This Isn’t What World Domination Looks Like

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

The Pudong business district is shrouded by heavy air pollution in Shanghai on January 16, 2013. Several days of hazardous air quality across large swathes of northern China triggered an emergency response which saw schoolchildren kept indoors, factories closed and government cars parked. Experts are urging authorities to take firmer action to confront the consequences of China's rapid industrialisation -- and the spending habits of the middle classes created by its economic boom.
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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.


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. 


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.” 


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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