the China Dream is rather vague in
content, scope and horizons, and therefore purposefully serves Xi’s
political objectives without the need for him to actually deliver on
specific outcomes. In particular, it provides a powerful slogan to
revitalise domestic confidence in the future of the country, at a time
when the ongoing rebalancing of the sources of economic growth
in China implies a sensible slowdown compared to Hu’s times, and
painful restructuring in many sectors and regions. By evoking the
American Dream, Xi aims to reassure the country’s new middle
class that China will eventually be able to achieve prosperity, but
economic growth has been and will continue to be slower under his
leadership, and structural reforms are lagging behind, in the financial sector and in State-Owned Enterprises (SOEs) as well. As the
author puts it: the new middle class might have to dream a smaller
dream of China than what Xi has evoked so far.
The urgent need for reforms in the financial system is Cristopher Balding’s main focus in Chapter 3. A rising dependence
on debt is evidence that financial reforms are stuck in the back-
10
China Dream: Still Coming True?
rooms of decision-makers in Beijing. The current domestic financial system, marked by an underdeveloped banking industry,
is holding back the economic transition needed for achieving
the China Dream. The renminbi is a decisive issue too, but its
full liberalization – planned for completion by 2020, when the
China Dream will ostensibly have led to a moderately prosperous society – is a risky undertaking that might threaten a fragile
financial system.
When it comes to the foreign and security field, China’s changing approach to the regional context might transform the China
Dream into a nightmare in disguise for many Asia-Pacific countries. In chapter 4, Axel Berkofsky warns against the contradiction
between the China Dream as a peaceful concept and the escalation
of its territorial claims in the East and South China Seas. Since Xi
Jinping came to power, China replaced its “Hide and Bide” strategy – adopted since Deng Xiaoping’s leadership – in favor of a
more proactive stance. The China Dream and its global reach are
questioning the traditional Chinese “non-interference” policy due
to Beijing’s rising political and economic interests abroad. It remains to be seen if China will eventually be a revisionist power of
a global order or will adapt to the current status quo.
So, the Chinese Presidency of the G20 comes at a sensitive moment, as Andrea Goldstein explains in Chapter 5. China’s hosting of
the summit is the recognition of the greater role that China is playing in global governance. At home, the G20 might be helpful in escorting China along its multiple transitions (e.g. domestic demand
instead of exports, consumption instead of fixed capital formation,
services instead of manufacturing, private business instead of stateowned enterprises, innovation instead of capital accumulation).
Moreover, at the international level, it also helps China strengthening relations with other emerging economies and promoting IMF
reforms. Nonetheless, cooperation among G20 leaders is a prerequisite to achieving sustained and sustainable growth and ultimately
Beijing’s success in chairing the G20 Summit will depend on its
ability and willingness to bridge Western economic powers and
emerging economies.
Introduction
11
The last chapter by Wang Wen and Jia Jinjing focuses on a key
Chinese undertaking, whose impact may be anything but negligible
for both Beijing and the rest of the world: the “One Belt, One Road”
(OBOR) initiative. OBOR is presented by China as an opportunity
for enhancing development along its Eurasian route, and its ambition is to pave the way to shared prosperity built upon mutually
beneficial cooperation. Moreover, the announcement of a revival of
the Silk Road is already drawing a lot of attention in China and creating heavy competition among Chinese provinces to reap the benefits of infrastructural projects and new trade routes. Indeed, OBOR
is mainly intended to favor the poorest Chinese provinces on the
northwestern and southwestern borders, and it could therefore make
a difference in terms of economic prospects for such provinces.
The China Dream may mark a turning point for both China and
the rest of the world. However, its vagueness leaves room for skepticism and concerns. It is up to Xi Jinping to fine-tune this concept,
but in so doing he needs to implement difficult reforms while facing
mounting opposition at home. At the same time, Xi needs to scale
up the Chinese role at the regional and global level, while avoiding
painful retaliations. Definitely not an easy task, but one Xi needs
to successfully accomplish. If not, he would have to admit that the
China Dream is just that: a dream.
Paolo Magri
ISPI Executive Vice President and Director
1.
Waking from the China Dream
Filippo Fasulo
China is in transition and its leader needs a narrative to make his political agenda a success. This is the reason behind the China Dream,
a political slogan and a long-term pledge at the core of the political
initiative of Xi Jinping, the Chinese President and the Party General
Secretary. The China Dream promises the modernization of China
by the middle of the 21st century and is aimed at giving back the
prominent international role that China lost after the First Opium
War. In order to fulfill his commitments, Xi Jinping has to face political and economic obstacles. The political ones are represented
by party cadres and economic circles interested in maintaining the
status quo. They will pose a serious challenge, slowing down the
implementation of national policies both at the central and at the
local level. For what concerns the economic hurdles, they emerge
in an economy facing a structural reorganization that will inevitably
have costs in terms of political and social dissatisfaction, economic
setbacks and unemployment. China will achieve its Dream if the
political authorities are capable of properly addressing those issues.
This chapter deals with the political implications of pursuing the
China Dream. It starts by analysing the choice of the slogan with
reference to some of the previous experiences within China’s political debate and its linkage to events that occurred in China’s history
in the last two centuries. Then the chapter analyses the political and
economic context in which the China Dream is inserted. The time of
economic restructuring is also the time of a political power struggle
and the success of the China Dream is also the success of the rule of
the Communist party over China. Xi Jinping must balance between
14
China Dream: Still Coming True?
reforms and the status quo to advance his political agenda without
upsetting the equilibrium among the party leaders and between the
party and society that allowed China to experience such outstanding growth in the last decades. Finally, the chapter will list the tasks
that Xi Jinping has to complete to make the China Dream a reality.
What the China Dream is
Since Xi Jinping came to power in 2012, he has been promoting
a significant shift within Chinese politics under a new and catchy
label: the China Dream. Even if this idea appears to be easy to understand, it hides minor but important meanings that are not so selfevident, especially for a Western audience. Although from a shallow analysis it might seem that China is mimicking the American
Dream1, Xi’s version differs significantly in terms of genesis, scope
and dimension.
Xi Jinping introduced the China Dream (Zhongguo Meng) into
contemporary political debate on 29 November 2012, just days after being elected General Secretary of the Central Committee of
the CPC2. The occasion was a visit by the newly appointed sevenmember Politburo Standing Committee to the National Museum of
China’s permanent exhibition named “The Road of Rejuvenation”
(Fuxing Zhilu). Xi Jinping called for China to win back the role
of world-class country. As it was, for example, at the beginning of
the 19th century when China accounted for about one-third of the
world’s GDP at purchasing-power parity3. In Xi’s view “to realize the great renewal of the Chinese nation is the greatest dream
for the Chinese nation in modern history”. Accordingly, China will
The American Dream was presented for the first time by James Truslow Adams in
1931. It is a national ethos promoting the achievement of individual success without
regards to birth and class origin.
2
Xi Jinping became the CCP’s General Secretary during the 18th Party Congress held
in Beijing on November 2012.
3
The Economist published a chart showing the share of global GDP at purchasingpower parity. See “China’s economy. Hello America”, 6 August 2010, http://www.
economist.com/blogs/dailychart/2010/08/chinas_economy
1
Waking from the China Dream
15
be “an affluent, strong, civilized and harmonious socialist modern
country” in time to celebrate the 100th anniversary of foundation of
the People’s Republic of China (PRC) in 2049. Prior to that, China
should accomplish a middle-term goal “to complete the building of
a moderately prosperous society in all respects”. This intermediate
stage coincides with the 100th anniversary of Communist Party of
China foundation in 20214.
From the occasion and the words used by Xi Jinping, it seems
clear that a central element of the China Dream concept is the idea
of rejuvenation (Fuxing). This feature is connected to China’s history in the XIX and XX centuries, when the Middle Kingdom lost
its status as most civilized nation in the world (according to the Chinese view) and was reduced a to semi-colony subjected to foreign
will5. The period between the First Opium War (1839-1842) and the
foundation of the PRC is labeled the century of humiliation, and it
is described as crucial in shaping the Chinese narrative since the fall
of the millenniums-old Chinese empire in 1911. Thus, the idea of
rejuvenation, which is connected to this long-term historical view,
claims for China and its rulers the moral duty to regain the role once
played. As it is officially presented, the China Dream is not an idea
of rising to become a world superpower, but to gain back what can
be described as a sort of “natural” (for China) leadership.
The genesis of the China Dream cannot be simply described as
an intuition developed by Xi Jinping, but is instead connected to
images, narratives and slogans that have been part of the CCP’s
toolkit for decades. As stated, the idea of rejuvenation was present
in China even before the end of the century of humiliation and has
been refreshed many times since. For example, as Wang reported6,
Jiang Zemin and Hu Jintao extensively promoted “the great rejuvenation of the Chinese nation” from the early 1990s. This conXi pledges “great renewal of Chinese nation”, Xinhua, 29 November 2012, http://
news.xinhuanet.com/english/china/2012-11/29/c_132008231.htm
5
Wang Zheng analyses the rejuvenation narrative in the light of the CMT complex
(Choseness-Myths-Trauma) underlying how this event deeply shaped the Chinese
identity. See Wang Zheng, “The Chinese Dream: Concept and Context”, Journal of
Chinese Political Science, 2014, vol. 19, no. 1, pp. 1-13.
6
Ibid., p. 6.
4
16
China Dream: Still Coming True?
cept is present both within the Reports at the 16th and 17th Party
Congresses – read, respectively, in 2002 by Jiang and in 2007 by
Hu – and in the White Paper on Political Democracy published
in 20057. The same holds true when it comes to the concept of
China Dream. Earlier accounts of the use of “China Dream” date
back even to the VIII-VII century B.C. and, according to Ryan
Mitchell, it was adopted both by imperial poets and within plays
in the late 1980s8. The most recent uses of the term are connected
to an op-ed written by New York Times’ Thomas Friedman, who,
in October 2012 – right before the 18th Party Congress that celebrated Xi as new paramount leader of China – claimed that “China
Needs Its Own Dream”, referring to recent Chinese publications9.
This article was quoted by the Chinese media and The Economist
suggested it can be listed as one of the main sources for the resurgence of the concept10.
The historical narrative contained within the China Dream helps
underline its main difference from the American Dream. While the
latter focuses on the individual goal of achieving happiness and personal success, the former focuses on the collective dimension enrooted within common development at the nationwide level. Therefore, the China Dream is the dream of the whole nation. Although it
should also be fulfilled through personal commitment (since 2012
Chinese streets have been covered by tens of thousands of posters
stating “China Dream, my dream”), individual success will not be
complete without China becoming a modern nation.
See Jiang Zemin, Report at the 16th CCP National Congress, Beijing, 14 November
2002, http://en.people.cn/200211/18/eng20021118_106983.shtml; Hu Jintao, Report at the 17th CCP National Congress, 24 October 2007, http://news.xinhuanet.
com/english/2007-10/24/content_6938749.htm; and State Council Information Office, The White Paper on Political Democracy, 19 October 2005, http://www.china.org.cn/
english/2005/Oct/145718.htm
8
R. Mitchell, “Clearing Up Some Misconceptions About Xi Jinping’s” “China Dream”,
The Huffington Post, 20 August 2015, http://www.huffingtonpost.com/ryan-mitchell/
clearing-up-some-misconce_b_8012152.html.
9
T.L. Friedman, “China Needs its Own Dream”, The New York Times, 2 October 2012,
http://www.nytimes.com/2012/10/03/opinion/friedman-china-needs-its-owndream.html?_r=0
10
“The Chinese Dream. The Role of Thomas Friedman”, The Economist, 6 May 2013,
http://www.economist.com/blogs/analects/2013/05/chinese-dream-0
7
Waking from the China Dream
17
From this very brief review of the genesis of the China Dream, it
is possible to draw some points. First of all, the idea of an ultimate
national goal is deeply rooted within Chinese politics and it has been
promoted through history, sometimes with the same name, sometimes with a different one (communist society, substantive democracy, modernization or harmonious society), and commitment to the
long-term is consistent with Chinese political philosophy. Likewise,
the crucial point of national rejuvenation was largely adopted by
Chinese political actors even before establishment of the Communist Party of China. Secondly, the term bounced from China to the
West and back many times, so many that the specific original source
of the concept is no longer clear. The fact that the Chinese media
referred to Western media in order to promote the China Dream,
even if the concept was well presented within their cultural instruments, might be a sign that Xi Jinping’s version is aimed at achieving a leading role in international discourse. The Chinese media
themselves played on the ambiguity of the China Dream versus the
American Dream, strengthening the consideration that the Chinese
model can represent an alternative to American soft power11.
In this light, the China Dream is also intended as a way to reshape the global balance of power, advancing a counterweight to
the international liberal order. Promoting the New Development
Bank (BRICS Bank) and the Asian Infrastructure Investment Bank
(AIIB) are both elements of this strategy12.
Briefly, Xi Jinping’s innovation in terms of the China Dream
and national rejuvenation is to label them as the core of his political
agenda and to give them a global stage. In doing so, under Xi Jinping the China Dream is no longer a domestic issue but has achieved
global resonance; on the one hand, through the innovative technologies available in 2012 (e.g. social media), and on the other to a
specific willingness to promote a national dream tailored to every
civilization and localized to every country. During several meetings
Shi Yuzhi, “Zhongguo Meng qubie yu Meiguo Meng de qi da tezheng” [Seven major
characteristics differentiating the China Dream and the American Dream], Qiushi, 20
May 2013.
12
See chapter 4 in this volume.
11
18
China Dream: Still Coming True?
with foreign leaders, Chinese officials and the media spoke about
the African Dream, the Asia-Pacific Dream and the Latin American
Dream13. As a consequence, Xi Jinping paved the way for a Chinese
development model that denies the universality of the so-called
“Washington consensus”, making it clear that reforming China does
not mean democratizing the country in the Western-liberal sense.
According to Wang14, the China Dream is a major strategic concept
that is linked to the general issue of the legitimacy of the Chinese
Communist Party. Many scholars affirm that the party can survive
the collapse theories – that predicted the fall of the CCP almost daily since October 1st 1949, the PRC’s foundation15 – thanks to winning economic performance16. A long-term narrative like the China
Dream helps Chinese leaders postpone the time for checking attainment of the good governance promised. Stating that China will be a
fully modernized country by the middle of the 21st century allows
the Chinese Communist Party to justify possible economic setbacks
in the short term. The long-term perspective is helpful in presenting
the Chinese government as committed to the people’s wellbeing
even without an electoral legitimacy. In sum, the China Dream is
an instrument to recall past dreams of Chinese glory along with an
13
See for example, on the African Dream “‘Chinese Dream’ and ‘African Dream’ resonate”, People’s Daily, 23 August 2013, http://en.people.cn/90883/8375185.html; for
the Asia-Pacific Dream After “‘Chinese dream’, Xi Jinping outlines vision for ‘AsiaPacific dream’ at Apec meet, South China Morning Post, 9 November 2014, http://www.
scmp.com/news/china/article/1635715/after-chinese-dream-xi-jinping-offers-chinadriven-asia-pacific-dream; for the Latin American Dream Yan Huan and Ding Gang,
“El ‘Sueño Chino’ contribuye al ‘Sueño Latinoamericano’, Peoples’ Daily, Spanish Edition, 2 December 2013, http://spanish.peopledaily.com.cn/31619/8472533.html
14
Wang Zheng, op. cit.
15
A recent example is constituted by David Shambaugh’s scholarship, who warned
against the start of the CCP’s collapsing process. See D. Shambaugh, China’s Future,
Polity Press, Cambridge, 2016. He developed a similar hypothesis within an op-ed published by the Wall Street Journal, D. Shambaugh, “The Coming Chinese Crackup”, The
Wall Street Journal, 6 March 2015, http://www.wsj.com/articles/the-coming-chinesecrack-up-1425659198 t of the CCP’s collapsing process (link)
16
On the regime legitimacy in China see Zeng Jinghan, “The debate on Regime Legitimcay in China: bridging the wide gulf between Western and Chinese scholarship”,
Journal of Contemporary China, vol. 23, no.88 pp. 612-635, 2014; Tong Yanqi, “Morality,
Benevolence, and responsibility: Regime Legitimacy in China from Past to the Present”, Journal of Chinese political Science, vol. 16, no. 2, 2011, pp. 141-159.
Waking from the China Dream
19
aspiration to lead on the international stage, putting an end to the
“weak China paradigm” that characterized the last two centuries.
In order to successfully achieve the long-term goal, Xi Jinping
and his predecessors prepared the intermediate stage by borrowing the name xiaokang shehui from Confucian heritage. In fact,
when Hu Jintao advanced it, it was interpreted as a clear signal of a
Confucian revival after the condemnation of Confucianism during
the Cultural Revolution17. The term, which is usually translated as
“moderately prosperous society”, was fully adopted by Xi as a core
element of his political agenda and listed in Xi’s strategy called the
“Four Comprehensives”. This political theory is supposed to represent Xi Jinping and the Fifth Generation’s theoretical contribution
to the Party’s core values. Actually, the Party constitution clearly
associates a theoretical contribution with each of the five generations of Chinese leadership. Along with Marxism-Leninism there is
Mao Zedong’s Thought (first generation), Deng Xiaoping’s Theory
(second generation), the Three Represents (third generation, linked
to Jiang Zemin), the Scientific Outlook on Development (fourth
generation, promoted by Hu Jintao). The Four Comprehensives are
a kind of summation of Xi Jinping’s main policies conveyed in the
Party’s language. They are set to comprehensively deepen reform
(first), to govern the nation according to the law (second) and to
strictly govern the Party (third) and are linked, respectively, to the
Third Plenum’s reforms, to the push towards rule of law promoted
during the Fourth Plenum and to the massive anti-graft campaign.
The fourth and last component is to build a moderately prosperous
society, which can be referred to the first part of the China Dream.
As said, Xi plans to achieve this moderately prosperous society by
2021, when the Party will celebrate its hundredth anniversary.
However, while the long-term goals by nature cannot be fulfilled
by the current political leadership, the middle-term goal is increasingly close. This is true especially because the CCP clearly defined
the concrete meaning of a “moderately prosperous society” and put
17
On Hu Jintao and Confucian heritage see for example D.A. Bell, “China’s leaders
rediscover Confucianism”, The International Herald Tribune, 14 September 2006.
20
China Dream: Still Coming True?
it at the center of the Thirteenth Five-Year plan. The goal for 20202021 is to double China’s 2010 GDP. Not fulfilling such a goal –
which can only be achieved by maintaining an average growth rate
of 6.5 per cent for the next five years – would not simply imply a
slowing down, but could mean that China falls short of pursuing
the right path towards the long-term goal. Therefore, quantifying
the substance of the moderately prosperous society might force Xi
Jinping into a “performance cage” that will certainly constrain his
policies in the near future. China’s economy must be reformed and
a first “examination” is approaching. The choice to clarify the characteristics of xiaokang society in terms of economic performance
might represent a critical point, since China has been gradually getting over a sort of GDP-growth-rate-fever that poisoned its policies
both at the national and local levels. The rush towards a higher GDP
growth rate was one of the factors behind a growth model that respected neither the environment nor high quality standards. China’s
so-called new normal, the new growth model that should shape the
present and future Chinese economy, focuses on quality, environment and sustainability, ending the tyranny of GDP target growth.
This is in contradiction with achieving the xiaokang society in five
years and it will be a sensitive issue for China to keep the focus on
quality if economic growth proves too slow to double per capita
GDP.
Political and economic challenges
The China Dream is a pledge of economic success and Xi Jinping
must be sure that his term is the one in which China strides the
global stage, not the beginning of the end of China’s miracle. The
new normal is useful in making clear that the country needs to be
reformed as soon as possible. However, China’s reforms have been
facing both political and economic obstacles.
On the economic side, Xi Jinping is promoting a titanic shift
from one development model to another. This shift is essentially
to move from an economy driven by low-quality exports and pub-
Waking from the China Dream
21
lic investments to an economy with a stronger role for services,
domestic consumption and high-quality goods. However, time and
cost constraints threaten Xi’s capacity to fulfill his commitment.
When the stock exchanges in Shanghai and Shenzhen crashed in the
summer of 2015 and again in early January 2016, the effect on the
Chinese economy was relatively limited because stock trading is
less extensive in China. However, it showed the world and the Chinese people that something in the Chinese economy was no longer
sustainable. The rationale behind the new normal was eventually
clear to everybody. This is one of the setbacks that Xi’s China might
face during the transition to structurally reforming its development
model and that might put pressure on the president due to a potential loss of international and domestic trust that could affect China’s
foreign direct investments and consumption demand.
Nonetheless, the financial system is not the major threat to the
China Dream. Indeed, during the era of double-digit growth (from
the 1990s until the aftermath of the recent crisis), the rising social
contradictions were easily resolved with more job opportunities
that could be easily found elsewhere in an economy that was experiencing a decade-long boom. Today China needs to redesign
its industrial structure, promoting new sectors and closing nonproductive industries. The decision taken after the global financial
crisis in 2008 to invest 4 trillion RMB to balance the negative
effect of falling global demand generated the current overcapacity crisis. A significant share of China’s economic reforms foresees the closure or downsizing of what are now labeled “zombie
firms”. Steel, aluminium, glass and cement are among the most
affected sectors and are all connected to the construction bubble
that emerged in the last few years. As a result, the decision to shut
down many firms will lead to significant job losses in the sectors
involved. According to a report published by Reuters in March
2016, the Chinese government has planned to cut up to 6 million
jobs in the coal and steel sectors and it will spend 150 billion
RMB to cover layoffs till 201918. The Economist Intelligence Unit
18
Be. Kang Lim, M. Miller, D. Stanway, China to lay off five to six million workers, earmarks
22
China Dream: Still Coming True?
estimates that steel-related unemployment might reach 500,000
workers by the end of the decade19. These figures are quite significant even for a huge country like China, especially if considered
at the local level. However, the impact will vary across regions,
due to different installed capacities, average profit margins and
reduction plans. The state of the Chinese steel industry at the provincial level is a central issue in the government’s political agenda. The history of the steel industry is connected to that of Stateowned Enterprises (SOEs) and to their ambiguous role in terms
of productivity (increasingly lower), employment and local and
national tax rates. Reforming SOEs has traditionally been a cyclical problem to tackle for the Chinese authorities20. The reforms
occurring in the late 1990s almost doubled the unemployment rate
during the period 1996-2002 (from 6.8 to 11.1 per cent)21 that was
lessened only after 6 years of high growth rates. Although this was
a major goal shared also by the Third Plenum, the effective implementation of the policies has been quite disappointing. Therefore,
Xi’s government has been keen to promote the reforms signaling
that their implementation is a priority. One of the reasons why
reforming the SOEs is complicated is the political costs they bear.
