Return to Winter: Russia, China, and the New Cold War Against America (29 page)

Chinese companies haven’t managed to avoid the spotlight altogether. The Obama administration filed a complaint with the World Trade Organization in 2012 alleging that China’s government was unfairly subsidizing the production of some parts being shipped to the U.S., putting American manufacturers at a disadvantage.
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It was the administration’s eighth complaint against China and the third in 2012, in a continuing series of intense trade standoffs between the two countries. In the slow-recovering American economy, the short-term benefits of Chinese investment are easy to see, but they come at a cost to our long-term competitiveness. We cannot afford to keep losing out to China’s cheaper labor and manufacturing costs. As Peter Navarro and Greg Autry argue in
Death by China
, America’s impotent
response to Beijing’s economic imperialism is a serious danger to our economic future. Rejecting the arguments of some critics that the U.S. and China can be economic partners, Navarro sees a “zero-sum game between China and the U.S. where their gain is our loss.”
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A crucial aspect of China’s race ahead is the willingness of ordinary Chinese to help one another here. “Wherever there is a Chinese person keen to set up a business,” Juan Pablo Cardenal and Heriberto Araújo argue, “there will always be a compatriot ready to lend him or her money to provide help with getting a visa or a permit, whether out of family or racial ties.”
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Flush with cash, the Chinese are buying up American real estate, too. Chinese buyers accounted for 18 percent of the $68.2 billion that foreigners spent on homes during the 12 months that ended in March 2013, according to the National Association of Realtors.
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Unlike other foreign buyers, who spend an average of $276,000 on U.S. homes, the Chinese purchase more expensive homes with a median price of $425,000. Amazingly, almost 70 percent of these deals were made in cash.

A Chinese businessman in San Jose, Costa Rica, summed up a great deal of the challenge the Chinese model poses. “If a Chinese man were to set out to compete in a cycling competition like the Tour de France, he’d end up coming last. Do you know why? Because he’d spend the whole race looking around him at the villages and towns along the road, thinking to himself: Where would be a good place to set up a business?”
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To casual observers, then, the Chinese juggernaut seems only to keep rolling, amassing momentum and building dominance—both at home and abroad. But fundamental problems at the heart of the Chinese system threaten everything the regime has gained—and, if they are not solved satisfactorily, they might well push Xi Jinping in the future to become even more authoritarian in his efforts to obscure the dissatisfaction of hundreds of millions of Chinese citizens.

Clouds on the Chinese Economic Horizon

“Mothers with children wearing face-masks scurry past toward the Shanghai aquarium, mindful of the cars and motorcycles that try to exploit any gap in the traffic that may provide temporary respite from the grinding gridlock,” wrote John Ivison from Shanghai. “No-one saunters; everyone wants to get inside away from the smog. Most suffer from the ‘Beijing cough.’ The whole city is like the inside of a smoker’s lung.”
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Ivison pointed out that the city of Ontario, Canada, declares a “smog day” if the air-quality index is 30 or higher; when Ivison was in Shanghai, the index hit 254. In Beijing, he said, it’s even worse: 900, which counts as “beyond index.” China’s mounting pollution crisis—an outgrowth of its turbo-charged industrial output combined with minimal environmental standards—is only the most visible sign of the difficulties ahead.

As Ivison put it: “Half a billion people have been lifted out of poverty since Deng Xiaoping inaugurated reform in the mid-1970s but at a cost: The air is unbreathable; incomes are more unequal than in South Africa; and crony capitalism flourishes.”
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Shanghai, where Ivison wrote his reports for Canada’s
National Post
, is one of the world’s most expensive cities, but most ordinary Chinese cannot afford most items sold there, especially the luxury brands. Yet China’s wealthy elites spend so freely that they accounted for 47 percent of global luxury consumption in 2013.
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The country’s economic growth has left hundreds of millions behind; they’re no better off than they were before the Chinese market revolution. The business culture is steeped in bribery and corruption; many deals don’t go through without the exchange of a “red bag”—an envelope stuffed with cash. Young Chinese, meanwhile, despair of getting good jobs—or any jobs at all—unless they know someone within the Communist Party hierarchy.

