Risks & Trends

by Malcolm Riddell

China's Grand Strategy
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Killing China's Grand Strategy

CHINADebate

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Malcolm Riddell
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Founder of CHINADebate

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June 3, 2021
Killing China's Grand Strategy
Killing China's Grand Strategy
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China's Grand Strategy

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Today we look at a trend that has become a risk.

Trend: Under the Xi Jinping administration, China has amped up abrasive ‘Wolf Warrior’ diplomacy; cracked down within its borders, despite protests and criticisms from other countries; become increasing bellicose in responding to those protests and criticisms, and any other pushback it doesn’t like; and increased its aggressive rhetoric and actions against neighbors.

Risks: If this sounds like a problem just for the world’s Ministries of Foreign Affairs, think again – the impact extends deep into business and finance.

  • Australia calls for an investigation into the origins of the Covid pandemic and finds China using trade to bring it in line; H&M and other clothing manufacturers bring up, however mildly, the question of slave labor in the production of cotton in Xinjiang, and their China businesses come under attack; the EU sanctions a few Chinese officials over Xinjiang, and China hits back so hard that the EU puts the seven-years-in-the-making investment agreement with China on ice.
  • Factoring the uncertainties and risks these actions present into strategies and developing plans for dealing with China’s next offensive are challenges for decision-makers. Ones they can’t ignore.

The big question: Why is China doing this? We’ve followed this trend for some time. In March, we cited a great WAPO op-ed by John Promfret:

  • ‘The moves are befuddling — with a buoyant economy and a practically covid-free country, China is poised to see its influence rise if it plays it smart.’
  • ‘But it’s not; instead, it’s alienating individuals and nations across the world.’
  • ‘I’ve been studying China for my entire adult life and I have to admit to being bewildered by China’s performance.’
  • That's two of us.

Recently it’s been reported that Mr. Xi may be having second thoughts at least about the impact of these tactics on China’s image. Bloomberg reports in ‘Xi Seeks “Lovable” Image for China in Sign of Diplomatic Rethink’:

  • ‘President Xi Jinping urged Chinese officials to create a “trustworthy, lovable and respectable” image for the country, in a sign that Beijing may be looking to smooth its hard-edged diplomatic approach.’
  • ‘Xi told senior Communist Party leaders Monday that the country must “make friends extensively, unite the majority and continuously expand its circle of friends with those who understand and are friendly to China,” according to the official Xinhua News Agency. Beijing needed “a grip on tone” in its communication with the world, and should “be open and confident, but also modest and humble.” ’

Channeling a lot of China watchers, Mathieu Duchâtel of the Institut Montaigne asked in a Tweet:

  • ‘Reining in the wolf-warriors or simply more coverage of the attractive sides of Chinese society and nature?’

The consensus seems to be that Mr. Xi means the latter.

This is echoed in the WAPO’s ‘Xi’s call for a “lovable” China may not tame the wolf warriors.’

  • ‘There’s good reason many are skeptical about a real change.’
  • ‘The wolf warriors may be controversial abroad, but they are broadly popular at home.’
  • ‘And what if they are not the root cause of China’s aggressive foreign policy, but a symptom.’

The question then becomes: A symptom of what?

  • Without an understanding the ‘what’ neither policy makers nor business and finance leaders will be able to craft strategies and decide appropriate actions and responses to China’s tough stances.
  • And in turn they will not be able to mitigate the risks this trend poses.

Among the many analyses of the ‘what’ is the excellent, ‘Wolf Warriors Killed China’s Grand Strategy’ by Sulmaan Wasif Khan of The Fletcher School of Law & Diplomacy at Tufts University and the author of Haunted by Chaos: China’s Grand Strategy from Mao Zedong to Xi Jinping.

  • Dr Khan frames the issue in terms of China’s grand strategy:

‘Sometime in 2020, China came unmoored from its grand strategy.

  • ‘Until then, Beijing’s diplomatic, military, and economic efforts were all directed toward national security.’

‘Of late, however, China has lost that purposefulness—one of the hallmarks of grand strategy.’

  • ‘The predominant feature of Chinese conduct today is not grand strategy but a belligerent, defensive nationalism that lashes out without heed of consequences.’

‘A decades-long grand strategy doesn’t die suddenly. Its death is a process, with warning signs along the way.’

  • ‘In China’s case, the Xi era has seen the accumulation of somewhat counterproductive policies that catalyzed a breakdown.’


‘What changed in 2020 was that nationalism for its own sake became the predominant motif of Chinese conduct.’