A traditional Chinese proverb states: “Heaven is high and the emperor is far away”. It indicates that in the eyes of the people the
local government is more responsible for local issues than the central authorities. As a consequence, local authorities have broad
autonomy in implementing central policies in their constituencies,
utilizing them to further their own political and economic interests. It follows that central plans for closing coal mines and steel
factories might well suit Xi’s goal of reforming the Chinese ecoat least $23 billion, Reuters, 3 March 2016, http://www.reuters.com/article/us-chinaeconomy-layoffs-exclusive-idUSKCN0W33DS
19
Economist Intelligence Unit, The Implication of Steel Capacity Cuts, 12 May 2016,
http://country.eiu.com/article.aspx?articleid=804209864&Country=China&topic=E
conomy&subtopic=Regional+developments
20
For a brief history of Soe’s reforms see Li Weiyue and Louis Putterman, Reforming
China’s Soe: An Overview in Josef C. Brada, P. Wachtel, Dennis Tao Yang (eds.) China’s
economic development, Palgrave Mcmillan, London, 2014, pp. 114-140.
21
Economist Intelligence Unit, op. cit.
Waking from the China Dream
23
nomic model, but at the same time they clearly conflict with many
provincial governors’ plans to boost local economic growth and
fight unemployment. Once again, the steel industry represents an
example of the constraints that the central government has to face
in implementing its policies. In fact, 66 per cent of China’s steel is
produced by thousands of small and medium-sized local firms that
might be unwilling to follow government instructions22. In this
regard, it is not uncommon for Chinese and foreign newspapers
to report on firms celebrating their re-opening, which is an event
intended to revitalize the cities’ economies that are dependent on
that sector23, showing at the same time how hard it is for authorities to keep them closed.
What is perhaps even more important, Xi Jinping’s ambitious
plan to restructure the Chinese economic model must also overcome the economic interests of the political elites. As the journalist Bill Bishop put it24, there are some questions about the support
he can gain among the strong power-holders in Beijing. Nonetheless, this is related to the way Xi Jinping achieved his paramount
position, which still remains unclear. He succeeded in becoming
the Party’s General Secretary as a man of compromise between
the two factions of the former top leaders Jiang Zemin and Hu
Jintao. Once in power, however, Xi overshadowed his second-incommand – the Prime Minister Li Keqiang – and launched a fierce
anti-graft campaign that severely wounded both Hu’s and Jiang’s
inner circles. Xi Jinping thus reshaped the power balance within
the party by carefully working to build his own faction, which now
seems to be composed of some of the loyal friends and colleagues
of Mr. China Dream25. In this regard, according to many sources,
the connections to his ancestral home, the Shaanxi province, and
to those who served with him in Fujian, Zhejiang and Shanghai
are strong. The faction-building process is therefore instrumental
Stratfor Analysis, The Story of Steel in China, 1 June 2016.
Reuters, China’s top steel making province bans reopening of mills ordered closed: Xinhua, 26
April 2016, http://www.reuters.com/article/us-china-steel-hebei-idUSKCN0XN0D1
24
See B. Bishop, The Sinocism China Newsletter 03.01.16, https://sinocism.com/?p=11617
25
Cheng Li published on Hoover Institution’s China Leadership monitor a series of
article dealing with Xi’s inner circle. Check from Issue 43 to Issue 49.
22
23
24
China Dream: Still Coming True?
to the 19th party Congress, to be held in 2017, when Xi could profit
from his powerful position to promote his allies within the Central Committee and the Politburo. Xi Jinping’s political strength
does not, however, silence questions about how he rose to that
position. As mentioned before, he was a man of compromise, and
still very unclear is what actually happened in (and the political
meaning of) the few weeks before the 18th Party Congress in 2012.
For about a month the General-Secretary-to-be disappeared and
it is not yet clear whether he was engaged in a power struggle or
if he was really injured, as reported by the Chinese media. In any
case, the climate within the party in the last four years – since
the scandal surrounding Bo Xilai erupted as breaking news in
the major world media26 – has been far from harmonious. Those
who see their political status and revenues threatened by reforms
and the anti-graft campaign cannot be pleased with them. Some
scholars speculate that Xi Jinping himself might be worried for
his own safety. Whether this is true or an exaggeration/speculation, a complete analysis of the Chinese political situation must
take into account events such as the anonymous letter published
on 4 March 2016 asking for Xi Jinping’s resignation27. The letter
blames the General Secretary for numerous misbehaviours, such
as nepotism, a power struggle masked by the anti-graft campaign,
an aggressive shift in foreign policy, layoffs and power centralization. According to the unnamed “loyal Communist members” who
wrote it, Xi Jinping’s policies are undermining the PRC’s political and economic stability, which, in their own words, “may also
bring risks to the personal safety of you [Xi] and your family”.
The Chinese government’s response to the letter was investigation
and detention for the director and employees (and their relatives)
of the website that published the letter. In general, the letter con26
The Bo Xilai case involved the Communist Party Chief of Chongqing Municipality
Bo Xilai in 2012. He was a prominent and popular politician who was running an ultraleftist campaign and eventually was investigated and found guilty for corruption. His
quick fall, just few months before the 18th Party Congress, shook the apparent inner
stability of the CCP and exposed to the public an on-going power struggle.
27
The text of the letter can be find at http://chinadigitaltimes.net/2016/03/openletter-devoted-party-members-urge-xis-resignation/.
Waking from the China Dream
25
tributed to increasing the level of state control over the media and
academia, a trend that has been ongoing in the last few years.
This all is to say that the party is undergoing a vibrant power
reshuffle, a shake-up that is also affecting the institutionalization process that led to a stable and peaceful succession from the
fourth (Hu Jintao) to the fifth generation (Jiang Zemin). In 2012,
scholars were quite sure that China had found its own way to deal
with changes in top leadership. Ten years per generation, a power
shared by a multitude of actors, strong limits to one-man-rulership
and a division of labour between the president (political affairs,
domestic and international) and the prime minister (economic
governance). Xi Jinping is questioning this whole system. He is
now also in charge of economic governance through creation of
the Central Leading Group on deepening reforms. His leadership
in economic affairs is evident also from the fact that while at the
time of his appointment the media were largely promoting Likonomics as the main theoretical framework for economic policies,
in 2016 all the interest is in Xi’s supply side structural reform.
Xi Jinping also strengthened one-man rulership, re-proposing the
wording of hexin, core of a generation. This terminology was suspended after Deng Xiaoping’s term, in favour of the collective
leadership system, and this is why Jiang and Hu’s theoretical contributions do not include their names.
Moreover, through creation of the Central Leading Group on
deepening reforms he put all the political issues under his control.
In addition, he also created a new security group and a military position that have led many to agree with Geremie Barmie’s definition
of “Chairman of everything”28. Finally, some commentators even
question the 10-year term. Li Keqiang now seems not so sure to be
re-confirmed as prime minister in 2018. Back in 2012 the second
term was considered to be automatic, but that prediction now turns
out to be wrong. It was based on the ten-year term led by the duo
Hu Jintao and Wen Jiabao, who held the positions of president and
Geremie Barmiè labelled Xi Jinping “China’s CoE, Chairman of everything”. See
G.R. Barmé, L. Jaivin, J. Goldkorn (eds.), Shared Destiny: China Story Yearbook 2014,
Australian National University Press, Canberra, Australia, 2014.
28
26
China Dream: Still Coming True?
prime minister for the entire duration of their generation’s decade
(2002-2012). However this is an assumption based only on a single
case. The alternative scenario might see Li Keqianq “promoted”
to chairmanship of the National People’s Congress (NPC) and replaced by one of Xi’s loyal followers, such as Wang Qishan, the
man currently in charge of the anti-graft campaign. These dynamics
would replicate the process occurring during the third generation
(1992-2002) when, with Jiang Zemin in charge as General Secretary and PRC President, Li Peng served first as prime minister
(1993-1998) and then in the NPC, while Zhu Rongji served as loyal
prime minister in the five years from 1998 to 2003. Another case
has been made by prominent China-watcher Willy Lam who suggests that, considering Xi Jinping’s efforts in building a strong personality cult, he might not be willing to abandon power by 2022,
at the end of his ten-year term. According to Lam, Xi might revive
the role of Party President from the 1970s and thereby retain power
while not breaking the rule of a decade-long term for Party General
Secretary29.
While Xi Jinping is struggling internally with those dissatisfied with his policies, he is believed to be scoring high in terms of
popular consensus. As shown in a survey published by Harvard’s
Kennedy School of Government in December 2014, Xi Jinping
was the world’s most popular leader, with more than 94 per cent
of support from his citizens for his management of domestic affairs30. Such a high popularity rate is common in authoritarian
states, and even though he can rely on state-controlled media, the
result is an evident sign of large consensus among the Chinese
people. This element was also confirmed in another survey, this
time by the Pew Research Center31, that listed corruption, polW. Lam, “Xi Jinping Forever”, Foreign Policy, 1 April 2015, http://foreignpolicy.
com/2015/04/01/xi-jinping-forever-china-president-term-limits/
30
Tony Saich, Reflections on a Survey of Global Perceptions of International Leaders and World Powers, Ash Center for Democratic Governance and Innovation John
F. Kennedy School of Government Harvard University, http://ash.harvard.edu/
files/ash/files/survey-global-perceptions-international-leaders-world-powers_0.
pdf ?m=1426191298
31
R. Wike, B. Parker, Corruption, Pollution, Inequality Are Top Concerns in China, Pew
29
Waking from the China Dream
27
lution and the income gap as the main concerns of the Chinese
people. Xi Jinping’s initiatives, comprising the harsh anti-graft
campaign, the new normal with its dual focus on a more sustainable growth model and doubling GDP seem to be in accordance
with his people’s will. Moreover, the same survey indicated that
almost two-thirds expect corruption to be reduced in the next five
years and, while pessimism persists with respect to pollution levels, a large majority is happy with the current economic situation
and almost all the Chinese interviewed are confident that their living standards are higher than that of their parents.
Therefore, an apparent contrast exists that might be worthwhile
noting. In the year 2016 China is staging a very low-key celebration of the start of the Great Cultural Revolution fifty years ago. The
contrast lies in the fact that while part of the political elite questions
Xi’s central leadership, he is securing central leadership through
popular support. In the 60’s one of the main slogans of the Cultural
Revolution was “bombard headquarters” and it was aimed at supporting the paramount leader – Mao Zedong – against the party
leadership. Even though there are obvious differences, from current
events it is always interesting to see how the people were instrumental in promoting a political agenda designed by the paramount
leader and opposed by some in the party at the time. It is, indeed,
the people’s support that should secure Xi’s position more than any
faction-building operation either within the party or the army. At
this stage, with the China Dream on course, if the political elite
dissatisfied with Xi’s policies tried to delegitimize him they would
only succeed in delegitimizing the party itself. As a consequence,
Xi Jinping’s political course could be described as the race of a
man of compromise who built a strong personal cult and significant
popular support and eventually relied on that support to end the
compromise that permitted his rise to power.
Research Center, 24 September 2015, http://www.pewglobal.org/2015/09/24/corruption-pollution-inequality-are-top-concerns-in-china/
28
China Dream: Still Coming True?
The next steps toward the China Dream
In order to successfully promote the China Dream, Xi Jinping set
a long-term goal – in accordance with the Chinese and the Communist tradition – that is instrumental in strengthening the party’s
legitimacy and his own personal consensus. The economic reality
and fulfillment of the intermediate stage of the China Dream forced
him to put forward a reformist political and economic agenda since
the very first day of his term. To fulfill his commitments to China’s
full modernization, as pledged in the China Dream, Xi Jinping has
to accomplish the following tasks:
1. Reform the economy
2. Strengthen the party leadership
3. Manage political and economic costs among political elites and
local power-holders
4. Manage social costs
The first task is the most pressing. The Chinese economic model is
no longer sustainable and a structural change is needed. The political leadership that started its term at the 18th Party Congress is characterizing its political agenda as a matter of economic reform. However, in order to reform the economy Xi Jinping must be sure he has
the capability to effectively control the party. Indeed, since changing the economic model will reshape the inner-party power balance,
he will face growing resistance. This is the reason behind most of
his policies. As a matter of fact, Xi Jinping adopted three initiatives to secure him control of the party. First of all, he promoted the
anti-graft campaign, that, under the guidance of his follower Wang
Qishan, reduced the influence of the existing factions. Secondly,
during the Third Plenum he established the Central Leading Group
on comprehensively deepening reform, a decision-making body
that puts all political power in the hands of the General Secretary,
reducing the role of the other members of the Politburo’s Standing
Committee. Moreover, on the occasion of the Fourth Plenum, Xi
Waking from the China Dream
29
Jinping promoted reform of the rule of law that, far from representing a limitation for the central party’s power, instead constituted a
way of reducing the influence of local power-holders.
Therefore, the third task is to contain dissatisfaction among
members of the party elite. As the case of Zhou Yongkang demonstrated32, there is a strong connection between political power and
economic power. Reforming the SOE’s and pushing the anti-graft
campaign affects the business of the established cliques. Xi Jinping
needs to curb internal opposition and for this reason he is running a
campaign about adhering to the party line. The media and academia
are urged to strictly adhere to Xi Jinping’s decisions, with the declared aim of strengthening national cohesion. However, censorship and ideological radicalization will not be enough to keep the
party united. Xi Jinping will probably have to find compromises
to balance the loss of economic gains among party elites and local constituencies. The continuous delays in implementing the SOE
reforms33 follow this logic. Nonetheless the economic goals to be
achieved in 2020 pressure Xi Jinping to speed up his political agenda. He will have to carefully promote political allies at the central
and the local level, granting subsidies and preferential policies to
specific sectors.
Finally come the people and the management of social costs.
Economic reforms will not only affect the big economic interests
in the country (i.e. private entrepreneurs and public managers), but
most of all the workers. In fact, the successful economic performance that is meant to legitimize both the Party and Xi Jinping’s
rule might be threatened by rising unemployment during the transition from one economic model to the other. Xi Jinping’s actions will
have to address two issues. On the one hand, a main problem is to
Zhou Yongkang is the former Security Chief of China. He was the first member of
the Politburo’s Standing Committee to be investigated and found guilty since the Gang
of Four in the late 1970s. His conviction is, among other things, due to a bribe given to
the former head of the state-owned China National Petroleum Corporation. Indeed,
Zhou has been linked to the national oil sector industry.
33
L. Hornby, “China rows back on state-sector reforms”, Financial Times, 15 June
2016,
http://www.ft.com/intl/cms/s/0/92e52600-31f7-11e6-ad39-3fee5ffe5b5b.
html#axzz4Bd6uCjCO
32
30
China Dream: Still Coming True?
find the right formula to make the layoffs gradual and to redistribute
them across sectors and provinces. If only a few sectors located in
selected provinces were to be affected, the Chinese political system
might be exposed to a threat too big to be solved. This is due to the
structure of Chinese political institutions. The absence of a procedural-democratic system means the lack of a relief valve for social
tensions. For this reason, the economic transition could be the occasion for introducing innovations to China’s system of political
and interest representation. In this regard, Xi Jinping has strongly
rejected political reforms that adhere to the principle of Western
democracy, while he has promoted democracy with Chinese characteristics. This model does not limit the role of the leading party.
On the contrary, it calls for a mechanism of consultation with local
and sectorial stakeholders34. The name of this system is consultative
democracy and, if well developed, may help Xi Jinping absorb the
social costs that will arise when the transition presents its bill.
Conclusions
The China Dream is aimed at both economic and political success.
The long-term perspectives allow Xi Jinping to resist sudden economic setbacks with the promise of future national prosperity. Once
achieved, this goal would make China great again, ending a twocentury journey that took the Middle Kingdom from prosperity and
honour to a semi-colonial condition and poverty and back. However,
in line with Chinese tradition and with more recent Communist slogans as well, the China Dream aims also at reaching an intermediate stage called xiaokang shehui (moderately well-off society). This
intermediate stage, to be achieved by the end of the decade, poses
a narrow limit that will constrain Xi Jinping’s political agenda over
the next five years. According to Chinese plans, the 100th anniversary of foundation of the Communist Party of China in 1921 should
A first analysis of this topic was carried by Steve Tsang. See S. Tsang, Consultative
Leninsm: China’s new political framework?, Discussion Paper 58, China Policy Institute, The
University of Nottingham, March 2010.
34
Waking from the China Dream
31
be celebrated by doubling China’s 2010 per capita GDP. In order to
achieve this goal, China has to grow at a 6.5 per cent average rate
for the next five years, the target set by the Thirteenth Five-Year
Plan. If China does not succeed in reaching the xiaokang shehui,
the China Dream and party legitimacy based on economic performance might be contested. Therefore, Xi Jinping has an urgent need
to complete transformation of the Chinese economy’s development
model. He has to overcome the opposition he will face within the
party and to manage the transition costs represented by a slowing
economy and job layoffs.
2.
Beijing’s Economy:
Dream a Little Dream of China?
Alessia Amighini
Dream talking
Since the beginning of his mandate in late 2012, Xi Jinping, the current head of the Communist Party (CCP), chose the “China Dream”
as his doctrine, following Chinese tradition since Mao to identify a
personal slogan for each term1. The “China Dream” artfully evokes
the American Dream – “the notion that the American social, economic, and political system makes success possible for every individual2” – but in fact is far less individualistic and utilitarian than its
American counterpart, and actually refers to the aim of a prosperous
society in collective terms. As the Chinese economy is expected
to overtake America’s within a decade, by evoking the American
dream, Xi aims to reassure the country’s new middle-class that
they will eventually be able to reach prosperity, despite economic
growth being slower under Mr Xi than it was under Mr Hu.
At the same time, the China Dream doctrine cleverly shows off
Xi’s ambitions to restore China’s role in the world3. After decades
of extraordinary rise, China is today the world’s second largest economy, with hundreds of millions of Chinese lifted out of poverty
and hundreds of millions who joined the middle class, but that rise
1
2
3
See chapter 1 in this volume.
American Dream, Collins English Dictionary, avalaibale at collinsenglishdctionary.com.
See chapter 4 in this volume.
34
China Dream: Still Coming True?
has not yet gone along with a comparable rise of China’s position
in global economic governance. With a GDP now around 90 per
cent of U.S. GDP in purchasing power parity terms, and about onesixth of the world’s total, China is rapidly recovering the position it
had in the early 1800s, when China was the largest manufacturing
country in the world and its GDP was one-third of the world’s total.
Dreaming of a day when China’s economy becomes once more the
biggest in the world, Xi secures the support of nationalists, particularly within the armed forces, who have been allured with the message that the “strong-nation dream of a great revival of the Chinese
people” is in effect a “strong-army dream”, in contrast with the liberals’ ambitions to remove the army from the party’s direct control4.
Backed by the overall aim of the China Dream, Xi has so far
aimed at orchestrating domestic policy reforms his own way with
the support of constituencies and forces whose support is essential
for the reform process to be effective. One such constituency is the
new middle class. According to Li Chunling, “since the beginning
of this century, a social group with higher income, higher education
and higher occupational prestige has been emerging in Chinese cities5”. This followed the beginning of a major ideological and policy
shift in 2000, when Jiang Zemin “in contrast to the Marxist notion
that the Communist Party should be the “vanguard of the working
class”, argued that the CCP should broaden its base of power to
include entrepreneurs, intellectuals, and technocrats, all of whom
regularly occupy the ranks of the middle-income stratum, the official euphemism for the middle class”6. Although it has been called
“middle class” by the public media, the official jargon has never
adopted such a term, but a number of nuanced versions of it, and a
lively scholarly and public debate has since been ongoing about the
definition of middle class in China7. Since then, the so-called middle
“Chasing the Chinese Dream”, The Economist, 4 May 2013.
Li Chunling, Profile of Middle Class in Mainland China, p. 1, http://e-sociology.cass.
cn/pub/pws/lichunling/grwj_lichunling/P020090525597135469507.pdf
6
Li Cheng “Introduction: The Rise of the Middle Class in the Middle Kingdom”, in Li
Cheng (ed.), China’s emerging middle class: beyond economic transformation, Washington, D.C.:
Brookings Institution Press, 2010, pp. 3-31.
7
Ibid
4
5
Beijing’s Economy: Dream a Little Dream of China?
35
class has been considered a political ally of the party’s supremacy,
being those who most benefited from China’s rapid growth over the
last three decades. Their support is therefore vital to pursuing the
economic and political reforms on which their future economic and
social advancement depends. What really threatens the party’s rule
is the rising divergence in living standards within the Chinese population, and the latent, but increasingly worrying conflict between
rich and poor, which could seriously undermine the aim to reach a
“harmonious society”8.
The middle-income groups have become an important constituency for the Chinese government and their satisfaction and
support a clear policy objective of the government. This is due
to their dual economic and political role. Their material advancement has fuelled consumption and is more and more vital to sustain domestic demand in the ongoing transition towards a new development strategy, from an investment-led to a consumption-led
growth model. Moreover, they serve as a proof that the party’s
rule is not inconsistent with material well-being. The importance
of the middle-income groups has long been publicly recognised
by the Chinese authorities, who have called for “enlarging the
size of the middle-income group” since at least 2002. More recently, the middle-income groups confirmed their economic importance during the recent global crisis and recession: they have
grown in size, in contrast with a shrinking of the middle class in
the West. This has purposefully served the aim of Chinese authorities to publicize the idea that China is entering the “golden
age” of its middle-class development9. Yet according to Li10, the
status of China’s emerging middle-income groups is the subject
of scholarly debates. Not everyone in middle-income groups is
better off today than before the crisis, “partly due to the loss of
jobs and financial assets as a result of the global financial crisis
Ibid.
Lu Xueyi, “Xianzai shi Zhongguo zhongchan jieceng fazhan de huangjin shiqi” [It’s
the “golden age” of Chinese middle-class development], Zhongguo qingnian bao, China youth daily, 11 February 2010.
10
Li, Cheng, op. cit.
8
9
36
China Dream: Still Coming True?
and partly because of the rapid rise of housing prices in urban
China11”. Only a subset of the middle class, including officials
and managers of SOEs, grew, according to Mao Yushi, and to the
detriment of other subsets of the middle class12. The rise of the
new middle class has been the sign of China’s embarking on the
road to prosperity, and now its further economic advancement is
vital to increasing overall domestic consumption and demand.
To their ears, the China Dream provides a powerful slogan to
revitalise domestic confidence in the country’s future prospects,
at a time when they are increasingly anxious about being negatively affected by the transition to a new growth model, since the
ongoing rebalancing of the sources of economic growth in China
implies a sensible slowdown compared to Hu’s times, and painful
restructuring in many sectors and regions.
Although Xi implicitly reassures that the “new normal” will not
force the new middle class to tighten their belts, there are increasing
signs showing that in fact they might have to dream a smaller dream
of China than what Xi has evoked so far. Even more importantly, the
opacity of Xi’s slogan makes it difficult to understand whether the
China Dream, in contrast to its American namesake, actually aims
at something more than middle-class material comfort – further expansion and advancement of the middle-income groups – or in fact
something different from middle-class material well-being – i.e.
overall national prosperity and ascendance in global governance.
