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China's Crisis of Success

Bill Overholt and I recently had a discussion about the points he makes in his new book, China's Crisis of Success. Here are five key points, each corresponding to a section below.

Bill Overholt's The Rise of China: How Economic Reform Is Creating a New Superpower, published in 1993, was called 'nonsense' and 'too optimistic.' How did that work out for the reviewers? 

Now, almost three decades after The Rise of China, Bill believes that China's future has become 'much more uncertain.' And, he addresses his concerns in a new book, China's Crisis of Success.

Bill outlined some the key points from his book recently in an interview with me. And, I have conveyed these below. As you will see, I have let Bill speak for himself. 

Bill was right in 1993. 

1. Fear and simplicity.

A 'sense of terrible crisis [was] a prerequisite for an Asian economic take off,' Bill says. 

  • Fear. Following the events that befell Asian countries - such as, the Korean War and the Chinese civil war - each nation faced the real possibility that it might not recover. This made leaders more willing to take great risks and their peoples more willing to accept them.
  • Simplicity. 'These countries' economies, when they're getting started, are basically agriculture, infrastructure, and some very primitive manufacturing.' This makes the plan simple: 'stimulate growth, build infrastructure, and open and marketize the economy.'

2. Simplicity to complexity - and new crisis. 

With success comes more complex economies, politics, and societies. 'And, then you gradually get to a point of complexity, where there is an economic and political crisis of some kind.' Time for a transformation.

  • China's leaders realized this and reached consensus about the need for reform during Hu Jintao's 'lost decade,' 2002 to 2012.
  • The guide for reform: China 2030, jointly prepared by the World Bank and China and adopted by the Third Plenum in 2013.

3. Slower reform, bigger debt. 

The decision for leadership: quick reform and lower GDP, or slow reform, maintaining higher GDP but accumulating debt in support of inefficient industries.

  • China chose slower reform, higher GDP, and increasing debt.

4. China's leadership

China's leadership wanted Xi to centralize power. We often hear criticism that Xi Jinping is power hungry. But, in fact, Xi's centralizing of power was part of the consensus leadership plan, what they saw as the only way to push reforms through. 

5. But,

'Xi Jinping may have gone well beyond what the consensus originally intended, and the politicization of the reform may not be exactly what some of the designers of the reform intended.' 

You will find each of Bill's points developed below. Let me know what you think.

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1. 'A sense of terrible crisis was a prerequisite for an Asian economic take off'

China's Crisis of Success—1 : 'The essence of the Asian economic miracles: fear and simplicity,' says Bill Overholt.

'Why is this sense of terrible crisis a prerequisite for an Asian economic take off? Because it creates a certain political environment.'...'The counterpart, on the economic side, is an economic simplicity.' says Bill Overholt.

Political Fear. 

'The Asian Miracle countries are all countries that were scared out of their minds.'

  • 'Japan after World War II. South Korea after the Korean War. Taiwan after the Chinese Civil War. Singapore after a very traumatic separation from Malaysia. And, China, after what I call a "bad hair" century - a  terrible series of crises and wars, ending with the Cultural Revolution.'

'Why is this sense of terrible crisis a prerequisite for an Asian economic take off? Because it creates a certain political environment.'

  • 'The leaders are so scared that they're willing to take great political and economic risks. And, to do bigger things, more dangerous things than a normal leader would.'
  • 'The people are conditioned the same way. They're scared that society is going to collapse. That their kids won't have anything to eat. They're willing to accept more stressful change than people in a normal, unfrightened place would accept.'
  • 'The leaders offer policies and tell the people, "You need to know this is going to be terribly disruptive. And painful. But, it's going to save our society."'

Economic simplicity. 

'The counterpart, on the economic side, is an economic simplicity.'

  • 'These countries' economies, when they're getting started, are basic agriculture, weak infrastructure, and some very primitive manufacturing.'
  • 'Even the government can figure out what to do in that situation initially: stimulate growth, build infrastructure, and open and marketize the economy.'

'The Asian Miracles have a succession of models, starting with Japan, each asking: How we can create a great economic take off? The common answer:'

  • 'Gradually open the economy to foreign trade and foreign investment'. 
  • 'Gradually marketize the economy by allowing market prices and other market phenomena to work.'
  • And, build infrastructure like crazy.'

'This works for quite a while because politically it's relatively simple.'

  • 'That doesn't mean there aren't terrible political struggles, that doesn't mean there isn't a resistance, but it's not the way it would be in Britain, or the  US, or China in normal times when people would push back against these tremendous, rapid changes.' 

'So, all this works for a while. And then, success comes.'

  • 'And, then you gradually get to a point of complexity, where there is an economic and political crisis of some kind.'

'Successful economic modernization has eliminated the fear that once energized the  Asia's Miracle Economies.'

  • 'Simple economies and politics have been replaced with immensely complex ones.'

'Economic and political complexity are two sides of the same coin.'

  • 'The rise of large, rich, efficiently organized economic sectors is the same as the rise of large, rich, powerful interest groups with conflicting interests of immense complexity.'
  • And, this creates the crisis of success.
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2. China 2030: 'It's hard to find a more impressive economic plan anywhere else in economic history.'

China's Crisis of Success—2

'Simple economies and politics have been replaced with immensely complex ones. And you gradually get to a point of complexity, where there is an economic and political crisis of some kind.'

Bill Overholt says, 'China's situation today is a little like that of an entrepreneur, who has invented a good widget, done well in marketing it, the company is taking off, and it's gotten to a certain point where they have to do the IPO.'

  • 'Now, it needs professional accounting and professional human resources and so on. It needs a transformation in order to keep going. If it succeeds at that transformation, take off continues, and if it doesn't, it flops.'
  • 'The core issue for China is dealing with the social complexity that comes with economic success.'

From simple to complex. 'China doesn's have simple infrastructure, agriculture, and government manufacturing anymore. There are thousands of sectors.'

  • 'In the power sector, you have all kinds of different power production systems: coal, solar, wind, hydro. You have conflicts between the producers and the distributors, who are no longer the same companies.'
  • 'There are thousands of software firms in conflicts between the users and the owner, inventors. And, so on.'
  • 'These sectors are big and powerful and assert their interests.'
  • 'China's economy just got too complicated to be managed from a few offices in Beijing anymore.'

'China's leadership recognized the issue; they saw it coming; and they addressed it.'

  • 'They decided, "Instead of trying to make all the major decisions in the NDRC, the National and Development Reform Commission, we're going to have market allocation of resources. It's going to be done automatically by the market, and it’s going to be more efficient."'

'From that premise, like somebody developing a system of mathematical theorems, they deduced hundreds of individual policies to implement that market allocation of resources. They consulted Nobel Prize winners, they consulted all kinds of private sector actors, as well as government officials.'

'The end result was China 2030: Building a Modern, Harmonious, and Creative High-Income Society prepared jointly by the World Bank and the Development Research Center of the State Council.'

  • 'It's hard to find a more impressive economic plan anywhere else in economic history.'

'China 2030 was announced as a report of the Third Plenum, with great detail about what they planned to do after Xi Jinping took power.'

