Transcript: Is China’s power on the wane?

This is an audio transcript of the Rachman Review podcast episode: ‘Is China’s power on the wane?’

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Gideon Rachman
Hello and welcome to the Rachman Review. I’m Gideon Rachman, chief foreign affairs commentator of the Financial Times. This week’s podcast is about the future of China. With the Chinese economy faltering, many confident predictions about Chinese wealth and power are now being questioned. My guest is Richard McGregor, author of a classic study of the Chinese Communist party and more recently of a book called Xi Jinping: The Backlash. Richard’s a senior fellow at the Lowy Institute in Sydney, Australia, which is also where I’m based this month.

So, have we reached peak China?

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The winding-up order issued by a Hong Kong court for the Chinese property company Evergrande is the latest chapter in the deflation of the Chinese housing market.

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We’re talking about a company that has over $300bn in debt, and the bulk of that is in mainland China onshore.

Gideon Rachman
That’s a story with major implications, since a housing boom has helped to power the Chinese economy and a lot of consumer wealth is tied up in housing. There are also other negative trends that China is having to contend with, such as American sanctions on the tech sector, high youth unemployment and deflation. All that’s led to a wave of scepticism about the future of China as an economy and as a major power. But as you’ll hear, Richard McGregor takes a more nuanced view. Before we got into the debate, I asked Richard for some definitions. What do people mean by peak China?

Richard McGregor
Well, I think there’s many economists, many western, for good reason, who predicted for many years that the Chinese economy couldn’t go on as it was. In other words, with the property sector 25-30 per cent of GDP, with the excessive reliance on investments and an inability of exports to pick up the slack in economic growth because, you know, China can’t keep exporting more of its surplus because the world won’t have any room for it — eventually, people said China would hit a wall and slow down. And of course, it has. But do you extrapolate from that to saying China can’t recalibrate its economic model?

So peak China, I think, is confusing in a number of ways. It’s correct that China would slow down, but it’s not necessarily correct that it can’t reform, as difficult as it may be. But also, I think another problem with peak China is some people extrapolated from that that it’s peak China economically to peak China geopolitically. In other words, well, the west has faced another threat from a sort of rising rival power. But of course the system doesn’t work and we’ve seen them off. So I’m quite wary of peak China on a number of levels.

Gideon Rachman
Because it can lead to a kind of almost western complacency in a certain stage and writing of China off prematurely.

Richard McGregor
Yes. And I guess people would look around the world and say, where’s the complacency? And I guess that gives the lie immediately to the idea of peak China, because if China is peaking out, then there wouldn’t be a threat, if you like, from China militarily, particularly in Asia in the East China Sea, in the South China Sea around Taiwan. If there were a peak China, then Europe wouldn’t be worrying about an influx of cheap electric vehicles. If there were a peak China, then who would care about China’s domination of manufacturing, particularly in so-called green technologies? You know, peak China can in some respects, collect its arguments around a few points of GDP growth here or there. But I think that doesn’t really tell you the whole story.

Gideon Rachman
Yeah. No, as you say, I mean, it’s a very complex story because in some areas you can point to China making very rapid progress, such as electric vehicles. And then another one you didn’t mention but that’s making headlines is that they seem to be advancing in chip technology despite American efforts to restrain them. And yet there are these economic problems. So I suppose one of the things that gives peak China its force is people say property bubbles, they are very destructive when they begin to unwind. They remember what happened with Japan. And that really was the beginning of the end of the sort of Japan-is-gonna-take-the-world-over story. And then, of course, the financial crisis in America in 2008 — that was the unwinding of a property bubble. So let’s talk about the property issues. How serious are they in China?

Richard McGregor
I wouldn’t want to underestimate that at all. China has an enormously high rate of private property ownership, I would say higher than where we are in Australia, higher than the UK, higher than America. And the reason for that is twofold. One is the state got out of the business of property in the mid-90s and allowed people to buy their state homes, and it sort of developed from there. And secondly, because there’s very few things to invest in in China. Nobody invests in the stock market with any certainty — it is a casino, or it does go up and down at the whim of government policy in a way that makes it very unreliable. You can’t easily take your money offshore and put it in offshore markets.

So if you have enormous savings, what do you do with it? You buy property. And that’s why, for example, Xi Jinping, when he was talking about pricking the property bubble, he said, well, properties are for living in, not investing in. Well, he might well say that, but there’s nothing much else to invest in.

And of course, the way the industry was structured, where developers gather money for their next project by selling forward apartments which they are going to build. That’s the second thing. And of course, that can’t go on because there’s less and less demand for apartments because the population is slowing and so forth. So it is a real problem, and it would take some years to wash out of the system.