President Xi has suggested that he aims to address both the country’s radically uneven distribution of wealth and its rampant corruption. “We must have the resolution to fight corruption at every level, punish every corrupt official and eradicate the soil that breeds corruption,” he told a Communist Party audience.
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But at the same time, Xi is charged with perpetuating the Party’s rule and power. Pushing for reform will mean bumping up against the Party’s institutional norms and its members’ well-loved perks and privileges—which, so far, Xi has not proved he will do. At a much-ballyhooed senior meeting of Communist Party officials in November 2013, Xi disappointed reform advocates by resorting to jargon and generalities instead of tackling China’s pressing policy needs. In the meantime, his challenge is cut out for him in the macroeconomic sense, as China’s historic economic growth shows every sign of cooling down to a more moderate pace. This slowdown is partially a result of something that was always inevitable: the rise of labor costs (20 percent over the last four years) as competition for labor has forced companies to pay more for workers.
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Some economists project that, along with rising labor costs, the cost of shipping goods from China and the rising value of the Chinese currency will combine to make China’s manufacturing costs nearly on par with America’s in the next four or five years.
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After China’s second-quarter numbers were released in summer 2013, Barclays Capital revised its growth forecast downward, from close to 8 percent to 7.4 percent.
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Indeed, China’s growth rate had been slowing since the fourth quarter of 2010, with the exception of a robust fourth quarter in 2012.
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While its growth remains the envy of most nations, it represents a comedown from the rates China had enjoyed for a generation: an average rate of 10 percent for the past 30 years.
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China’s economic success has been powered by its transition from a highly centralized planned economy to a market economy, of course, just as the nation itself moved from being a mostly hermetic enclave to
a major player on the international scene.
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The reform and development of China’s banking industry and financial markets were important catalysts for China’s rapid economic expansion. The markets have been under pressure, however, from China’s crackdown on rampant credit growth as well as from new proposals that aim to control state prices of energy and natural resources, encourage private business, and promote market competition.
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There is also new concern that China could be headed for a debt crisis. Beijing has tried to rein in undisciplined lending in the fastest-growing portion of China’s financial industry, its “shadow banking” sector: the trust companies, insurance firms, leasing companies, pawnbrokers, and other lenders that take risks traditional banks won’t, backing projects that might never pay off.
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The shift in monetary policy from “quantity to quality,” as China’s official news agency Xinhua calls this push, aims to stave off a crisis like the one the U.S. experienced in 2008.
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“The main concern is that ‘hidden debt’ will come flying out of the woodwork onto public balance sheets in a slowdown, ultimately leading to a problem” the government must absorb, says Harvard University economist Kenneth Rogoff, a former International Monetary Fund chief economist.
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The shadow banking industry’s future is now in the hands of Beijing’s central bank.

China’s trade data for June 2013 came in much weaker than expected: Exports fell 3.1 percent from the same period a year earlier, and imports decreased 0.7 percent. While things look shaky, then, across several fronts, the Chinese economy’s prospects over the long term remain strong thanks to its high savings rate—another attribute of state capitalism. Chinese banks are flush with cash because the government forces the country’s 1 billion depositors to accept below-market interest rates and prevents them from investing their money in more profitable investment vehicles.
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Whatever the Chinese economy’s problems, most analysts still project that it will overtake the United States’ sometime in the 2020s,
and Beijing’s state-capitalist policies remain one reason why. The state sponsorship that Chinese companies enjoy, often in the form of hidden subsidies and cheap financing, gives them an unfair advantage against competitors. These state-owned companies (often described as “national champions”), such as Sinopec or China Mobile, accounted for 43 percent of all business profits in 2011.
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While President Xi has made noises about economic liberalization, it’s highly unlikely that the nation’s statist economic model will undergo major reform. The Chinese economic leadership remains highly technocratic, as evidenced by the huge $586 billion stimulus package that Beijing implemented to stave off the effects of the global financial crisis.

