This Isn’t What World Domination Looks Like

China is supposed to be the next global hegemon. Don’t hold your breath.

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Michael Hirsh and Adam B. Kushner
Nov. 7, 2013, 4 p.m.

BEIJING — This Sat­urday, rook­ie Chinese Pres­id­ent Xi Jin­ping will launch what is be­ing billed as the most im­port­ant con­clave of Chinese lead­ers since 1978, the year that Deng Xiaop­ing trans­formed China from a dy­ing Red gi­ant in­to a mar­ket-driv­en dy­namo. (“Seek truth from facts,” rather than com­mun­ist ideo­logy, he said.) The his­tor­ic “Third Plen­um” of Xi’s term is meant to sig­nal that he has con­sol­id­ated power, de­cided on a dir­ec­tion for the coun­try, and achieved con­sensus with the polit­ic­al class. Xi, a prag­mat­ic, worldly ap­par­at­chik who likes to re­min­isce about the happy sab­bat­ic­al he spent in Iowa as an ag­ri­cul­ture stu­dent, is by all ac­counts im­mensely pop­u­lar with the people, though of course true polit­ic­al polling doesn’t ex­ist in this still-cen­sored coun­try.

Al­though China’s growth has stumbled this year in tan­dem with the glob­al slow­down, Xi’s am­bi­tious re­form agenda hopes to power its con­tin­ued rise. China is already the world’s second-biggest eco­nomy, after the United States; its pur­chas­ing power, as it shifts from a pro­du­cing eco­nomy to a con­sum­ing eco­nomy, com­mands de­fer­ence across the world. Xi pledges an eco­nom­ic and polit­ic­al trans­form­a­tion to weak­en spe­cial-in­terest groups — in­clud­ing big, slow-mov­ing state-owned en­ter­prises, cor­rupt of­fi­cials, huge bur­eau­cra­cies, and klepto­crat­ic loc­al gov­ern­ments — that have ac­ted re­cently as a drag on the coun­try’s oth­er­wise re­mark­able eco­nom­ic as­cent.

China’s apo­theosis, in oth­er words, seems un­stop­pable. When the Pew Re­search Cen­ter sur­veyed 38,000 people in 39 coun­tries over the sum­mer, it found that the vast ma­jor­ity “be­lieve the glob­al bal­ance of power is shift­ing.”¦ China’s eco­nom­ic power is on the rise, and many think it will even­tu­ally sup­plant the United States as the world’s dom­in­ant su­per­power.” In Wash­ing­ton, the Obama ad­min­is­tra­tion has touted a “pivot” of U.S. in­terests to Asia that Beijing be­lieves is in­ten­ded to counter its as­cent.

Yet there are just as many signs today that China is in deep trouble. Amer­ica and the rest of the world should be less con­cerned about a rising China than about a sput­ter­ing — or even a crash­ing — China that could someday turn the world eco­nomy’s greatest growth cen­ter in­to a glob­al al­batross.

THE CRISIS

Start with this week’s con­fab, the third time Xi will lead a plen­ary ses­sion of the Cent­ral Com­mit­tee. Des­pite all the tri­umph­al talk, it is less a coron­a­tion than a reck­on­ing. Lead­ers, start­ing with Xi, have come to real­ize that as China’s eco­nomy ma­tures, its get-rich-quick ma­chine is slow­ing down. This year, the eco­nomy is set to grow at 7.5 per­cent, its slack­est pace in 23 years — a dream for any oth­er eco­nomy (and more than twice the rate in the United States and Ja­pan) but a sign of danger here.

As the film of smog re­minds big-city res­id­ents sev­er­al times a week, growth has come at a cost. Mounds of debt, from mu­ni­cip­al­it­ies (which owe $3.1 tril­lion) on up, dog the coun­try, as does a de­clin­ing private-sec­tor cash flow; a real-es­tate bubble fed by a grow­ing and scary “shad­ow bank­ing sys­tem” that China’s own reg­u­lat­ors have likened to a Ponzi scheme; and a raft of loom­ing Com­mun­ist Party power skir­mishes. So the gov­ern­ment can’t simply stoke the flame: “We are mak­ing too many bubbles if we keep stim­u­lat­ing the eco­nomy,” says one high-rank­ing party of­fi­cial who asked to re­main an­onym­ous. “A slow­down is in­ev­it­able. When you look at pro­ductiv­ity, you can see that the way we were pro­du­cing GDP was not al­ways healthy.”