Is it like Japan? I’d say not exactly the same. Japanese debts were much higher than that of China. Japan was already peaking in terms of other forms of growth in its economy. Japan had other things going on, like the sharp appreciation of its currency. And I think China in some respects has more levers in its power because of the power of the state and the closed capital account. Plus, I think there’s perhaps even, dare I say, the more dynamic private Chinese economy.

Gideon Rachman
More entrepreneurial.

Richard McGregor
More entrepreneurial in many respects with more room to grow than Japan. So look, there’s a whiff of it. It’s affecting economic growth. But whether it sends China into a sort of two-decade-long, slow-motion tailspin, I think that’s another argument.

Gideon Rachman
Yes, although it must be concerning, both in the sense of morale of citizens because, as you say, this is where people’s money is being put, and also as they look to shift the economy to domestic demand and become less reliant on exporters, suddenly people will feel they’re losing wealth. They’re less likely to spend.

Richard McGregor
Well, that’s exactly what’s been happening. Post-Covid, China was meant to bounce back. It did temporarily. Not anymore. And a big reason for that is that the consumption growth engine is not picking up as fast as the government has wanted it to. Of course, they’ve been pushing this for 15 years, and it hasn’t taken off. Now the proximate cause of that is concern about wealth, is concern about property. If your main store of wealth, your own home and maybe some investment properties, are static or in fact losing value, you know, the market is kind of frozen, you’re less likely to spend, you’re more likely to save. The ageing society has an impact on that as well. People still save for their children’s education. They save for their pensions and healthcare and the like.

And I guess one of the interesting things about that is how much the political system is a block to greater consumption. In other words, when we look at the US and other countries trying to stimulate demand after Covid or maintain demand during Covid, a lot of that was about transfers to households. China doesn’t do that. The finance ministry seems antagonistic to it. Even more importantly, Xi Jinping seems quite against it because he sees that as a form of welfarism, you know, people getting soft and the like.

Gideon Rachman
Yeah. So ironic for a Communist party leader to be opposed to welfarism.

Richard McGregor
Well, his sort of injunctions against that sort of thing are kind of biblical, you know. I’ve been out looking at a bit of the bible the other day. It’s about toughen up, get up and stand on your own two feet, very old-fashioned.

Gideon Rachman
Didn’t he tell young people to eat bitterness?

Richard McGregor
Yes, eat bitterness, which is the Chinese way of saying suck it up sort of thing. And I think since in recent months he’s changed his message a little bit on that, acknowledged that households are struggling in many cases. And of course, in policy terms, the government’s also shifted a little bit as well and left more room for stimulus to kick growth up a little bit. But of course, none of that stimulus is much about household. Stimulus in China is always about corporates and spending on mainly infrastructure or in this case, on telecommunications towers, high tech, that sort of thing. So they’re sort of stuck in a rut. Now, what’s real growth in China? There’s a debate about that. Is it 5 per cent, as the government says, or closer to 1 per cent? You know, China could grow, by the way, I think quite well at 3-4 per cent if they had a different model of growth, but they haven’t got there yet.

Gideon Rachman
Yeah. I mean, just to keep putting the opposite case for a while, I mean, it seems to me another danger in the system is that the disappointments seem to be disproportionately hitting the young, the people coming out of universities. It’s a notoriously competitive society, like South Korea, like Japan. People put all this effort in and they can’t find jobs at the level that they expect.

Richard McGregor
Yes, well, it’s a double whammy in some respects. You know, it’s not only people not being able to find jobs, it’s people wanting a different life. In other words, they’ve got a level of affluence. They’re not like their parents. And so you’ve got the sort of dropout or lying-flat syndrome as well. The bigger problem, of course, about youth unemployment is about disappointment in the kind of jobs they get. You know, you’ve got a degree from overseas and you end up delivering food or something like that. And so not only job prospects are poor, your income prospects are poor. And some of the sectors which were higher-paying, like the tech sector, has been laying off people; the engineering sector, unless you have a good job in one of the better companies or you’re in government finance, research institutes and the like, you know, the engineering, construction engineering, sort of civil engineering, those jobs are becoming fewer and fewer. And so, you know, retooling the economy, consumption economy, service economy, that’s difficult as well when service industries, financial industries, for example, that’s the state and the party state doesn’t want to let them go. So, you know, I’m open to China peaking at some stage. I’m just wary of declaring it.