However, – as described in chapter 1 – the definition of the China
Dream is rather vague in substance, scope and horizons, and therefore purposefully serves Xi’s political objectives without the need
for him to actually deliver on specific outcomes. Opacity about substance allows Xi to defend any policy measures and their exact opposites as avenues for the Dream to come true, with little possibility
for assessment. This gives him comfortable space for manoeuvring
any kind of policy backtracking on both economic and political reforms. In fact, compared with the first half of Xi’s term, when momentum was high to accelerate on both, the times are now changing
11
12
Ibid
Ibid
Beijing’s Economy: Dream a Little Dream of China?
37
quite substantially and structural reforms are lagging behind in the
best case, reverting in the worst case. Similarly, opacity about the
scope allows Xi to justify any policy initiatives as contributing to
the Dream, from tighter Party control of the economy to massive
dismissal of former state workers, from reduction of subsidies to exporting firms to increasing military spending and initiatives. Dream
talking magically acts as an ex-ante validation for any kind of intervention in the economic, political, cultural, and military spheres.
Finally, opacity about horizons allows Xi to easily spread the alleged
policy outcomes over an unspecified time span, ranging from a few
quarters up to 2049. Again, this does not allow for ex-post assessment and postpones political responsibilities to an indefinite future.
However difficult an assessment might be of whether China is
still heading to its own dream or is simply talking about it, a number
of elements are available for discussion of the direction the country
is taking, given the current policy stance.
What does the China Dream mean for China’s economic
model today?
As the “new normal” leit motif has repeatedly insisted on since the
beginning of 2015, China’s future growth must rely on different
drivers compared to the past. From 1990 to 2014, Chinese gross savings as a percentage of GDP and gross fixed investment as a percentage of GDP both increased significantly (to 50 per cent and 45 per
cent of GDP in 2014 respectively), while private consumption as a
percentage of GDP declined sharply (to about 35 per cent of GDP
in 2014, compared to 60 per cent of GDP in more advanced economies). As indicated by Morrison, “China’s gross savings as a percentage of GDP and gross fixed investment as a percentage of GDP
are the highest among the world’s largest economies, while China’s
private consumption as a share of GDP is among the lowest”13.
13
Wayne M. Morrison, China’s Economic Rise: History, Trends, Challenges, and Implications for the United States, Congressional Research Service, October 21, 2015.
38
China Dream: Still Coming True?
Source: World Development Indicators, World Bank
The imbalances on which China’s rapid economic growth relied
on in the past three decades need to be resolved by rebalancing
the sources of growth from fixed investment towards more private
consumption. Morrison also reported that according to a “2009 International Monetary Fund (IMF) report, fixed investment related
to tradable goods plus net exports together accounted for over 60
per cent of China’s GDP growth from 2001 to 2008 (up from 40 per
cent from 1990 to 2000). This percentage was significantly higher
than in the G-7 countries (16%), the Eurozone (30%), and the rest
of Asia (35%)”14. In response to the global financial crisis, which
led to a sharp fall in demand for Chinese exports, and sharply reduced China’s trade surplus, the Chinese government reacted in
part by sharply fuelling fixed investment (with easier credit access
for firms) and, therefore fixed investment as a share of GDP rose
from 40.5 in 2008 to 45.9 per cent in 2013.
The rapid growth of fixed investment is no longer sustainable,
due to a number of factors including overcapacity in some manufacturing sectors, as well as in the real estate sector (which largely
fostered economic growth from 2009 until 2014, when the after14
Ibid.
Beijing’s Economy: Dream a Little Dream of China?
39
maths of the recent recession had depressed foreign demand for
Chinese goods), and decreasing profitability and increasing debt
accumulation by State-Owned Enterprises (SOEs). Together with
increasing fixed investment, private savings have also increased.
The major reason for this is the lack of an adequate social safety
net (such as pensions, health care, unemployment insurance, and
education), which induces households to save a large portion of
their income.
A number of additional reasons contribute to the high saving rate
in China, such as the unequal distribution of wage increases across
different population groups. The highest gains went to the highest
percentiles of urban residents, who already show a lower marginal propensity to consume (while wage earners in lower percentile
groups have spent a much higher share of their income gains). As
a result, the wage gains did not translate into more consumption,
but instead into more savings: between 1982 and 2012, the average
urban household saving rate rose from 12 to 32 per cent 15.
Last but not least, the gender gap, notably far more evident in
China than in any other country (due to the perverse impact of the
one-child policy), is a specific factor behind the high saving rate
in China. In fact, the excess of men over women in marrying-age
groups forces would-be grooms (and therefore their parents) to accumulate saving to provide sufficient funds to increase the probability of finding a bride. The business sector is also a major contributor
to the high savings rate in China. As many Chinese firms, especially
SOEs, do not pay dividends and retain most of their earnings, they
prevent households to consume out of the income received from
their unpaid dividends.
Finally, in a country that places restrictions on the export of capital, households are forced to keep a large share of their savings in
domestic banks. And since the Chinese government often sets the
interest rate on deposits below the inflation rate, to allow Chinese
firms to get credit at low interest rates, the result is lower household
15
T. Choukhmane et al, The One-Child Policy and Household Savings, LSE working papers,
London School of Economic, 18 September 2014.
40
China Dream: Still Coming True?
income – personal disposable income in China as a share of GDP
was lower in 2014 (44%) than it was in 2000 (47.9%), and lower
household consumption.
The need to rebalance the economy requires major structural reforms, including:
• banking sector reforms to rebalance the relative cost of funding
and to reduce the implicit tax on households savings;
• financial sector reforms to provide an alternative funding mechanism for firms and an alternative investment channel for households;
• welfare system reform to reduce households’ savings for retirement and health;
• industrial policy reforms, aimed at restructuring debt-burdened
SOEs and reducing overcapacity in many sectors.
In many of these sectors, though, reforms are lagging behind, as
state control of the economy is still widespread, or even worse, they
are being reversed in a retreat from market mechanisms back to
state dirigisme.
Reforms lagging behind
Although the XIII Five Year Plan has confirmed the need for supply-side reforms (gongjice), there is no clear-cut view or proposal
about the substance of these reforms. According to the National
Development and Reform Commission (the main Chinese development agency), China should become more innovative and efficient
in producing the type of goods Chinese consumers want to buy. But
the reforms they suggest, such as tax reductions on electric car purchase, are more demand stimuli than supply-side interventions. Unfortunately Xinomics is light years away from the Reaganomics of
the 1980s (which now inspires, at least in words, Xi’s supply-side
reforms), both in diagnosis, and in prescriptions. At the moment it
is not much more than the name given to awareness that large SOEs
Beijing’s Economy: Dream a Little Dream of China?
41
and sectors and provinces where they are dominant (heavy industry
in the northeast of the country, today already in recession) must be
the protagonists of the new course of reforms, otherwise they will
drag the entire country into recession.
Unfortunately, however, while the reform process is lagging behind in many sectors, it is in fact being reversed precisely where
most urgently needed, in industrial policy and financial sector reforms, where the drive towards market mechanisms to improve the
allocation of resources has stopped, and Party control has been on
the rise again.
Industrial policies and SOEs
Since the late 1990s, China’s industrial sector was significantly
transformed through policy changes that allowed large state companies – SOEs – to open up to individual investors, and created new
ones, mainly through consolidation of existing firms. After reforms
in the late 1990s, China’s SOEs – which date from the early 1950s,
when private businesses as well as any infrastructure that survived
the previous decades of war were nationalised – remained in “pillar
industries” where they were reassembled into national champions.
Under the slogan “Grasp the Large, Let Go of the Small”, the
Fourth Plenum of the Communist Party’s Central Committee in
1999 announced industrial reforms aimed at merging large SOEs
into profit-maximizing industrial conglomerates while privatizing
or closing smaller firms. As a result, the share of China’s industrial
output from state-owned firms fell from 50 per cent at the end of
the 1990s to 30 per cent in 2014. This dramatic shift has convinced
some experts that a rapid transition to a market economy has been
going on in China and that the private sector has been largely responsible for the rapid growth of the economy over the last 15 to
20 years.
However, “although the number of SOEs has declined sharply,
they continue to dominate a number of sectors (such as petroleum
and mining, telecommunications, utilities, transportation, and vari-
42
China Dream: Still Coming True?
ous industrial sectors); they are shielded from competition; they are
the main sectors encouraged to invest overseas; and they dominate
the listings on China’s stock indexes. One study found that SOEs
constituted 50 per cent of the 500 largest manufacturing companies
in China and 61 per cent of the top 500 service sector enterprises”16.
According to Hsieh and Song, the SOEs reform campaign launched
in 1999 has transformed the state sector in China, but this is due only
partly to an effective change in corporate ownership structures, and
partly to what is in fact a form of camouflaging existing state-owned
or -controlled firms. Relying on micro-data from the Chinese Bureau
of Statistics, in 2012 more than half of the state-owned firms were
registered as some form of privately owned firms17. Over time the nature of China’s SOEs has become increasingly complex. Many SOEs
appear to be run like private companies and made initial public offerings in China’s stock markets and those in other countries, although
the Chinese government is usually the largest shareholder.
By analysing data from China’s Annual Survey of Industries on
all state-owned and private companies with revenues of more than
5 million RMB, the authors show that the downsizing of the state
sector actually boosted labour productivity and total factor productivity (TFP), narrowing the gap with privatized companies. Although corporate restructuring freed labour and other resources into
the more productive private sector, the TFP of newly established
state-owned companies actually exceeded that of private companies. The authors calculate that the surviving SOEs accounted for
more than 13 per cent of aggregate growth in the industrial sector
during 1998-2007, newly formed SOEs accounted for 7 per cent of
growth, while private firms accounted for only 3.2 per cent. However, state-owned firms made far less progress in capital productivity
(i.e. output per unit of value of fixed production assets), which reMorrison, op. cit.. The study cited here is Xiao Geng, Xiuke Yang, Anna Janus,
“State-owned Enterprises in China, Reform Dynamics and Impacts”, in Ross Garnaut,
Ligang Song, Wing Thye Woo (eds.), China’s New Place in a World in Crisis: Economic,
Geopolitical and Environmental Dimensions, ANU Press, 2009, p. 155.
17
Chang-Tai Hsieh, Zheng (Michael) Song, Grasp the Large, Let Go of the Small: The
Transformation of the State Sector in China, NBER Working Paper no. 21006., 2015.
16
Beijing’s Economy: Dream a Little Dream of China?
43
mained significantly lower than that of private firms, which means
that SOEs use fixed capital stock inefficiently compared to private
firms (mainly due to overcapacity).
Despite public announcements as recently as last September to
make SOEs more efficient and market-oriented, in order to overcome the problems of corporate debt accumulation and overcapacity, today the Party is giving greater power to Party cells within every SOE, reversing nearly two decades of attempts to remodel them
along the lines of Western corporations. As a result, boards of directors will possibly be discouraged to make decisions based on market conditions, profitability and hard budget constraints. According
to the Financial Times, an article written by the State-Owned Assets
Supervision and Administration Commission in the influential party
magazine Qiushi, or Seeking Truth, writes “all the major decisions
of the company must be studied and suggested by the Party committees. Major operational management arrangements involving macro-control, national strategy and national security must be studied
and discussed by the Party committees before any decision by the
board of directors or company management”18. Still today, almost
all executives at SOEs are party members and their corporate status
is equivalent to that of the government officials who regulate them.
The heads of the largest SOEs also enjoy senior party ranking.
According to the World Bank, of the 95 Chinese firms on the
2014 Fortune Global 500 list, 82 were identified as having government ownership of 50 per cent or more19. Moreover, “China has
become one of the world’s most active users of industrial policies
and administrations”20. While many observers used to think that it
has not been clear so far to what extent the Chinese government
has actually attempted to influence decisions made by the SOE’s
that have become shareholding companies, now things are getting
clearer, although not in the direction one would have expected.
18
L. Hornby, “China rows back on state-sector reforms”, Financial Times, 14 June 2016;
L. Hornby, “China reverses industry’s free-market drive”, Financial Times, 15 June 2016.
19
“Global 500”, Fortune, 2014, http://fortune.com/global500/
20
The World Bank, China: 2030, 2012, p. 114.
44
China Dream: Still Coming True?
Financial sector, banks and the stock exchange
Despite extensive reforms over the past three decades, the Chinese
financial system is still largely underdeveloped with the banking
sector still largely controlled by the central government, and the
stock market heavily regulated (see Chapter 3 in this volume).
Following the financial turmoil in mid-2015 (although the decline
in China’s stock market was a normal correction and would have
eventually occurred), the way monetary authorities handled the crisis was largely criticised for introducing possibly even more uncertainty in the stock market, although aimed at the opposite result.
What the Chinese government did was to increase its control over
listings, and backtrack from its commitment to enhancing free market reforms.
More recently, at the time we are writing, a further confirmation
that the Chinese financial system – more specifically the stock market system – has not fared sufficiently well on reforms was given
by the MSCI, the New York-based stock index provider, which has
refused to include mainland Chinese shares in its Emerging Markets Index. This is because although Goldman Sachs had put the
chance of approval at 70 per cent, and the IMF recently agreed to
include the yuan as one of the currencies in its basket for Special
Drawing Rights, A-shares of Chinese companies are mainly held
by local investors and are in any case off-limits for foreign investors. According to Chang Liu, the China economist with Capital
Economics, “… the MSCI’s decision primarily reflects the fact that
financial reforms in China haven’t yet gone far enough rather than
worries that policymakers will back-track on already implemented
reforms”.21
According to the Financial Times, the MSCI cited two reasons
why it did not list Chinese stocks. One of them is China’s decision
to impose a 20 per cent limit on repatriation of funds by foreign
investors during share sell-offs, in order to reduce the volatility of
21
As quoted in Saibal Dasgupta, “China misses out on MSCI Emerging Markets
index”, The National, June 15 2016.
Beijing’s Economy: Dream a Little Dream of China?
45
the yuan and the stock market. The global compiler also called for
removal of the Chinese rule that allows local exchanges in Shanghai and Shenzhen to impose pre-approval restrictions on launching
financial products.
Although official statements say that the Chinese government
will continue with capital market reform plans to develop a more
market-oriented and properly regulated market, in order to establish
long-term stability and a healthy capital market, there are no signs
of such a progress so far.
Toward market economy status
After three decades of widespread economic reforms, more than
80 countries have already granted China Market Economy Status
(MES), including BRIC (Brazil, Russia, India and China) countries,
such as Russia and Brazil, but also advanced economies, including
Switzerland, Singapore, Australia and New Zealand, but not any of
its major trading partners, including the EU and the US.
The European Union has not yet granted China MES, based on
its latest assessment conducted in 2008, evaluating the influence of
state intervention on prices and costs in China. Requests for MES
are evaluated based on five criteria regarding government intervention in the allocation of resources or business decisions in the
economy, as follows :
1. a low degree of government influence over the allocation of
resources and decisions of enterprises, whether directly or indirectly (e.g. public bodies), for example through the use of
state-fixed prices, or discrimination in the tax, trade or currency
regimes;
2. an absence of state-induced distortions in the operation of enterprises linked to privatisation and the use of non-market trading
or compensation system;
3. the existence and implementation of transparent and non-discriminatory corporate law which ensures adequate corporate
46
China Dream: Still Coming True?
governance (application of international accounting standards,
protection of shareholders, public availability of accurate company information);
4. the existence and implementation of a coherent, effective and
transparent set of laws which ensure respect for property rights
and the operation of a functioning bankruptcy regime;
5. the existence of a genuine financial sector which operates independently from the state and which in law and practice is subject
to sufficient guarantee provisions and adequate supervision”22.
As the European Union Academic Programme (EUAP) in Hong
Kong noed, “China must fulfil all five criteria for the EU to grant it
MES, but according to the EU China has met only criterion 2 since
2004. The 2008 assessment acknowledged the progress that China
has made in reforming the economy and law but the remaining four
criteria were still unmet. Therefore, the EU has still not yet granted
MES to China”23. The United States Department of Commerce is
much stricter than the EU when examining whether a country is
eligible for MES, as it also takes into account interference in trade
union affairs – indeed state control of trade union organisations –
and the lack of free collective bargaining.
According to Section 15 of China’ Protocol of Accession to the
World Trade Organization (WTO) accession agreement signed in
2001, China argues that it is automatically entitled to MES by the
EU after December 2016, but some legal analyses would show that
there is no legal automaticity in the EU granting MES to China
after that deadline and a range of organisations representing European industry strongly contests the suggestion that China should
automatically be granted MES in 2016. According WTO rules, each
importing WTO member can decide whether they treat China as a
market economy or not based on their national law.
22
“One-year to go: The debate over China’s Market Economy Status (MES) heats up”,
Policy Department, Directorate-General for External Policies, Bruxelles, European
Union, 2015, DG EXPO/B/PolDep/Note/2015_330
23
European Union Academic Programme Hong Kong, “The issue of granting the
Market Economy Status (MES) to China by the European Union”, February 23 2016.
Beijing’s Economy: Dream a Little Dream of China?
47
As the Financial Time stated, ”attaining market economy status
has been one of Beijing’s main goals in international economic diplomacy since it joined the WTO in 2001”24. According to Beijing,
the state’s presence in the economy has shrunk drastically in the
past 15 years, while the role of the state has actually increased in
several EU economies. One simple way to assess the size of the
public sector is to measure general government revenue as share of
GDP, which remains far higher in the Eurozone on average (50%)
than in the United States (35%) and twice as high as China (25%).
It is hard to argue that China, particularly given the massive distortions from its state-directed lending, is a market economy, and
the Chinese government itself claims that China is in fact a socialist
market economy. This is why most countries have reasonably “concluded that China does not meet the criteria whereby its lending
and production decisions are substantially made without state direction”, [while] “Beijing has been much keener to lobby for MES
than to reform its own economy to attain it on merit”25.
Why is being recognised as a market economy very important
for China’s leaders? Partly for domestic propaganda: it would prove
to the Chinese people that the Party’s rule is not only consistent
with but provides the right system to reach economic well-being,
while protecting the people from the vagaries of free markets.
More practically, as the Financial Time underlines, “securing market economy status would benefit China by requiring global trade
regulators to compare the price of Chinese exports to its domestic
market – instead of higher-priced third countries – in anti-dumping
cases and thus limit their ability to impose tariffs”26.
After US complaints to the World Trade Organisation, China
has recently withdrawn subsidies for its exporters, but the recent
reversal in the Communist Party’s control of SOEs management
boards makes it harder for China to argue that it deserves being
granted MES by major world economies, especially the EU (since
the United States has already refused to grant MES to China).
“China’s flawed case for market economy status”, Financial Times, May 11 2016
Ibid.
26
“China fights for market economy status”, Financial Times, May 9 2016.
24
25
48
China Dream: Still Coming True?
A dream for the nation, much less for the people?
In an inspiring report/article on the China Dream at the beginning
of Xi’s term27, The Economist reported that a number of journalists
went on strike in early 2013 in protest over a censored version of
an article in a state-controlled newspaper, Southern Weekend, titled
“The Chinese dream: a dream of constitutionalism”. While the original article said that only a division of powers could allow China to
become a “free and strong country”, the published version did not
mention the constitution.
According to a famous song by Ms Sisi Chen, the Chinese dream
is “A dream of a strong nation […] a dream of a wealthy people”28.
But Mr Xi is facing increasing difficulty in convincing the people
that China can be “rich and strong” while remaining a one-party
state. If the China Dream is not the American Dream, what is it? For
the time being Mr Xi is keeping the course he will be following unclear. At the beginning of his term, Mr Xi had to stick to the Party’s
long-term plans to achieve a “moderately well-off society” by the
time of the Party’s 100th anniversary in 2021 (one year before Mr
Xi would have to retire) and creation of a “rich, strong, democratic,
civilised and harmonious socialist modern country” by 2049, the
100th anniversary of the Peoples’ Republic of China. But demands
for clarity mount as the middle-income groups grow increasingly
worried about environmental degradation and social unrest. In the
meantime, they are probably dreaming their own dreams for the
near future, hoping they are not too different from Xi’s.
27
28
“Chasing the Chinese Dream”, The Economist, 4 May 2013.
Ibid.
3.
Financial Markets:
the Pain of Reform Before the Gain
Christopher Balding
In a series of symbolic milestones China has recently reached, the
yuan’s inclusion in the International Monetary Fund’s SDR (Special
Drawing Rights) made it one of the world’s reserve currencies and
increased international credibility for the yuan, the “people’s currency”. Few had believed this would happen in the near future. The
IMF itself in its previous assessment review of basket composition
in 2010, had rejected the yuan, saying it didn’t meet the necessary
criteria. Politics and expectation of future reform and growth seem
to be bigger drivers pushing RMB inclusion in contrast with what
has been actually achieved. As IMF Managing Direction Christine
Lagarde so pointedly notes: “The renminbi’s inclusion in the SDR
is a clear indication of the reforms that have been implemented and
will continue to be implemented and is a clear, stronger representation of the global economy”.
RMB internationalization is needed to improve capital allocative efficiency. Beijing currently maintains an iron grip on both
capital pricing and flow. Whether it is the financial repression of
the citizenry or implicit subsidies given to favored state owned
enterprises, control over finances and currency are used as means
to protect firms. Beijing cannot reform its economy without fundamentally addressing the problems with state control of capital
allocation.
Beijing is approaching a turning point of needing to liberalize
the RMB or to restrict its mobility in the long-term. There is very
little middle ground where China can allow the RMB to float but
50
China Dream: Still Coming True?
also control the flows and the price which it so badly wants. Conversely, liberalizing the markets too rapidly now risk large outflows
and rapid depreciation given the clear currency pressures. With the
large drop we have seen in international investment inflows into
China and MSCI (Morgan Stanley Capital International) exclusion,
a primary concern focused on the capricious policy making and
capital flow restrictions. China cannot pursue reform that makes it
a dynamic economy and leader in financial services without fundamental reform.
Reforming Chinese financial markets:
vital for economic growth
China is attempting a historical rebalance of its economy. Since
the Global Financial Crisis (GFC) in 2008, China has relied on
ever-increasing levels of debt and investment to drive economic
growth. This rapid accumulation of debt has prompted concern in
a range of financial institutions, from the Bank for International
Settlements (BIS) and the IMF to Citibank and the Royal Bank of
Scotland. The Chinese debt level has become one of the dominant
concerns in international finance. Reforming capital markets to
improve allocative efficiency will be key to facilitating a transition to a service- and consumption-led economy relying on innovation and technology.