  • ‘From that year on, what stands about China’s diplomacy is spreading wild rumors about COVID-19, getting in a shouting match with Australia, and threatening dire consequences for anyone who opts to boycott the 2022 Winter Olympics in Beijing.’

The cause? ‘The most persuasive explanation is that China has poisoned itself through its own rhetoric.’

  • ‘In the aftermath of the 1989 Tiananmen Square massacre, nationalism was seen as a way to get citizens on the same page as the party.’
  • ‘It was not really meant to inform practical foreign policy.’
  • ‘But as the United States discovered in the Donald Trump years, one cannot stoke nationalistic fires without their eventually blazing beyond control.’

‘Over the years, rhetoric about how Taiwanese needed to be made grateful, about the protests in Hong Kong being a product of Western influence, about Western aggression, about Japan never apologizing for World War II, about the righteousness of the party and the infallibility of the Chinese government and the hurt feelings of the Chinese people—all this seeped in and took hold.’

  • ‘And it made grand strategy hard to keep alive.’

The danger? ‘For China, the risks of its current drift are immense.’

  • ‘It’s not just that the bombast has managed to generate resentment.’
  • ‘It’s not even that alienating much of the rest of the world would turn China into a giant version of North Korea.’

‘The real danger is that once toxin has spread through the system, there is no knowing where it will end.’

  • ‘In China’s own past, similar blindness led to the bloodletting of the Cultural Revolution.’
  • ‘If Zhao or Hua can tweet nonsense about outsiders today, it is but a hop, skip, and jump to smearing any measured policymaker tomorrow.’
  • ‘Ultimately, that spells death for sound policymaking.’
  • And for sound business strategy and planning.

‘For the rest of the world, China’s abandonment of grand strategy poses a problem.’

  • ‘It is one thing to deal with a power that has a clear goal; one might be at cross-purposes, but at least one knows where matters stand.’
  • ‘A power lashing out like a belligerent drunk, however, is more difficult to address.’

The rest of the world, particularly the United States, finds itself confronted not with the hard task of managing a rising, reasonably predictable power but the infinitely harder job of managing a flailing one.’

  • And for business and finance leaders, managing the risks that this creates.

Bloomberg

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Matt Levine | Bloomberg
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VIEs
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Part 1 | 'Owning Chinese Companies Is Complicated'

‘ “Variable interest entities”(VIEs): The problem with this is that it sort of sounds like you’re kidding. But this is a standard method for mainland Chinese internet companies to go public, and the market has come to accept it.’
7/22/2021

Bloomberg

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Matt Levine | Bloomberg
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VIEs
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Part 2 | The DiDi VIE (as an example)

‘The prospectus has a diagram, above, of the corporate structure, which looks almost normal. But everything below the double arrow — the actual ride-hailing business, etc. — is slightly askew.’
7/22/2021

Bloomberg

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Matt Levine | Bloomberg
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VIEs
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Part 3 | Revising the Rules

‘The Chinese government could declare “all these VIE contracts are actually a disguised form of foreign ownership, which is not allowed by the rules, so they are all void and your Didi and Alibaba shares are worthless.” ’
7/22/2021

CHINADebate

CHINADebate

Malcolm Riddell
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CHINADebate

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VIEs
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China: Signals Blinking Red & Oops, We Missed the Risks

I had intended to make this issue all about ‘Variable Interest Entities’ (VIEs) and the emerging risks to about $1.8 trillion dollars’ worth of Chinese shares listed on U.S. exchanges – that is, 4% of the capitalization of the U.S. stock markets.
7/22/2021

Nikkei Asia

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VIEs
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'Crackdown on US listings: Will China close $1.6tn VIE loophole?'

‘If Chinese authorities start to question “Variable interest entities”(VIEs), amid the crackdown that has already battered ride-hailing company Didi Global -- another VIE user -- the resulting loss of investor trust could send shock waves through global financial markets.’
7/22/2021

Financial Times

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Jamie Powell | Financial Times
7/22/2021

Foreign Policy

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Sulmaan Wasif Khan | The Fletcher School of Law & Diplomcy, Tufts University and the author of 'Haunted by Chaos: China’s Grand Strategy from Mao Zedong to Xi Jinping'
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China's Grand Strategy
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1 | 'Wolf Warriors Killed China’s Grand Strategy—and We'll All Come to Miss It'

‘The predominant feature of Chinese conduct today is not grand strategy but a belligerent, defensive nationalism that lashes out without heed of consequences.’ Sometime in 2020, China came unmoored from its grand strategy.
6/3/2021