  • But, 'in the politics and implementation, it's gotten complicated.'
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3. The slower the reforms, the bigger the debt

China's Crisis of Success—3

'What the Chinese have effectively chosen is much slower reform in order to keep the economic growth rate up around 6.7%.'

Bill Overholt says, 'When they started to implement the China 2030 reforms, first, the leadership had a choice:

  • 'Rapid reform, which would mean much slower economic growth', or 
  • 'High economic growth, which would mean accumulating a lot of debt and slowing the reform process.'                                   

'What the Chinese have effectively chosen is much slower reform in order to keep the economic growth rate up around 6.7%.'

  • 'So, they've acquired a substantial problem of debt as they're trying to keep this engine moving really fast.'

How this works. 'Fast reform would, for instance, involve very rapid reduction of over capacity. Now, the Chinese are reducing over capacity, but not as fast as they might.'

  • 'These inefficient concrete and aluminum factories, and other things, accumulate more debt as they wait the reform process.'
  • 'Also, and very important politically, local governments have become incredibly indebted, and you can crack down on that quickly, or you can not allow them to work at all for a considerable period of time.'
  • 'It's all happening more slowly than it might have otherwise.' 

'The other political decision that has slowed reform is that in effect politics has been given priority over a lot of economic reform.'

  • For example, 'The government talks about putting these big State Owned Enterprises on a level playing field with others. It talks about putting them on completely market basis.'
  • 'Then they say, "we're going to strengthen the role of the party committee inside these enterprises." They make sure the party committee has control over corporate strategy.'
  • 'Well, is it really on a market basis if the party controls the strategy has been strengthened?'

Another example. 'We're going to have the rule of law. It's going to be one of the major things of reform.'

  • 'But we're going to strengthen the role of the party commission that oversees the courts’ decisions.'
  • 'Well, is it really rule of law if a political commission is ultimately making the decisions?'

'There's a whole series of such things I talk about in China's Crisis of Success as the "Ten Key Contradictions"' (page 248).

'Reform is going forward, but it's going forward at a considerably slower pace than it might have, and with much higher priority for political considerations than was expected when China 2030 was drafted.'

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4. Enter Xi Jinping. The reformer?

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China's Crisis of Success—4

'Second, they realized that these reforms are painful, and so there's going to be a lot of pushback from all the important power groups of Chinese society. So, they used the Anti-Corruption Campaign as a hammer to push aside these groups who were resisting reform.

Hu Jintao, Xi Jinping's predecessor, presided over China from 2002 to 2012 or, what some call, China's 'Lost Decade.'

'Under Hu, China's top decision making body, the then nine-person Standing Committee of the Politburo worked a little bit like the U.S. Supreme Court - one man, one vote,' says Bill Overholt.

  • 'It wasn't even like the U.S. Federal Reserve, where the Chairman of the Federal Reserve really has tremendous power to drive the outcomes.'
  • 'So, reform just wasn't happening, and China's leaders (those with power, whether in or out of office) decided they needed to centralize power to a much greater degree.'

First, 'the leaders chose a much more charismatic, forceful top leader than Hu - Xi Jinping. And, they:

  • 'Reduced the Standing Committee to seven members from nine.'
  • 'Lobbed off the more extreme political views in order to have an easier consensus. For example, they jailed Bo Xilai, who represented one part of the end of the spectrum.'
  • 'Put the, so-called, extreme reformers in a second tier, in the Politburo, not in the top Standing Committee.' And,
  • 'Created all these small "Leading Groups," as they're called, to handle the most important problems, with Xi Jinping in charge of them all.'
  • 'A tremendous centralization in order to get reform going. That's one part of that consensus decision.'

'Second, they realized that these reforms are painful, and so there's going to be a lot of pushback from all the important power groups of Chinese society. So, they used the Anti-Corruption Campaign as a hammer to push aside these groups who were resisting reform.'

  • 'The most dramatic and the first was going after Politburo Standing Committee member Zhou Yongkang who also ran something called the Petroleum Faction. The Petroleum Faction oversaw controlled energy prices and therefore, hundreds of billions of dollars, which they could extract a share of for themselves.'

'The final piece was Xi Jinping himself. 'Xi had a fairly limited personal political base. He's been very concerned that doing painful reforms in the face of tremendous opposition would not work, or maybe not work and get him unseated.'

  • 'So, he's spent the first five years using his more centralized powers to eliminate all possible rivals and to try to get all the interest groups as much under control as possible.'
  • 'The story has been that the first 5-year term, which just finished recently, is about consolidating power, and the second five years is about implementing the reform process successfully.'
  • 'We’ll have to see.'
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5. Has Xi gone too far?

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China's Crisis of Success—5 : 'Xi Jinping may have gone well beyond what the consensus originally intended.'

Bill Overholt believes 'Xi Jinping may have gone well beyond what the consensus originally intended, and the politicization of the reform may not be exactly what some of the designers of the reform intended.

Bill Overholt believes 'Xi Jinping may have gone well beyond what the consensus originally intended, and the politicization of the reform may not be exactly what some of the designers of the reform intended. There's considerable controversy below the surface over whether reform is consistent with the things I mentioned before:'

  • 'Strengthening the party committees rule over corporate strategy', and
  • 'Strengthening party control over judicial decisions.'

'After we find out how economic reform is going to work, there's still the question of political complexity. I talk about economic complexity, you've got all these different sectors with computing interests. Well, these are political interest groups, too. They're now very different from what they were at the beginning of reform.'

  • At the beginning of reform, groups like private enterprises were small. Even the party, itself, was smaller, less organized, less well led.
  • 'Now you have religious groups, and lawyers and journalists, above all I'd say private sector business, a middle class, all sorts of professional groups that are pushing important political demands.'
  • 'It's just as complicated to sort those out as it is to sort out the different economic interests. And, just as you can't sort out all the economic issues from the few offices in Beijing, you can't sort out all the political issues from a few offices in Beijing.'

'What China hasn't yet done, is to come to grips with, not even developed the theory, of how to deal with this political complexity.'

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'China goes private'—from financial reform to the Belt Road Initiative

Malcolm Riddell's conversation with Harvard's Tony Saich
The State & Party's technical prowess is somewhat limited.
  1. 'China goes private.' Tony Saich discusses the Xi and the Party's move toward toward greater control of private business, especially the tech/Internet sectors. 
  2. 'It's the politics, stupid.' Tony explains why Xi focused first on trying to bend Chinese society and the State to his and the Party's will.
  3. 'The State and the Party.' Tony details the problems the Party has in getting the State to implement its policies, and why.

1. The Party goes private

The big idea. 

Having made headway in exerting Party control over Chinese society, the economy, and the State, Xi Jinping has his sights on gaining more control of private business, especially the tech/Internet sectors, in two ways:

  • The government may buy (or receive 'donated') shares and get board seats. 
  • And, Chinese Communist Party Committees embedded in private companies would have a say in major decisions.

What could possibly go wrong?

The background. 

‘The Chinese State didn’t have the capacity to develop things like Alibaba, Baidu, Tencent, and so forth,’ says Harvard's Tony Saich.

  • ‘So, it outsourced its Internet and hi tech development to the private sector.’