As Chinese growth has decelerated in official terms over the
past few years to an official rate of 6.8 per cent in 2015, debate
both within China and outside has focused on potential reforms to
the Chinese economy. In the real economy, Beijing has announced
plans to shift away from heavy industry like coal and steel, targeting cuts in surplus capacity to drive this shift. In finance, China’s
announced plans focus on deleveraging, improving capital markets
specifically in fixed income, and greater RMB liberalization. There
has been no shortage of official announcements and plans designed
to ease concern about the increasingly urgent need to reform Chinese capital markets.
Financial Markets: the Pain of Reform Before the Gain
51
In practice, however, there is real reason to doubt the veracity of
these reform announcements and what exactly Beijing hopes to accomplish. In December 2015, the National Party Congress released
the preliminary Five Year Plan stressing the importance of deleveraging and in January 2016 new loan figures grew an astounding 67
per cent. Subsequently, PBOC (People’s Bank of China) governor
Zhou Xiaochuan commented on the need to reduce the growth of
debt. Then the People’s Daily published an interview with an “authoritative person” on the need to deleverage. Debt through April
2016 was up more than 30 per cent from the same period in 2015
belying Beijing’s ability to reduce its debt addiction.
Investors know Beijing’s dilemma well. Anticipating announced
stimulus and investment plans, investors drove up the traded price
of base commodities like steel, prompting many mills targeted for
closure to re-open at profitable rates and hampering Beijing efforts
at capacity reduction. There is a profound moral hazard enveloping
the economic policy-making efforts in Beijing. If Beijing does not
increase the risk investors face, it runs the risk of shouldering investor losses; conversely, if it does induce investor losses, crossing
this psychological Rubicon runs the risk of inducing panic in the
marketplace, causing significant volatility or worse.
However, even beyond China’s ability to achieve reform objectives, there are serious questions about what Beijing even means by
reform in financial markets. Beijing has declared the importance of
increased market risk pricing in financial markets for debt products
but mandates prices at which local government debt will be purchased by banks. After the RMB joined the IMF special drawing
right (SDR) basket in 2015 with full portfolio accounting to begin
in 2016, offshore deposits of RMB have declined by more than 25
per cent as the PBOC has intervened to restrict offshore liquidity
and mainland borrowers have moved foreign debt obligations onshore through repayment. This has caused a de-internationalization
of the little amount of RMB outside of China that did exist.
This framework begs the question as to what exactly is happening with Chinese financial reforms and what the expected outcomes
are with regard to their impact on the real economy and firms. The
52
China Dream: Still Coming True?
direction and outcome of Chinese financial reforms will have a major impact on the world economy and Chinese firms for the years to
come. To address the questions, I will proceed by providing more
detail on the macroeconomic background to lay out the framework,
then focus on the major financial markets including stock, bond,
currency, and shadow banking contributions to growth, finishing
with an analysis combining these various markets and the reform
impetus.
The Chinese economy: debt dependent and loving it
After the 2008 global financial crisis, China embarked on what UC
Berkley economist Barry Eichengreen described as “hard to point
to another credit boom of this magnitude in recorded history”1.
Despite the often-used term “fiscal stimulus”, Beijing pursued a
public-private partnership spending-spree with most of the capital
provided by quasi-private sources. The official headline figure from
Beijing was approximately US$ 500 billion but in reality, the stimulus was structured so that local governments and firms would take
the funds to local banks and receive additional leverage. The official
US$ 500 billion stimulus with bank lending turned into an approximate US$ 2 trillion stimulus with local governments and firms on
the hook for Beijing’s largesse.
The 2008 GFC demarcates the beginning of the great Chinese
debt binge. The McKinsey Global Institute estimated in 2015 that
from 2007 to 2014 Chinese growth quadrupled from US$ 7 trillion
to US$ 28 trillion2. In eight years, Chinese debt ballooned from
158 per cent of GDP to 282 per cent. Given the continued rapid
growth in debt since the report was released, this number has only
Barry Eichengreen writing in Project Syndicate dated 11 May 2016 and accessed
12 May 2016 at https://www.project-syndicate.org/commentary/china-bad-loansolutions-by-barry-eichengreen-2016-05
2
McKinsey Global Institute, February 2015, Debt and (Not Much) Deleveraging accessed
on 10 May 2016 at http://www.mckinsey.com/global-themes/employment-andgrowth/debt-and-not-much-deleveraging
1
Financial Markets: the Pain of Reform Before the Gain
53
increased. Even as Chinese economic growth continues to slow,
debt growth continues to accelerate causing a worrying growth in
leverage raising concerns about economic reform and strategic objectives.
There is no clearer way of demonstrating the lack of impact continued debt growth has had on the Chinese than looking at the level
of new debt relative to GDP growth. In 2015, new debt was nearly
four times the absolute level of new GDP and this ratio has been
growing steadily since the global financial crisis. In other words,
new debt is having a smaller and smaller impact on growth despite
increasingly larger injections of capital. In still other words, to generate not just the same but a smaller level of GDP growth, Beijing
is having to borrow more and more money every year. This is a
worrying and unsustainable trend.
The rising debt levels are not a fundamental break with long
run Chinese economic policy as much as shifting where the capital
comes from. The Chinese economic has focused heavily on capital
accumulation. After joining the World Trade Organization (WTO)
in 2000, this necessitated a policy of running large current account
surpluses driven by an undervalued currency. The trade surpluses
were sterilized with money growth that drove rapid capital accumulation. Sterilization prompted high levels of investment via public
savings where the additional money supply was lent through the
banks that sold the incoming dollars to the PBOC. While 2008 may
demarcate the shift into debt, it does not signal a fundamental shift
in economic policy due to the overall reliance on rapid growth in
capital accumulation. After 2008 however, it became apparent that
the relative level of trade surplus was not enough to continue to
drive growth and it was reaching its political limits.
However, the political reliance on high levels of growth pushed
Beijing to find new sources of capital, shifting to a debt-driven
capital accumulation rather than trade surplus. China has not fundamentally changed its economic growth model of rapid capital
accumulation since 2000. This implies that the transition China is
undertaking is not simply attempting to reduce its reliance on debtfueled growth but focuses on the much larger issue of shifting to a
54
China Dream: Still Coming True?
more sustainable model of growth driven by innovation and consumption. Unless Beijing can recalibrate its entire growth model, it
will be unable to transition its economy away from physical capital
accumulation requiring debt and trade surpluses.
To accomplish this transition, Beijing has declared its intention
of reforming capital allocation through banking, currency, stock,
and bond markets. However, truly targeting these areas means making State-owned Enterprises (SOEs) less reliant on subsidized and
politically allocated capital and Beijing less influential. This is not
merely a tweak to the financing model but a revolution in economic
governance. The shift in economic drivers as simply moving away
from debt understates the enormity of the challenge facing China.
Debt can be managed but remaking an economy is more challenging.
Trapped in a state-run underdeveloped
banking industry
Despite the attention paid to other sectors like bonds, stocks, or
shadow banking, the Chinese economy remains a financial market
dominated by commercial bank lending. Furthermore, the major
national state-owned banks continue to dominate the market. Of the
top ten banks in China, which have over 80 per cent of the market,
only one is not state-owned. Despite the overall funding dominance,
the model for Chinese banks is changing, given both regulatory and
market-driven pressures. These shifts reveal a number of unique
facets of how we can expect the reform path to proceed.
The Chinese banking industry is marked by a number of factors
that make either systemic or financial reform difficult. A disproportionate share of lending is short-term in nature. If we just take official on-balance-sheet lending, which for reasons we will see later
distorts the overall picture, since January 2012 only 55 per cent of
new bank lending has been medium-term in nature. It is not uncommon for banks to have upwards of 70 per cent of on-balance-sheet
lending maturing in less than one year. Listed firms have on average
Financial Markets: the Pain of Reform Before the Gain
55
75 per cent of their liabilities under one year. The short-term nature
of debt in China is worrying.
This excessive reliance on short-term funding lowers some risks
but in this case raises short-term concerns such as rollover risk. Especially given the relatively high level of fixed asset investment,
by nature a long-term asset, having such a high relative level of
short-term funding, creates a troubling asset and liability mismatch.
It also raises the risks of funding constraints if depositors do not
provide the necessary level of funding to continue rolling over the
loans.
Also, Chinese banks are heavily tilted towards the corporate
sector and specifically large state-owned enterprises. Since January
2012, only 36 per cent of new loans have been given to households
compared to corporate borrowers. The primary motivation of the
Chinese banks is to funnel the large pool of savings to SOEs at
generous rates, providing a type of quasi-subsidy. This promotes
the accumulation of physical capital by firms and puts the policy
importance of state-owned banks at the center. Given the divergent
interest-rate costs applied to favored firms and households, it also
acts as an implicit subsidy giving these firms an enormous advantage.
However, due to the political allocation of capital, Chinese banks
face a rising tide of bad loans. Though officially at 1.8 per cent, with
questionable loans raising the total to nearly 6 per cent, skeptics
have argued that the non-performing loan ratio either has or will
top 20 per cent. Even within Chinese financial circles, reports have
been circulated and questions raised about the seriousness of the
explosion in bank lending. As SOE firms run into difficulty, there is
little incentive for an SOE bank to tighten lending terms but rather
lend more or roll over questionable loans.
Recent policy moves to prevent the rising tide of bad loans from
becoming a flood, however, have only inspired skepticism at Beijing’s ability to face up to the problem. For instance, a proposed
debt-for-equity swap whereby banks take equity stakes in borrowers unable to make payments does little to resolve the underlying
problems of excessive indebtedness and poor cash flow. In fact, it
56
China Dream: Still Coming True?
may even exacerbate the problem, as firms with lower debt levels
may feel emboldened to assume new debts or lower prices in an
already deflationary environment.
Furthermore, banks seem unprepared to become a major shareholder in non-bank firms. Banks are struggling to manage their own
businesses with rising bad loan levels, much less turn around failing firms with a political mandate to preserve jobs. Nor is it clear
how a bank will receive cash flow, essentially via dividends, from a
failing firm for their equity stake or how they would liquidate their
holdings should they need to cash out. There is little incentive for
the bank to reform the firm or itself to tackle bad loans.
The central government in Beijing owns a golden share through
a number of holding companies. The banks, however, have become
increasingly independent, pushing back at Beijing diktats although
ultimately surrendering to political orders. Given their pre-eminent
position in Chinese finance, there can be no talk of reform without
prior reforming the banking system. Beijing seems unwilling to release its grip on the primary source of capital allocation in China
and unwilling to face the costs of its poor record of capital allocation. The inevitable recapitalization of banks’ balance sheets, recognition of bad loans, and ultimate release of the banking system
to make commercial rather than politically driven loans seems an
unlikely though needed outcome.
Bond market growth: less than meets the eye
Beijing has targeted the bond market as a source of financial market
reform to reduce bank-driven financing and, at least officially, increase market pressures for risk pricing. In the past 12-18 months,
the bond market has witnessed a surge measured in offerings and
volume. However, there is less to this surge in offering than appears on the surface. Bond market offerings remain dominated by
government bodies or SOEs and rising defaults have only signified
delayed payments before eventual bailouts rather than greater risk
pricing. As with all aspects of the Chinese economy, it is important
Financial Markets: the Pain of Reform Before the Gain
57
to dive beneath the surface to understand the details of what is happening and its potential impact.
Beijing wants to increase bond market influence over capital allocation for a number of reasons. The bond market may better price
risk than politically motivated bank loans. Beijing actually recognizes that political influence has motivated vast amounts of lending and the price charged for that risk is not accurately reflected in
the price of lending. However, Beijing wants to increase risk pricing without actually changing the price or permitting the failure of
weak firms. As with many parts of financial reform, Beijing appears
to want the benefits without the costs.
Additionally, tapping the bond market opens a vast new pool
of capital for potential borrowers. Banks in China typically offer
average deposit rates of 1 per cent while direct security investment
on loans offers significantly higher. Just because banks are under orders to reduce top-line lending does not mean borrowers are under
orders to reduce indebtedness or leverage ratios. However, given
the implied levels of non-performing loans, banks are having difficulty remaining liquid enough to roll over existing loans that cannot
be repaid. To increase capital, targeting investors seeking higher
rates of return than bank deposits, Beijing is encouraging growth in
the bond market to tap investor capital.
However, there is less to this “market” development than initial
appearances might indicate for numerous reasons. First, bond issuance is dominated by various levels of government and state-owned
companies like policy banks. Through April, the corporate sector
excluding policy banks were responsible for only 270 billion RMB
in issuance out of 6.4 trillion RMB. This is an almost irrelevant
amount of new issues. Even the corporates that do issue are primarily state-owned corporations like major national banks or other
national champions in which the government has a major stake. In
other words, the government is preventing the bond market from
allocating capital efficiently.
Second, a primary purpose of the explosion in bond market issuance is a debt swap from higher-cost shorter-term bank loans into
longer-term lower-yielding bonds to stave off a debt crisis. Begin-
58
China Dream: Still Coming True?
ning with the local government debt problems that threatened to
morph into a larger catastrophe, Beijing has pushed for troubled
local governments and corporates to swap debt maturities and costs.
Given the known riskiness of much of the corporate and local government issuance, this should not be considered a positive development but an attempt to stave off much larger short run default
waves.
Third, Beijing has essentially mandated bond duration and pricing to bailout indebted firms and governments. In many cases, local
government debt is sold at sovereign prices and subsequently trades
at a lower yield than Chinese sovereign debt. By mandating duration changes and pricing, Beijing is short-circuiting the ability of
the debt market to enforce discipline by pricing the risk of the issuance. Furthermore, rather than use the breathing space as a chance
to put their fiscal house in order, many provinces and firms continue
to engage in rapid debt buildups that do not portend stabilization.
Beijing is looking to the bond market as a source of new financing, not for its transparent discipline. Despite the pleasant-sounding
rhetoric about market risk pricing and imposing discipline, Beijing
is preventing the exact mechanisms which accomplish these tasks
by mandating bond purchases, pricing, and duration. While the
move to encourage growth in the bond market should be considered
a positive step, it needs the proper context to understand exactly
what is and is not happening. There is much less reason to believe
the market is being allowed to impose the type of financial discipline Beijing claims to want.
Shadow banking: out of the shadows
and part of the machine
While shadow banking draws comparisons to illicit money flows, it
has gone increasingly mainstream in China given the reluctance or
inability of major financial institutions to serve the needs of entrepreneurs, households, and non-state-owned enterprises. Non-bank
financial institutions grew out of a demand to meet the financial
Financial Markets: the Pain of Reform Before the Gain
59
service needs of individuals and companies not being served by the
major commercial banks. However, their rapid growth has increasingly worked closely with major financial institutions but focusing
on a different client base of small and medium-size enterprises.
The Chinese shadow banking sector has moved out of the shadows and into the mainstream. It is a misnomer to call them shadow banks, given their funding sources and client base among both
borrowers and lenders. For instance, just the big four state-owned
banks in China, hold 15.7 trillion RMB in “Financial Investments”
on their balance sheets, which is just one place they hold securities from non-bank financial institutions, primarily in the form of
short-term fixed-income securities in wholesale funding. As a point
of reference, this amounts to roughly 23 per cent of nominal GDP.
There are a number of specific problems when we consider how
to reform the shadow banking industry to build a more sustainable
foundation for economic growth. First, these financial institutions
are large enough to be systemic risks and should not be treated as
some backwater of Chinese finance. Shadow banking is intimately
connected with mainline commercial lenders acting as either major
sales channels or wholesale funders. Given the size of assets under
management and their importance to an increasingly larger segment
of society, shadow banking should not be treated as systemically
unimportant. To this day, non-bank financial institutions exist in a
legal gray area with little formal regulatory oversight for shadow
banks, P2P lenders, and related non-bank financial institutions. It
is important that the regulatory and reform framework incorporate
them into the financial system and devise how best to serve their
clients and funders. Shadow banks are systematically important institutions.
Second, inclusion into a larger regulatory structure should not
prevent non-bank financial institutions in China from serving their
primary clientele of households and small to medium-sized enterprises. Commercial banks in China primarily serve major SOEs
while P2P and shadow banks grew rapidly to serve households and
non-SOEs. While there is a substantial need for non-bank financial institutions to be brought into the larger regulatory structure,
60
China Dream: Still Coming True?
it would be counter-productive if this change closed off financial
channels for segments unable to access bank finance. Reform of
the shadow banking sector with an eye to economic growth should
focus on building up the sector and its independent nature rather
than trying to incorporate it into the mainline commercial sector.
Shadow banks grew to meet unserved demand.
Third, while bank loans have risen in the past year or two, the
primary driver of lending growth has come from non-bank financial institutions. As banks have restrained lending, non-bank financial institutions have overseen an explosion in lending. Banks,
however, have been major funders of shadow banks. Banks benefit with higher rates of return and reduce their capital risk weighting by lending to financial institutions. This only shifts their risks
largely off their balance sheets in disguised ways. The net result is
that a lot of lower-quality borrowers are migrating from banks to
non-bank FI’s with banks acting as wholesale funders. This means
that the risk level has continued to rise as banks are now at an
arm’s length from the end customer even though they continue to
act as the primary funder. This process raises serious risk management issues.
RMB liberalization: the dragon in the room
Arguably the greater risk to the Chinese economy and financial
markets is the issue of RMB liberalization. This also has the potential to enforce the greatest level of discipline and reform upon
Beijing and the entire Chinese economy. Unsurprisingly, this is also
the one Beijing is resisting the most and the one most at risk to
shocks outside its control. However, Chinese citizens and firms are
not cooperating, shifting large amounts of capital out of the country and thereby forcing Beijing to impose ever tightening capital
controls. This quiet step backwards in the year the RMB officially
joins the IMF SDR basket is a major embarrassment to Beijing but
represents potential to push toward financial reform to drive longterm economic growth.
Financial Markets: the Pain of Reform Before the Gain
61
While Beijing maintains its official stance that it intends to complete full liberalization of the RMB by 2020, the last few months of
2015 and first half of 2016 have seen nothing but steady retreat from
this position. Offshore RMB deposits have been falling around the
world, with the major offshore center in Hong Kong seeing a 25 per
cent fall in the past year. This was driven by the onshoring of foreign
denominated debt by Chinese corporates and PBOC intervention ensuring the CNH (CNH is the ISO Code for the Chinese Yuan when
traded offshore) stayed near parity with the Chinese yuan (CNY).
Both moves, while individually rational, were driven by concern
over the state of the RMB and de-internationalized the RMB.
The greater risk to RMB liberalization is the risk level of Chinese assets perceived both by domestic and international investors.
Through April, depending on the specific metric used, capital flows
into China were down almost 40 per cent from 2015 while outflows
were up more than 30 per cent. International investors who have become increasingly concerned about China really changed their risk
acceptance in the fourth quarter of 2015 and through the first half of
2016. Rapidly rising debt levels and potential currency risks were
no longer something to keep in mind, but shifted to major concern.
This has caused a near collapse in capital inflows with declines in
both direct and portfolio investment.
The rising capital outflows, while motivated by broadly similar
concerns, are also more nuanced and structural in nature. Driven
less by short-term foreign central bank interest-rate decisions, Chinese outflows have been rising steadily since 2012 when a unique
confluence of events came together to start the process. In 2012,
China changed its foreign payment system, liberalizing most current account transactions while retaining a tight grip on the capital
account. This prompted many Chinese businesses and individuals
to move money abroad via fraudulent current account transactions
by overpaying for imports. In 2015, this amounted to approximately
US$ 750 billion.
Additionally, although the exact date cannot be specified, economic activity began a slow downward trend sometime in 2012
through the first half of 2013. The rising capital outflows that began
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China Dream: Still Coming True?
in 2012, were an indicator that real economic investment opportunities were declining and capital was looking elsewhere for good
opportunities. This was exacerbated by the government transition
with Xi Jinping assuming the position of General Secretary of the
Chinese Communist Party in late 2012. Already concerned about
politically motivated financial seizures and quality-of-life issues,
the corruption crackdown caused many to accelerate their plans to
leave China.
These factors have combined to place enormous pressure on the
RMB. Liberalizing the currency might be the largest structural and
psychological bridge for Beijing to cross. Allowing capital to flow
freely out of China risks triggering deposit outflows from already
stressed banks, prompting liquidity or credit crunches as firms
would be unable to rollover debts. Psychologically, the sacrosanct
link between the RMB and the US$ occupies a central place in the
Chinese national psyche.
RMB liberalization would open up large amounts of new liquidity to flow into sectors and companies deprived of capital. However, it would also withdraw liquidity from financial institutions
and firms teetering on the edge. In May 2016 the concern focused
on the potential risks from continued liberalization, which led to
intervention to reduce RMB deposits and firms to onshore foreigndenominated debt. RMB liberalization will prove a net positive, but
it is risky given financial fragility, lack of demand for RMB assets,
and Chinese demand for foreign assets.
Financial market reform and
economic growth in China
China’s financial market was created to allocate capital for political purposes rather than economic efficiency. Discussing financial
reform in the shadow of the ensuing political consequences requires
an understanding of the implications. In the absence of either the
political will or reform to allow increased capital allocation efficiency, any discussion of financial reform is moot.
Financial Markets: the Pain of Reform Before the Gain
63
The financial risks are very real. Corporate China suffers from
high leverage ratios and an industrial environment stuck in a deflationary spiral for more than four years. Revenue across most industries has been flat even as liability growth increases by double
digits. Financial market reform must be considered as one half of a
larger economic reform package.
However, financial and economic reform in China if anything
appears to have regressed. Despite an emphasis on deleveraging at
the 2015 Congress, 2016 has witnessed a return to rapid debt-fueled
growth and a tightening of economic policy that is scaring off foreign investors. The supposed transition to an innovative, serviceled economy is in reality a return to the debt-fueled heavy industry
growth of the past decade. Capital controls have been tightened
and SOEs propped up rather than the promised gradual reform and
opening up.
Probably the most problematic issue facing Chinese policymakers and financial market reform is tackling moral hazard. There
is a profound belief that Beijing will save investors, which has resulted in the widespread belief that asset prices can only move in
one direction. While policy-makers try to nudge risk and potential
losses onto investors, so far, although defaults have risen, virtually
all companies have ultimately been bailed out. Some companies
have even engaged in M&A sprees while in default and others saw
their debt rise well past face value, indicating the confidence investors have in being made whole.
Consequently, while Beijing may pay lip service to accepting
the costs of real economic and financial reform, investors and firms
act against the policy diktats. There is little belief that Beijing will
allow an indebted firm or bank to collapse and risk either social or
financial instability that may cascade across the system. The results
of this moral hazard policy are seen throughout the financial system.
Investors buy the bonds of firms in default in the belief that Beijing
will backstop losses, ultimately bailing out the default. Local governments have used the local government debt swap of short-term
high-interest bank loans for long-term low-interest debt not as an
opportunity to get their fiscal house in order but to engage in an-
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China Dream: Still Coming True?
other debt spree. Until Beijing begins imposing losses on investors
and firms, rather than just entering default as more of a standstill,
moral hazard will remain the dominant investment paradigm.