Foreign Policy

CHINADebate

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Sulmaan Wasif Khan | The Fletcher School of Law & Diplomcy, Tufts University and the author of 'Haunted by Chaos: China’s Grand Strategy from Mao Zedong to Xi Jinping'
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China's Grand Strategy
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2 | Blame It on Xi

‘In China’s case, the Xi era has seen the accumulation of somewhat counterproductive policies that catalyzed a breakdown.’
6/3/2021

Foreign Policy

CHINADebate

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Sulmaan Wasif Khan | The Fletcher School of Law & Diplomcy, Tufts University and the author of 'Haunted by Chaos: China’s Grand Strategy from Mao Zedong to Xi Jinping'
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China's Grand Strategy
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3 | Enter the ‘Wolf Warriors’

‘What changed in 2020 was that nationalism for its own sake became the predominant motif of Chinese conduct.’
6/3/2021

Foreign Policy

CHINADebate

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Sulmaan Wasif Khan | The Fletcher School of Law & Diplomcy, Tufts University and the author of 'Haunted by Chaos: China’s Grand Strategy from Mao Zedong to Xi Jinping'
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China's Grand Strategy
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4 | Why China Abandoned Its Grand Strategy

‘The most persuasive explanation is that China has poisoned itself through its own rhetoric.’
6/3/2021

Foreign Policy

CHINADebate

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Sulmaan Wasif Khan | The Fletcher School of Law & Diplomcy, Tufts University and the author of 'Haunted by Chaos: China’s Grand Strategy from Mao Zedong to Xi Jinping'
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China's Grand Strategy
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5 | Two Caveats

‘Highlighting the strategic questionability of China’s policies doesn’t mean that Beijing’s fears of the outside world are completely unjustified.’
6/3/2021

Foreign Policy

CHINADebate

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Sulmaan Wasif Khan | The Fletcher School of Law & Diplomcy, Tufts University and the author of 'Haunted by Chaos: China’s Grand Strategy from Mao Zedong to Xi Jinping'
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China's Grand Strategy
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6 | The Risks & the Dangers

‘The real danger is that once toxin has spread through the system, there is no knowing where it will end.’
6/3/2021

CHINADebate

CHINADebate

Malcolm Riddell
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CHINADebate

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&
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China's Grand Strategy
0

Killing China's Grand Strategy

Trend: Under the Xi Jinping administration, China has amped up abrasive ‘Wolf Warrior’ diplomacy; cracked down within its borders, despite protests and criticisms from other countries; become increasing bellicose in responding to those protests and criticisms, and any other pushback it doesn’t like; and increased its aggressive rhetoric and actions against neighbors. Risks: If this sounds like a problem just for the world’s Ministries of Foreign Affairs, think again – the impact extends deep into business and finance.
6/3/2021

Project Syndicate

CHINADebate

Shang-Jin Wei
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Columbia University

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China's demographic challenges
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'Sex and the Chinese Economy'

‘A rise in China’s male-female ratio may have contributed to between one-third and one-half of the increase in its trade surplus with other countries.’ ‘The sex imbalance thus likely underpins an important source of tension between China and the US. Yet bilateral engagement has paid scant attention to this linkage.’
5/27/2021

CHINADebate

CHINADebate

Malcolm Riddell
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CHINADebate

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China's demographic challenges
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'Demography + Technology is Destiny'

The census showed that the number of births nationwide fell to the lowest level since 1961, following a nationwide, manmade, famine caused by Mao’s “Great Leap Forward” that killed tens of millions of people, and that China’s total population could peak in the next few years.
5/27/2021

Bloomberg

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China's demographic challenges
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'China: Births Falling'

‘China’s total population could peak in the next few years, spurring profound changes for the world’s second-biggest economy.’
5/27/2021

Bloomberg

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China's demographic challenges
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'China Bets on Productivity Over Population to Drive Its Economy'

‘Beijing has a two-pronged approach to maintaining economic growth as its population shrinks.’ ‘First, it intends to slow the decline of the urban workforce by raising the retirement age and encouraging migration of more of the country’s 510 million rural residents to cities.’ ‘Second, it plans to raise productivity -- a measure of economic output per worker -- with the latest five-year plan emphasizing better vocational education and more investment in scientific research, automation and digital infrastructure.’ [see second chart above]
5/27/2021

Financial Times

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Gideon Rachman | Financial Times
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China's demographic challenges
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'Lousy demographics will not stop China’s rise'

‘The old maxim ‘demography is destiny’ no longer holds in the same way that it used to.’ ‘A shrinking and ageing population may not have the same gloomy implications in the 21st century.’
5/27/2021