Already, China may be stum­bling to­ward a pre­cip­ice. “The real eco­nomy is slow­ing; the spec­u­lat­ive eco­nomy is grow­ing,” says Patrick Chovanec, an as­set-man­age­ment strategist based in Asia and a former pro­fess­or at Tsinghua Uni­versity’s School of Eco­nom­ics and Man­age­ment in Beijing. “They’re rid­ing a ti­ger, and they don’t know how to get off…. China is well along the pro­cess of a hard land­ing.”

Eco­nom­ists and China hands in­creas­ingly say the na­tion needs polit­ic­al re­form — the freedoms that will spark an in­nov­at­ive rather than im­it­at­ive eco­nomy, and a leg­al sys­tem that will en­force the rule of law, crit­ic­al to a de­veloped eco­nomy. (How long will cit­izens trade the right to polit­ic­al self-ex­pres­sion for eco­nom­ic en­rich­ment, they won­der?) Yet 35 years after Deng’s his­tor­ic plen­um, the scler­ot­ic au­thor­it­ari­an­ism left over from a by­gone era may not prove supple enough to mas­ter the chal­lenge. It’s more than a dec­ade since China joined the World Trade Or­gan­iz­a­tion, but the rule of law is still not a pri­or­ity, and the sys­tem of ac­count­ab­il­ity is a run­ning joke around the world. The richest top 50 Chinese politi­cians have amassed some $95 bil­lion in wealth, nearly 100 times more than the col­lect­ive as­sets of the 50 wealth­i­est mem­bers of the U.S. Con­gress, The Eco­nom­ist re­por­ted. “You’ve taken an ex­tant mod­el as far as it can go,” says Jonath­an Pol­lack of the Brook­ings In­sti­tu­tion. “There­fore, un­less there is polit­ic­al will to shape dif­fer­ent kinds of out­comes, then we may be deal­ing with much more troubled eco­nom­ic per­form­ance.”

Oth­er prob­lems: The ever-worsen­ing en­vir­on­ment reg­u­larly shuts down cit­ies as of­fi­cials scramble to re­verse the dark­ness-at-noon phe­nomen­on. The birth rate, thanks to the one-child policy (which Beijing is ex­pec­ted to re­lax soon), is just 1.58 births per wo­man — a loom­ing demo­graph­ic time bomb. Pen­sion as­sets are only about 1 per­cent of gross do­mest­ic product, com­pared with around 70 per­cent in the United States, mean­ing people will be less will­ing to take risks and the bur­den of sup­port will fall on a smal­ler, young­er gen­er­a­tion. “The Chinese people are wor­ried they will be old be­fore they are rich,” says Vic­tor K. Fung, chair­man of the Fung Glob­al In­sti­tute in Hong Kong.

So while Xi’s agenda looks im­press­ive, in fact it is evid­ence of the party’s anxi­ety. Un­der his “383 plan” — so named be­cause it cov­ers three main areas (the mar­ket, gov­ern­ment, and cor­por­a­tions); ad­dresses eight key sec­tors; and de­ploys three pack­ages of re­forms — Xi is seek­ing to trans­form China from top to bot­tom as it nears the end of its phase as a de­vel­op­ing, man­u­fac­tur­ing-driv­en eco­nomy over the next two dec­ades. Among oth­er changes, Xi wants to open up the ser­vices sec­tor, cut red-tape ad­min­is­trat­ive ap­provals, pro­mote more com­pet­i­tion, re­form land laws, lib­er­al­ize bank­ing (in­clud­ing in­terest rates and the ex­change rate), set up ba­sic so­cial-se­cur­ity nets, rein in state-owned en­ter­prises, and pro­mote in­nov­a­tion, in­clud­ing green tech­no­logy. It’s quite a list. Elites here say their coun­try needs a ver­sion of Amer­ica’s Pro­gress­ive era.