Since then, the government has pretty much left these and other tech/Internet companies alone. But, that could be changing. According to Wall Street Journal reporting in October 2017:

  • 'The Chinese government is pushing some of its biggest tech companies—including Tencent, Weibo and a unit of Alibaba—to offer the state a stake in them and a direct role in corporate decisions.' '
  • “This is the thing that keeps Pony up at night,” says a Tencent executive about Mr. Ma, the company’s chief executive.
  • 'Even if the plan doesn't go through, the government has another way to gain control: '[A]t Mr. Xi’s urging, a campaign is under way to set up party units in private companies.' This will give Party representatives authority to approve or veto major decisions, say sources, other than WSJ.

Tony Saich gives context: 

This 'reassertion of State and Party control in the private sector is something we've seen before.' 

  • ‘Essentially, when the private sector has developed in an area and has become successful, the State and the Party move back into that sector both to try and guide it, but also to take more profits from that sector.’
  • ‘I think we’re seeing that now with the hi tech and internet sectors.’

As for Party reps in Internet firms as well as other private companies, Tony says:

  • 'In theory, that was probably the case before. But, in practice, the private companies were probably left pretty much alone.’ 
  • Now, the government is trying to 'to rein in, bring back in Party and State control over that very vibrant sector, and also to ensure it works more coherently for Party interests.’
  • ‘I would suspect that over the next period, we’re going to see a tightening up in that area.’

Why this is important. 

Less tech- and business-savvy Party and State apparatchiks could dampen or even kill the vibrancy and innovation of individual companies and, perhaps, collectively, China's tech/Internet sectors. If that happens initiatives like 'Made in China: 2025' may be jeopardized. Also:

  • Mixed government/private companies will have more difficulties obtaining SIFUS approval for U.S. investments.
  • Beijing would gain even greater control over the web and even greater access to people's personal data. 
  • For analysts, figuring out what's happening in China's economy, tech/Internet sectors, and individual private companies would become a lot tougher. 

2. 'It's the politics, stupid!' 

‍‍The Economist

The big idea. When Xi Jinping came to office, western observers expected him to tackle China's flagging economy day one. But, Xi had different priorities. (Cue western hand wringing).

  • 'When Xi Jinping took over power,' Harvard's Tony Saich says, 'his view was "It's the politics, stupid"' (riffing on Bill Clinton's 1992 winning presidential campaign strategy, summarized in, 'It's the economy, stupid').
  • 'The Party's relationship to society was in very dire straits. It was not just the corruption issues, the behavior of officials, but a lack of trust.
  • 'The Party had trust issues, too. 'The Party didn't trust the State to carry out its policies, and it certainly didn't trust society.' 
  • 'Xi felt there for anything to happen it was essential that the Party itself became stronger, more disciplined, and more unified, and that the Party had to get a much tougher grip over State and over society.'

Society & the Party, it's complicated.  

Society was losing confidence in Party leadership, and the Party didn't (and doesn't) trust society. Xi's Anti-Corruption Campaign went a long way toward restoring confidence in the Party. But, nothing could make the Party trust society. Tony explains:

  • The Party 'fears that somehow society is getting away from Party rule and from the dominance of the Party.'
  • 'The fear that if society is let loose, it’ll run off in its own merry way, which might be detrimental to, or possibly even in conflict with, Party interests.'
  • 'That worried the Party because it could lead to the flourishing of a range of heterodox and unorthodox ideas within society that could undermine Party power.'
  • 'So we’ve seen a much tougher control over information flows, over what is acceptable to be talked about, and over what is acceptable to be written about. I don’t see that changing in the next five years.' 

3. The State & the Party, it's even more complicated

‍Getting the State bureaucracy in line. 

Why are Xi and the Party working so diligently to bend the State to the their will?  

China is a one-party state with two bureaucracies: the State and Party. 

  • In theory, '[T]he State bureaucracy does the day-to-day job of public administration, and the Party bureaucracy sits next to and controls the way they do it,' Stein Ringen, Oxford professor emeritus told me. 

But, in practice, 

the State doesn't necessarily carry out the Party's policies. Harvard's Tony Saich explains:

  • 'What I mean about the Party not trusting the State is not just a question of the corruption.'
  • 'It's really about State institutions pursuing their own particular interests that may conflict with the policies that the Party wants to push forward and pursue.''
  • Say, for example, on the environment, the Party has good regulations and policies, but State institutions don’t carry them out.'
  • Why? 'Because there are vested interests within their localities that benefit from the perpetuation of pollution producing industries.'

The reality. China is '...such a rambling country with so many different institutions and so many different tiers of government that it’s very difficult to control.'

  • 'The way China works, people are going to fall in line, seek to appease themselves with General Secretary Xi, and try and follow whatever his directives are.'
  • 'But, like most of these things in China, the directives tend to be very vague. This leaves open a lot of potential for local variants and local experimentation.
  • 'My translation: Nothing new here. 天高皇帝远 - 'Heaven is high and the Emperor is far away,' as the oft quoted - since the Yuan Dynasty (1271-1368) - proverb goes. 

What it all means

‍Chinese dynamism: left, after Deng;  right, after Xi?

What it all means. Xi may be able to bring Chinese society and the State to heel, but at what cost? Tony posits: 

  • 'The Chinese leadership really needs to think about: Where does dynamism come from within its economy and within its society?'
  • 'It’s not necessarily within the State-owned sector.'
  • 'So, this recentralization could curb the enthusiasm and entrepreneurialism within society.'
  • 'And, this may be detrimental to meeting Xi's longer term goals of maintaining stable growth and a relatively peaceful societal framework.'
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What are the policy implications for China's economy from the 19th Party Congress?'

Pieter Bottelier—top China economist, former World Bank head in China, and stalwart CHINADebate expert—set the theme today: the crucial albeit unsung importance of elite technocrats in guiding China's Economic Miracle. Here is summary of today's three parts.

1. Pieter, in our interview, warned that China's shift from pragmatism to ideology could weaken the quality of the technocrats' economic policy making and regulation, and thereby hurt economic stability and growth. 

2. Pieter believes China has avoided a hard landing, thanks especially to technocrats who manage the property sector. 

3. I employ one of my favorite real estate graphics to demonstrate - using data - just how well, in fact, the technocrats manage the property sector. And, the impact less competent technocrats could have.

1. Shift from pragmatism to ideology could make China's managed economy harder to manage

'Black cat, white cat. If it catches mice, it's a good cat.' 

The big idea. The shift from Deng Xiaoping pragmatism to Xi Jinping ideology and Party control could weaken the effectiveness of China's economic policy and decision making. This would undermine the foundations of China's Economic Miracle, and, in turn, the stability and growth of China's economy.

Pieter Bottelier - top China economist, former head of the World Bank in China, and stalwart CHINADebate expert - surprised me when he gave this issue as his sole concern when I asked him, 'What are the policy implications for China's economy from the 19th Party Congress?'

China is still, to a great extent, a managed economy, and the managers are the elite technocrats; they pull levers that in the West we leave to the market.

Elite technocrats are the unsung heroes who guided China's Economic Miracle and navigated the crises that could have derailed it at any point.

