Remarks at a December 2015 Panel at the Kissinger Institute on China and the United States

Just before Christmas I participated on a panel–Points (tipping), Lines (9-dash), Planes (military), and Spheres (of influence) – The Geometry of a Changing Relationship–at the WIlson Center’s Kissinger Institute with David Wertime of Foreign Policy, Shannon Tiezzi of The Diplomat and Robert Daly of the Kissinger Institute.

It was a lot of fun and all three of them provided some terrific insights. I have embedded the video as well as a copy of my opening remarks below:

Thanks for having me, it is an honor to be here, and to be back in DC where I grew up. We just moved back in august from 10 years in Beijing, I have not lived in dc for over 20 years, and never worked here. I naively thought I could spend a few months figuring out how this place works but four months in I have realized it is a hopeless task. Figuring out Beijing may be easier…

The good news in the Us-China relationship is there is cooperation on big issues, like Iran and the climate deal, and possibly progress on cyber. But one thing that has struck me is that the mood in DC towards China has gotten fairly dark, there is lots of questioning of “engagement”, though frankly I have not heard any great ideas for what can replace it that do not carry a much higher risk of deepening frictions if not outright conflict, something everyone sane on both sides wants to avoid.

There are certainly US issues at play here, but the Xi administration has a lot to do with the shift, from what looks to be a more assertive foreign policy in its neighborhood, to growing nationalism that at times looks like it may veer into jingoism, to a remarkable military buildup and modernization agenda, to its internal and external cyberspace policies, including those laid out at the ongoing Wuzhen World Internet Conference, to an increasingly challenging economic and regulatory environment that has US businesses less willing to lobby on behalf of China here in DC, to the worst period of ideological tightening in decades.

One of the most obvious changes is that Xi has put the Party back front and center. Lots of observers I think had assumed the Party was losing its relevance, and clearly one of the reasons Xi is doing what he is doing with the corruption crackdown, ideological tightening etc is that the party had become flaccid and dissolute, Xi is making clear that that needs to change, and so we are seeing more of what the Party is and I think a lot of people find that worrisome. The party espouses a set of goals and values that are in many ways inimical to US interests and values, and so that trend is one that is hard to see not leading to more friction at best in the relationship.

Apologies if I sound a tad pessimistic, but as the Chinese say “seek truth from facts”, and right now most of the facts are not pointing to happier times ahead in the US-China relationship.

I want to go back and look at my three predictions for 2015 I wrote in the Sinocism newsletter in January 2015, not directly about the US-China relationships but they certainly have an impact:

The first prediction was that Xi Jinping would still be in charge at the end of 2015 and would make significant progress on economic reforms.

That may seem like an easy first part, but you have to remember that lots of people keep talking about Xi being weak, there were even crazy coup rumors before the 5th plenum. I don’t think he is weak, he does seem to have built significant strength in the sources of hard power in the system. In the the PLA, that power is especially obvious through the corruption takedowns, the parade in September, for which there were lots of audiences, the military internally perhaps being among the most important one, as well as the PLA reforms that are rolling out. In the security services the multiple detentions of senior officials and personnel moves at the Ministry of Public Security and Ministry of State Security are a couple of signs of gaining power over those bureaucracies. That said, clearly the reforms laid out at the 3rd plenum have been slower than expected.

So is Xi not really a reformer, or is the bureaucracy not responding as expected or planned, an age-old problem in China? I am guessing it is more the latter, though clearly Xi is not interested in some of the reforms that some observers had hoped for. I expect that one of the reasons for the updated article 46 in the recently revised party discipline regulations issued the week before the 5th plenum, the part that discusses 妄议中央 or “improper discussion of party policies” may actually be that this article 46 will be used as a lever by the party center to force better implementation of policies coming out of Zhongnanhai, not just to deepen intraparty ideological purification. As one very smart China watcher friend here in DC said to me recently, don’t be surprised if Xi isn’t about to declare war on the bureaucracy as a way to force more progress on the Third Plenum agenda.

The second prediction was that the corruption crackdown would intensify and at least one more Zhou Yongkang-level tiger would go down, as would at least one member of the “red nobility”.

The crackdown has intensified, Xu Caihou, Guo Boxiong, Su Rong, Zhou Benshun and many other fallen officials if they could talk would probably tell you that, but so far no one else at Zhou’s level or any of the “red nobility” have been taken out. I still think it will happen, these things are very politically complex and I do not subscribe to the reductionist view that the crackdown is just about power consolidation, but time will tell. In the meantime, I challenge you to find any red nobility or princelings who have not significantly changed their behavior in the face of this crackdown.

The third prediction was that China’s economy would have another rough year but it wouldn’t collapse and that the Shanghai Composite would at some point hit 4500 in the “Xi Jinping bull market”.

The economy is clearly struggling and we should not expect it to get better any time soon. That said, collapse is still unlikely and we need to get away from the sometimes simplistic, binary discourse around the economy. There are some bright spots in the economy and the government looks to still have plenty of tools to keep things from going off the rails.

The Shanghai Composite topped 4500 in May, on its way to over 5000 before the big crash. The party propaganda hyping of the market, the lack of understanding of the explosion of risky margin financing, and the ham-fisted, panicked rescue response to the crash bring into question both the competence of the economic policymakers and the robustness of the system for making decisions. Those questions were only heightened by the poor handling of the change to the pegging mechanism for the Renminbi in August and the tens of billions of dollars they subsequently had to spend to defend the currency.

Something changed over the last year, seemingly either the underlying problems are now so acute that there are no good choices, or the policymakers were never that good but there was so much low-hanging fruit it was easy to look smart, or there is something going in on the policymaking process, perhaps the centralization of so much of the information flow and decision-making into the small leading groups, including the central finance and economics leading group, that the decision-making process has been degraded. I think there is something to all three but put the greatest weight on the last conjecture. We should expect a difficult 2016 as China continues to grind through its many challenges, but when it comes to the market do not be surprised if the Shanghai Composite heads back to near 4500. At some point greed will take over from fear and uncertainty again, even among foreign investors.

Thank you.

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