BEIJING — This Sat­urday, rook­ie Chinese Pres­id­ent Xi Jin­ping will launch what is be­ing billed as the most im­port­ant con­clave of Chinese lead­ers since 1978, the year that Deng Xiaop­ing trans­formed China from a dy­ing Red gi­ant in­to a mar­ket-driv­en dy­namo. (“Seek truth from facts,” rather than com­mun­ist ideo­logy, he said.) The his­tor­ic “Third Plen­um” of Xi’s term is meant to sig­nal that he has con­sol­id­ated power, de­cided on a dir­ec­tion for the coun­try, and achieved con­sensus with the polit­ic­al class. Xi, a prag­mat­ic, worldly ap­par­at­chik who likes to re­min­isce about the happy sab­bat­ic­al he spent in Iowa as an ag­ri­cul­ture stu­dent, is by all ac­counts im­mensely pop­u­lar with the people, though of course true polit­ic­al polling doesn’t ex­ist in this still-cen­sored coun­try.

Al­though China’s growth has stumbled this year in tan­dem with the glob­al slow­down, Xi’s am­bi­tious re­form agenda hopes to power its con­tin­ued rise. China is already the world’s second-biggest eco­nomy, after the United States; its pur­chas­ing power, as it shifts from a pro­du­cing eco­nomy to a con­sum­ing eco­nomy, com­mands de­fer­ence across the world. Xi pledges an eco­nom­ic and polit­ic­al trans­form­a­tion to weak­en spe­cial-in­terest groups — in­clud­ing big, slow-mov­ing state-owned en­ter­prises, cor­rupt of­fi­cials, huge bur­eau­cra­cies, and klepto­crat­ic loc­al gov­ern­ments — that have ac­ted re­cently as a drag on the coun­try’s oth­er­wise re­mark­able eco­nom­ic as­cent.

China’s apo­theosis, in oth­er words, seems un­stop­pable. When the Pew Re­search Cen­ter sur­veyed 38,000 people in 39 coun­tries over the sum­mer, it found that the vast ma­jor­ity “be­lieve the glob­al bal­ance of power is shift­ing.”¦ China’s eco­nom­ic power is on the rise, and many think it will even­tu­ally sup­plant the United States as the world’s dom­in­ant su­per­power.” In Wash­ing­ton, the Obama ad­min­is­tra­tion has touted a “pivot” of U.S. in­terests to Asia that Beijing be­lieves is in­ten­ded to counter its as­cent.

Yet there are just as many signs today that China is in deep trouble. Amer­ica and the rest of the world should be less con­cerned about a rising China than about a sput­ter­ing — or even a crash­ing — China that could someday turn the world eco­nomy’s greatest growth cen­ter in­to a glob­al al­batross.

THE CRISIS

Start with this week’s con­fab, the third time Xi will lead a plen­ary ses­sion of the Cent­ral Com­mit­tee. Des­pite all the tri­umph­al talk, it is less a coron­a­tion than a reck­on­ing. Lead­ers, start­ing with Xi, have come to real­ize that as China’s eco­nomy ma­tures, its get-rich-quick ma­chine is slow­ing down. This year, the eco­nomy is set to grow at 7.5 per­cent, its slack­est pace in 23 years — a dream for any oth­er eco­nomy (and more than twice the rate in the United States and Ja­pan) but a sign of danger here.

As the film of smog re­minds big-city res­id­ents sev­er­al times a week, growth has come at a cost. Mounds of debt, from mu­ni­cip­al­it­ies (which owe $3.1 tril­lion) on up, dog the coun­try, as does a de­clin­ing private-sec­tor cash flow; a real-es­tate bubble fed by a grow­ing and scary “shad­ow bank­ing sys­tem” that China’s own reg­u­lat­ors have likened to a Ponzi scheme; and a raft of loom­ing Com­mun­ist Party power skir­mishes. So the gov­ern­ment can’t simply stoke the flame: “We are mak­ing too many bubbles if we keep stim­u­lat­ing the eco­nomy,” says one high-rank­ing party of­fi­cial who asked to re­main an­onym­ous. “A slow­down is in­ev­it­able. When you look at pro­ductiv­ity, you can see that the way we were pro­du­cing GDP was not al­ways healthy.”