  • 'One of the pillars of China's Economic Miracle has been the quality of the technocratic elite in the civil service since the start of the economic reforms under Deng Xiaoping in the late 70's.'

Beginning in the Deng era of economic reforms, technocratsoperated in an environment of, '... free debate and free research, as well as unrestricted exchanges between Chinese technocrats and overseas technocrats and intellectuals.' Black cat, white cat.—Pragmatism trumped Party power and ideology.

Now, Party power and ideology trump pragmatism.

  • 'The policy environment and intellectual climate within which economic policy is made have definitely changed.'
  • 'The recent 19th Party decisions confirmed the political changes that had been underway for some time.'
  • 'Politics has moved to center stage.'
  • 'Party priorities have changed from economic growth, economic development to party power, party prestige, party control over everything - the economy and, of course, the political system.'
  • 'That has potentially very significant implications for the economic policy making environment.'

Beyond the technocrats.  The enshrinement of 'Xi Jinping Thought' in China's constitution further solidifies 'the shift in priorities from pragmatism to party power that translates into an ideologically underpinned party power.'

  • For example, 'Chinese universities have all hurried to create institutes for the study of 'Xi Jinping Thought.' 
  • Because of this, 'I worry that the very positive and open intellectual climate in China's universities and think tanks in China will become a thing of the past.'
  • Chinese academics and think tank experts, unlike those in the West, wield greater influence and have an outsized role in policy making.

What this means. 'Because ideology and party power have drifted back to center stage, the environment within which intellectuals and policy makers have to debate policy options and consider alternatives has changed fundamentally.'

  • 'This may lead to the very strict narrowing of the intellectual climate within which the technocrats can operate in the years ahead.'
  • 'And that could undermine a significant part of the foundations of China's economic miracle of that last few decades -the freedom of debate, the freedom of research, and the open exchange between Chinese technocrats and foreign intellectuals.'
  • 'If that climate, which has been so positive and so open in the last several decades, is jeopardized, we have to worry about the quality of the economic decision making in the years ahead.'
  • And, the stability and growth of the economy.

New problems in analysis. 

China's technocrats have proven capable of managing most every problem the economy has thrown at them. They have done such a good job that we don't even notice them or factor their abilities into our analyses. They are just so much background; we take them for granted. 

  • That's changed. From now on, figuring out what's happening and what might happen in the economy just got more complicated.
  • We have to understand better how the bureaucracies that manage and regulate the economy work, and then dig down a layer or two in.
  • We have to assess the technocrats and pay attention to who is appointed - competent economist or ideologue?
  • Be ready for some bungling, weak policies, and inept regulation that could put the stability and growth of China's economy at risk.And, catch these before they ripple through the economy. 

2. No hard landing for China's economy...for now

giphy-61.gif

'Two years ago we were all speaking about, all worried about the possibility of a hard landing,' Pieter Bottelier also told me in our interview.

  • 'Very few people are talking about that today.'
  • 'Even though the risk has not disappeared completely from the horizon, it's no longer on the top of the agenda of most pundits.'

What's changed? 

'The major factor that has worked out differently from what had been expected is the property sector.'

  • 'Real estate markets have recovered instead of deteriorated.'
  • 'They have pulled demand for raw materials much more strongly than expected, and exports have been stronger than expected.'
  • 'All together manufacturing, gross exports, and the real estate sector, particular the urban property sector, are the main factors explaining why the objective economic situation has improved rather than deteriorated as many people had expected.'

How about the real estate bubble? 'That risk is certainly there. There is in a way a bubble, but the bubble is not about to burst.'

  • 'We have seen is a more positive regular evolution of development in the real estate markets. Partly as a result of strong demand and partly as a result of very capable administrative regulation.
  • 'Very astute management of the administrative environment at the local level is the main explanatory factors, plus the underlying demand remains very, very, very strong.'
  • 'The stock of unsold properties as a percentage of the total supply side has declined a lot in recent, in the last eighteen months. So we have a much more healthy supply-demand balance situation than we had two to three years ago.'
  • 'And the prospects, of course, remain uncertain but the likelihood is that markets will weaken in the next several quarters in 2018.'
  • 'Total turnover and prices will probably slacken.'
  • 'But, I don't expect a collapse as we did a few years ago.'

3. Technocrats manage China's property sector pretty well

NBS_Price_Movements_Jan2012-May2017.gif
‍Source: Analysis by Real Estate Foresight based on data from NBS, Datastream

Pieter Bottelier credits 'very astute management of the administrative environment at the local level' for managing China's real estate bubble.

Have a look at one of my favorite charts, above, courtesy of Robert Ciemniak of Real Estate Foresight.

  • We can see that the real estate market is not a 'market' as we understand it.
  • Rather than the invisible hand at work, local technocrats pull their many levers, tightening and loosening at will.
  • Loosen , markets go up. Tighten, markets go down.
  • Never out of their control.

Riffing on Pieter's worry that the shift from pragmatism to ideology could weaken economic decision making...

  • Imagine that competent technocrats might substitute their best judgement to toe the Party line and keep their jobs.
  • Or that they are replaced with cadres who are more ideological than competent.
  • Then, the real estate and China's economy really might... 
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China Cause America's Trade Problems?

Malcolm Riddell's conversation with Yukon Huang
'America's trade problems are not the consequence of China's policies.'

1. 'China Did Not Cause America's Trade Problems' Copy

About China & the U.S. trade deficit

'America's trade problems are not the consequence of China's policies.' 

Yukon Huang, China economy guru at the Carnegie Endowment, has once again upended what I thought I understood about a particular China issue - this time U.S-China trade. And, more annoying, he has, as you will see, the data to back up his contentions. 

During our conversation, he told me...

America's trade deficit with China has been surging.

So people say, 'If I want to solve America's trade deficit problems, the simplest way to do it is to somehow narrow the trade deficit with China.'

This is why Donald Trump comes up with the view that China is the problem, but it's basically wrong.

Using this chart, Yukon explains that China's trade surpluses and U.S. trade deficits don't coincide...

Notice that when America's trade deficits start to get smaller, around 2005 or 2006, China's trade surpluses start to get bigger. They actually move in the wrong direction.

What this diagram shows is that there is no direct link between China's trade balances and America's trade balances.

It's a mistake to say that America's trade problems are the consequence of China's policies.

There's a lot more to Yukon's analysis. To see how he gets to these conclusions, watch his video. It's only 6 minutes -  you won't look at U.S.-China trade the same way again.

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Siri: 'Can The iPhone Prove President Trump's Wrong About U.S.-China Trade?'

Malcolm Riddell's conversation with Yukon Huang

'America's trade problems are not the consequence of China's policies.' 'How much of that $650 iPhone - which adds to China's trade surplus with the U.S. - actually originates and stays in China? — Only $25.'

  • For decades, about 50% of U.S. imports of manufactured goods have come from Asia.
  • During this time China has risen from supplying 10% of those Asian goods to supplying 65%.
  • The reason: after joining WTO, China became Asia's assembly plant.
  • Companies ship components manufactured in other Asian countries to China for assembly and export as finished products.
  • And, the full price of those products - components as well as profits - go on China's trade balance, even though China's only economic benefit is the assembly.
  • Hence, China's actual trade surplus is smaller than stated, and, in fact, is a stand-in for Asia's overall trade surplus with the U.S.

