As Deng Xiaoping ascended to the position of paramount leader of China in 1977, China possessed a GDP of almost US$175 billion, translating to a GDP per capita of US$185. By 2010, after more than three decades of economic reform, it possessed a GDP of US$6.1 trillion and a GDP per capita of US$4,561, surpassing Japan to be the second-largest economy in the world after the United States. China still holds this title almost four years later, with a GDP of over US$11 trillion and a GDP per capita of US$8,059 in 2015. In between 1992 and 2010, China had ten years where it experienced double-digit growth to its GDP, fueling a massive Asian economic miracle. However, China’s double-digit annual GDP growth has largely come to an end, having consistently descended down into single-digit growth since 2011 (The World Bank, 2017). China’s GDP growth
53
for 2015 was reported to have decreased to 6.7 to 6.9%, which may in fact be a manipulated and optimistic figure (Worstall, 2016). Even for those who believe that the 6.7% to 6.9% figure is accurate, credit has instead been given to government stimulus policies (Huang C. , 2016).
The fifth-generation leadership is unique in that it is presiding over more than just a pronounced economic slowdown in a country that had been reliant on economic growth and increased standards of living for legitimacy, all while handling existing social issues inherited from the fourth-generation Hu administration before it and the third-generation Jiang administration before that. It is, in fact, overseeing a necessary transformation of the Chinese economy, where trends have fundamentally changed. China’s alignment in terms of international trade and investments is no longer just a matter of geopolitics;
rather, it now has everything to do with the domestic economy. China’s meteoric economic growth through the late 20th century and the early 21st century, from Deng of the second-generation to Hu of the fourth generation, had been established on two major fulcrums. Domestically, China opened itself to foreign investments and debt that fueled its capital growth; internationally, China exported cheap labor and processed materials such as steel. By becoming the “factory of the world”, China was able to accumulate capital and manage it effectively through an export- and investment-based economy, which in turn fueled other domestic sectors (Wei, Xie, & Zhang, 2017).
However, these economic policies were always meant to be temporary, and are clearly now no longer tenable, resulting in the Xi administration being caught in a
54
precarious balancing act. The collapse of commodity prices, such as metals and oil, has damaged the profitability of Chinese exports (Worstall, 2016). Overinvestment has inflated prices, especially in the real estate sector. Much of these investments have been built upon bad credit that now threatens the Chinese banking system, many of which were managed ineptly and with a degree of corruption by state-owned enterprises and other non-performing businesses. Western reliance on Chinese exports waned during the Asian financial crisis of the 90’s (Lai, 2002). This decrease in exports was exacerbated a decade later during the global recession of 2008. Even though there are doubts as to whether or not there has actually been a decreased demand in Chinese exports, an oversupply of these goods have also lowered their selling values and damaged profitability (Worstall, 2016). And as the Chinese economy grows, increasing both the standards and costs of living, China continues to produce a trained, educated work force that no longer qualify as cheap labor as per the “Made in China 2025” strategy and are thus no longer as attractive for foreign investments, which instead turn to underdeveloped Southeast Asian states like Vietnam for their manufacturing needs (The Economist, 2015).
China ultimately has two primary economic goals today. The first primary economic goal is to avoid an outcome reminiscent of the collapse of the Japanese asset bubble of the 90’s, which was also fueled by inflated stocks, rapid manufacturing growth, overinvestment in real estate, increased non-performing banking loans, a depreciated currency, and low domestic consumption. Second, dictated by its geopolitical realities, it needs to transfer its wealth westwards to the isolated inland regions, which has important social components explored in the next section. For the first, China’s traditional tool for
55
maintaining economic growth was to control the value of the Chinese yuan, especially in relation to the U.S. dollar, to facilitate foreign investment and boost exports; this was possible because for much of China’s economic growth, the yuan was not traded as an internationally-traded currency (Yurichuk, 2011). However, the yuan formally became a currency in the International Monetary Fund (IMF) special drawing rights (SDR) basket in October of 2016 (Taplin & Blanchard, 2016). The yuan is the only SDR currency that isn’t freely convertible, with official trading down in China and Hong Kong, indicating that Beijing still intends to control the value of the yuan to maintain economic growth over the next five to ten years (Yiu, 2016). This adds to the urgency to which China must push forth other reforms and other solutions, as it will soon no longer be a reliable economic tool.
The Chinese leadership must focus on market reforms, especially in terms of being able to boost the output of China’s service sector vis-à-vis its manufacturing sector.
