LONDON: Two years ago, at the World Economic Forum in Davos, which launches once again this week, Chinese president Xi Jinping gave a speech positioning himself as the protector of globalisation.
“Whether you like it or not, the global economy is the big ocean that you cannot escape from,” he said, as newly elected US president Donald Trump was busy launching trade wars with friends and foes alike.
“Any attempt to cut off the flow of capital, technologies, products, industries and people between economies, and channel the waters in the ocean back into isolated lakes and creeks, is simply not possible,” Mr Xi declared, citing all the ways in which China’s economic opening has enriched both the Middle Kingdom and the world.
BACKTRACKING ON REFORMS
So much for that. A year later, Mr Xi removed term limits on the presidency, a move back to the Mao era.
China began backtracking on reform, encouraging unproductive state-owned enterprises to grow even bigger, reducing competition and exacerbating the economic slowdown already under way.
In coping with this slowdown, Beijing has fallen back on an old formula — papering over problems with debt, as big companies receive big loans from state-owned banks, while the more productive private sector is squeezed out.
It now takes US$3 of debt to create a dollar of growth in China, according to Ruchir Sharma at Morgan Stanley Investment Management.
SILVER LINING TO THE TRADE WAR
Mr Trump has taken plenty of heat for upsetting the global system, and rightly so. But China has not taken enough. Mr Trump’s tariffs have brought to the fore the existential conflict between the US and China that has been brewing for years. But he is not the main event.
“Trump takes extreme measures, but we would have come to this point naturally,” says Chinese private equity investor Weijian Shan, whose new book, Out of the Gobi, is a memoir of growing up in Mao’s China but also a study in why markets have worked better than state control for the country.
“There are vested interests that don’t want to see China change. In reality, if a trade war pushed the country to make real reforms, like lowering investment barriers and protecting intellectual property, it could be a good thing.”
TIGHTENING STATE CONTROL
So far, it has not. The US under Mr Trump has fallen back on the old sugar high of financialisation — tax cuts and corporate share buybacks propping up wobbly markets that are ripe for correction after a decade of easy money and record debt.
China is doing its version of the same, supporting the usual glut of unnecessary construction projects, loosening credit and allowing asset bubbles to brew.
Far from promoting some new agenda around globalisation and multilateralism, Mr Xi has tightened state control of the market, and made it tougher for a host of companies — from Qualcomm, to Apple, to Visa and Mastercard — to do business.
Beijing is also exerting more control over the high-growth technology sector, requiring both foreign and domestic companies to engage in more censorship and cooperate with state security efforts.
That is part of a dangerous narrative that Chinese-style centralisation is exactly what the high-tech sector needs.
In an age of artificial intelligence and big data, the story goes, China will have an advantage over the US because there is no civil liberty debate to get in the way of the surveillance state.
With unfettered access to all the information generated by the world’s largest population, the Chinese tech sector will move ahead quickly. It is an argument that has been used recently by the heads of US tech companies to push back against regulatory efforts in Washington and Brussels.
I don’t buy it. I think China’s surveillance state will bring more repression than innovation. A recent report published by Freedom House found that Beijing had exported its surveillance technology to at least 18 other countries, making it easier for governments in countries such as Zambia or Vietnam to crack down on their citizens.
WHAT’S NEEDED? OPENING UP
China’s leaders say the country’s slowdown is a natural and welcome thing, a transition to a new consumer-led economy. There are plenty of others who say it is the result of the reversion to command-and-control policies.
Nicholas Lardy of the Washington-based Peterson Institute for International Economics believes that the increasing drag of state companies in China has resulted in a massive productivity slowdown since the global financial crisis. Reversing this requires less state control, not more.
As Mr Xi noted in his 2017 Davos speech, after China opened up in the 1980s it attracted more than US$1.7 trillion of foreign investment and made a huge contribution to global growth.
Today, both capital flows and growth are decreasing. Some of the slowdown is due to the US-China trade war. But just as US economic problems start at home, so do China’s.
Mr Trump has cancelled the US delegation’s trip to Davos because he is too busy orchestrating a needless government shutdown as part of a wholly manufactured immigration crisis.
The Chinese will be there. But this year, it will be much tougher for Beijing to position itself as any kind of protector of globalisation.
© 2019 The Financial Times Ltd.