The financial system that has evolved in China is acting as a drag
on the economic transition China wants to undertake. As long as
Beijing remains unable or unwilling to make systematic reforms to
capital allocation in China, it will face enormous difficulties transitioning to a high-growth middle-income country.
4.
Chinese Foreign and Security Policies: Dream at Home, Nightmare Abroad?
Axel Berkofsky
After the conclusion of the 18th National Congress of the Communist Party of China in November 2012, President Xi Jinping for the
first time put forward the idea of the “China Dream” (Zhongguo
meng) on a visit to the exhibition “The Road towards Renewal”
at the National Museum of China. During the visit, Xi announced
that the “Great rejuvenation of the Chinese nation is a dream of the
whole nation, as well as of every individual.” While the contents
of the “China Dream” continue to remain fairly vague1, details on
what Xi means when he talks about “resurrecting” Chinese power
continue to emerge every once in a while. The conceptual and linguistic origins of the “China Dream” (or “Chinese Dream”2), however, go back to the year 2010 and a book published by Liu Mingfu,
senior colonel of China’s armed forces: The China Dream: Great
Power Thinking and Strategic Posture in the Post-American Era.
The book argues that China should regain its position as the most
powerful nation in the world, a position it had held for a thousand
years before its humiliation by Western powers.
In December 2012, during an inspection tour of the navy in
southern China, Mr Xi then announced what he called a “Strong
Army Dream”, emphasising that the army will continue to remain
under exclusive control of the Party, i.e. under control of himself3.
See chapter 1 in this volume.
The literature uses the terms “China Dream” and “Chinese Dream” simultaneously.
3
Also see “An Uneasy Friendship”, The Economist, 9 May 2015, http://www.
economist.com/news/china/21650566-crisis-ukraine-drawing-russia-closer-china1
2
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China Dream: Still Coming True?
In Xi’s view, Chinese foreign policy should help realise two goals
for the country: the doubling of China’s gross domestic product
(GDP) from 2010 levels and achieving what he refers to as the “renewal” of the nation by 2049, the 100th anniversary of the Communist Party takeover of power in China. While the first objective
is clear and tangible, the second is not, at least not yet. Then again,
China’s currently very assertive policies related to territorial claims
in the South China Sea are somehow hinting at what Xi means
when he speaks of “renewal”: the unilateral “renewal” of China’s
territorial borders. Indeed, over the last three years – at least so it
seems – China’s (very) assertive and at times aggressive policies
related to territorial claims in the East and South China Seas have
been an instrument to help “resurrect” Chinese power as declared
in the “China Dream”. Unilateral territorial expansion in the South
China Sea, accompanied by the construction of civilian and military facilities on islands claimed also by other countries must indeed be interpreted as a demonstration of Chinese (military) power
and the ability to reclaim and occupy what – at least in Beijing’s
view – has belonged to China since “ancient times”. Given that the
“China Dream” aims at re-building the power and influence China
had in the past (before its clash with Western powers and Western
colonialism and imperialism in China and elsewhere in Asia), reclaiming and occupying territories China claims to have possessed
in the past is hence only logical – at least and arguably only from
a Chinese point of view. However, that China is no longer – at
least formally – an empire and Southeast Asia no longer a group of
Chinese vassal states, seems to be completely irrelevant in Chinese
policymaking circles.
For those in Asia who are feeling the results of Chinese dreaming of returning to a “glorious past” and an undisputed “Middle
Kingdom” status, the overall quality and level of Chinese peacefulness and/or belligerency will also have to be measured by China’s
regional foreign policies and their impact. As it turns out, unilaterally reclaiming islands in the South China Sea and building civrelationship-far-equal
Chinese Foreign and Security Policies: Dream at Home, Nightmare Abroad?
67
il and military facilities on them is in Southeast Asia (and pretty
much elsewhere too) perceived to be the very opposite of the kind
of “peaceful development” and “Sharing the China Dream” Xi Jinping has been promising since 2012.
“Hide and bide no more”?
The “China Dream” seems to replace Deng Xiaoping’s “Hide and
Bide” approach to international affairs. When Deng came to power in
China in the late 1970s, he wanted China to put a focus on economic
development and growth and therefore wanted the country to take a
very low profile in international politics. This was not least decided
in view of the country’s very limited resources and expertise after 30
years of Maoism, China’s international isolation and foreign policies
that were driven by ill-fated ideology and resistance to alleged U.S.
global imperialism. After the events on Tiananmen Square in June
1989 Deng is cited as having “invented” the slogan “Bide its time,
hide its brightness, not seek leadership, but do some things”4. However, there is no evidence, as U.S. China scholar David Shambaugh
writes, that it was Deng who invented and propagated that slogan in
19895. Either way, “Hide and Bide” became the mantra of Chinese
foreign and security policies and it was, as Shambaugh writes, former Chinese President Jiang Zemin, who picked up the slogan and
officially attributed it to his predecessor Deng. The “Hide and Bide”
policy is a policy that has kept China from getting politically or militarily involved in international conflicts and was accompanied by
China deciding to make neither allies nor enemies.
This policy approach, however, has been transformed over the
last three years and this is where the “China Dream” and a new
In Chinese: Taoguang yanghui, bu dang tou, yousuo zuoweo.
Shambaugh argues that the slogan neither featured in Deng’s speeches nor was
published in Deng’s book Selected Works. Instead, Deng only once during his so-called
‘Southern Tour’ in 1992 announced that “We will only become a big political power
if we keep a low profile and work hard for some years, and then we will have more
weight in international affairs.” See D. Shambaugh, China Goes Global, The Partial
Power; Oxford University Press New York 2013, p. 18-19.
4
5
68
China Dream: Still Coming True?
approach to regional and global Chinese foreign policies becomes
relevant. China’s ever deeper integration into the world economy
– accompanied by its global trade ties with and foreign direct investments (FDI) in many politically unstable countries – makes it
much more difficult (i.e. impossible) to passively stick to Deng’s
“Hide and Bide” paradigm. This also means that it has become increasingly difficult for Beijing to adhere to its sacred “Principle of
Non-Interference”6. China denying others the right to “interfere” in
any of what China refers to as its “internal affairs” is (very) deeply
embedded in Chinese foreign and security policy thinking and making and Beijing will continue to take on board only the kind of advice on its foreign and security policies that comes nowhere near to
resembling “interference”. Chinese policymakers have over recent
years insisted that no outside party in general and the U.S. in particular has the right to take a position on, i.e. “interfere in”, China’s
domestic and foreign policies, in and beyond Asia7.
What’s more, the kind of foreign and foreign economic policy
initiatives Beijing is proposing today obviously exclude the U.S.
Xi has repeatedly proposed creating a new regional security architecture that would exclude the United States, and Beijing has been
very active in regional security forums of which the U.S. is not a
member: the Shanghai Cooperation Organization (SCO), ASEAN
plus 1, ASEAN plus 3, and the Conference on Interaction and Confidence Building Measures in Asia (CICA). For Southeast Asian
countries8, however, a new Asian security architecture under Chinese leadership remains very problematic. Indeed, against the background of Asian territorial and maritime disputes involving China,
a Chinese leadership role is from a Southeast Asian perspective curSee e.g. M. Duchâtel, O. Bräuner, Hang Zhou, Protecting China’s Overseas Interests-The
Slow Shift from Non-Interference, SIPRI Policy Paper 41, International Peace Research Institute (SIPRI), Stockholm, June 2014, http://books.sipri.org/files/PP/SIPRIPP41.
pdf
7
See e.g. F. Godement, “The End of Non-Interference?”, China Analysis, The
European Council on Foreign Relations/Asia Centre, October 2013, http://
www.ecfr.eu/page/-/China_Analysis_The_End_of_Non_interference_
October2013.pdf; See also M. Duchâtel, O. Bräuner, Hang Zhou, op. cit.
8
Not to mention East Asian countries such as Japan or South Korea.
6
Chinese Foreign and Security Policies: Dream at Home, Nightmare Abroad?
69
rently all but inconceivable. And not only from a Southeast Asian
perspective as it turns out. Closer to home, too, China’s tactics and
policies hardly correspond to the kind of regional “win-win” realities, which according to Xi Jinping would result from the “China
Dream”. When Taiwan’s newly-elected president Tsai Ing-wen took
office at the end of this May she was reminded several times to
stick to the so-called “1992 consensus” acknowledging that there is
only one China9. Tsai has so far chosen not to do so and she and her
country might sooner or later become subject to some of the “Moving earth and shaking mountains” policies Xi threatened Taipei with
in case it opted for policies aimed at turning Taiwan’s de facto independence into a formal one.
Sweet dream versus bitter reality
State Councillor and former Chinese Minister of Foreign Affairs10
Yang Jiechi wrote in an American newspaper in September 2013
that “The Chinese dream requires a peaceful and stable international and neighbouring environment, and China is committed to realizing the dream through peaceful development. Since the “China
Dream” is closely linked with the dreams of other peoples around
the world, China is committed to helping other countries, developing countries and neighbouring countries in particular, with their
development while achieving development of its own”11. That
sounds good on paper, but the reality of Chinese regional foreign
and security policies arguably does not get reflected in that explanation of the “China Dream”. Unilaterally occupying disputed islands in the South China Sea is – at least from the perspective of
those countries also claiming the islands China is already building
civilian and military facilities on – the very opposite of the kind
See “Rocking Boats, Shaking Mountains”, The Economist, 28 May 2016.
Between 2007 and 2013.
See Yang, Jiechi, “Implementing the Chinese Dream”, The National Interest, 10 September 2013, http://nationalinterest.org/commentary/implementing-the-chinesedream-9026?page=3
9
10
11
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China Dream: Still Coming True?
of “peaceful development” Yang Jiechi mentioned at the time. To
be sure, officially, the “China Dream” is a continuation of China’s
so-called “Peaceful Development Strategy” announced and propagated by Xi’s predecessor Hu Jintao. The origin of Hu’s “Peaceful
Development Strategy” was the “Peaceful Rise Strategy” (heping
jueqi) as proposed by Zheng Bijian, from the Central Party School
in 2003. “Peaceful Rise” became “Peaceful Development”, which
in turn was complemented by the “Harmonious World” (hexie shijie) slogan to calm Western anxiety about China’s rise, be it “peacefully” or “harmoniously”.
Today, however, the concept of a “harmonious world” is no longer part of the official Chinese foreign policy rhetoric and seemingly not a concept belonging to the “China Dream” either. When
Chinese policymakers, journalists and scholars talk about the
“China Dream” and the return to the “Glory of the Middle Kingdom” in the same sentence, the alarm-bells go off immediately in
Southeast Asia. Indeed, the return of the concept/strategy of China
as the “Middle Kingdom” in Southeast Asia recalls the bad old days
of the Ming and Qing dynasties, during which the “Middle Kingdom” dominated much of Southeast Asia, treating states as “vassals” on the “periphery” of the Chinese Empire12. In January 2014
Liu Zhenyu, journalist of the Chinese People’s Daily Online newspaper13 wrote an article in the online newspaper The Diplomat, in
which he explicitly linked the “China Dream” to the term “Middle
Kingdom”: “I dream that the Chinese people will one day fully recover from the trauma of the “Century of National Humiliation”,
when China was bullied at the hands of Western and Japanese invaders, and the Middle Kingdom will restore its former glory”14.
12
Indeed, long before Xi’s “China Dream” became part of the official Chinese
foreign policy rhetoric, Beijing’s decision to again use the term “Middle Kingdom”
created anxiety among Southeast Asian policymakers and scholars. The concept of
China as the Middle Kingdom today implies for Southeast Asian countries that China
is the political, economic centre of the region, while Southeast Asia finds itself again
existing at the “periphery” of the Chinese Empire, confined to a “vassal state” status.
13
Generally referred to as the ‘mouthpiece’ of China’s Communist Party; the newspaper is run and owned by the Communist Party.
14
Liu, Zhenyu, “I have a Dream, a Chinese Dream”, The Diplomat, 12 January 2014,
Chinese Foreign and Security Policies: Dream at Home, Nightmare Abroad?
71
Indeed, there is little doubt that there is in Chinese policymaking
circles a conceptual connection between the “China Dream” and
the Middle Kingdom15. That connection becomes evident in Xi’s
project to revive the ancient Silk Road trading route from China to
Europe: indeed, the very same version of the Silk Road when China
was the “Middle Kingdom”16.
Dream interpretation
Given that the “China Dream” is a slogan as opposed to a welldefined concept explaining in detail the allegedly new qualities
of Chinese foreign policies, it is obviously difficult to qualify and
quantify which, how and to what extent China’s foreign and security policies are in Beijing’s view designed to help achieve that
“dream”. That said, however, if strengthening and expanding China’s regional and global foreign and security policy profile and
positioning is part of that “dream”, then it can be concluded that
Beijing’s (very) assertive policies related to territorial claims in the
South China Sea serve that purpose. In other words, reclaiming and
occupying islands in the South China Sea which are also claimed
by other countries is – from a Chinese perspective – an instrument
to help the Chinese government convince the Chinese people that it
is able and indeed very prepared to make the de facto expansion of
Chinese territory a part of the “China Dream”.
And China is arguably getting fairly good at this. Large parts
of the territorial waters in the South China Sea are disputed and
China is the country that acts on these disputes by in essence declaring that there are no disputes: the disputed territories all belong
to China as far as China is concerned. In the South China Sea that
includes the Paracel Islands (also claimed by Taiwan and Vietnam),
http://thediplomat.com/2014/01/i-have-a-dream-a-chinese-dream/
15
Various interviews this author conducted with Chinese ministry officials and policymakers in 2014 and 2015 confirm this.
16
See Shi, Ting, D. Tweed, “Xi Jinping Outlines ‘Big Country Diplomacy’ for China”,
The Sydney Moring Herald, 2 December 2014, http://www.smh.com.au/world/xijinping-outlines-big-country-diplomacy-for-china-20141202-11yaj5.html
72
China Dream: Still Coming True?
the Spratly Islands (claimed by Taiwan, Vietnam, the Philippines,
Malaysia and Brunei) and the Scarborough Shoal (claimed also by
both Taiwan and the Philippines). To put all of this on paper, Beijing
took the so-called “Nine-Dash Line” (a line marking the borders of
Chinese territorial waters as viewed from China dating back to the
1940s) out of the drawer, providing alleged “evidence” that more
than 90 per cent of the South China Sea is part of Chinese sovereign
territory. Over the last three years, China has in the South China
Sea pursued a rather effective approach that is also referred to as
a ‘”combination of punches”. Firstly, deploying law enforcement
units on the sea to assert its power while at the same time avoiding direct military clashes with other claimant countries. Secondly,
using economic power to divide ASEAN countries’ stances on territorial disputes with China. This dual tactic, however, has in 2014,
2015 and 2016 been complemented by something more concrete:
unilaterally declaring that what is disputed really belongs to China.
In 2015, for example Beijing increased the construction of facilities on and around disputed islands, including military facilities.
After declaring in June 2015 that the process of building seven new
islands by moving sediment from the seafloor to reefs was close
to completion, Beijing in the second half of the year undertook efforts to build ports, airstrips and radar facilities on disputed islands
in the South China Sea. In April 2015 China built an airstrip on
reclaimed land on the Spratly Islands and unless there is a dramatic
shift in Chinese territorial policies – which is as unlikely as it gets
– we have not yet seen the end of China re-claiming and building
facilities (including military bases) on disputed islands in the South
China Sea. To be sure, Beijing does not get tired of pointing out
that that it is merely reclaiming land and islands that have always –
since ancient history – belonged to China17.
Panda Ankit, “Vietnam Slams Chinese Naval Drill in South China Sea”, The Diplomat, 27 July 2015, http://thediplomat.com/2015/07/vietnam-slams-chinese-navaldrill-in-south-china-sea/; also D. Watkins, “What China has been Building in the South
China Sea”, The New York Times, 29 February 2016, http://www.nytimes.com/interactive/2015/07/30/world/asia/what-china-has-been-building-in-the-south-chinasea-2016.html?_r=0; “Who Rules the Waves”, The Economist, 17 October 2015, http://
www.economist.com/news/international/21674648-china-no-longer-accepts-ameri-
17
Chinese Foreign and Security Policies: Dream at Home, Nightmare Abroad?
73
In sum, the “China Dream” suggests that China is bound to
become more proactive in international politics and security and
could, as some analysts point out, begin to seek military alliances.
Up until today, however, Beijing insists that it does maintain military alliances with any country, including North Korea and Russia. The literature suggests that Moscow and Beijing will maintain
what is also referred to as an “axis of convenience” as opposed to
anything resembling a military partnership that goes beyond joint
opposition to U.S. and Western policies18.
Dream for some, nightmare for others?
Chinese state-controlled media warn on a regular basis that while
Beijing has nothing against U.S. economic involvement in East
Asia per se, the expansion of U.S. security and defence ties in Asia
through its “Asia pivot” is aimed at keeping China from pursuing
the “China Dream” of “National Rejuvenation”19. While that does
arguably sound a bit alien and overly dramatic to Western ears, it is
very serious business for China as China’s most well-known scholar of international relations Yan Xuetong20 argued in 2013 during
a debate with U.S. scholar John Mearsheimer21. China under Xi’s
leadership, Yan argued at the time, will be able to tell friends from
enemies, allowing those who – as he put it – “Play a constructive
role in China’s rise to profit from it”. This is arguably a Chinese
version of a “carrot and stick policy”, “rewarding” those who play
by China’s rules and “punishing” those who are daring enough not
ca-should-be-asia-pacifics-dominant-naval-power-who-rules
18
See Yun Sun, “China-Russia Relations: Alignment without Alliance”, PacNet, no.
67; CSIS - Center for Strategic and International Studies, 7 October 2015, https://
www.csis.org/analysis/pacnet-67-china-russia-relations-alignment-without-alliance
19
“Chasing the Chinese Dream”, The Economist, 4 May 2013, http://www.economist.com/news/briefing/21577063-chinas-new-leader-has-been-quick-consolidate-his-power-what-does-he-now-want-his
20
From Tsinghua University of Beijing. Yan is known for being an outspoken scholar
and commentator with nationalist and anti-West/anti-U.S. tendencies.
21
The full debate can be accessed on YouTube at https://www.youtube.com/
watch?v=wBrA2TDcNto
74
China Dream: Still Coming True?
to. While that might sound plausible from a very confident and
arguably nationalist point of view (somehow smelling of plans to
install “hegemony” and Chinese “supremacy”), one may wonder
where the “China Dream” ends and the nightmare for the rest of
the world begins. But not so fast. The basis and fundament of rising
Chinese global influence and power over the last 10 years has been
an economy producing double-digit growth rates. Double-digit
Chinese economic growth rates, however, are a thing of the past
and today the country is confronted with enormous economic and
financial difficulties, which need to be addressed very urgently and
very profoundly. China’s debt – public and private debt combined –
could, according to The Economist, already amount to close to 300
per cent of the country’s GDP22 – not exactly the strongest position
from which to “reward” or “punish” those who are and who are not
playing by China’s rules. To be sure, there are Chinese policymakers and scholars also warning of a Chinese “imperial overstretch”
and arguing that Beijing is already overplaying its foreign policies
hand23. China is indeed faced with enormous economic and social
problems and tough foreign policy talk and action is probably also
meant to distract from the country’s economic ills. Xi Jinping’s
“strong-man” behaviour, his grandiose rhetoric associated with the
“China Dream” and his very assertive at times belligerent warnings
to the West and anybody else about not interfering in any of the
country’s domestic and foreign policies are arguably not necessarily
a sign of self-confidence and strength but rather the opposite: insecurity and deep-seated concerns that the Chinese people could, as in
1989, turn against the government and the state should the state not
be able to provide the people with the public goods – in this case,
strong economic growth accompanied by prosperity – that it promised to do. Following that logic, the more Xi and like-minded policymakers talk tough and conduct megaphone diplomacy warning
22
“The Coming Debt Bust”, The Economist, 7 May 2016, http://www.economist.com/
news/leaders/21698240-it-question-when-not-if-real-trouble-will-hit-china-comingdebt-bust
23
This author’s off the record interviews with Chinese scholars in Beijing in 2015
confirm that.
Chinese Foreign and Security Policies: Dream at Home, Nightmare Abroad?
75
others not to meddle with the country’s internal and external affairs,
the more insecure the leadership seems to feel. Chinese policymakers and scholars do obviously disagree and typically react very
defensively when confronted with Western assessments of how unstable and insecure the Chinese leadership and/or the Communist
Party is24. Indeed, Beijing usually refers to such critical analyses
of the state and the Chinese leadership’s control over China and
the Chinese people as unfounded and “malicious” speculations and
Western attempts to drive a “wedge” between the leadership and the
Chinese people.
The west got it all wrong, of course
China itself cannot find anything aggressive about any of its regional foreign and security policies. It is – at least from its own
perspective – merely reclaiming what has belonged to China since
“ancient times”. In fact, there is very little (if any) room for negotiations with China about whom disputed territories in Asia belong
to, even if Beijing continues to insist that it is – at least in principle and strictly on a bilateral basis – prepared to talk to other
claimant countries about conflicting territorial claims. However,
this is arguably only in principle and theory because there are no
indications whatsoever that Beijing is prepared to seriously negotiate any ownership of islands in the South China Sea. And with
good reason, according to the Chinese (U.S.-based) scholar Zheng
Wang, who – like many other Chinese scholars too – talks about
“misperceptions” between China and some of its neighbours over
sovereignty issues25. “Misperceptions”, however, is arguably only
one way of putting it. Unilateral territorial expansion at the exA case in point is the American China scholar David Shambaugh, who in 2015
made himself rather unpopular among Chinese colleagues and indeed also policymakers when he concluded (in, among others, the Wall Street Journal) that Beijing’s
very assertive domestic and foreign policies are also a result of an insecure leadership.
25
Zheng, Wang, “Not Rising, But Rejuvenating: The ‘Chinese Dream’”, The Diplomat,
5 February 2013, http://thediplomat.com/2013/02/chinese-dream-draft/
24
76
China Dream: Still Coming True?
pense of militarily weaker Southeast Asian countries is the way
that Southeast Asia and pretty much everyone else sees it. Zheng
Wang’s explaining that the West and Southeast Asia have it all
wrong is telling and stands for much of what is wrong with the
“China Dream”, at least for those who are faced with the dream’s
not-so-dreamlike consequences. “Although outsiders almost always speak of China’s ‘rise’, the Chinese like to refer to their impressive recent achievements and future planned development as
‘rejuvenation’ (‘fuxing’)”. The use of that word underscores an important point: the Chinese view their fortunes as a return to greatness and not a rise from nothing. In fact, rejuvenation is deeply
rooted in Chinese history and the national experience, especially
with regard to the so-called “century of national humiliation” that
began with the First Opium War (1839-1842) and lasted through
the end of the Sino-Japanese War in 1945. It seems inconceivable
to the Philippines and Vietnam that China’s historical evidence of
sovereignty over islands in the South China Sea should take precedence over modern international law. Consequently, these countries and others perceive China’s claims and efforts to defend them
as inherently aggressive, and in turn demonstrate that China is a
revisionist power, Zheng Wang writes. The trouble, however, is
that China cites “evidence” that is Chinese evidence and Chinese
only. The maps China today refers to were drafted by China and
are not acknowledged as “evidence” of Chinese territorial claims
anywhere else outside of China. Or put differently: Chinese territorial claims in Asia have been “dreamt up” in China – as part
of the “China Dream”. Either way, while a number of Southeast
Asian countries would beg to differ (very strongly), the “China
Dream” is about getting back what has always belonged to China.