Gideon Rachman
What about the argument, though, that the old China, where technocrats had more of a sway, would have been more nimble, more able to explore things? But Xi is such a control freak and not particularly skilled economist, as far as one can work out, that he has actively damaged the economy, particularly by taking on the big tech firms, Jack Mas and so on. Is he capable of retooling the economy?

Richard McGregor
Well, in theory, no, because people say that he has consciously sacrificed economic growth in favour of national security priorities. In other words, securitising the economy in readiness for possible conflict with the United States and the west, worried about the destabilising impact of any confrontation with the United States. And that can just be the ordinary, destabilising impact of war or it can be about protecting China against US campaigns on issues like semiconductors and various other technologies, firewalling China. And if that means having a little bit less growth, that’s not a bad thing. But let’s not forget though with property, I don’t overgeneralise about Xi, but the government took a conscious decision a few years ago itself to prick the property bubble. Now, they might have thought this was just going to be a controlled explosion, a demolition, whereas in fact it turned into a long-running series of very damaging bankruptcies and the like.

Gideon Rachman
And the figures are huge. I mean, Evergrande — what were its debts?

Richard McGregor
$300bn, in theory. So, you know, there’s all manner of debt bombs all over China for different reasons. Can they get out of this gradually? Or do they have to find a way to take all those manner of debts off the balance sheet and collect them into some sort of bad bank, bad debt sort of vehicle? But, you know what, one of the interesting things I think about China in the last year coming out of Covid, there’s been massive volatility in policymaking. You know, one day they’re saying, we love foreigners. Win-win co-operation. We love FDI. Come in. Li Qiang, the premier, goes off to Davos and makes the kind of speech one makes at Davos. The next day they’re raiding foreign firms, firewalling the economy against Americans, increasing the ambit of the Anti-Espionage Act and arresting foreigners.

Now what’s going on there? Is this volatility the result of a debate in the system — in other words, some people finally pushing back against Xi? Is it Xi himself chopping and changing his own views, realising there’s a problem with slower growth that doesn’t necessarily help national security? Is there an element of debate in the system? You know, economic policy in China was always subject to a much more open debate than politics, so maybe we’re getting back to that. Or is it simply just a mess, and they haven’t made up their own mind?

Gideon Rachman
And where’s your money? 

Richard McGregor
Well, I’m in the volatility camp. You know, I think that yes, obviously Xi is the boss. If you look at the composition of the standing committee of the politburo, the top group in the country, seven people, and they are all identifiably Xi loyalists. Now, that is highly unusual in Chinese politics. If you go back, even back to 1949, every leader had identifiable rivals or different camps or different political networks at the top. And what is amazing about Xi is that he has gotten rid of all of them.

Now, paradoxically, since he trusts all these people, particularly the premier Li Qiang, for example, does that mean he allows them to come up with different ideas? Is he persuadable because he trusts them a little bit more? And that’s certainly one of the strands of thinking that I’m focusing on, because if you look at the people on the top of the politburo, just because they’re loyalists, does that mean they’re cronies or hacks? And if you look, for example, at the premier Li Qiang’s public record in cities like Shanghai, you know, he has a lot of experience running cities which are dominated by the private sector in China. So I have a little bit of flexibility on this issue, because of the economic problems that allows for the introduction of a better set of policies, or possibility of a debate about an introduction for a better set of policies. They’re not there yet, but I don’t think economic debate is dead yet either.

Gideon Rachman
Yeah. And do you assume that even though a lot of people, particularly the young, as we were saying, are having a difficult time in China, that there’s no real question of a threat to political stability? I mean, we were joking earlier about people saying the Chinese system is brittle. Do you think it’s brittle? Or do you think Xi can ride this out without too many problems?

Richard McGregor
Well, I think that is a very interesting question, actually. Now, obviously there’s no threat to Xi that we can see. He controls the politburo. He controls all the organs of the party-state: personnel, propaganda and the like. He’s got a tighter grip on the state security organs. He continues to clean out the military and put his people in there. That’s not a good sign, of course, that he still has to do that, but still, there’s no sense of any disloyalty as opposed to corruption within the military. But if you have three to four years of subpar growth in China, continuing high youth unemployment, stagnant incomes — remember the winning argument of the Communist party is that we made you richer — Xi has a host of critics and enemies who are looking for issues to latch on to, to get back in the game, as it were. He’s up for a fourth term in 2027. If we’ve got a stagnant economy then people’s lives aren’t getting better. The property market is still struggling to recover. I think he’s vulnerable. I just don’t think that we should all automatically assume that he just goes on and on forever. We call Chinese politics elite politics because it’s an elite game. It’s only conducted amongst the elite. It’s not a mass-participation sport. But I still think it’s a performative system. And if he’s not performing anymore, then it will be interesting to see if his critics can actually find a voice and start to challenge him on some substantive policy issues.