Already, China may be stum­bling to­ward a pre­cip­ice. “The real eco­nomy is slow­ing; the spec­u­lat­ive eco­nomy is grow­ing,” says Patrick Chovanec, an as­set-man­age­ment strategist based in Asia and a former pro­fess­or at Tsinghua Uni­versity’s School of Eco­nom­ics and Man­age­ment in Beijing. “They’re rid­ing a ti­ger, and they don’t know how to get off…. China is well along the pro­cess of a hard land­ing.”

Eco­nom­ists and China hands in­creas­ingly say the na­tion needs polit­ic­al re­form — the freedoms that will spark an in­nov­at­ive rather than im­it­at­ive eco­nomy, and a leg­al sys­tem that will en­force the rule of law, crit­ic­al to a de­veloped eco­nomy. (How long will cit­izens trade the right to polit­ic­al self-ex­pres­sion for eco­nom­ic en­rich­ment, they won­der?) Yet 35 years after Deng’s his­tor­ic plen­um, the scler­ot­ic au­thor­it­ari­an­ism left over from a by­gone era may not prove supple enough to mas­ter the chal­lenge. It’s more than a dec­ade since China joined the World Trade Or­gan­iz­a­tion, but the rule of law is still not a pri­or­ity, and the sys­tem of ac­count­ab­il­ity is a run­ning joke around the world. The richest top 50 Chinese politi­cians have amassed some $95 bil­lion in wealth, nearly 100 times more than the col­lect­ive as­sets of the 50 wealth­i­est mem­bers of the U.S. Con­gress, The Eco­nom­ist re­por­ted. “You’ve taken an ex­tant mod­el as far as it can go,” says Jonath­an Pol­lack of the Brook­ings In­sti­tu­tion. “There­fore, un­less there is polit­ic­al will to shape dif­fer­ent kinds of out­comes, then we may be deal­ing with much more troubled eco­nom­ic per­form­ance.”

Oth­er prob­lems: The ever-worsen­ing en­vir­on­ment reg­u­larly shuts down cit­ies as of­fi­cials scramble to re­verse the dark­ness-at-noon phe­nomen­on. The birth rate, thanks to the one-child policy (which Beijing is ex­pec­ted to re­lax soon), is just 1.58 births per wo­man — a loom­ing demo­graph­ic time bomb. Pen­sion as­sets are only about 1 per­cent of gross do­mest­ic product, com­pared with around 70 per­cent in the United States, mean­ing people will be less will­ing to take risks and the bur­den of sup­port will fall on a smal­ler, young­er gen­er­a­tion. “The Chinese people are wor­ried they will be old be­fore they are rich,” says Vic­tor K. Fung, chair­man of the Fung Glob­al In­sti­tute in Hong Kong.

So while Xi’s agenda looks im­press­ive, in fact it is evid­ence of the party’s anxi­ety. Un­der his “383 plan” — so named be­cause it cov­ers three main areas (the mar­ket, gov­ern­ment, and cor­por­a­tions); ad­dresses eight key sec­tors; and de­ploys three pack­ages of re­forms — Xi is seek­ing to trans­form China from top to bot­tom as it nears the end of its phase as a de­vel­op­ing, man­u­fac­tur­ing-driv­en eco­nomy over the next two dec­ades. Among oth­er changes, Xi wants to open up the ser­vices sec­tor, cut red-tape ad­min­is­trat­ive ap­provals, pro­mote more com­pet­i­tion, re­form land laws, lib­er­al­ize bank­ing (in­clud­ing in­terest rates and the ex­change rate), set up ba­sic so­cial-se­cur­ity nets, rein in state-owned en­ter­prises, and pro­mote in­nov­a­tion, in­clud­ing green tech­no­logy. It’s quite a list. Elites here say their coun­try needs a ver­sion of Amer­ica’s Pro­gress­ive era.