China, Zheng Wang therefore concludes (erroneously) is a status
quo power. “The Chinese see their country as a status quo power
whose actions are inherently defensive. From this perspective, the
Chinese are merely trying to protect their ancestral rights – as laid
out in historical documents – from the encroachment of others”.
Xi Jinping’s ambitions, the Chinese scholar Feng Zhang argues, do
not stop there. “Xi isn’t content with making China a great power
Chinese Foreign and Security Policies: Dream at Home, Nightmare Abroad?
77
in the region and beyond. He also wants to make China the dominant power in key areas of Asia-Pacific regional relations. Indeed,
as a keen student of history, Xi may be trying to restore the role
of China in the contemporary East Asian system to its historical
height during the era of the Chinese empire (221 BC–1911 AD)”26
– arguably the worst-case scenario for the rest of Asia.
The answer to U.S. containment?
From a Chinese perspective, the U.S. military presence in East
Asia in general and the U.S. “Pivot to Asia” announced in 2011
in particular is standing in the way of China achieving regional
political and military supremacy, which – as we have established
above – seems to be part of the “China Dream”. If China perceives
itself to be the subject of U.S. containment policies accompanied
by the strengthening of Washington’s security and military with
traditional decades-old allies (such as Japan and South Korea) and
the development of new defence ties with countries such as the
Philippines, Vietnam, Australia and India 27, then the realization
of the “China Dream” is also a response to U.S. containment. And
that would be the part of the dream which, as mentioned above,
seeks to re-configure China’s current to past territorial boundaries.
In turn, the strengthening of U.S. defence and military ties with
Southeast Asian countries is aimed at helping Southeast Asia to
keep China from controlling the territories it did when it was the
“Middle Kingdom”. Hence, it all makes sense, albeit potentially
in very destabilizing way.
26
See Feng Zhang, “Xi Jinping’s Real Chinese Dream: An ‘Imperial’ China?”, The
National Interest, 18 September 2015, http://nationalinterest.org/blog/the-buzz/xijinpings-real-chinese-dream-imperial-china-13875
27
For details on the contents and objectives see e.g. K. Campbell, B. Andrews, Explaining the U.S. Pivot to Asia, Chatham House, August 2013, https://www.chathamhouse.org/sites/files/chathamhouse/public/Research/Americas/0813pp_pivottoasia.pdf
78
China Dream: Still Coming True?
Conclusions
The jury is still out on whether the “China Dream” is the conceptual
basis for China to become a revisionist power aiming to remodel the
global order or whether Beijing will content itself with remaining a
status quo power28. Indeed, much of what the “China Dream” will
and will not entail will have to emerge and become (much) clearer
in the years ahead. For now, however, it is fair to conclude that the
‘China Dream’ – a “peaceful” concept according to Beijing’s aforesaid explanation – does not stand in the way of Chinese not-sopeaceful policies related to territorial claims in the East and South
China Seas. Whatever the “China Dream” turns out to be and “instructs” Chinese policymakers to do, China’s foreign and security
policies will have to be measured by their quality and results rather
than by high-sounding and nice-sounding “China Dream” rhetoric.
To Western ears, the “China Dream” concept sounds – like many
other slogans of Chinese domestic and external policies over the
decades – alien. A slogan meant mostly for domestic consumption.
In turn, Western scholars and policymakers often find themselves
confronted with Chinese accusations of not being able to “understand” China, its history, culture and everything else about China if
and when Western scholars and policymakers point out that slogans
like the “China Dream” mean less or indeed very little in a Western context. Indeed, accusing non-Chinese scholars and policymakers of criticizing China out of ignorance or inability to understand
China continues to remain an important “defence mechanism”
against Western criticism, finger-pointing and more generally Western “interference” in China’s internal affairs. However, China’s
“non-interference” policy has gradually been transformed over the
past years, due to China’s ever deeper involvement in the global
economy, making it more difficult for Beijing to stick to Deng’s
above-mentioned “Hide and Bide” paradigm29. Consequently, it is
See Li Xing, “Interpreting and Understanding ‘The Chinese Dream’ in a Holistic
Nexus”, Fudan Journal of the Humanities and Social Sciences, vol. 8, no. 4, 2015, pp. 515-520,
http://vbn.aau.dk/files/218980898/Fudan_Journal_2015.pdf
29
See e.g. Qin Liwen, “Securing the ‘China Dream’: What Xi Jinping Wants to Achieve
28
Chinese Foreign and Security Policies: Dream at Home, Nightmare Abroad?
79
probably secondary whether the “China Dream” entails “instructions” to modify, adjust or indeed overcome the “principle of noninterference” in view of the fact that China’s increasingly global
economic and political interests demand that already and anyway.
While China under Xi Jinping has not – at least not yet – officially
replaced the “Hide and Bide” strategy, China’s current foreign and
security policies in general and those in the region in particular have
very little in common with how Deng intended to conduct foreign
and security policies. To be sure, Deng’s China did not have the
resources and economic power and influence to conduct the kind of
foreign and security policies Xi is conducting today.
with the National Security Commission (NSC)”, China Monitor, no. 4, Mercator Institute for China Studies (MERICS) Berlin, Germany, 28 February 2014, http://www.
merics.org/fileadmin/templates/download/china-monitor/China_Monitor_No_4.
pdf
5.
China’s G20 Presidency:
Coming at the Wrong Moment
Andrea E. Goldstein
The G20 presidency with its core themes of “Towards an Innovative, Invigorated, Interconnected and Inclusive World Economy”
and “breaking a new path for growth” comes at a sensitive moment
for China. In an integrated international economy, chairing the G20
is both an opportunity for shaping global economic governance and
an instrument for promoting China’s domestic development agenda.
On the one hand, the 4-5 September G20 Leaders Summit in
Hangzhou (Zhejiang Province) allows Beijing to showcase its
unique route to development and poverty reduction, so effectively
shepherded over the past three decades, and the “China dream”,
put forth by President Xi Jinping, to build a moderately prosperous
society and realize national rejuvenation by the middle of the century. In this sense, heading the G20 is a timely opportunity to define
China’s role in global economic governance, by setting goals that
are both ambitious and realistic and by promoting its own initiatives
and principles for the global common good.
On the other hand, the presidency may appear an unwelcome distractions from the burning issues that the Chinese leadership must
tackle this year: a slowing domestic economy, subtle and yet clear
cracks in the social contract and serious flash points in the U.S.China relationship (in particular the question of America’s naval
role in the Western Pacific and China’s claims to a nine-dash line).
For all the well-deserved satisfaction of hosting the club of those
who hold the decision-making power at the international level, a lot
remains for China to do before completing its full modernization.
82
China Dream: Still Coming True?
At the same time, China this year is the first non-Western power
(considering that Russia is a sui generis case and in fact was a G8
member when it hosted the G20 in 2013) to chair the world’s premier body for international economic cooperation. Under Chinese
stewardship, the discussions on the value of the G20 take renewed
importance. This relatively new format of global governance is increasingly criticized for being an empty talking shop, where statements follow declarations with little impact, and even less success
in giving new impetus to the global economy. In 2016, a number of
new challenges are coming to the fore: world GDP growth is projected to fall below its long-term average, global trade is slowing
down, international investment flows are declining when due attention is paid to financial gimmicks.
The principal aim of this chapter is to analyse the contribution of
the G20 to global governance and coordination in different policy
domains (macroeconomic stability, development, trade, investment
and, prospectively, migration) and the role of China therein. A secondary objective is to understand how the G20 can in turn influence
the reforms that China, now the world’s second-largest economy
and the largest contributor to world growth, has embarked in since
the Third Plenum of the Chinese Communist Party’s 18th Congress.
Is the G20 underperforming?
While the G20 has not superseded the G7/G8, and there are indeed
important topics that it does not cover while they recur in the industrial nations’ summits, ever since the 2009 Summit in Pittsburgh the
former has come to represent the real pinnacle of informal global
governance. From the legitimacy viewpoint, the participation of
emerging economies gives the G20 a more inclusive nature. The
risks, however, are multiple. One is that the grouping may have
become too large and heterogeneous to move fast and effectively. A
definite advantage of G7/G8 gatherings have been frank exchanges – a modus operandi that made it possible to reach consensus
and make progress in many delicate economic and political areas.
China’s G20 Presidency: Coming at the Wrong Moment
83
The G20, much more than the G7/G8, also suffers from the lack of
a permanent secretariat, although the creation of a Troika system
(composed in any given year by the current Chair with the past and
the following ones) goes in the direction of securing greater institutional continuity.
The position of China on these founding matters remains unclear. Beijing (as indeed Tokyo in the G7/8) has always adopted a
very conciliatory tone in G20 exchanges, reflecting the consensual
nature of (East) Asian diplomacy. Exemplary in this sense is the
difference with Reserve Bank of India Governor Raghuram Rajan,
who has openly called on the International Monetary Fund (IMF)
(and the G20 more broadly) to examine the effects of quantitative
easing and unconventional monetary policy not just on the G7 countries that implement them, but also on the rest of the world. Concerning the establishment of some kind of formal structure, the IMF
and the Organisation for Economic Co-operation and Development
(OECD) would be natural candidates to assume this role, with their
complementary competencies in macroeconomic and structural
policies. Beijing (and the other BRICS, in fact to an even greater
degree) was initially adamant in its opposition to the OECD (of
which China is not a member) in the G20, although in recent years
initial concerns have given way to a much closer relationship.1
As Jean Pisani-Ferry observed in 2012, “whereas warding off depression [from Washington to Pittsburgh] was conceptually simple,
the aftermath was more complicated because it involved addressing
a conceptually debatable and politically delicate issue: the so-called
global imbalances”2. According to the IMF, G20 members have made
progress in reducing large current account imbalances and (to a more
limited extent) internal imbalances. However, G20 actions have been
insufficient to both achieve more balanced and stronger growth and
reduce disequilibria between surplus and deficit economies.
For an unofficial view, see Xu Hongcai (2016), “G20 to Benefit from a Secretariat
and a “5+1” Policy Coordination Body”. The author is Director-General of the Economic Research Department, China Center for International Economic Exchanges.
2
“Macroeconomic Coordination: What Has the G-20 Achieved?”, in Think Tank 20,
New Challenges for the Global Economy, New Uncertainties for the G-20.
1
84
China Dream: Still Coming True?
In recent years the accumulation of reserves in China (and other
emerging economies) has continued. In 2006, the BRICS held 30
per cent of global foreign exchange reserves, China alone 20 per
cent: these percentages have grown in 2014 to 40 and 31, respectively. This strategy has a considerable social cost, of the order of
1 per cent of GDP, which corresponds to an insurance premium
against financial crises3. Emerging economies are also holding
less sovereign debt, and they have created bilateral and regional
currency-swap arrangements. Partly as a result of this, they act as
financiers to the Global South and increasingly to the old North. In
addition, well over 110 countries have deployed macro-prudential
measures since the 2008 global financial crisis and there is evidence that foreign currency-related measures are more effective for
emerging markets4.
These broad trends suggest that emerging economies still feel
very vulnerable to sudden shifts in financial market conditions.
There have been numerous appeals to greater global coordination
and G20 statements to that effect, but they are unlikely to have much
effect. The description made of the Plaza and Louvre decisions of
the G7 – i.e. “deliberations hammered out in innumerable meetings
with the aim of influencing the exchange rates, more through declarations than with actual intervention [with] no precise trend [of the
exchange rates] in the direction of self-regulation” – also applies
to the G20. The success of international cooperation in addressing
global macroeconomic challenges requires realistic expectations
about what can be accomplished and greater determination to better
integrate different policy issues5. Broadening the focus of the G20
growth strategies (in particular by balancing fiscal consolidation
and monetary expansion) and reinvigorating the mutual assessment
process should be priorities for China in 2016.
3
R. Dani, The Social Cost of Foreign Exchange Reserves, NBER Working Paper, no.
11952, 2006.
4
E. Cerutti, S. Claessens, L. Laeven, “The Use and Effectiveness of Macroprudential
Policies: New Evidence,” forthcoming, Journal of Financial Stability, 2016.
5
See A. Triggs, “The G20 and macroeconomic policy cooperation”, in The Chinese
2016 G20 host year, Lowy Institute for International Policy, G20 Monitor, no. 19, 2016.
China’s G20 Presidency: Coming at the Wrong Moment
85
China’s multiple transitions
At the same time as international economic cooperation needs
to be grounded on more deliberate commitments, many of the
world’s largest economies are facing internal challenges. China’s
economy is rebalancing towards new sources of growth – domestic demand instead of exports, consumption instead of fixed capital formation, services instead of manufacturing, private business
instead of State-owned enterprises (SOEs), innovation instead of
inputs’ accumulation. This switch and the accompanying arrival
of the “new normal” of below-7 per cent growth and industrial
slowdown will have some negative consequences for the global
economy, although excessive pessimism is unwarranted. Producers of raw materials, such as copper, oil and minerals, and intermediate goods, in particular parts and components used for the
production of consumer electronics, are already seeing the biggest
changes. In a world of global value chains, even in OECD countries, value-added exports to the world often pass through China
and that economy’s slowdown has noticeable effects on their export performance. On the opposite side of the coin, some lowercost producers can benefit from the relocation of production in
industries where China used to enjoy absolute dominance, partly
by attracting more foreign direct investment.
There is a lot of uncertainty about the current speed of changes
in China and a lot seems to hinge on policies to make SOEs more
efficient and market-oriented6. As recently as September 2015, authorities aired their commitment to accelerate attempts to remodel
them along the lines of Western corporations. Even more recently,
a government drive was announced to recognise and address industrial overcapacity in sectors such as steel and shipbuilding which
are heavily dominated by SOEs. The International Monetary Fund
has also recommended China create a task force that would help
restructure debt-laden SOEs.
“Party seeks tighter control of state enterprises as Xi consolidates power”, Financial
Times, 15 June 2016.
6
86
China Dream: Still Coming True?
Recent development, unfortunately, do augur badly. The government and, even more so, the ruling party are moving to tighten their
grip on SOEs (and civil society, the military and media, for that
matter). The initiative announced in June by the State-owned Assets
Supervision and Administration Commission in Qiushi, or Seeking
Truth, an influential party magazine, gives greater power to party
cells within every SOE. It runs counter to previous moves to establish boards of directors and let them or company management make
decisions independently7. Now the line of command emphasizes
macro-control, national strategy and national security over respect
for Chinese corporate law.
The continuation and in fact acceleration of market reforms is
important for the domestic economy, but also for China’s international economic relations and henceforth the G20. On the one hand,
reducing the role of the state in the economy contributes to the right
macroeconomic strategy of lower savings, more services, and an
appreciation of the yuan (the “three-handed approach” suggested
by Blanchard and Giavazzi and only partly realized8). National,
provincial and local SOEs binged on debt during the stimulus programme after the global financial crisis, remain hugely subsidize,
and continue to invest even in sectors where global over-capacity
is clear. On the other hand, SOEs are major outward investors and,
as long as their actions are perceived to be guided by non-market
considerations, Chinese officials cannot be surprised if they are met
with scepticism, resistance and sometime outright protectionism.
International finance and trade – the evergreens
Against this background, China may also be tempted to export its
way out of the slowdown. The problem of course is that countries
using negative interest rates (including, most recently, Japan) are,
Almost all executives at SOEs have a rank equivalent to the government officials
who regulate them. The heads of the largest SOEs also enjoy senior party ranking.
8
O. Blanchard, F. Giavazzi, “Rebalancing Growth in China: a Three-Handed Approach”, China & World Economy, vol. 14, no. 4, 2006, pp. 1-20.
7
China’s G20 Presidency: Coming at the Wrong Moment
87
by forcing currency devaluation, already exporting weak demand
– ultimately a zero-sum game. Curbing external global imbalances, reducing distortions, and taming volatility in capital flows,
exchange rates, and relative prices is what the G20 should do better, setting the ground for more technical work at the IMF. For this
reason, modernization of international financial institutions is expected to receive much attention in the lead-up to the Summit. The
pace of IMF reform, that is vital to its long-term legitimacy and its
cornerstone role in global architecture, is disturbingly slow. And an
election year is not the most auspicious time for the U.S. Congress
to ratify a package of quota and governance changes that would
address the issue of BRICS countries and emerging economies representation. No matter how little progress has been achieved so far,
it is time already for negotiating the 15th General Review of Quotas.
As Triggs (2016) notes,
China can […] seek to drive a political agreement among G20
members to extend the IMF’s temporary bilateral resourcing until
a more permanent resourcing solution can be agreed. Such discussions will not be easy, but if they are handled astutely, they
have the potential to insert momentum back into a long-stalled
process and demonstrate positive Chinese leadership in setting
global rules.
China’s hand in this poker could be stronger if the emerging world
were stronger. In an increasingly interconnected world, Brazil, Russia, India, China, and (later) South Africa have come together economically as a group since 2009. This initiative has reflected more
the perceived inability of the global economic order in satisfying
their respective interests and needs, than the strength of common
BRICS views. The transformation of the BRICS into a full-fledged
mechanism of current and long-term coordination on a wide range
of key issues of the world economy and politics is proving perilous. As the economic slowdown bites in the BRICS, diverging economic interests make policy coordination mechanisms even more
demanding than in the past. At the same time, the BRICS them-
88
China Dream: Still Coming True?
selves have not yet become an alternative source of growth for the
world economy, but they still heavily rely on growth in advanced
countries. China will try to use the BRICS in 2016 to improve their
cohesiveness and G20 influence in terms of agendas, organization
and deliverables. It will be a difficult task, considering that India,
where the eighth BRICS Summit will be held in October, will be
very attentive to maintain its prerogatives as the host nation.
Trade is another area in which the G20 has had a rather mixed
record so far. Its role amounts to a circuit breaker in overcoming
seemingly intractable international economic issues – among which
multilateral trade liberalisation figures eminently. On the one hand,
it has been largely effective in securing the application of the protectionism standstill; on the other hand, repeated calls to conclude the
Doha Round have fallen on deaf ears, thus damaging the G20’s credibility on trade policy. Instead, the shift to ‘mega-regionalization’ of
trade policy by major G20 members has gained momentum, adding
to the strains of the World Trade Organisation (WTO). Whether the
G20 eventually succeed in restoring multilateralism will depend in
part on actions to facilitate the dialogue between arrangements such
as the TPP (Trans-Pacific Partnership), TTIP (Transatlantic Trade
and Investment Partnership), and RECEP (Russia-European Centre for Economic Policy) and the WTO. After 2009, the great trade
collapse has been a major culprit of the global slowdown and the
G20 has a major responsibility in building consensus on concerted
policies to restore trade as a driver of growth. Slower growth in the
advanced economies has also weakened trade flows, adding to the
headwinds.
The G20 should pursue a more ambitious trade agenda and
China has a lot to gain from this, given its pivotal position in the
international division of labour through global value chains. Concrete actions that can be implemented by individual governments
on a concerted basis to reduce trade costs and improve access to
services for firms, an opportunity that reform-minded Chinese officials can also seize to break the domestic deadlock. More effective monitoring of trade policy broadly defined (including subsidies and investment incentives) can also be effective in giving
China’s G20 Presidency: Coming at the Wrong Moment
89
momentum to global negotiations – and the coincidence of both
China (20 - 22 July) and the United States (19 - 21 December) going through the Trade Policy Review Mechanism in 2016 cannot
be wasted.
The G20 can also call for multilateral analysis of the impact of
the many preferential trade agreements involving China, the EU and
the US, the world’s largest trading powers. This would be important
to secure a modicum of policy coherence. Development became a
G20 priority under the Korean presidency in 2010 and has remained
central to global summitry ever since. The G20 has formally involved itself in the post-2015 process from the St. Petersburg Summit in 2013 and placed the Sustainable Development Goals (SDGs)
as one of its core priorities in 2015. The SDGs as defined in the
2030 Agenda cannot be achieved globally if they are not realized
in all G20 countries, high- and middle-income alike. At the same
time, the SDGs cannot be achieved in the low- and middle-income
countries outside the G20 unless the G20 itself provide support and
coherent action.
International development, climate change
and infrastructure – the recent classics
As the SDGs come to dominate the action of donors and issues of
financing take central stage, in Hangzhou the G20 is expected to
decide on a 2030 Agenda Action Plan with formal commitments in
implementation. China has initiated an interactive process across all
work streams to strengthen the overall coherence of the G20 development work in both the Sherpa and the Finance Track. However,
the UN remains the main channel for global negotiations as well as
the follow-up implementation and tracking.
China has a unique opportunity to strengthen the G20 developmental perspective through a working narrative that underlines the
unique role of South-South cooperation and of the BRICS’s agen-
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China Dream: Still Coming True?
da9. In this context the G20 can also benefit from the experience of
the 2007 Heiligendamm Dialogue Process, that for the first time
recognized the value of South-South and North-South cooperation,
as well as of triangular cooperation in providing an important link
that can enhance synergies between the two. Triangular cooperation
offers an opportunity for enhanced national and regional ownership
as well as an increase in the support, harmonisation and coordination of peace, security and development efforts of the international
community.
The other 2015 legacy for the China presidency is the Paris
Agreement on climate change which, after years of controversial
negotiations, has defined a program for de-carbonization and structural transformation of the global economy. The post-COP 21 agenda poses unprecedented challenges to all societies and requires new
levels and innovative modalities of transformational cooperation
and mutual policy learning. In particular, low-income and middleincome countries will require comprehensive external support to
reach a pathway of de-carbonization within a short period of time.
There is a general agreement on what the G20 – which pledged
in 2009 to “rationalise and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption”
– could do:
• Remove fossil fuel subsidies by 2025 and establish carbon pricing, channeling revenue streams to support vulnerable social
groups and inclusive transformation.
• Call on the International Financial Institutions, including existing Multilateral Development Banks, to mainstream sustainable development criteria and to incorporate climate risk into
credit rating criteria.
• Initiate early action on policy pathways for de-carbonization before the 2018 stocktaking.