China will surely remain the dominant economic force in Asia. Its two closest competitors, India and Japan, each have GDPs far less than half of China’s when adjusted for purchasing power. And after India and Japan, no other state in Asia even comes close to matching China’s GDP: The latest figures put it at $8.23 trillion in 2012, a GDP representing 13.27 percent of the world economy.
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So China’s economic dominance is unlikely to ebb soon.

The real issue here is not China’s economic might—but how the difficulties of maintaining and extending it, while dealing with restless citizens and political corruption, will push the regime not to further democratization but to greater authoritarian measures and antidemocratic alliances. This, in fact, is what we have been seeing from China, and it mirrors the response to adversity taken by a less potent though still formidable economic player: Russia.

State of the Russian Economy

“Our key challenge in the coming years is to remove many infrastructure constraints that literally stifle our country and prevent unlocking of entire regions,” said Putin as he announced a decision to tap the
country’s pension reserves for a $43 billion loan. The Russian president would use the cash infusion to pay for infrastructure projects that he hoped would pump new life into Russia’s flagging economy.
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The plans included a superhighway in Moscow, a high-speed railway between Moscow and Kazan, and a modernization of the Trans-Siberian Railway. Critics questioned the move, suggesting that Putin’s decision would endanger pension funds and lead to inflation, not economic growth—or at least not growth anywhere near what Putin has envisioned.
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Economically, Putin has made big promises to the Russian people. On returning to power in 2012, he pledged to deliver GDP growth of at least 6 percent annually to keep Russian living standards rising steadily.
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But the IMF has cut projected Russia GDP growth to 2.5 percent in 2013 and 3.25 percent in 2014 because of “weak investment and poor external demand,”
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and Economy Minister Andrey Belousov conceded that a recession might be on the way. The Russian economic boom of 2000 to 2008 has not revived; since 2010, the economy has lagged far below the annual GDP growth target of 5–6 percent that Putin had set. Russia is unlikely to meet those targets in the future. In August 2013, Moscow announced that GDP growth in the second quarter was a paltry 1.2 percent. Putin’s critics pounced.

“I don’t really think the economy is heading toward collapse, more likely long-term stagnation—a lost decade, if you will,” said Vladimir Milov, a former deputy energy minister and now a leader in the political opposition. “This will not lead to an immediate surge in protests, but it will be very difficult for Mr. Putin to stage another successful election in 2018 should the economy be dead.”
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Putin is doing everything he can to prove Milov wrong, and the Russian economy does retain some powerful advantages. Russia straddles two vastly different regions and has a different economic position relative to each. Per capita, Russia is about as wealthy as most of its
central Asian, Eastern European, and Asian neighbors, but because of its size, it has a vastly higher GDP than any of these countries: over $2 trillion in 2011.
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With no legitimate rival peers in the region, Russia enjoys huge economic leverage over its relatively weak neighbors. And Russia is trying to expand its economic trade in the Asia-Pacific region, currently about a quarter of its national total (the EU remains Russia’s biggest trading partner). Russia’s Asia-Pacific position is strong in two areas: It is the sole petroleum-exporting region in the trading bloc, and it possesses nuclear expertise unmatched by any other Asian Pacific Economic Cooperation (APEC) nation.
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Russia has pursued economic expansion through smart use of plentiful natural resources, predominately in oil and energy. Russia leads the world in natural-gas production, generating 20 percent of global output, and is one of the two largest oil producers in the world, generating 12 percent of global oil output.
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Russia has used its growing oil and energy industry to increase state power and the country’s political leverage. Especially during the 2000s, Moscow became expert at using its oil and gas supplies as a tool of geopolitical influence—and often of intimidation.