Commentary: A trade deal needs Chinese Communist Party leadership consolidation. Will the US take it?

Commentary: A trade deal needs Chinese Communist Party leadership consolidation. Will the US take it?

Consolidation is required to maintain a pragmatic, flexible, and strategic approach to managing systemic risks and addressing internal concerns and external threats, say Andrew Sheng and Xiao Geng.

US President Donald Trump and Chinese leader Xi Jinping (pictured in 2017) agreed to a 90-day tariff
US President Donald Trump and Chinese leader Xi Jinping (pictured in 2017) agreed to a 90-day tariff truce in order to find a more permanent solution to the trade dispute. (Photo: AFP/Nicolas Asfouri)

HONG KONG: Last month, at a conference to commemorate the 40th anniversary of China’s “reform and opening up”, President Xi Jinping underscored the tension between the continuation of that process and the imperative of protecting national security. 

Xi recognised that “China cannot develop itself in isolation from the world, and the world needs China for global prosperity.” Yet he also emphasised that “no one is in a position to dictate to the Chinese people what should or should not be done.”

READ: No, Xi Jinping’s speech wasn’t about the US or Donald Trump, a commentary

GROWING PRESSURES

There is no doubt that the world – and especially the United States – has lately been trying hard to pressure China to make changes. US President Donald Trump’s trade war – which he justifies in national-security terms – is the most potent example. 

But earlier this month, on the same night Xi and Trump struck a 90-day trade truce, Meng Wanzhou, the chief financial officer of the Chinese tech giant Huawei, was arrested in Canada at the behest of the US.

While the reason for Meng’s arrest has not been clarified by the US Justice Department, it appears to relate to US suspicions that Huawei has violated American sanctions against Iran. But it also likely reflects the technological dimension of the escalating economic and geopolitical competition between the US and China.

READ: Tantrum diplomacy in the arrest of one Huawei executive, a commentary

READ: A winter of discontent awaits after Huawei executive arrested, a commentary

Chinese telecom giant Huawei's chief financial officer Meng Wanzhou faces US fraud charges
Chinese telecom giant Huawei's chief financial officer Meng Wanzhou faces US fraud charges related to sanctions-breaking business dealings with Iran (Photo: AFP/WANG ZHAO)

In any case, the possibility of unexpected restrictions or sanctions on businesses or individuals, imposed in the name of national security, sharply increases the risks faced by Chinese, American, and other businesses. 

This sends a chilling signal to financial markets, which have been plumbing multiyear lows all month.

BUT IN GOOD STEAD TO WEATHER CHALLENGES

There is good reason to hope that China can weather the challenges ahead. After all, the country has endured serious internal and external shocks almost every decade over the last 40 years: The Cultural Revolution in the 1970s; high domestic inflation in the 1980s; the Asian Financial Crisis of the 1990s; and the 2008 Global Financial Crisis.

In fact, China turned these crises into opportunities. The result has been average annual GDP growth of 9.5 per cent (compared to a 2.9 per cent global average) since 1978, which raised China’s share of global GDP from 1.8 to 18.2 per cent and lifted 740 million people out of poverty.

China now ranks second in the world in terms of GDP, consumption, and foreign direct investment, and first for manufacturing, trade in goods, and foreign exchange reserves.

EMPOWERING HARDLINERS

As Xi emphasised in his recent speech, this success reflects the hard work of the Chinese people, the innovative practices of Chinese businesses, and the leadership of the Communist Party of China. 

Yet it is this centralised, one-party system of governance that the US is trying to change, in what amounts to the first significant external shock with a prominent national security dimension that China has faced in the last 40 years.

Chinese President Xi Jinping and fellow delegates raise their hands as they take a vote at the clos
Chinese President Xi Jinping (front row, center) and fellow delegates raise their hands as they take a vote at the closing session of the 19th National Congress of the Communist Party of China, in Beijing, China October 24, 2017. (Photo: REUTERS/Thomas Peter)

The risk today is that the increasingly hardline “America First” approach taken by the US will strengthen China’s own hardliners, who will push to emphasise national security over continued reform and opening up. 

As Pascal Lamy, a former World Trade Organisation director-general, put it, “a more aggressive US can create a more aggressive China in a chain reaction that would be bad for all".

READ: The US-China rivalry is all about us, a commentary

Such a chain reaction would include a negative downward spiral in global trade and investment dynamics. Rising trade tensions are already increasing the chances of a synchronised global recession, with slower growth in the US, China, and Europe in 2019. 

Meanwhile, resistance to China’s Belt and Road Initiative – which has also been demonised by some Chinese national-security hawks – could choke off one of the world’s few sources of finance for much-needed infrastructure and public goods, particularly in developing countries.

DOUBLING DOWN

China now faces a dilemma. In order to minimise its vulnerability to external hostility, the authorities may need to rethink some elements of their domestic reform agenda. 

From a national security (and public goods) perspective, maintaining a strong state sector, emphasising debt financing, and strengthening the Chinese Communist Party leadership make more sense. 

But, in order to ensure quality growth, the country must continue working to boost private business, expand equity financing, and advance decentralisation, thereby spurring competition, innovation, and job creation.

Xi hopes to balance these imperatives by doubling down on China’s growth model with Chinese characteristics, incorporating lessons from Chinese philosophy and history, as well as from his predecessors: Mao Zedong, Deng Xiaoping, Jiang Zemin, and Hu Jintao. 

Souvenir plates featuring portraits of former and current Chinese leaders including President Xi Ji
Souvenir plates featuring portraits of former and current Chinese leaders including President Xi Jinping and the late Chinese Chairman Mao Zedong are displayed for sale at a shop next to Tiananmen Square in Beijing, Chinam March 1, 2018. REUTERS/Jason Lee

This means consolidating Party leadership, contrary to America’s wishes, in order to maintain a pragmatic, flexible, and strategic approach to managing systemic risks and addressing internal concerns and external threats.

Domestically, China’s government will aim to support development that emphasises boosting productivity and thus delivering innovative, coordinated, green, open, and inclusive growth. 

READ: Four traps in China's way to becoming world's largest economy, a commentary

Such a strategy will include continued experimentation and adjustment, particularly when it comes to developing effective institutions that can provide public goods in a transparent and accountable way. On the international front, Xi plans to maintain a responsible foreign policy aimed at inclusive global development and resisting hegemony by any single actor.

In short, Xi will uphold China’s tried-and-tested, deeply pragmatic approach to modernisation. Like so many of his predecessors, but unlike many in the West, Xi understands that there is no simple, one-time solution to the challenges ahead. 

As he put it at the 40th anniversary conference: 

We must resolutely reform what should and can be changed, we must resolutely not reform what shouldn’t and can’t be changed.

China seems ready for realistic reforms. Is America ready for a pragmatic deal?

Andrew Sheng is Distinguished Fellow of the Asia Global Institute at the University of Hong Kong and a member of the UNEP Advisory Council on Sustainable Finance. Xiao Geng, President of the Hong Kong Institution for International Finance, is a professor at Peking University HSBC Business School and at the University of Hong Kong’s Faculty of Business and Economics.

Source: Project Syndicate/nr(sl)

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