Gideon Rachman
Yeah. So all sorts of challenges, potentially even threats to the system. And yet, as you said right at the beginning, that doesn’t seem to mean that China is not, in other respects, still expanding its power internationally and particularly, you know, the region that lies between Australia and China — south-east Asia. Do you see that becoming more like China’s backyard despite America’s best efforts?

Richard McGregor
Well, I think south-east Asia is one of the most interesting places to look for Chinese influence. As you say, it’s near to China. It may not be its backyard, but it’s its neighbourhood. It’s the area in which its economic influence is greatest. It’s the area potentially in which its politico-cultural influence is greater. China is not a newcomer to south-east Asia. Just about every south-east Asian country, in one way or another, has large ethnic Chinese populations. And China, of course, is the biggest trading partner of all those countries. Now, in many cases, they’re not importing from those countries so much as reimporting or importing for export from them. But nonetheless, there’s a growing sort of symbiotic relationship between China and those countries. So China can persuasively argue to these countries that this is our region. We are culturally joined together. We’re natural friends. Asia should be run by Asians, after all. And what’s wrong with that? What are the Americans doing here anyway? And so over the longer term, I think China has run that argument very well.

Now, of course, the flip side of that is that an Asia run by Asians is an Asia run really by China. Remember, Japan in the ‘80s used to be at the head of the Asia-should-be-run-by-Asians argument. And the whole idea about Asian values propagated by Lee Kuan Yew of Singapore and Mahathir Mohamad of Malaysia was very popular then. But I think now it’s come back into the lexicon of the Chinese Communist party. It’s not really a pan-Asian movement. It’s the Chinese Communist party adopting the pan-Asian sort of sentiment in its own interests. And I think many of the countries in south-east Asia don’t want to be dominated by China. They want alternative options, but they’re very worried about saying so. I mean, it’s fascinating to travel through south-east Asia these days because everybody, as in the UK, frankly, in Australia and the like, and in Canada, everybody can be openly critical of America. Sometimes they deserve it. They’re a superpower. And the same is the case in south-east Asia.

But when it comes to China, China is very good, I think, at internalising in those countries the idea that, oh, don’t criticise China. Number one, lurking in the back of their minds is if you do, you’ll pay a cost for that. But secondly, it’s the cultural thing. That’s not how Asians talk about each other. We work out things behind the scenes. And of course, that’s a very self-serving notion, politics in the guise of culture, if you like, because south-east Asian countries, as well as Japan and South Korea, have all manner of disputes with China. Let me just put it like this: America, for all its problems, has no territorial disputes in Asia. But if you look at China, you know, you look at air defence identification zones, maritime exclusive economic zones, land features, islands. China has disputes with South Korea, Japan, Vietnam, the Philippines, Malaysia, Indonesia, Brunei. And that’s even without mentioning Taiwan.

Gideon Rachman
Or indeed India.

Richard McGregor
Yes, India on the other side. I’m thinking about maritime Asia. So if you think about it like that, and the idea that China seamlessly moves into the region as the new hegemon and the US sort of disappears over the other side of the Pacific in sort of bourgeois decline, it doesn’t really make sense to me. Now, a lot of what happens, of course, depends on what the US does.

Gideon Rachman
Sure. Trump disrupts everything.

Richard McGregor
Yeah. So, you know, in the old days, I think we would have thought of the US as a predictable power, China as unpredictable. Now it’s the opposite. It’s the US that is unpredictable. So there’s a massive demand for the US to stay. Whether the US wants to stay, though, is quite another thing.

Gideon Rachman
Yes. And also, I mean, you talk about all the very skilful diplomatic game that China plays, but doesn’t its influence in particular in south-east Asia, but really all over the world — Africa, for example — translates simply into the sheer amounts of money they can invest? I mean, the Americans . . . It’s a very rich country, but they seem relatively broke when it comes to sort of offering to subsidise infrastructure, whereas China has been splashing cash.

Richard McGregor
Yes. Well, that’s absolutely true. And if China invests in Africa, why is that a bad thing? And if they build things that African countries want or Asian countries want, why is that a bad thing? So I’m not against Chinese investment, but I think we’re at a different stage of that now. We’re almost at Belt and Road 3.0. So the first part of Belt and Road that was first announced in 2013 was a rush of money out the door. It started to decline in 2018 when the Chinese quietly reassessed this and realised they are wasting a lot of money. A big, underestimated part of that is, I think, within China itself, a massive backlash against Belt and Road among the poor people in China saying why are we spending money in Africa? Plus, of course, the ministry of finance said, what a waste of money. And then the Covid, you see Belt and Road investment really go rapidly downhill.