Following what now appears to be the vain hope that China would solve the North Korean nuclear problem for him, President Trump seems to be tweeting up to a trade confrontation, perhaps even a trade war, with China.

But, just as he was wrong about China's being a currency manipulator, the President may also be wrong - albeit for more subtle reasons - about how much China itself actually contributes to the U.S. trade deficit.

Yukon Huang, senior fellow at the Carnegie Asia Program and former World Bank head in China, in laying out these subtle reasons, concludes that China's actual trade surplus with the U.S. is smaller than stated in trade statistics. Here's why...

For decades, U.S. imports of manufactured goods from Asia has remained pretty steady at between 45 and 50%.

What has changed is the share of those goods imported from China since it joined the WTO...

There are two possible reasons for this. One is that China simply beat out the other Asian nations.

The other - and real explanation - is that, after joining the WTO, China became the assembly plant of Asia, taking parts and components manufactured in other Asian countries, assembling them into finished products, and then exporting those products to the U.S.... 

‘China accounts for 65% of the exports from Asia to the United States.
'That 65% of exports from Asia to the United States does not represent the true value of these goods being produced in China, since most of these parts and components are actually being produced in Korea, Taiwan, Japan, Singapore, Malaysia, and the Philippines.
'China's only value-added is the labor and the assembly.'

Consider the case of the iPhone. Yukon breaks that $650 price tag down:

  • $325: the value of parts and components, mainly produced in South Korea and Japan.
  • $300: profit to Apple.$25: labor – the only added value to China's economy.
  • $25 to China! Yet, on the trade books, here's what happens...
‘You take a $650 iPhone, assembled, exported from China, and it comes to the United States. It shows up in the balance of payments, in the trade balance, as a $650 item deficit for the U.S. and a $650 surplus for China.
'But, how much of that $650 actually originates and stays in China? Only $25.' 

And, adding insult of a sort to injury...

'That money actually never really shows up in China, because the receipts are basically secured in the United States, but it never stays in the United States. It's basically transferred overseas, but in the trade books it shows up as a product from China, which costs $650.'

So, what do we have... 

  • The U.S. is importing as many Asia manufactured goods as ever - so, there has been no surge in Asian imports.
  • But, what's changed is that Asian manufacturers have been funneling their products to China - Asia's assembly plant  - for assembly and export.
  • So, on the books, it looks as if U.S. imports from China have exploded (please have a look again at the chart, above).
  • In reality, nothing has changed, except for China unfairly taking the blame for what is, in fact, Asia's usual trade surplus with the U.S.
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Will 'One Belt, One Road' Tank China's Economy?

CNBC
'My fear is that Xi will see this initiative as an alternative to economic reform.'— Pieter Bottelier

But, the biggest threat in the near term is that Xi Jinping will see OBOR as an alternative to completing the economic reforms promised - but not delivered - in 2013's Third Plenum.

Time to start watching China's One Belt, One Road (OBOR) initiative.

Last month, 29 heads of states, mostly from small countries in Southeast Asia, Central Asia, the Middle East, Africa, and Eastern Europe, but also from Russia and Italy, met in Beijing for the Belt Road Forum (India was notably absent). In all, China and some 60 other countries signed 317 major investment deals for transportation and energy infrastructure projects. 

The initiative holds the promise was juicing China's economy for decades, and, at the same time, reducing overcapacity, giving work to its giant construction companies, increasing its political influence across large parts of the world that developed countries often overlook...the benefits seem endless.

OBOR also holds the threat of saddling China with huge financial burdens (a trillion dollars over the next decade) and perhaps little return, all as its economy slows.

But, the biggest threat in the near term is that Xi Jinping will see OBOR as an alternative to completing the economic reforms promised - but not delivered - in 2013's Third Plenum.

So, while we watch for OBOR's impact in emerging and frontier markets, in individual industries, and on commodities, we have to also keep an eye on how China integrates OBOR into the overall structure of the economy, the good and the not so good.

I had a terrific opportunity to learn about OBOR and its potential impact on China's economy from one of the great experts, Pieter Bottelier. Before joining the School of Advanced International Studies (SAIS),  Pieter had a long career at the World Bank, which included serving as its China chief in Beijing. No westerner I know is better connected with China's top economists.

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Why A Trump–Kim Jeong Eun Summit Could Work

Malcolm Riddell's conversation with Bill Overholt
'If it would be appropriate for me to meet with him [Kim Jong-un], I would absolutely. I would be honored to do it.' — President Trump — May 2017

'What President Trump has done is to signal we are willing to move away from this formula that the North Koreans have to give up everything in their nuclear program before negotiations - only then we'll talk with them. I admire our U.S. negotiators, but that formula is simply absurd.'

Missing from the latest on how to deal with North Korea is President Trump's radical suggestion that he meet with Chairman Kim (Bloomberg -Trump Says He’d Meet With Kim Jeong Eun Under Right Circumstances). Perhaps, it was lost in the blizzard of Trumpian pronouncements.

But not lost to Bill Overholt of the Harvard Asia Center. In my conversation with him, he told me...

Crucially, President Trump has indicated a willingness to meet with Kim Jeong Eun. 
We have only been able to move forward on serious deals with North Korea when American envoys have been top level. The North Koreans react very badly to having these life and death issues dealt with at the Assistant Secretary of State level. 
Ultimately, any deal that's going to work has to be sealed at the presidential level.

Although President Trump did not specify the conditions for a meeting, Bill believes that...

What President Trump has done is to signal we are willing to move away from this formula that the North Koreans have to give up everything in their nuclear program before negotiations - only then we'll talk with them. I admire our U.S. negotiators, but that formula is simply absurd.

Why absurd? Because...

North Korea is like an animal injured, trapped in the corner.You threaten a little animal more, it's just going to bite you more - because that's all it knows how to do. The nuclear program is their only theory of having any security.
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Is The U.S. Ceding Global Leadership To China?

Malcolm Riddell's conversation with Bill Overholt
'China isn't positioned to replace the U.S. as a global leader anytime soon.'

Hard on President Trump's 'American First' inaugural address, Xi Jinping gave a rousing paean to globalism at the World Economic Forum. And, immediately the hot question became: 'Is the U.S. ceding global leadership to China?'

Yes and no, says Bill Overholt of the Harvard Asia Center. Yes, the U.S. is ceding global leadership. No, China won’t replace the U.S.

What will replace the U.S. is ‘G-Zero’, a world with no single global leader. Not China, not the U.S.

So, can his critics lay this outcome at President Trump’s feet?

  • The U.S. has been ceding global leadership since the end of the Cold War.
  • But, China — often cited as the likely successor to the U.S. — is not yet ready to assume leadership.
  • Instead, we are headed for is a ‘G-Zero’ world, with no single global leader. Not the U.S. and not China.