U.S. ex­perts and of­fi­cials are skep­tic­al about Xi’s goals, es­pe­cially key items such as curb­ing the power and cor­rup­tion of the state-owned en­ter­prises that still dom­in­ate the eco­nomy. Many party of­fi­cials worry about loosen­ing the shackles; they cite the pre­ced­ent of Mikhail Gorbachev, whose re­forms got ahead of him and un­raveled the So­viet Uni­on. “I don’t get the sense there is much dis­cus­sion of SOE re­struc­tur­ing and privat­iz­a­tion,” Robert Dohner, deputy as­sist­ant U.S. Treas­ury sec­ret­ary for Asia, said re­cently at a lunch­eon at the Cen­ter for the Na­tion­al In­terest in Wash­ing­ton. And even if the in­tent to change is genu­ine, it’s still a long list of very com­plic­ated tasks with very high stakes. As the Chinese them­selves point out, the easy part is already done.

While the party re­mains firmly in con­trol, so­cial un­rest laps at seem­ingly stable is­lands like Beijing and Shang­hai. Chinese so­cial me­dia re­veal deep­en­ing cyn­icism about gov­ern­ment (al­beit not out­right re­volt). Only a week ago, a dis­con­ten­ted fam­ily of three Uighurs — an op­pressed group of Turkic-speak­ing Chinese from the coun­try’s far west — plowed a car in­to a crowd at Tianan­men Square, killing them­selves and two bystand­ers. For dec­ades, China has urb­an­ized many rur­al poor as a way to pump low-cost labor in­to its vast man­u­fac­tur­ing ma­chine. The policy has forced the gov­ern­ment to cre­ate 10 mil­lion jobs per year (on pain of civil dis­con­tent and lost le­git­im­acy) and keep 200 mil­lion mi­grant work­ers around the coun­try tethered to second-class lives un­der the hukou sys­tem of house­hold re­gis­tra­tion. And, in the past four years, more than 50 farm­ers have im­mol­ated them­selves to protest the land seizures that come with urb­an sprawl.

Pre­vi­ously touted re­forms, such as the Shang­hai free-trade zone — billed as a mod­el — have amoun­ted to nearly noth­ing so far: Al­most no for­eign com­pan­ies have in­ves­ted there. To little no­tice, since last June the People’s Bank of China has been in­ject­ing TARP-sized amounts of money in­to the ail­ing shad­ow bank­ing sys­tem (at least $70 bil­lion in the third quarter), sug­gest­ing that if China pos­sessed a more mar­ket-based sys­tem, it might have crashed already. “Re­form of lend­ing here is prob­ably more im­port­ant than open­ing to the world,” says Ye Yu, an ana­lyst at the gov­ern­ment-fun­ded Shang­hai In­sti­tutes for In­ter­na­tion­al Stud­ies. “The Chinese fin­an­cial-ser­vices sec­tor is not ma­ture, not flex­ible. It’s ri­gid. Its in­terest rate is still fixed, not mar­ket-driv­en. And the fin­an­cial in­fra­struc­ture doesn’t have de­pos­it in­sur­ance.” In fact, the Bank for In­ter­na­tion­al Set­tle­ments re­cently poin­ted to a dra­mat­ic in­crease in over­seas dol­lar bor­row­ing by Chinese com­pan­ies that sug­gests a pan­icky de­mand for cred­it.

In a study pub­lished earli­er this year, Ox­ford Uni­versity eco­nom­ist Linda Yueh found that most of China’s eco­nom­ic pro­gress “is es­sen­tially the res­ult of one-off di­vidends that flowed from the re­forms that began in 1979, namely the dis­as­sembling of many SOEs and the re­lo­ca­tion of mil­lions of farm­work­ers from the coun­try’s rur­al in­teri­or to the cit­ies and factor­ies along the coast.” Those moves ex­plain more than 85 per­cent of China’s total factor pro­ductiv­ity, which meas­ures how ef­fi­ciently an eco­nomy turns labor and cap­it­al in­to out­put. Without new sources of pro­ductiv­ity, all the gov­ern­ment can do is in­vest more with di­min­ish­ing re­turns, as ap­pears to be hap­pen­ing now.

None of this in­dic­ates that China is trend­ing to­ward he­ge­mon, or even to­ward a fully de­veloped eco­nomy. 

