Today’s edition is a far from exhaustive look at some of the key trends I think will define China in 2018. I have unlocked it on the website so please feel free to forward to friends and colleagues.
Happy 2018, and thanks for reading.
1. The Communist Party Leads Everything
Xi Jinping is determined to reinsert the Chinese Communist Party (CCP) into all aspects of live in the People’s Republic of China. The CCP may not be as focused on “Communist” as it once was, but Marxism-Leninism is not dead in China. Xi views the restrengthening of the Party as key to preventing a USSR-style collapse and to achieving the “great rejuvenation of the Chinese nation”, as he has said repeatedly.
The Party serves as the key lever for social, political, legal and economic control, and as the vanguard of increasing anti-foreign sentiment inside the PRC and influence operations globally.
As Xi reiterated at the October 2017 19th Party Congress:
“Government, military, society and schools, north, south, east and west, the Party is the leader of everything 党政军民学，东西南北中，党是领导一切的”.
All of China’s domestic and foreign policies need to be viewed through the lens of the CCP and its goals. The CCP is far more than a simple political party, and its interests and goals are often inimical to those of its neighbors and of Western countries.
2. Xi Jinping Is Large And In Charge
The recent Party Congress cemented Xi as the undisputed leader of the PRC, the “Chairman of everything”. The 19th Party Congress enshrined “Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era” as a new theoretical guide for the Chinese Communist Party.
Xi stacked the top leadership with his allies at the October Party Congress and at the first Politburo meeting after the Congress institutionalized the shift away from “collective leadership” of the last two decades with the new exhortation to “uphold the authority and centralized, unified leadership of the CPC Central Committee” and “safeguard Xi's position at the core of the CPC Central Committee and the whole Party”.
Xi’s power is far from unfettered but he is more of the “decider” than any single PRC leader in decades. That can be positive for moving quickly and forcefully, but the downside risks are significant if subordinates tend towards sycophancy and blind obedience instead of real policy debate.
3. The PRC’s “Three Tough Battles”
The annual Central Economic Work Conference, held this year right before Christmas, introduced "Xi Jinping Thought on Socialist Economy with Chinese Characteristics for a New Era” and focused on “three tough battles”—controlling financial risks, targeted poverty alleviation, and reducing pollution.
Expect much of the 2018 political and economic agenda to revolve around these three issues.
Beijing recognizes it has a massive debt problem, and while absolute deleveraging is still not on the table there will be significant efforts to reduce and manage riskier debt.
Poverty alleviation has long been a priority project for Xi and he sees it as key to maintaining support for the Communist Party and achieving the “great rejuvenation”.
The PRC leadership has recognized that environmental degradation may pose the greatest risk to the Party’s continued rule. The ongoing crackdown on pollution is more real than it has ever been, though the incentives to pollute are still so great and the multi-decade degradation so massive that progress will be halting at best. The global goodwill towards the PRC’s efforts is significant as America’s abdication of climate leadership stands in stark contrast to the PRC’s real commitment to mitigating the huge damage it has done to its environment.
Remember: At the 19th Party Congress the CCP changed the “principal contradiction”, an overarching principle in a Marxist-Leninist system, from “ever-growing material and cultural needs of the people versus backward social production” set in 1981 to “between unbalanced and inadequate development and the people’s ever-growing needs for a better life”. This is not just empty rhetoric and is a clear indicator that Xi and the Party are serious about changing the PRC’s growth model.
4. Big Data, AI and the Technology Revolution
The Chinese Communist Party has embraced technology, and specifically Big Data and Artificial Intelligence, as a key part of the Chinese government's blueprint for becoming a superpower and achieving "the great rejuvenation of the Chinese nation," while maintaining Communist Party control.
The PRC has huge data sets generated by nearly a billion Internet users, few legal restrictions on the use of that data, a rapidly growing pool of talented Chinese AI engineers and extremely government polices, including significant financial support.
This technology revolution can bring much good, including better health care, improved governance, more efficient transportation systems and enhanced pollution control.
It will also enhance surveillance and control capabilities in disturbing dystopian ways, as is already happening in the Xinjiang region, and potentially give the PRC an edge in the next great revolution in military affairs.
5. Increasing US-China Frictions
President Trump’s approach to China has been far different than the tough “America First” program he promised on the campaign trail. Much of the difference is due to the crisis over North Korea’s weapons programs.
That looks to be about the change, for several reasons.
The Trump Administration’s National Security Strategy very clearly reframed the US government’s view of China:
For decades, U.S. policy was rooted in the belief that support for China’s rise and for its integration into the post-war international order would liberalize China. Contrary to our hopes, China expanded its power at the expense of the sovereignty of others. China gathers and exploits data on an unrivaled scale and spreads features of its authoritarian system, including corruption and the use of surveillance. It is building the most capable and well-funded military in the world, after our own. Its nuclear arsenal is growing and diversifying. Part of China’s military modernization and economic expansion is due to its access to the U.S. innovation economy, including America’s world-class universities.