Hard on President Trump's 'American First' inaugural address, Xi Jinping gave a rousing paean to globalism at the World Economic Forum. And, immediately the hot question became: 'Is the U.S. ceding global leadership to China?'

Yes and no, says Bill Overholt of the Harvard Asia Center. Yes, the U.S. is ceding global leadership. No, China won’t replace the U.S.

What will replace the U.S. is ‘G-Zero’, a world with no single global leader. Not China, not the U.S.

So, can his critics lay this outcome at President Trump’s feet? Again, yes and no.

Yes, President Trump's ‘America First’ policies and his disdain for international regimes in trade, climate change, and defense, as well as his treatment of some of the U.S.’s greatest allies, has certainly accelerated America’s global retreat.

But, no, too. Because the U.S. retreat began well before President Trump took office. As Bill points out…

Why is the U.S. ceding global leadership?

The headlines are all about President Trump, and a lot of that is appropriate, but there are much deeper trends that are more important in the long run.
When Americans are not concerned about a great war or a Cold War, they get less interested in foreign policy when they elect a president.

Thus, since the end of the Cold War, we have elected presidents - from Bill Clinton and George W. Bush to Barack Obama and now Donald Trump - who came to office with no foreign policy experience.

And, we can see a parallel trend in Congress...

What's happened since the Cold War is that Congress has generously funded the military.
But, the State Department and economic aid budgets have been cut and cut and cut. That's a continuous process that has been going on since the 1990s.
Again, Trump is the ultimate caricature of that, trying to take an already minuscule State Department budget and cut it by another 30%, but he's on trend.

The result: 'The principal tools of successful strategy are being eroded at the same time when the top leaders are less experienced, less knowledgeable, and less interested in national strategy and foreign policy.' No wonder American has been losing influence globally.

But, regardless of the causes, the U.S. retreat could still benefit China.

Take Australia, as an example. Headlines there say that Canberra is 'now thinking it needs to tilt more toward China because the U.S. is such an unreliable ally.'

And that, it's 'starting to take more Chinese priorities into consideration’ on issues ranging from South China Sea to free trade.'

If our foreign policy can push even Australia - perhaps our most faithful ally - toward China, how much more will it drive our less stalwart Asian allies toward Beijing?

So, if China isn't destined for global leadership, can it nonetheless supplant the U.S. as the regional leader in Asia? Bill has his doubts about that too. 

2. In A G-Zero World, Will China Dominate Asia?

  • A G-Zero World is coming, where the U.S. will be first among several other powers - but no longer global leader
  • China will become the second most important power and the leader of Asia, propped up by countries alienated by President Trump
  • Still, the extent of Beijing’s regional hegemony hinges on whether it can overcome an array of domestic and international challenges.

Last week, Bill Overholt of Harvard’s Asia Center, presented an intriguing case for why China will not replace the U.S. as global leader (in case you missed it, you can watch our conversation here.)

Instead of a world led by China or the U.S., for that matter, Bill posited a G-Zero world, without any dominant hegemon. In contrast to...

A G-1 one world with one leader like the U.S.
A G -2 world would be a world where the U.S. and China were collaborating to create a world order, as to some extent they have been for a quarter century.
In the G-Zero world, the U.S. and China will be one and two, respectively globally. But...
China will be the regional leader in Asia.
We're not talking about everybody joining an alliance with China. That's not going to happen.
But, on trade issues, on local strategic issues, the Chinese voice is going to get stronger and stronger.
And, even a powerful country like South Korea will be more and more influenced by Chinese views.

And as China consolidates its dominance in what it considers its backyard, there is no guarantee that long-time friendly Pacific powers like Thailand, Philippines, or even Australia will support the U.S. as they used to.

Still, China’s regional hegemony is not a given. According to Bill, the extent of  Beijing’s leadership will depend on Zhongnanhai’s...

  • Successfully implementing its ‘One Belt, One Road’ initiative
  • Tamping down the quibbling over minor territorial issues with its neighbors, and
  • Completing economic – and, especially SOE - reform.

How will Beijing carve out a place for itself in this more anarchic reality? How will neighboring nations, who long have prioritized economic growth over military spending, respond to a new Chinese push for Asian domination? And, the crucial question: is war between China and the U.S. inevitable?

3. What 'Thucydides Trap'? Why China & the U.S. Won't Go to War

'It was the rise of Athens [China] and the fear that this instilled in Sparta [the U.S] that made war inevitable.' - Thucydides -(with apologies) 

Like Zeus, the Thucydides Trap has lost its power

Thucydides, 2,400 years ago, summed up the cause of the Peloponnesian War this way: 'It was the rise of Athens and the fear that this instilled in Sparta that made war inevitable.'

In more recent times, political scientists have used the simple equation rise of new power + fear of reigning power = war to explain the cause of about a dozen major armed conflicts. The latest to apply the formula is Graham Allison in his Destined for War: Can America and China Escape the Thucydides's Trap?.

So can we escape? According to Bill Overholt, the question itself is wrong: The Thucydides Trap died in World War II.He argues that since World War II. 

the geopolitical landscape has experienced 'one of the greatest transformations in world history'...   

‘The people who use the Thucydides Trap for analysis - John Mearsheimer and a dozen of other political scientists, including now Graham Allison - focus on the period before World War II.'What they miss is the strategic divide between the pre-World War II era when traditional military and territorial approaches were the way to build a powerful and successful country, and the post-World War II modern world where those approaches are more likely to be self-defeating.' 

Because the proponents of Thucydides Trap analysis focus on the previous world order, they miss entirely that...   

'The game is now going to be decided more by economics. I'm not talking about economic interdependence. I'm talking about the fact that economics is the key to success if you're a realist in the modern world - and this is something that political science realists have never focused on. 'What you do today to achieve power is pour your money into your country's economic success, not make territorial conquests or have overwhelming military superiority. 'This post-World War II change from using military force to using economic development to gain power is one of the greatest transformations in world history.'   

In this new world order, where economics trumps force, the U.S. and China have little reason to go to war...   

'Never have two countries gotten so much economic advantage from dealing with each other than the U.S. and China have. 'There's going to be constant pressure on both sides for leaders to realize that and not to mess it up.'   

And, of course, not go to war.

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AmCham China Chairmen's View From China in D.C. 2017

AmCham China & CHINADebate U.S.—China Trade/Business Series 2017
AmCham China & CHINADebate U.S.—China Trade/Business Series 2017 Terrific insights from leaders on the ground in China. While in D.C. the Chairmen joined us in a panel discussion and individual interviews about U.S. business in China, U.S.-China relations, trade, and much more. We present their views in a 13 part series. Sheryl WuDunn, business executive, lecturer, best-selling author, and winner of the Pulitzer Prize moderated.

1. Meet the AmCham China Chairmen

2. 'U.S. companies feel less welcome in China.'

3. 'On trade, reciprocity should rule.'

4. Trade & Innovation

5. Open China’s Markets to U.S. Business

6. ‘Is Jack Ma right, will e-commerce create U.S. jobs?’

  • [Q&A] Dennis Wilder, Georgetown University, Assistant Professor of Practice & Senior Fellow at the Initiative for US-China Dialogue on Global Issues

7. ‘Has China decided Foreign Direct Investment isn't so important for them?’