See H. Reisen, “How should the G20 promote efforts for South-South cooperation and trilateral activities?”, in T. Fues (ed.), G20 and Global Development, German
Development Institute, 2010.
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91
On each priority action, China can provide leadership, especially in mainstreaming de-carbonization principles in the activities
of the Asian Infrastructure Investment Bank and the (BRICS) New
Development Bank. Institutions that so far have seemed driven by
short-term interests, rather than a well-developed plan. Of course,
the other face of the story is that China’s financial support to users
of coal, oil, gas and electricity (setting energy prices at levels below
international benchmark prices) was the fifth-largest in 2013, after
Iran, Saudi Arabia, Russia, and India.
At the intersection between climate change and development
stands the large global infrastructure gap. This has been a high
priority of recent G20 presidencies, and seems likely to feature
prominently in the Chinese agenda in 2016 as well. G20 Leaders
announced the Global Infrastructure Hub (GIH) at the November
2014 Brisbane Summit. The GIH is a rare example of the G20’s
capacity to create international bodies. It is now fully operational
and has a potentially important role in the G20’s collective efforts
to implement its multi-year global investment agenda. The key to
attracting private capital into investment projects continues to be
bridging data gaps, build government capabilities for project selection and preparation, match bankable projects to private sector
partners, and secure institutional settings that foster investment. At
the same time, in the context of a weak multilateral agenda, many
regional initiatives show high potential to become game changers
in the long-term, with huge growth and development implications.
China will certainly take advantage of the G20 to show case its two
major vehicles for infrastructure financing, the One Belt and One
Road initiative and the Asian Infrastructure Investment Bank.
New topics - International investment and migration
There are also new topics on the G20 medium-term horizons – notably international investment and migration. In each case there
have been some early attempts at developing joint action on related
policies, namely investment in the broad sense and remittances.
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However, despite the number of action plans that countries have
announced in recent years to accelerate investment in infrastructure
and improve the investment climate, little progress has been made
in implementing pledged actions.
In 2016 China has taken the lead by creating a new G20 trade
and investment working group with ambitious goals – especially on
responsible business conduct, international investment agreements,
and the trade-investment nexus in the age of global value chains.
Being a major home country for outward foreign direct investment
flows, directed to both advanced and developing economies, China
is in a unique position to create this additional intergovernmental
platform that will allow a continued systematic intergovernmental
process to discuss the range of issues related to the governance of
international investment. Several outcomes that could be pursued
under China’s G20 leadership: non-binding shared principles that
could outline the architecture of a universal framework on international investment; an International Support Program for Sustainable Investment Facilitation; and the creation of an additional intergovernmental platform to discuss the governance of international
investment – preferably paralleled by an informal, inclusive and
result-oriented consensus-building process that takes place outside
intergovernmental settings.
A further new important topic in the G20 is international migration, the quintessential “ugly duckling” in global governance,
as the global community has traditionally shied away from taking any concrete action to regulate cross-border flows of people.
In 2015, however, the refugee crisis in the Mediterranean in Europe prompted Turkey to include migration in the Antalya agenda.
Emerging economies, including China, should welcome this new
orientation, being simultaneously major source and host countries
for international migration, which in fact has an increasingly SouthSouth nature. The G20 should take the lead in agreeing on some
general principles to guide international cooperation on migration
and refugee policies, although politicians often have little to gain
from involving themselves in these matters and the general public
is misinformed about the costs and benefits of migration.
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93
Conclusions
China is integral to the dynamics of an overall slowing global
economy and this interconnection or mutual dependence presents
new challenges in terms of imbalances, volatility, instability and
protectionism. Against the backdrop of accumulating economic and
geopolitical headwinds shaking many countries and regions, G20
leaders need to cooperate more than ever to restore sustained and
sustainable growth. Despite initial scepticism and growing deception regarding its effectiveness and accountability, the G20 is in
fact playing a unique role as a flexible bridge between traditional
economic powers (the G7 in shorthand) and emerging economies.
It does it through informal, non-binding exchanges on major hot issues such as global imbalances and trade, but also as an ideal space
in which to test the waters for new, vital global issues. This facet
of informal governance is important in clarifying the mandate for
other, more formal multilateral institutions and fora such as the UN
system, the Bretton Wood institutions and the OECD (to which
China increasingly turns for advice and support). Only the G20 can
serve as a forum for dialogue between developed and developing
countries (among which China is definitely a primus inter pares, at
least on these issues) on the profound implications of such initiatives for the future of the global economy.
The G20 in September 2016 is also a crucial milestone for the
China Dream. It offers Beijing an opportunity to be finally recognized as a global leader and promote its global initiatives, in particular infrastructure investment and South-South cooperation. At
the same time, China has to show that it is not only a responsible
stakeholder but also a promoter of a common agenda for global
growth. The G20 can also serve the cause of a reform-minded leadership, if commitments taken at the international level can be used
to accelerate change at home. From this viewpoint no issue is more
important than SOEs’ reform, a sensitive issue full of political traps.
6.
Silk Road Economic Development: Vision and Path
Wang Wen and Jia Jinjing
The Silk Road: from past to present
The Silk Road: present and future
Due to the significant importance of the Silk Road, a great many powerful countries engaged in a fierce rivalry over this region for as long
as 100 years, historically known as “the Great Game”. This is how
the geopolitics took shape. In the late XIX century a railway network
opened up, bringing the Silk Road into a modernized age. In 18961903, Russia built “the first Euro-Asia Continental Bridge” connecting Vladivostok with Moscow. In 1990, “the second Euro-Asia Continental Bridge” connecting Lianyungang in the Jiangsu province of
China with Rotterdam in Holland was completed and further geared
up the spread of railway networks along the Silk Road. On 3 June
2014, the 250km/h second double line of the Lanzhou-Xinjiang railway in China (the Xinjiang section) opened to traffic, laying the foundation for the Silk Road to enter the “high-speed rail era”. Lately, the
National Development and Reform Commission (NDRC) disclosed
that the overall planning of the Silk Road Economic Belt was in the
works, and that Xinjiang would become the core region along the
corridor of development to open more widely to the inside and outside world1. Based on the current estimate of China’s high-speed rail
See 21st Century Business Herald released on Jun.11, 2014: NDRC: New Regional Planning
1
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China Dream: Still Coming True?
experimental running speed as close to 600km/h2, it is technically
possible to cross the Eurasian continent within 24 hours. In addition,
there are national highways connecting Northeast Asia, South Asia,
Central Asia and China with Russia, Kazakhstan and Pakistan. And
the construction of other routes, including the China-KyrgyzstanUzbekistan highway, Tajikistan-Urumchi highway, and Pakistan’s
Karakoram highway are in the planning stage.
Railroads lead the way to modern civilization. Railroad lines
and corresponding motorways connect separate towns and continents, with new cities and factories emerging and booming along
them. An all-weather logistics network is to be built. A brand new
blueprint of Eurasia has unfolded.
On 7 September 2013, Chinese President Xi Jinping proposed
the concept of “Silk Road Economic Belt” during his visit to Kazakhstan; a month later President Xi visited Southeast Asia and unveiled the “21st Century Maritime Silk Road” project to strengthen
regional infrastructure and trade with countries of the Association
of Southeast Asian Nations (ASEAN). On 23 March 2015, the Chinese government issued an action plan on the China-proposed Belt
and Road Initiative, which refers to the Silk Road Economic Belt
that links China with Europe through central and western Asia, and
the 21st Century Maritime Silk Road connecting China with Southeast Asia, Africa and Europe.
Conceptually, the “Silk Road Economic Belt” is essentially a
transport network and trading channel which starts within China at
one end and links to Europe by extending north to Russia and Central Asia along the north line, west to countries around the Caspian
Sea and Black Sea along the middle line, and south to South Asian
countries and Europe along the south line, with North Africa as its
extension. Specifically, the Belt runs through over 30 countries including China, Kazakhstan, Uzbekistan, Kyrgyzstan, Tajikistan,
to Promote the Organic Integration of Opening Up Inwards and Outwards: Overall Planning on
”One Belt and One Road” is Being Compiled, Notably Focusing on the Development Planning of
South Xinjiang.
2
According to 21st Century Business Herald released on 16 January 2014, the experimental speed of CIT500 made by CSR clocks in at 605km/h.
Silk Road Economic Development: Vision and Path
97
Figure 1 - The China-Proposed “Silk Road Economic Belt”
and “21st Century Maritime Silk Road”
Turkmenistan, Afghanistan, Iran, Syria, Russia, Belarus, Ukraine,
India, Pakistan, Turkey and several European countries.
The Silk Road Economic Belt is like a golden line connecting
many countries having political confidence, developed economies,
rich resources and strong national strength, including the world’s top
10 biggest economies (except the U.S., Japan and Brazil). The combined GDP of countries along the Silk Road accounts for 55 per cent
of the world’s total, whereas their populations and proven reserves
may account for 70 and 75 per cent respectively. With such a big
economic scale, plus the most competitive economic development
speed in the world, it is very likely that the Silk Road Economic Belt
will be an economic artery in the era of globalization.
Looking from the perspective of cooperative frameworks, regional economic cooperation usually comes in three forms, i.e., regional economic cooperation forums, regional trading arrangements,
and sub-regional economic cooperation. First, for regional economic
cooperation forums, the Shanghai Cooperation Organization has matured over the years. Next, for sub-regional economic cooperation,
there is the Central Asia Regional Economic Cooperation (CAREC)
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China Dream: Still Coming True?
mechanism, an important Asian regional economic cooperation
mechanism initiated by the Asian Development Bank in 2002.
CAREC has 10 member states including China, Afghanistan, Azerbaijan, Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan, Uzbekistan,
Turkmenistan and Pakistan, and transport, energy sources, trade facilitation and trade policies are its four key cooperative fields. Thirdly,
no Regional Trade Agreement (RTA) has been set up between China
and other countries on the Silk Road Economic Belt. Looking from
this perspective, the Silk Road Economic Belt serves as more than a
road connection. Mechanism connections should also be enhanced to
drive and guarantee the development of the countries involved.
Common development: from ideas to action
As China’s relations with European and Asian countries developed
rapidly over the past 20 years, the old Silk Road has begun to reinvigorate and take mutually beneficial cooperation between China
and other countries to a new height with a new form.
China values development opportunities: instead of seeking
domination in regional affairs and carrying out military expansion, China advocates that countries should seek common development and keep enhancing mutual trust, consolidating friendships,
strengthening cooperation and boosting common prosperity, creating well-being among people of all countries.
The history of contacts over the past 2,000 years proves that
countries of different races with different beliefs and cultural backgrounds are quite able to share peace and common development as
long as we cooperate to achieve a “win-win situation” on the principles of unity and mutual trust, equality and mutual benefit, being
inclusive and learning from each other.
New bonds for peaceful development
Developing the Silk Road Economic Belt and making new bonds
for peaceful development will bring various benefits in security, development and stability to all the countries involved.
Silk Road Economic Development: Vision and Path
99
First of all, construction of the Silk Road Economic Belt will raise
the regional security level. Giving each other firm mutual support in
key issues concerning national sovereignty, territorial integrity, security and stability represents the essence of China’s development
of strategic partnerships with Central Asian countries. Developing the Economic Belt helps eliminate the breeding ground for organized transborder crimes such as terrorism, “three evil forces”3
, drug trafficking and illegal armed groups, etc.
At present, terrorism threats exist in countries like Afghanistan
and the Middle East countries that are along the Silk Road. As
the U.S. withdraws its troops from Iraq and Afghanistan, security
prospects in these regions face uncertainties. On the other hand, it
should be noted that major nations in these regions have a tradition
of trading, a good cultural foundation for developing economies
peacefully. The fact that conflicts in this region seem endless, called
“a thousand-year war”, is linked to inadequate communication between races and tribes whose technological conditions are poor.
Construction of the Silk Road Economic Belt will undoubtedly put
all of inland Eurasia under a common trade framework, thus rooting
out violence and terrorism.
Secondly, construction of the Silk Road Economic Belt will
boost economic development. China became the world’s largest
consumer market in 2013. It is estimated that, during 2014-2018,
China’s imports will hit US$ 10 trillion, with direct overseas investment exceeding US$ 500 billion. The development of the Silk
Road Economic Belt will provide new potential for economic development in Middle East countries and contribute to economic
links between Middle East countries and Europe. China and Russia
have set the goal of increasing bilateral trade volume up to US$
200 billion by 2020 and the Silk Road Economic Belt can be one
of the key impetuses to meeting the target. By taking advantage
of the Belt, the Central Asian countries not only have their outlet
to the sea but can also integrate into global financial and trading
The “three evil forces” are terrorism, separatism and religious extremism. This is
an analytical concept frequently used by Chinese authorities within the context of the
Shanghai Cooperation Organization (Sco).
3
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China Dream: Still Coming True?
systems. For Middle East countries, the Belt will further help them
enter China’s energy consumption market, which has tremendous
significance considering that the U.S. is committed to localizing its
energy supply. For developing countries along the Belt, they can
gain the “positive spillover” effect from China’s economic success,
certainly significant.
Thirdly, construction of the Economic Belt will boost stability
in all the countries involved. Both China and other countries along
the Belt are at a critical stage of development and face unprecedented opportunities and challenges. Their strategic goals are the
same, i.e., to ensure long-term and stable economic development
and achieve national prosperity and reinvigoration. If all countries
can strengthen practical cooperation in an all-around manner by
converting advantages such as political relations, regional proximity and economic complementarity into the advantages of practical
cooperation and sustainable growth, creating a community of interest, a favorable development environment and a stable political
environment will be the result.
New blueprint for economic development
Over past centuries, history has proved that sea power decides the
rise and fall of a country. Lacking an outlet to the sea, Central Asian
countries lag behind in global evolution. At present, their economies remain at the stage of primitive capital accumulation. If foreign investment can be drawn into these countries, their economic
level will rise significantly.
Looking at their territories, the Central Asian region links together
the largest energy base and manufacturing center in the world. To its
east is the Asia-Pacific economic rim, which is experiencing rapid
economic development, and to its west is the developed European
economic rim. There is a considerable economic gap between the
region and its western and eastern neighbors despite the fact that they
have uniquely abundant natural resources, land resources and human
resources. In particular, the region’s mineral products can meet the
needs of almost all manufacturing countries, with huge exploration
potential. A good thing is that technical advances have removed the
Silk Road Economic Development: Vision and Path
101
bottleneck restricting the development of countries in the inland part
of the continent and, what’s more, the Silk Road Economic Belt will
turn their geographical nature to unique advantage.
Figure 2 - Growth Trend of Trade Between China &
Five Central Asian Countries
The Silk Road Economic Belt covers a population of nearly 3
billion, with unmatched market scale and growth potential, as well
as cooperative potential between countries in trade and investment. With the Economic Belt realized a new common market will
emerge, followed by a new round of economic growth.
China is by far the largest trade partner of each of the five Central Asian countries. In 1992, total bilateral trade volume was only
US$ 460 million but rose to US$ 50.2 billion by 2013. Meanwhile,
bilateral trade between China and Central/Eastern Europe experienced fast growth too. In 2000, the trade volume was US$ 3 billion
and by 2015 the figure topped US$ 56.2 billion4.
Refer to the General Administration of Customs of the People’s Republic of China.
4
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China Dream: Still Coming True?
Referring to the “1+2+3” cooperative landscape mentioned by
President Xi on June 5, 2014 at the opening ceremony of “The 6th
Ministerial Meeting of China-Arab Cooperation Forum”, we can
conceive a “1+2+3” cooperation framework for the China – Central
Asian Silk Road Economic Belt as well. Here “1” refers to natural
resource cooperation by deepening production-chain cooperation in
petroleum, gas and minerals, and ensuring security for pipelines;
and based on that, building long-term friendly relationships featuring mutual benefit and reliability. “2” means enhancing cooperation in key development projects and iconic job-creation programs
while promoting infrastructure building and trade and investment
facilitation, and making arrangements for promoting bilateral trade
and investment. “3” means making great efforts to upgrade practical cooperation and move towards all-round economic cooperation
by making breakthroughs in the three sectors of nuclear energy,
high technology and new energy.
New focus of world development strategy
The world’s wealth-creation center has shifted at an increasing rate
since 2008. Following the financial crisis, the economies in the West
remained in a downturn while China contributed 52 per cent of new
GDP growth during 2009-2013. The world’s wealth-creation center
is shifting from Europe and America to Asia. It is foreseeable that,
in the near future, the world’s wealth creation will focus around the
Silk Road Economic Belt and the shift of the world’s wealth center
will be followed by changes in the global strategic landscape.
Noticing the shift of the world’s economic center towards Eurasia, American mainstream strategists judged that it was China’s
fast rise that broke the strategic balance of international patterns
and the world order after the Cold War. Based on this judgment, the
U.S. became the first to implement so-called “Resetting the Balance”, and other Western countries followed suit immediately. For
the United States, “Resetting the Balance” first refers to a “Return
to Asia”, while leading the establishment of Trans-Pacific Partnerhttp://www.customs.gov.cn/publish/portal0/
Silk Road Economic Development: Vision and Path
103
Figure 3 - Economic center of gravity
Source: McKinsey Global Institute analysis using data from Angus Maddison;
University of Groningen.
ship Agreement (TPP). For America’s loyal ally, Japan, “Resetting the Balance” means reinforcing its military alliance with the
U.S., joining the U.S.-led TPP and negotiating with the EU on the
Europe-Japan Free Trade Zone Agreement. In Europe, “Resetting
the Balance” is the Transatlantic Trade and Investment Partnership (TTIP) to establish a European-American free trade zone.
In October 2013, the EU and Canada signed a bilateral free-trade
agreement, the first among G8 countries to do so and this serves
as an excellent example. A host of Western countries headed by
the U.S. are driving the strategy of “Resetting the Balance” which
could lead to the formation of new international rules. Compared
to the previous rules, the new rules will become stricter, more uniform, more universal and more specific while their non-neutrality
becomes more hidden.
Given this situation, the Silk Road Economic Belt will undoubtedly play a significant role in encouraging developing countries to
participate together in the formulation of international rules. China,
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China Dream: Still Coming True?
Russia and India as representatives of developing countries need a
top-level design to “balance” new trade-zone planning dominated
by developed countries. Similarly, the five Central Asian countries
as representatives of inland economies need and should be in a central position of trade instead of being marginalized. Likewise, the
Middle East countries need new orientation in Eurasia. With all this
in mind, the Silk Road Economic Belt is a strategic scheme in the
best interest of Eurasian countries in the changing landscape of the
global economy.
Overcome difficulties – From communication
to cooperation
Resetting the balance among world powers
Halford Mackinder’s concept of the “heartland” was further developed by his student, Zbigniew Brzezinski5, making Central Asia a
place for world powers to compete for by implementing their specific strategies. How to reset the balance among these strategies is a
test for the decision-makers and think tanks of the countries along
the Silk Road Economic Belt.
1) America’s “New Silk Road” plan. In July 2011, the then Secretary of State Hillary Clinton, at the second U.S.-India Strategic
Dialogue held in India, said for the first time that the American concept of “New Silk Road” had three aims6. First, to ensure safety
after American troops withdraw from Afghanistan; second, to develop a regional framework to manage the India-Pakistan relationship and improve regional security; third, to play a dominant role
in regional development to ensure American influence7. The “New
Z. Brzezinski, The Grand Chessboard, Shanghai People’s Publishing House, 2007, p. 35.
As early as 1997, Senator Brownback and Fred Starr, head of Central Asia and Caucasus Institute of John Hopkins University submitted a proposal for a New Silk Road.
Refer to Yang Lei: “Implementation Targets of American New Silk Road Plan and its
International Influence”, Xinjiang Sociology, published in May 2012, pp.70-75.
7
Wu Zhaoli: “Analysis on American New Silk Road Plan”, Modern International Relations, 2012 no.7, pp. 17-22.
5
6
Silk Road Economic Development: Vision and Path
105
Silk Road” plan centers around Afghanistan and is designed to construct a channel leading from inland Eurasia to the Indian Ocean,
which involves five Central Asian countries: India, Pakistan, Afghanistan, etc. Although the plan’s designer admitted that the plan
would affect the interests of Russia, Iran and China, it excluded
these three countries. Looking at the cooperation areas, the “New
Silk Road” plan emphasizes, on the one hand, regional free trade
and trade facilitation, including reducing trade barriers, improving
trade regulation, simplifying customs formalities, and performing policy coordination etc. On the other hand, it also emphasizes
energy pipelines and infrastructure development including oil-gas
pipeline networks, roads, bridges, electric power and railways etc8.
It needs to be pointed out that the “New Silk Road” plan is by no
means the core interest of the United States. After Hillary Clinton’s
term of office ended, the plan’s importance decreased in American
strategic dialogues. If Hillary Clinton wins the 2016 presidential
election, the “New Silk Road” plan is likely to become a main
framework of American foreign strategy.
2) Russian’s “Eurasian Economic Integration”. On 29 May
2014, Russia, Belarus and Kazakhstan signed the Eurasian Economic Union Treaty, on the basis of which the Eurasian Economic
Union went into effect on 1 January 2015, giving the three countries
a free flow of commodities, services, capital and labor force, with
the ultimate goal that an economic union similar to the EU will
emerge as a unified market with a population of 170 million. This
marks significant progress in the Eurasian Economic Integration
project initiated by the three countries. Russian hopes for economic integration among CIS countries through closer economic ties.
Thus far, the Union has made noticeable progress in trade and tariff
cooperation, monetary and financial cooperation and infrastructure
building cooperation.
8
G. Pyatt, “Next Steps on the Silk Road”, Chennai, India, 15 November 2011, http://
www.state.gov/p/sca/rls/rmks/2011/177179.html
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China Dream: Still Coming True?
In monetary and financial cooperation, five member states of the
Eurasian Economic Community (Russia, Kazakhstan, Belarus, Tajikistan and Kyrgyzstan) signed the Anti-Crisis Fund Treaty (ACF)
with the observer state Armenia on 9 June 2009. The purposes of
the treaty are to help member states combat global financial and
economic crises, ensure the long-term stability of economies and finance and promote economic integration among the member states.
The fund in ACF is owned by all member states but is under the
management of the Eurasian Development Bank (EDB) in accordance with ACF fund management agreement9. Currently, ACF has
a total of US$ 8.513 billion, to which Russia contributed US$ 7.5
billion, Kazakhstan US$ 1 billion, Belarus US$ 10 million, Armenia, Tajikistan and Kyrgyzstan US$ 1 million each. Russia’s fund
contribution to ACF is commensurate with its GDP percentage in
the aggregate GDP of all countries. This reflects Russian’s dominance in the organization.