IM­AGE VS. REAL­ITY

When the weath­er is nice, this city makes you feel like any­thing is pos­sible. Par­is shows off with a few broad boulevards that cross the war­rens, but every av­en­ue in Beijing is like a parade ground — people are walk­ing quickly to work; sit­ting on stoops and chat­ting; hawk­ing street-side snacks and hand­bags; and honk­ing their car horns. It thrums in the way only a city of more than 20 mil­lion can. The sky­line an­nounces China’s rise with a pan­or­ama of pea­cock­ing “star­chi­tec­ture”: in the fore­ground, strik­ing build­ings de­signed by fam­ous people for a lot of money; in the dis­tance, apart­ment towers as far as the eye can see.

But Beijing has more and more bad days, too, when the sense of or­gan­ic pos­sib­il­ity yields to a feel­ing of can­cer­ous claus­tro­pho­bia. Without wind or rain, the air chokes with fumes. The apart­ment towers van­ish, and the showy glass build­ings blur. Eyes itch and red­den by mid-af­ter­noon. Traffic snarls. (Each week­day, cars with plates end­ing in cer­tain di­gits are for­bid­den to drive.) Sur­gic­al masks pro­lif­er­ate. The sun hides be­hind a smoggy veil. People see, talk, and smell through a gray me­di­um. Some par­ents ad­mit they don’t let their chil­dren play out­doors. The World Health Or­gan­iz­a­tion says the safe pol­lu­tion rate is 0-50 mi­cro­grams of dan­ger­ous air­borne particles per cu­bic meter. Above 300, the U.S. Em­bassy warns: “Every­one should avoid all phys­ic­al activ­ity out­doors.” Beijing’s rate tech­nic­ally tops out at 500 on the em­bassy’s scale (20 times the safe rate); it was 426 dur­ing a vis­it last week, and reached an ac­tu­al 755 earli­er this year.

The Chinese, still aglow with pride over the suc­cess­ful 2008 Olympic Games, are acutely aware of the en­vir­on­ment­al stigma. (China’s ma­jor cit­ies are ana­thema to some of the world’s most-sought-after sci­ent­ists, en­tre­pren­eurs, and tech ex­perts.) Xi Jin­ping knows that the key to rein­ing in run­away in­dus­tri­al pol­lu­tion, as with so many oth­er things, is crack­ing down on cor­rupt vi­ol­at­ors, es­pe­cially in the provinces, where cor­por­a­tions will go in­to smal­ler towns and simply buy up loc­al of­fi­cials. “In China, it is very im­port­ant for the cent­ral au­thor­it­ies to set tough tar­gets and for seni­or lead­ers to clearly sig­ni­fy their con­cerns so that pri­or­it­ies are un­der­stood by loc­al au­thor­it­ies,” says Christine Loh, Hong Kong’s un­der­sec­ret­ary for the en­vir­on­ment. So far, no pro­vin­cial lead­ers have been dis­missed for fail­ing to meet cleanup tar­gets.

Sim­il­arly, Xi’s ap­proach to cor­rup­tion is any­thing but in­nov­at­ive; in­stead, it re­calls the party purges of the 1960s and a re­turn to Mao­ism. Last sum­mer, a seni­or Chinese of­fi­cial ac­tu­ally de­man­ded that 30 for­eign firms, in­clud­ing Gen­er­al Elec­tric and Siemens, write “self-cri­ti­cisms,” as if it were the Cul­tur­al Re­volu­tion all over again, Re­u­ters re­por­ted. The of­fi­cial in­sisted they con­fess any an­ti­trust vi­ol­a­tions and warned that if they re­sor­ted to a leg­al de­fense, their pen­al­ties would only stiffen. Re­cently, Xi’s gov­ern­ment show­ily tried rising party star Bo Xilai and sen­tenced him to life im­pris­on­ment for em­bez­zle­ment, ab­use of power, and ac­cept­ing bribes. It’s more se­mi­ot­ics than justice — an at­tempt to demon­strate that the party is still le­git­im­ate and can re­in­vent it­self. It may also buy Xi the polit­ic­al cap­it­al he needs to push through eco­nom­ic re­form. “The op­tim­ist case would be that in China, when you’re pre­pared to move right on eco­nom­ics, move left on polit­ics to buy your­self some run­ning room,” says Pol­lack.