So China, now having built a whole lot of stuff, is now a massive creditor. They’ve got issues in Zambia, Uganda, Sri Lanka, Cambodia, Laos especially. And it’s not just the matter of them spending money, it’s a matter of others paying it back. So they’ve got a very different view on that. And if you look at south-east Asia, for example, where you know it’s the biggest bilateral lender, it is really only really, really dominant in three countries: Indonesia, Cambodia and Laos. And if you add up other lenders — World Bank, Asian Development Bank, Japan, South Korea, Europe, a little bit from America — it’s very contested, particularly as Chinese loans are going to have to become much more targeted now.

So I think the Belt and Road as we used to know it is over. But I think China is very clever. They’ve thought ahead about this. And so instead of just money, China is talking these days about ideas. And ideas can be very powerful. The Global Security Initiative, the Global Development Initiative, the Global Civilisation Initiative — if you read these things, you’ll fall asleep. But you know, this is about a parallel new world order, rival world order. And China says that developing countries, some developed countries even, the Americans don’t care about you. We will put you at the centre of the kind of order that we are building. We will give you priority. And even if the sort of mass-lending phase is over, the ideas phase, the ideas competition, I think we’re in the middle of that now. And we shouldn’t underestimate the power of what China is saying. In south-east Asia as in elsewhere, there’s a great deal of residual anti-colonial, anti-American, anti-imperialist, if you like, occasionally anti-white sentiment. And China is playing on that I think with great skill.

Gideon Rachman
So China has something that, as you say, I think the west doesn’t think about much. It has real soft power in its region.

Richard McGregor
Yes, it’s soft power, in a way. There’s different definitions of that. It’s not Chinese movies, it’s not Chinese soapies, but in terms of political soft power, if that’s not a contradiction, I think definitely.

Gideon Rachman
Yeah. So let’s finish this with the thing that tends to obsess people in Washington and I think in Australia, to some extent, in official circles: the hard power stuff. Chinese military build-up, been going on for 20 years now. There’s heightened alertness about what might happen over Taiwan. Do the south-east Asians, are they as concerned as the Americans and as the Australians? Or do they tend to discount it a bit? And who’s right? I mean, how much should we be worried about China’s ultimate intentions?

Richard McGregor
Well, if you’re worried about China taking Taiwan, if you’re worried about China dominating and policing the South China Sea, you should be very worried because that’s what they want to do, and there’s absolutely no change in that. That was the ambition of Chinese leaders before Xi Jinping. The big difference with Xi Jinping — yes, he’s been assertive, but he’s just like any other Chinese leader in many respects — he’s now got the firepower to execute what they’ve always wanted to do.

And China has translated economic power into military power. They’ve already got a much bigger navy numerically than the United States. Now, the US might have better technology, more practice, more interoperability with its other services. But China already I think has dominance around Taiwan. That’s pretty obvious. Does that mean they can easily invade Taiwan? No, but that’s a discussion for another day.

And I think in south-east Asia they often think, you know, Australia less so these days, but America talks about Chinese assertiveness being destabilising. Well, for them they say that’s not what is destabilising. It’s US-China competition that’s destabilising. And China’s very good at painting the Americans as the outside provocative power. I think the Biden administration has done a very good job recently in engaging with China, and part of the effect of that is to make the Americans look less like the provocateur, if you like. But I think China paints the US as outsiders increasingly, and it now has the military to enforce that. And as far as we can tell, with anything to do with Taiwan, south-east Asian countries will sit it out. They’re sitting on the fence, you know. You have hedges and balances. Countries like Australia are balances, aligning with the US, like Japan; to some extent, South Korea. South-east Asians are hedgers. They’re not putting themselves forward to be part of any conflict. The weak point of their argument, though, of course, is their territorial disputes with China and whether their own populations eventually start to rise up and create the domestic political conditions for these countries to start to challenge the Chinese over the incursions into their waters. Now we’re seeing a bit of that in the Philippines, but the Philippines doesn’t have the capability to really take China on board of the other countries. But if they all start to get angry about this issue, then I think the situation will look very different.

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Gideon Rachman
That was Richard McGregor of the Lowy Institute here in Sydney, ending this edition of the Rachman Review. Thanks for listening and please join me again next week.

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