  • [Q&A] Pieter Bottelier, Visiting Scholar, School of Advanced International Studies, Johns Hopkins University (SAIS)

8. ‘How do we solve the problems between the U.S. and China?’

  • [Q&A] Christine Vick, The Cohen Group

9. What's the most pressing challenge now? 

  • [Interview] Bill Zarit, Chairman of AmCham China, Senior Counselor, The Cohen Group

10. 'China's Got To Realize The Gig's Up' 

  • [Interview] James McGregor, Chairman, APCO Worldwide Greater China region | former Chairman of AmCham China (1996)

11. 'Re-look WTO agreements with China.'

  • [Interview] Dennis Wilder, Georgetown University, Assistant Professor of Practice & Senior Fellow at the Initiative for US-China Dialogue on Global Issues

12. ‘Biosciences, healthcare, consumer, all opportunities.’ 

  • [Interview] John Watkins, Former Chairman of AmCham China (2009 – 2010) and senior business executive] 

13. 'China: explain why markets not open.'

  • [Interview] Lester Ross, Wilmer Hale, Partner-in-Charge, Beijing Office

AmCham China & CHINADebate U.S.—China Trade/Business Series 2017

In February 2017, the Chairman of the American Chamber of Commerce in China, along with several past Chairmen, came to Washington, D.C. for the annual Congressional 'Door Knock.' The presidents joined us while on their annual Washington 'Door Knock' visit for meetings with members of Congress and other government leaders. Terrific insights from leaders on the ground in China. While in D.C. the Chairmen joined us in a panel discussion and individual interviews about U.S. business in China, U.S.-China relations, trade, and much more. We present their views in a 13 part series. Sheryl WuDunn, business executive, lecturer, best-selling author, and winner of the Pulitzer Prize moderated.

Moderated & Interviewed by Sheryl WuDunn

Sheryl WuDunn is a business executive, lecturer, best-selling author, and winner of the Pulitzer Prize moderated.

1. Meet the AmCham China Chairmen

2. 'U.S. companies feel less welcome in China.'

3. 'On trade, reciprocity should rule.'

4. Trade & Innovation

5. Open China’s Markets to U.S. Business

6. ‘Is Jack Ma right, will e-commerce create U.S. jobs?’
  • [Q&A] Dennis Wilder, Georgetown University, Assistant Professor of Practice & Senior Fellow at the Initiative for US-China Dialogue on Global Issues

7. ‘Has China decided Foreign Direct Investment isn't so important for them?’
  • [Q&A] Pieter Bottelier, Visiting Scholar, School of Advanced International Studies, Johns Hopkins University (SAIS)

8. ‘How do we solve the problems between the U.S. and China?’
  • [Q&A] Christine Vick, The Cohen Group

9. What's the most pressing challenge now? 
  • [Interview] Bill Zarit, Chairman of AmCham China, Senior Counselor, The Cohen Group

10. 'China's Got To Realize The Gig's Up' 
  • [Interview] James McGregor, Chairman, APCO Worldwide Greater China region | former Chairman of AmCham China (1996)

11. 'Re-look WTO agreements with China.'
  • [Interview] Dennis Wilder, Georgetown University, Assistant Professor of Practice & Senior Fellow at the Initiative for US-China Dialogue on Global Issues

12. ‘Biosciences, healthcare, consumer, all opportunities.’ 
  • [Interview] John Watkins, Former Chairman of AmCham China (2009 – 2010) and senior business executive] 

13. 'China: explain why markets not open.'
  • [Interview] Lester Ross, Wilmer Hale, Partner-in-Charge, Beijing Office
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'China's Got To Realize The Gig's Up'

Interviewed by Sheryl WuDunn
James McGregor is being interviewed by Sheryl WuDunn at a CHINADebate event in Washington, D.C.

'One of the problems in the U.S. is we're always worried about the relationship. Let's make China worry about the relationship for a while. China's got to realize the gig's up, that they had a really good run, and that now it's going to be reciprocity. It's going to be fairness. If they want to do business with America and Americans, then they've got to open their markets the way we have.'

[Interview] James McGregor

AmCham China & CHINADebate U.S.—China Trade/Business Series 2017
  • Chairman, APCO Worldwide Greater China region 
  • former Chairman of AmCham China (1996)

James McGregor is being interviewed by Sheryl WuDunn—executive, best-selling author, and Pulitzer Prize-winning journalist. The interview took place after a CHINADebate event at the Cosmos Club in Washington, D.C., where Sheryl moderated a panel consisting of the President of the American Chamber of Commerce in China and several of the past presidents, including Jim McGregor.

Jim McGregor is not only a long-time China business leader, he is also one of the pre-eminent China experts.

Candidate Trump was tough on China. President Trump, well, it's not clear. After his meeting with President Xi, he seemed to soften his stance in hopes of getting China's help with the North Korea nuclear program. Recently, however, he tweeted: 'While I greatly appreciate the efforts of President Xi & China to help with North Korea, it has not worked out. At least I know China tried!' Will the President now revert to form? Stay tuned.

For Jim McGregor's part, he counsels rebalancing the U.S.-China relationship...

One of the problems in the U.S. is we're always worried about the relationship. Let's make China worry about the relationship for a while. China's got to realize the gig's up, that they had a really good run, and that now it's going to be reciprocity. It's going to be fairness. If they want to do business with America and Americans, then they've got to open their markets the way we have.

If this sounds Candidate Trumpian, I should say that long before Mr. Trump came down the escalator to announce his candidacy, many long-time China folks believed that China was gaming the system and taking advantage of not only of the U.S. but also the rest of the developed world. And, that tough changes are long overdue. Amen to Jim McGregor.

So, while I agree with Jim's assessment, I also agree with his warning... 

If we don't go in there with smart policies, then there's going to be hell to pay because China is very smart and strategic, and they know what they want.
It's a complicated intertwined world of global supply chains, and we have to be very strategic and smart in the way we handle this.
So far, stirring things up is good, but, boy, we've thrown everything up in the air. If we don't bring it back down in a smart fashion, this could lead to a tit for tat trade war that neither one needs, wants, or could afford.
What we've seen so far from the Trump administration does not give a lot of confidence. Not long ago, I said to a conference in Hong Kong, 'My get tough with China agenda is finally on the table, and it looks as if the administration charged with implementing it may be filled with bunglers.' I am certainly hoping to be convinced otherwise.
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'Chinese Politics In The Xi Jinping Era'

Malcolm Riddell Interviewed Cheng Li
'If you ask any taxi driver in Beijing, Shanghai, or Guangzhou, he or she will tell you – with accuracy – which leader belongs to which faction.

'China is a one–party state, but that does not necessarily mean Chinese leadership is a monolithic group with leaders who have the same ideas, same background, same world views, same politics. No, they're divided.'

'The problem is that in the world outside China, we largely have no clue.’ 

‘Although the political factions in China are not so clear to the outside world, if you ask any taxi driver in Beijing, Shanghai, or Guangzhou, he or she will tell you – with accuracy - which leader belongs to which faction,’ Cheng Li told me during our discussion of his terrific book, Chinese Politics in the Xi Jinping Era.