Xi’s ap­proach may not work, es­pe­cially when it comes to the rough treat­ment of for­eign­ers. For a long time, the Chinese have been able to get away with what trade ne­go­ti­at­ors used to call “The Lec­ture.” Be­cause of the vast size of China’s 1.3 bil­lion-strong mar­ket, the Chinese would in­sist that for­eign­ers do busi­ness ac­cord­ing to their rules. Most for­eign com­pan­ies — wheth­er com­puter makers en­vi­sion­ing 1.3 bil­lion desktops or de­odor­ant firms con­tem­plat­ing twice that many armpits — would quail be­fore the im­plied threat.

China is still a huge, sought-after mar­ket, but it is no longer con­sidered such a uniquely at­tract­ive place to in­vest, in part be­cause of the in­creas­ing cost of its labor re­l­at­ive to oth­er new or open­ing mar­kets. Rap­id ad­vances in ro­bot­ics, ar­ti­fi­cial in­tel­li­gence, 3-D print­ing, and oth­er tech­no­lo­gies have also eroded China’s ad­vant­age by re­du­cing labor costs every­where. Not sur­pris­ingly, mul­tina­tion­als like Gen­er­al Elec­tric and Apple have be­gun to man­u­fac­ture again in the United States. For­eign CEOs “are say­ing they’re un­happy, that the cost of do­ing busi­ness has gone up,” says Bill Re­insch, pres­id­ent of the Na­tion­al For­eign Trade Coun­cil. “But where­as for the past few years the prob­lems were gen­er­ally or mostly in the [in­tel­lec­tu­al-prop­erty] area, now they’re talk­ing about the over­all cost of do­ing busi­ness.”

And for­eign com­pan­ies won’t jump in to cap­it­al­ize as read­ily on (de­creas­ingly) cheap labor without an in­de­pend­ent ju­di­cial sys­tem through which to con­test er­rat­ic reg­u­lat­ory en­force­ment and ap­peal cor­por­ate seizures. “We need more so­cial forces to play the role of whistle-blowers, watch­dogs,” says Chen Dongx­ia, the pres­id­ent of the Shang­hai In­sti­tutes. At the same time, Re­insch says, “the growth of new U.S. for­eign dir­ect in­vest­ment in China is go­ing to de­cline,” be­cause “it’s quint­es­sen­tially Amer­ic­an to look for next big thing. China is, in that sense, old news.” 

WHAT CHINA NEEDS

Un­like Gorbachev, Xi has a much bet­ter shot at re­mak­ing a sys­tem that is still very dy­nam­ic. And the United States will gain far more from wish­ing him suc­cess — and help­ing him to achieve it — than by root­ing for his fail­ure or try­ing to con­tain him, which many Chinese in­tel­lec­tu­als be­lieve is the real in­ten­tion of the Asia pivot. Amer­ic­an of­fi­cials don’t deny that the “re­bal­an­cing” of U.S. in­terests, in­clud­ing the an­nounce­ment last year that 60 per­cent of Amer­ic­an nav­al as­sets would shift to the Pa­cific by 2020, is largely about China. The United States is sim­ul­tan­eously beef­ing up its part­ner­ship with In­dia, re­new­ing mil­it­ary ties with the Phil­ip­pines, and as­sem­bling a Trans-Pa­cific Part­ner­ship for trade that doesn’t in­clude China — but could, if Beijing agreed to labor, in­tel­lec­tu­al-prop­erty, and en­vir­on­ment­al re­stric­tions that it has pre­vi­ously spurned.

Amer­ic­an stra­tegic wor­ries about China are not en­tirely without mer­it, of course: China’s cy­ber­ass­aults on U.S. in­fra­struc­ture, in­clud­ing the Pentagon, for in­stance, are un­re­lent­ing. But in in­ter­views here this week, on a trip sponsored by the non­profit Com­mit­tee of 100, a U.S. or­gan­iz­a­tion com­mit­ted to bet­ter bi­lat­er­al un­der­stand­ing, it’s clear that Beijing is far more con­cerned about its in­tern­al prob­lems — one reas­on, per­haps, it has been so slow to in­vest in a “blue-wa­ter” navy or oth­er tra­di­tion­al means of force pro­jec­tion.