While Trump has been far more successful than his predecessors in pushing China to pressure North Korea, he believes China is not doing enough, and said so much on Twitter Thursday:
Caught RED HANDED - very disappointed that China is allowing oil to go into North Korea. There will never be a friendly solution to the North Korea problem if this continues to happen!
In an interview with the New York Times earlier this week Trump said:
I like very much President Xi. He treated me better than anybody’s ever been treated in the history of China. You know that. The presentations. … One of the great two days of anybody’s life and memory having to do with China. He’s a friend of mine, he likes me, I like him, we have a great chemistry together. He’s [inaudible] of the United States. …[Inaudible.] China’s hurting us very badly on trade, but I have been soft on China because the only thing more important to me than trade is war. O.K.?..
…I like China, and I like him a lot. But, as you know, when I campaigned, I was very tough on China in terms of trade. They made — last year, we had a trade deficit with China of $350 billion, minimum. That doesn’t include the theft of intellectual property, O.K., which is another $300 billion. So, China — and you know, somebody said, oh, currency manipulation. If they’re helping me with North Korea, I can look at trade a little bit differently, at least for a period of time. And that’s what I’ve been doing. But when oil is going in, I’m not happy about that. I think I expressed that in probably [inaudible].
Trump has been consistent for decades in his assertions that China has been ripping America off; the last year of relatively calm rhetoric has been an anomaly.
The “America First” trade contingent in his administration, led by US Trade Representative Robert Lighthizer, looks to be in the ascendance, and if Director of the National Economic Council Gary Cohn leaves the White House soon, as is much rumored, there will be few people left in the White House to push back on a much more confrontational approach to trade. Several trade actions are in the planning stages and they will likely hit soon.
Beijing does not want a trade war but it will fight back, causing pain to some large US firms as well as quite possibly propagandizing US actions into further proof of the much believed claims of an American plot to keep China down.
6. No Prospects For A “Friendly Solution” To North Korea Crisis
If the near-term US goal really is denuclearization then it will fail.
Expect North Korea to still have nuclear weapons by the end of 2018, and possibly the capability to strike all of the US with a nuclear-tipped missile.
Kim Jong-un learned the lessons of Iraq and Libya and will not willingly give up nuclear weapons.
Sanctions will likely not bring about the collapse of the regime, especially since the PRC, as much as Xi Jinping dislikes Kim Jong-un, does not want to see chaos in North Korea, or a reunited Korean peninsula under South Korean leadership.
If the US decides China is not doing enough, as yesterday’s tweet from President Trump suggests, a likely next step is US sanctions against more important Chinese individuals and firms, including systemically important financial institutions. Such sanctions would likely lead Beijing to reevaluate its cooperation with the US, especially given the increasing trade tensions.
The remaining options are for the US are:
Continue to pressure North Korea but focus on deterrence, including accelerating the arms race in Asia by introducing nuclear weapons to Japan and possibly South Korea, while toning down the rhetoric as the Presidential emphasis on the North Korea treat only seems to embolden Kim Jong-un;
Negotiate directly with North Korea with the recognition that the best outcome will be some sort of freeze on the North’s weapons development;
Launch a military strike, which could very easily lead to another disastrous war in Asia that could kill hundreds of thousands and tip the strategic balance in the region in favor of the PRC.
President Trump has made North Korea the defining foreign policy challenge of his Presidency. A “status quo” or even a “freeze” would be a failure given his rhetoric, so either he ends up looking like a paper tiger or the risk of military action only increases into 2018.
7. PRC Influence Abroad
Xi Jinping has led the PRC to be much more assertive in foreign policy. That will continue as the country grows in confidence and power, and as it sees increasing opportunities to capitalize on the vacuum and discord created by Trump’s “America First” policies.
The concept that Xi and the CCP are pushing is “Chinese diplomacy in the new era is to promote the construction of a new type of international relations and a community of shared future”.
Beijing’s efforts are not welcomed by all but in the absence of constructive American leadership, especially around China’s periphery, targeted countries will increasingly gravitate towards China, even as some Asia nations try to strengthen inter-Asian alliances.
But there is increasing Western pushback against PRC influence and its attempts to reshape the global environment to accommodate CCP values. Australia and New Zealand have had significant political brouhahas around PRC political influence operations and there are efforts underway in the US, Australia and the EU to further regulate PRC investments, media activities and lobbying efforts. People need to be careful this does not tip over into another spasm of anti-Chinese racism, something which unfortunately has a long history in the West, and that is the main reason I prefer to call it “PRC influence” or “CCP Influence”. But it is a very real problem, and a significant priority for the CCP, so in the absence of concerted action CCP influence will only increase.
What to expect in 2018: Growing influence for the PRC across the developing world and especially in Asia and Central Asia, while Western countries take a much harder line against CCP efforts to influence media, politics and the Chinese diaspora in their countries.
Apologies if I sound a bit pessimistic. I would like to be much more optimistic but after all those years living in Beijing I learned the importance of seeking truth from facts 实事求是。
I hope I am wrong and we all have a happy and peaceful 2018. Thanks for reading.