3) EU-dominated cooperation and assistance. After the former
Soviet Union and Eastern Europe changed dramatically, the EU
began providing economic and technological assistance to Eastern
European and Central Asian countries, with a view to improving
democracy and human rights, combating corruption and conducting good governance in those countries. The assistance focuses on
personnel training for governmental agencies, laying out rules and
regulations, building local government, fiscal and budget reform,
healthcare facility building and health care system reform, and judiciary system reform. These efforts continue today. For example,
at the ministerial meeting held in 2013 the EU declared it would
provide 1 billion euro to Central Asian countries for their development from 2014 to 2020, supporting them to achieve sustainable
EDB was founded on 12 January 2006 by Russia and Kazakhstan with legalized
capital of US$ 1.5 billion (Russia and Kazakhstan contributed US$ 1 billion and US$
0.5 billion respectively). Its purpose is to facilitate market economy development and
economic growth in the member states and advance trade and economy integration
through investment among the member states. So far it mainly finances projects for
transport infrastructure, energy and the agro-industrial complex. As of 29 August
2013, assets invested through EDB were as high as US$ 3.857 billion.
9
Silk Road Economic Development: Vision and Path
107
natural resource management, social and economic development
and regional security, etc. The Development Committee of the European Commission announced that the key cooperation areas in
the next seven years will be governance, inclusiveness, and sustainable development, mainly targeting the most impoverished
and most fragile countries. It is true that the EU has important
interests in the Silk Road areas, but the importance has not grown
to the life-or-death extent. In economic cooperation, the EU overemphasizes superstructures such as government and institutions,
emphasizing similarity as close as possible to EU patterns and
standards, but relatively neglects universal concerns such as basic livelihoods, infrastructure and economic and trade exchanges.
This reduces the mutual dependence between EU and Central Asia
in structure10.
In addition to the above mentioned strategies for inland Asian
dominated by major powers, countries in this region also have their
own strategic concepts, e.g., the Silk Wind plan advocated mainly
by Kazakhstan and the “Modern Silk Road” (also known as the
Middle East Corridor) plan initiated by Turkey.
4) The Trans-Eurasia transportation plan initiated by Kazakhstan and other neighboring countries11. The “Silk Wind” plan
based on railway transportation aims to build a multi-modal container transport system running from Asia through the Caucasus
to Europe. The system was originally proposed by Azerbaijan and
Turkey in the framework of the “Transport Corridor Europe-Caucasus-Asia” (TRACECA) and the participation of Kazakhstan and
Georgia in 2012 took the plan to the implementation stage. In November 2012, member states of TRACECA held a meeting of the
standing secretariat in Moldova, planning to complete the “Silk
Wind” program by 202512. On 22 May 2014, the 9th International
10
“EU increases its assistance to Middle-Asian countries”, http://www.chinamission.
be/chn/omdt/t1102869.html
11
Refer to “Silk Wind Project in Central Asia and South Caucasus Gains Speed”,
Eurasia Daily Monitor, vol. 9, no. 224, 7 December 2012. http://www.jamestown.org/
single/?no_cache=1&tx_ttnews%5Btt_news%5D=40217
12
TRACECA was initiated by the EU in 1993. Now it has 14 member states, includ-
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China Dream: Still Coming True?
Conference on Transit & Transport Potential titled “Trans-Eurasia
2014” was held in Astana, Kazakhstan, where Kazakhstan, Turkey, Azerbaijan and Georgia signed an intergovernmental agreement on the Silk Wind program, i.e., enabling container trains to
run through China, Kazakhstan, the Caspian Sea area, Caucasus,
Turkey and Europe13.
As for a Eurasian road network, Kazakhstan has been proposing
to implement a “Western Europe – West China Transport Corridor”
plan14. Or rather, it is a “Western Europe – Russia – Kazakhstan –
West China” plan designed to connect over 10 cities in the three
countries through their existing road networks with a total length of
8998km, 3000km of which is within Kazakhstani territory. Goods
will enter Kazakhstan through Khorgas Port, continue on via AlmaAta, Taraz and Shymkent to Samara in the Volga Basin, Russia, and
finally arrive in Western European countries through European road
networks. The Transport Corridor reduces the 45-day period on the
sea to 11-day road transport.
5) The “Modern Silk Road” plan initiated by Turkey and other countries15. The 3rd Caspian Sea Forum was held in Istanbul,
Turkey on 5 December 2013, where Turkey and Azerbaijan announced the plan. Based on the “Silk Wind” plan, the “Modern
Silk Road” is a strategy of connecting Silk Road trade routes,
mainly including energy transmission networks focusing around
the “new global energy center” in the Caspian Sea area, the BakuTbilisi-Kars railway line and the Azerbaijan Alat International
Seaport project. The project was scheduled to start in 2015, allowing China-Europe transport time to be cut from 45 days by sea
ing Azerbaijan, Armenia, Bulgaria, Georgia, Iran, Kazakhstan, Kyrgyzstan, Moldova,
Romania, Tajikistan, Turkey, Ukraine, Uzbekistan and the EU.
13
Refer to “Kazakhstan to host international conference on transit and transport potential”, http://inform.kz/eng/article/2658412
14
Refer to “Kazakhstan hopes to improve its strategic position in transit through Eurasia Transport Corridor”, International Online, 11 September 2009, http://gb.cri.cn/278
24/2009/09/11/3245s2619433.html
15
“Turkey, Azerbaijan lead revival of modern Silk Road”, The Turkish Weekly, 14 December 2013, http://www.turkishweekly.net/news/159839/turkey-azerbaijan-leadrevival-of-modern-silk-road.html
Silk Road Economic Development: Vision and Path
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via the Suez Canal to 12 days by road. As a result, China-EU trade
volume is expected to double in five or six years.
According to the general summary of the main powers’ cooperation
prospects and proposals for this region, we find that infrastructure
is the common element for cooperation. It is worthy of note that the
differences or the “chasms” to be filled among these proposals are
remarkable.
Firstly, with respect to regional power games, there is the very
tense relationship between Russia and the U.S. and EU. In many
aspects, including the Ukraine Crisis and energy, the disputes and
fractures between Russia and the U.S. and EU cannot be resolved
in short the term.
Secondly, with regard to infrastructure, the differences in intention between these countries are remarkable. The U.S. stresses
south-north communication between Central Asia and South Asia.
Russia focuses on economic integration between the north of Central Asia and Russia; the EU hopes to connect Western Europe from
the Caspian Sea through Turkey, Central Europe and Eastern Europe.
Thirdly, in terms of cooperation mechanisms, currently, the Silk
Road region has been in a fragmented and overlapping trend. Bilateral and multilateral mechanisms co-exist, formal and informal
cooperation modes develop concurrently, and the large-coverage
mechanisms overlap those with small coverage, resulting in unclear
regional cooperation paths.
By summarizing all the data and information available, the “Silk
Road Economic Belt” Research Group of Chongyang Institute for
Financial Studies, Renmin University of China deems that the “Silk
Road Economic Belt” is to the benefit of the countries in Central
Asia. For more than 20 years since the start of national transformation, while having achieved a great deal in politics, economy,
society, etc., these countries have been facing many difficulties. For
example, they are all in the hinterland and have no sea ports, some
have limited national resources (making it very difficult to develop their economies), some are in grave security situations, which
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has blocked economic development and weakened the capacity to
maintain social stability. Road connections, smooth-flowing trade
and, monetary exchange through the “Silk Road Economic Belt”
can provide important support for the countries in Central Asia in
promoting nation-building and reinforcing connections with the
outside world. Roughly, the benefits for the countries in Central
Asia include support for the construction of infrastructures such
as roads, oil and gas pipelines, power grids and so on, multiplex
energy export routes, enriching domestic commodity markets and
expanding foreign trade volume, obtaining sea ports and easier integration with the global economy, obtaining the power to improve
domestic investment environments so as to increase foreign investment, and furthering connection with the outside, in particular with
China and European countries.
The countries in the Middle East are also in favor of China’s
project. The strategic dialogue between China and GCC (Gulf Cooperation Council) countries activated in 2010 is the effective platform between the parties to discuss how to promote the “Silk Road
Economic Belt”. Iran also hopes that, after construction, the land
Silk Road open to the west, would help Iran become the most important energy exporter to China. At present, there are petroleum
and gas pipelines extending from Iran to Pakistan; in the future, in
the “Silk Road Economic Belt” framework, the parties may jointly
construct energy pipelines to China through negotiation.
In addition, the countries in Central and Eastern Europe have
positive attitudes toward the “Silk Road Economic Belt”. The cooperation initiatives between China and 16 countries in Central and
Eastern Europe in transport, energy, etc. show that these regions
are also important integral parts of China’s new Silk Road policy.
Some scholars suggest that Poland’s cooperation focus should be on
western China, for example, the Lanzhou New Zone should be the
bridgehead for economic cooperation with Poland.
Without doubt, the “Silk Road Economic Belt” project is encountering pressure from outside forces. Some international media
and experts view the “Silk Road Economic Belt” as a “zero-sum
game”, the construction of common interests as the game of big
Silk Road Economic Development: Vision and Path
111
powers, the cooperation of countries in the region as “apparently
of one accord but divided in heart”. Such instigating and misunderstanding in international opinion and atmosphere are blocking
construction of the “Silk Road Economic Belt” and also affecting
mutual trust among the countries in the region.
However, as a whole, the countries in the region understand and
agree with this initiative more than they doubt or object to it, which
has provided a good international foundation for the promotion and
implementation of “Silk Road Economic Belt” strategy. On the other hand, the main concerns of the potential partners in the region
stem from an insufficient understanding of the specific measures
of “Silk Road Economic Belt” strategy, and they are less confident
in the implementation of these specific measures. China is playing
a more active role and should achieve more through cooperation
mechanisms and project innovation as early as possible, and bring
forward a development agenda able to realize multi-win outcomes
so as to increase confidence, dispel doubts and unify the people.
Compared with the “heartland” strategy of the other big powers,
“Silk Road Economic Belt” strategy not only advocates geopolitical
strategy on the basis of national demand but also intends to achieve
mutual benefit and overall win outcomes; and it is a long-term common development program with a higher pursuit of value. It has the
following three features:
Firstly, “Silk Road Economic Belt” strategy is characterized by
stronger mutual benefit and higher mutual win. Instead of any specific target, it aims at enhancing friendship and expanding exchanges between the peoples on the Eurasian Continent, and exploring
areas for common long-term development.
Secondly, “Silk Road Economic Belt” strategy is characterized
by wider scope and higher inclusion. It directly connects more than
30 countries on the Eurasian continent and focuses on the construction of “5 intercommunications” (as defined hereinafter) rather than
a narrow “Free Trade Zone”. Both in geographic scope and in connotation, it is wider and more inclusive than other strategic plans. It
is not exclusive to, and does not repel, the concurrent promotion of
the strategic plans of the other countries in the region.
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China Dream: Still Coming True?
Finally, “Silk Road Economic Belt” strategy is characterized by
rich content and a long time span. The foundation of this strategy
lies in connecting the hearts of the peoples of the region. On such a
basis, it promotes the exchange and cooperation of populations in
economy, trade, science and technology, culture, energy, transport,
education, security, etc. It is not confined to certain fields. Instead,
it is an integrated plan, in the long-term calling for the permanent
participation of the countries.
Internal re-coordination of China
After presentation of the “Silk Road Economic Belt” concept, the
Chinese Central Government has approved many projects, including coordination with other major strategic plans. On June 11, 2014,
the executive meeting of the State Council of China approved construction of a comprehensive solid transport corridor to create the
Yangtze River Economic Belt and proposed that this economic belt
should be strategically interactive with the “Silk Road Economic
Belt” in order to create a new economic support belt and an open a
cooperation platform with global influence16.
However, the Chinese Central Government has not announced
the domestic scope involved in the “Silk Road Economic Belt”: to
be specific, what provinces will be covered? Several local governments regard the “Silk Road Economic Belt” as a major opportunity
to speed their own economic and social development and include
the project in their administrative targets.
By studying the government work reports and statements of all
the provinces, autonomous regions and municipalities in regard to
the “Silk Road Economic Belt” in 2014, the “Silk Road Economic
Belt” Research Group of Chongyang Institute for Financial Studies,
Renmin University of China has found that there are three types
of combinations of “Silk Road Economic Belt” strategy these lo See the news report “Premier Li Keqiang holds the executive meeting of the State
Council to deploy the construction of comprehensive solid transport corridor to create the Yangtze River Economic Belt at www.gov.cn.
16
Silk Road Economic Development: Vision and Path
113
cal governments envision, as follows: the first type consists of the
provinces that regard the “Silk Road Economic Belt” as the main
or material route to opening up and have clear local plans and programs connected with the overall strategy, such as Shaanxi, Xinjiang, Gansu and Ningxia. The second type consists of the provinces
that integrate the “Silk Road Economic Belt” into existing local development plans in order to make full use of the comprehensive cooperation role of different development plans, such as Chongqing,
Qinghai, Yunnan, Sichuan, Shanxi, Zhejiang, Jiangsu, Shandong
and Hubei. The third type consists of the provinces that connect the
“Silk Road Economic Belt” with specific projects and in specific
development directions.
With respect to the economic scale of the provinces mentioned,
the provinces actively connecting to the “Silk Road Economic Belt”
are weak in economy but have large potential. In the 17 provinces
mentioning the “Silk Road Economic Belt” in their government
work reports, the economy of the first type of province with the
strongest intentions accounts for 5.5 per cent of total GDP of all
the provinces; that of the 8 provinces invited to participate in the
seminars held by the National Development and Reform Commission and the Ministry of Foreign Affairs due to their involvement
in the “Silk Road Economic Belt” for 14.2 per cent; that of the 17
provinces, 55.9 per cent.
In terms of Chinese provinces’ dependence on foreign trade,
only Fujian, Jiangsu and Zhejiang exceed the national average
(45.34%); all the other provinces are far below this average, for example, Shaanxi, one of the first type of provinces, relies on foreign
trade only 7.79 per cent; Gansu only 9.94 per cent; Ningxia only
7.68 per cent; Xinjiang, a little higher, but less than half the national average; Qinghai in northwest China only 4.13 per cent. With
regard to investment, whether “internal” or “external”, most of the
provinces connecting to the “Silk Road Economic Belt” are below
the national average. Regarding inflows of foreign investment, only
Jiangsu, Zhejiang, Shandong and Fujian exceed the national average; regarding “outward” investment, only Jiangsu, Zhejiang and
Shandong exceed the national average. Therefore, these provinces
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long very much for the development opportunities brought by construction of the “Silk Road Economic Belt”; and they have rather
large development potential and intrinsic drive. These constitute the
domestic powers of China for construction of the “Silk Road Economic Belt”.
Conclusions. Implications for the EU
Alessia Amighini
As the “China Dream” gets stuck into political and economic bottlenecks at home, Xi’s vision of China’s ascendance to cultural, economic and military power by 2049 gets more and more vague. The
cumbersome and sluggish reform process is casting rising doubts,
not only on the ability of the Chinese government to handle the
transition to a new growth model, but also on the direction the government will take to fulfil its mission, and, consequently, whether
Xi’s dream is anything like the Chinese people has been dreaming
for themselves.
The implications of increasing uncertainty and backtracking
about reforms are manifold for long-term relationships with Europe
and major world countries. In particular, the following policy recommendations may be provided to the EU:
Understanding China’s own narrative before
implementing a EU strategy on China
In order to deal with the rising Dragon, it is of primary interest for
the EU to understand the China’s political agenda and the narrative
it adopts. The China Dream holds a long-term meaning that is clear
for the Chinese people, but not necessarily to the European policymakers. Indeed, addressing the long-term goals set the by the China
Dream would be more helpful with a view to promoting political
and economic cooperation between the two side of the Eurasian
continent rather than focusing only on short-term issues.
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China Dream: Still Coming True?
Judging China’s foreign policies by deeds and actions
What the China Dream will mean for China’s regional and global
foreign policies will continue to be open to interpretation. The international audience is left with the task of identifying and understanding the consequences of a Chinese slogan, which the Chinese
leadership in general and Xi Jinping in particular have chosen not
to explain in details over the last 4 years. Consequently, outside of
China, Chinese regional and global foreign and security policies
will have to be judged by deeds and actions and not by slogans accompanying them.
Speaking with a single voice with China
This year, China chairs a G20 summit dominated by tensions and
need for emergency measures. Therefore, Beijing will find little response to its attempts to weave together new strategies and alliances to boost its limping growth, the New Silk Road and the newlyestablished Asian Infrastructure Investment Bank (AIIB). A single
EU position on the Chinese vision for an Eurasian future should be
strongly desirable, especially after the main ally – the UK – has just
opted out of the EU.
Reconsidering negotiation of a bilateral investment
treaty
The recent return to state dirigisme raises doubts on the future
course of political and economic reforms. If State-Owned Enterprises (SOEs) continue to be the largest share of enterprises, and
the majority of firms expanding abroad, backtracking on corporate
governance procedure means that national strategic decisions will
keep laying behind corporate strategies. This makes the need for a
bilateral investment treaty (BIT) more urgent, but at the same time
more complex to negotiate.
Conclusions. Implications for the EU
117
Linking MES to a Chinese path to reform
How could bilateral relations between China and the EU evolve
after Brexit? The most debated issue today is the recognition of
the market economy status (MES) - an important goal in Beijing’s
international policy agenda. The European Parliament has recently
issued an unfavourable opinion, with the only member state in favour being the United Kingdom, while major countries in continental Europe are more reluctant, as they contend that Beijing is not
fulfilling its commitment to meet minimum criteria of competition
and independence of firms from political power. Although MES is
clearly a political decision, the EU should emphasise the need for
the Chinese government to embark on a clearer path to reforms.
The authors
Alessia Amighini is Senior Associate Research Fellow at ISPI. She
is Associate Professor of Economics at the Department of Economic and Business Studies (DiSEI) at the Università del Piemonte Orientale (Novara, Italy), and Adjunct Professor of International Economics at Catholic University, Milan, Italy. She previously worked
as Associate Economist at the United Nations Conference on Trade
and Development (UNCTAD, Geneva, Switzerland). Her research
has been published in international peer-reviewed journals such as
China Economic Review, World Development, The World Economy,
International Economics, China and the World Economy, European
Journal of Comparative Economics, and several books published
by Edward Elgar, Harvard University Press, Oxford University
Press, Palgrave, Routledge.
Christopher Balding is Associate Professor of finance and economics at the HSBC Business School of Peking University Graduate School. A recognized expert in the Chinese economy and sovereign wealth funds, he is a columnist for Bloomberg Views as well
as a regular contributor to the Financial Times. His work has been
cited by a variety of global media outlets including CNBC, the Wall
Street Journal, and the BBC where he speaks regularly on the Chinese economy and financial markets. His scholarly work has been
published in leading journals such as the Review of International
Economics, the International Finance Review, and the Journal of
Public Economic Theory on topics such as CDS pricing, the WTO,
and the economics of adoption and abortion. He is the author of
Sovereign Wealth Funds: The New Intersection of Money and Politics, published by Oxford University Press.
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China Dream: Still Coming True?
Axel Berkofsky is Senior Associate Research Fellow at ISPI. He
formerly held the Gianni Mazzocchi Chair at Pavia University and
is currently Assistant Professor of Asian History and Politics. His
research interests include Japanese and Chinese foreign and security policies, Asian security, and EU-Asia relations. Author of more
than 200 articles in journals, newspapers and magazines, he has
taught at numerous think tanks, research institutes and universities
in Europe and Asia. Previously, he was Senior Policy Analyst and
Associate Policy Analyst at the Brussels-based European Policy
Centre (EPC), and Research Fellow at the Brussels-based European
Institute for Asian Studies (EIAS). He has worked as a freelance
journalist for the Tokyo-based Asahi Evening News and has been a
regular contributor to the Asia Times and to the Zurich-based International Security Network (ISN).
Filippo Fasulo is ISPI Research Fellow and his research focus is
on Asia with a particular interest in China at both the domestic and
international levels. In 2014 he earned a Ph.D. in Politics and Institutions from the Catholic University of Milan with a dissertation
on the concept of power in China’s politics that was awarded with
the Cesare Bonacossa Prize by the University of Pavia. In 2012 he
gained a MSc in China in Comparative Perspective at the London
School of Economics and Political Science. Since 2011 he has been
lecturing on China-related topics at the Catholic University of Milan and at the University of Pavia. He is also Academic Assistant at
the Class of Far Eastern Studies of the Accademia Ambrosiana in
Milan and Analyst for the Italy-China Foundation. Since 2014 he is
Board Member of the Institute for Public Administration Science
(ISAP – Istituto per la scienza dell’amministrazione pubblica).
Andrea E. Goldstein has a 23-year career in global governance,
most recently at the OECD Investment Division in charge of Global
Relations. He was previously Deputy Director of the UNESCAP
Subregional Office for East and North-East Asia in Incheon (Seoul)
and of the Heiligendamm L’Aquila Process (the G8-G5 political dialogue) Support Unit, as well as Senior Economist with the OECD
The Autors
121
Development Centre and Economics Department and the World
Bank Group. Since October 2015 he has been Managing Director for
policy research and outreach at Nomisma. He has published widely
on emerging economies; his most recent books are L’économie des
BRIC (La Découverte 2013) and Il miracolo coreano (il Mulino
2013). He also authored 40 articles in refereed journals and newspapers, and has a regular column in Il Sole 24 Ore. Mr Goldstein is
an Adjunct Professor at the Catholic University in Milan. He is also
President of the Bocconi Alumni Association, Paris Chapter, and
participates in the activities of Aspen Italia.
Jia Jinjing is Director of the Macroeconomic Research Department
of the Chongyang Institute for Financial Studies at Renmin University of China (RDCY). His principal research interests include:
international economic governance, financial analysis, macroeconomics, geopolitics, policy of innovation and industrial policy.
Before joining the Chongyang Institute of Renmin University, he
worked in the government and in the private sector in the fields of
investment and financing. Jia has also published numerous reports
and essays including The Construction of Silk Road Economic Belt:
vision and path which won significant attention.
Wang Wen is Executive Dean of the Chongyang Institute for Financial Studies at Renmin University of China (RDCY). He also
holds office as Secretary-General of Green Finance Association of
China, Standing Director of World Socialism Research at the Chinese Academy of Social Sciences, Special Analyst at the Xinhua
News Agency as well as Visiting Professor at many prestigious
universities. He worked as chief Op-ed Editor and editorial writer
at the Global Times. He participated in the G20 summit for three
consecutive years. At the symposium on philosophy and social sciences where President Xi Jinping was host and delivered an important speech on 17 May 2016, Wang Wen was among and also
the youngest of the ten scholar presenters. He won the honor of
“2014 Top Ten Figures of Chinese Think Tanks”, “2015 China Best
Commentary Award”, “2015 China Reform and Development Pio-
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China Dream: Still Coming True?
neers”. Wang has translated, co-edited and independently written
about 20 books including Anxiety of U.S., 2016: G20 and China,
Theories of World Governance: A Study in the History of Ideas, and
G20 and Global Governance, to name a few.