That’s why Amer­ica ought to be shor­ing China up right now, not seek­ing to con­tain it. The United States has its own polit­ic­al and eco­nom­ic prob­lems that have kept growth un­der 3 per­cent since the 2008 fin­an­cial crisis. So does Europe, which con­tin­ues to grapple with its col­lect­ive fail­ure to stim­u­late growth. By these reck­on­ings, the Chinese look less dys­func­tion­al. Their sys­tem has lif­ted hun­dreds of mil­lions of people out of poverty in just three dec­ades, eas­ily the most stun­ning hu­man-de­vel­op­ment achieve­ment in world his­tory, and it is still the primary source of growth in the glob­al eco­nomy. The gov­ern­ment has def­in­itely de­livered — which is why or­din­ary cit­izens har­bor a fair amount of good­will and pa­tience, and why the party will likely re­main en­trenched for a long time. “In 10 years, China will in­vest $500 bil­lion over­seas, im­port $10 tril­lion from oth­er coun­tries, and send 400,000 stu­dents abroad” who will bring home the best prac­tices and ideas, says an­oth­er high-rank­ing of­fi­cial, sum­ming up the gov­ern­ment’s vis­ion. Prob­ably China will muddle through the com­ing dec­ades at a slower but still suc­cess­ful rate of growth.

The best thing U.S. and West­ern poli­cy­makers can do is to keep push­ing the Chinese along the path they’ve lurched down since the days of Deng — to­ward open­ing up, rather than crack­ing down. One means at hand: the Trans-Pa­cific Part­ner­ship, which is in­ten­ded to force Beijing in­to guar­an­tee­ing IP and oth­er rights. “The Chinese at­ti­tude to­ward TPP has evolved from deep geo­pol­it­ic­al sus­pi­cion,” says the Shang­hai In­sti­tutes’ Ye, who com­pares it to the way WTO ac­ces­sion forced change. Now the party is “de­lib­er­ately us­ing TPP as one of the ma­jor ex­tern­al driv­ing forces to push for­ward the tough do­mest­ic re­form agenda.” The U.S. also needs to ca­jole Beijing to float its cur­rency freely rather than pur­sue beg­gar-thy-neigh­bor de­valu­ation policies that have al­lowed China to main­tain its ex­port might. And, of course, Beijing isn’t nearly as ser­i­ous about cap­ping car­bon emis­sions as many oth­er large eco­nom­ies are.

Obama ad­min­is­tra­tion of­fi­cials say they are, in fact, root­ing for the Com­mun­ist Party to pull off its trans­ition. “Broadly speak­ing, we want a pros­per­ous and suc­cess­ful China,” an ad­min­is­tra­tion of­fi­cial tells Na­tion­al Journ­al. Most Chinese, in turn, ac­know­ledge how deeply en­tangled the U.S. and Chinese eco­nom­ies are — and will re­main. They say, with ap­par­ent sin­cer­ity, that they are mainly seek­ing to emu­late Amer­ica’s prestige and suc­cess, not sur­pass it. Des­pite ef­forts, wishes, and pledges, the ren­min­bi will nev­er be a glob­al re­serve cur­rency, mean­ing that na­tions won’t ac­quire boat­loads of Chinese debt to fin­ance the coun­try’s de­vel­op­ment. And as a buy­er of U.S. debt, China is un­likely to find an al­tern­at­ive, des­pite re­cent calls for the “de-Amer­ic­an­iz­a­tion” of the re­serves after the shut­down and debt-ceil­ing stan­doffs. One ma­jor in­sti­tu­tion­al in­vestor says that, while Wash­ing­ton has dis­ap­poin­ted China, so have emer­ging mar­kets.

In the end, China doesn’t need to be a rising he­ge­mon. It only needs to suc­ceed.

COR­REC­TION: An earli­er ver­sion of this story sug­ges­ted that Deng Xiaop­ing’s his­tor­ic con­clave took place in 1988; it was ac­tu­ally 1978.

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