‘The problem,’ he went on to say, ‘is that in the world outside China, we largely have no clue.’ And, not having a clue, we keep making bad China policies, bad China business deals, bad China investments.

What Cheng challenges us to do is to go beyond our superficial assumptions and strive to understand how the Chinese political system really works…

China is a one–party state, but that does not necessarily mean Chinese leadership is a monolithic group with leaders who have the same ideas, same background, same world views, same politics. No, they're divided.
Because we do not understand them, we sometimes think these people are the same, that they are all authoritarian dictators. The reality is far more complicated. Chinese leaders also divided by different factions or coalitions. Everywhere there are factions.

These factions are already competing and horse trading in the run-up to the 19th Party Congress this fall, where…

The entire leadership will undergo substantial changes, from municipal level, provincial level, and the national level, especially the Central Committee and the Politburo Standing Committee....Somewhere between 70% to 75% of leaders will be replaced. This will be the largest leadership turnover since 1969 during the Cultural Revolution.

At stake is whether or not President Xi Jinping can consolidate his power. Cheng contends, 'Xi is a leader still trying to position himself.’ His success at consolidation is far from assured, and he has to be careful with his every move until after the Congress adjourns. Something our government should take into account as we reshape our relationship with China.

Given the complex and opaque workings of Chinese politics, we are fortunate to have Cheng Li. Cheng is not only the Director of the John L. Thornton China Center at the Brookings Institution, he is also the pre-eminent expert on Chinese elite politics and has been for decades.

I commend to you Cheng’s book Chinese Politics in the Xi Jinping Era  to help us all be a little less clueless about Chinese politics. I likewise invite you to watch my discussion with Cheng. 

Chinese Politics in the Xi Jinping Era: Reassessing Collective Leadership

Cheng Li, Brookings Institution

'If you ask any taxi driver in Beijing, Shanghai, or Guangzhou, he or she will tell you – with accuracy – which leader belongs to which faction.

'The problem is that in the world outside China, we largely have no clue.’

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First 100 Days: Do Not Provoke China

The First 100 Days interview series features Pacific Council experts addressing the top foreign policy issues facing the incoming Trump administration.

In this interview, Mr. Malcolm Riddell warns of the potential for new conflicts if Donald Trump follows through with his campaign promises regarding China. As an investment banker, diplomat, lawyer, Harvard academic, and CIA spy, or Riddell brings 40 years of experience working on China issues. He is CEO of RiddellTseng, a China-focused boutique advisory firm, and creator of CHINADebate and CHINADebateTV, which bring together leading China experts and decision makers for discussions of the issues that inform China and China-impacted decisions.

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The First 100 Days interview series features Pacific Council experts addressing the top foreign policy issues facing the incoming Trump administration.

In this interview, Mr. Malcolm Riddell warns of the potential for new conflicts if Donald Trump follows through with his campaign promises regarding China. As an investment banker, diplomat, lawyer, Harvard academic, and CIA spy, or Riddell brings 40 years of experience working on China issues. He is CEO of RiddellTseng, a China-focused boutique advisory firm, and creator of CHINADebate and CHINADebateTV, which bring together leading China experts and decision makers for discussions of the issues that inform China and China-impacted decisions. Read more about his background.

Pacific Council: What should the next administration’s top foreign policy priorities be during the first 100 days?

Mr. Malcolm Riddell: The main thing the administration has to do is decide what their strategies and priorities are, and what the implications are if President Trump follows through on many of his pledges. If he brands China a currency manipulator and slaps on a 45 percent tariff and then says, "Oh by the way, we want some help with North Korea," then he’s going to get a less than favorable welcome. It wouldn’t have been hard to talk about the first 100 days if Hillary Clinton had won, but it’s awfully hard here because if Trump does so much of what he said he’s going to do, the landscape is going to change so dramatically.

If [Trump] brands China a currency manipulator and slaps on a 45 percent tariff... he’s going to get a less than favorable welcome.

The priorities are going to change based on what he chooses to do, and the crises that may arise. He needs to pull his team together and work through these issues and see what the implications are and where the balances have to be made. For example, if he’s determined that the United States is going to take a hard line virtually everywhere except with Russia, there will be huge implications on what crises bubble to the surface.

PC: If the Trump administration pulls the United States out of the Trans-Pacific Partnership as promised, will other countries join China’s version, the Regional Comprehensive Economic Partnership, and how does China stand to benefit from that scenario?

Riddell: Other countries already are negotiating with China on its version. Depending on who you listen to, the TPP and China’s version are either competitors or complementary. If we look at them as being complementary, then we probably would’ve had a good platform to be able to participate more actively in trade, and maybe have some influence on China as well. By pulling out of the TPP, there’s only one game left in town and we’re not in it.

By pulling out of the TPP,  there’s only one game left in town and we’re not in it.

Everything depends on the Trump administration’s execution. If the campaign pledges go through to start renegotiating all our trade positions — NAFTA, WTO — then I think America’s allies, who probably are not as prone to those sorts of changes, will see China as a leader, not just in Asia but perhaps in the entire free trade realm.

PC: Will China’s activities in the South China Sea continue during the Trump administration, and how will Trump respond to that situation?

Riddell: If China doesn’t further escalate its activities, there are limits on how much the United States can do in response, unless the incoming administration makes the South China Sea a U.S. foreign policy priority. If President Trump decides that the South China Sea is a priority and the United States is going to stop China, and maybe even try to push back in favor of our allies in the region, then we’re likely to see some action up to and including a minor shooting war.

My concern is that the United States might be the provocateur.

If China is smart, it won’t do anything provocative until it gets a feel for how the Trump administration will react. But my concern is that the United States might be the provocateur. We might escalate the situation, given the overall hard line tenor of Trump’s campaign rhetoric. The South China Sea could go from being a long-term slow boil to a hot spot very quickly.

PC: How will Beijing respond if President Trump declares China a currency manipulator?

Riddell: It will certainly put the kind of pressure on [China's currency] that President Trump will not want. In a broader sense, it will depend on what he does in addition to labeling China a currency manipulator. It’s pretty much agreed that in the last several years China has been just that, but they really haven’t been trying to maintain an advantage; they’ve been trying to prop the currency up. If President Trump follows through with his other pledge of a 45 percent tariff, then we’re in a trade war. I can’t see that being a good thing for anybody. I’m a hard liner on China, and certainly not a supporter of Mr. Trump the person, but when I see the possibility of my hard line ideas actually being put into place, I start to get very nervous.

The possibility that the United States is going to take an "act now and see what happens" approach is very frightening.

Long before Donald Trump and Bernie Sanders came along, the world order had started to go in a bad direction. It’s gotten over-organized to the point that many groups have been left behind. I’m in favor of a shakeup, but this is just not at all what I had in mind. I was hoping for a thoughtful and considered reevaluation of the world order, and careful negotiation and proposals between nations. The possibility that the United States is going to take an "act now and see what happens" approach is very frightening. It’s not so much how President Trump handles the individual crises and problems that we have, but how he reacts to the crises he provokes if he follows through on his promises.

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