Of growing importance to the Xi administration’s response to its economic predicament is the need for “supply-side structural reform”. Not to be confused with U.S. President Ronald Reagan’s supply side economics, which utilized tax cuts and deregulation to encourage further business investments and production, Xi’s supply-side economics is precisely the opposite as he seeks to curtail excess production, particularly in sectors that host non-performing “zombie” businesses, which may eventually be subsidized (Roberts, 2016). These market reforms are being pursued over previous strategies of boosting real estate, stock markets, bank lending, and debt levels to support economic growth early in the Xi administration, notably by Premier Li Keqiang (Wang X. , Xi Jinping’s
supply-56
side plan now the genuine article of economic reform for China, 2016). The extent to which these reforms are possible, however, is still questionable. As recently as February 2017, the expansion of credit continues to expand faster than nominal GDP growth, even in the face of explicit calls by the government for deleveraging, with even People’s Bank of China Governor Zhou Xiaochuan confessing that “non-financial corporate leverage is too high” (Fensom, 2017). Furthermore, the BRI’s trade priorities aren’t threatened only by Western anti-dumping duties; in May 2017, Germany announced at the Belt and Road Forum in Beijing that it would not participate in the BRI if China does not provide guarantees on free trade and fair competition, conditions that have traditionally been elusive in the Chinese market (Glenn, Mason, Peter, & Munroe, 2017). This may mean that Beijing must choose between relinquishing control over their trade economy and losing the cooperation of the largest economy in the EU; neither bodes well for any Chinese attempts to utilize trade as a tool for economic reform.
Aside from purely economic reform, there is also the matter of industrial reform, as outlined in the “Made in China 2025” strategy. Emblematic of its push away from manufacturing metals and other industrial materials, for which China has a surplus in capacity as a result of mismanagement over SOEs, the Xi administration is looking towards redeveloping domestic innovation-driven manufacturing to focus more the high-tech and services manufacturing sectors. This is, in ways, similar to the “Medium- and Long-Term Plan on the Development of Science & Technology” strategy adopted by the fourth-generation Hu administration in 2006, but whereas that plan focused primarily on technological innovation, the “Made in China 2025” plan focuses on the entire
57
manufacturing chain (Kennedy, Made in China 2025, 2015). It can be seen as the master plan to reform China’s manufacturing sector as China gradually moves away from industrial manufacturing and oversupply, and loses its “factory of the world” status, supplementing the Xi administration’s “supply-side reforms”.
In relation to China’s economic reforms, the “Made in 2025” strategy explicitly favors and supports domestic industries, with a surprisingly specific goal of raising the domestic market share of Chinese suppliers in “basic core components and important basic materials” to 40% by 2020 and 70% by 2025. Just as Western markets are decreasing their dependence on Chinese industrial exports, China is decreasing its reliance on foreign high-tech exports by attempting to develop its domestic innovative manufacturing power, which must then not only be domestically consumed, but also internationalize Chinese manufacturing for exports as well in a manner more explicitly connected to the BRI. If Kazakhstan is emblematic of the sort of trade relations that China seeks under the BRI, especially with Central Asia and South Asia, then the “Made in 2025” strategy is consistent with Chinese-Kazakh trade patterns in which China exports a far more diverse range of exports, particularly in finished goods. Furthermore, two of the ten sectors that the Xi administration wishes focus on include railways and power, within which a great amount of Chinese-led infrastructure projects under the BRI banner belongs (State Council of the People's Republic of China, 2015). This comparison certainly seems more striking when compared to the lists of projects within CPEC (CPEC Secretariat, 2017).
58
China’s second primary economic goal warrants an examination of the BRI, which lies at the intersection of China’s current economic status and corresponding policies, which in turn give further insight towards the fifth-generation leadership’s policymaking calculus, especially since existing literature on the BRI, as covered in Chapter 2, confirms the connection of the Chinese economy to Eurasian markets via infrastructure projects. A dissection of the Xi administration’s motivations for the BRI, especially when set against the present Chinese economic transformation, can be examined when juxtaposed against previous generations of leadership and the preceding Western Development Strategy, also colloquially known as the Go West Policy, previously mentioned in Chapter 3.
Launched in 2000 during the third-generation Jiang Zemin administration and carried on into the fourth-generation Hu Jintao administration, the Western Development Strategy was the follow-up to the second-generation leadership’s Coastal Economic Development Strategy, wherein Deng Xiaoping explicitly targeted coastal China for economic development and market reform, promising to reward inland China for their patience (Lai, 2002). In recognition of the growing inequalities and discontent caused by Deng’s market reforms, the Western Development Strategy encouraged investment and infrastructure development in twelve province-level administrative divisions in western China (the municipality of Chongqing; the provinces of Gansu, Guizhou, Qinghai, Shaanxi, Sichuan, and Yunnan; and the autonomous regions of Guangxi, Inner Mongolia, Ningxia, Tibet, and Xinjiang) through the use of relaxed loan conditions and other incentives (Shih, 2004).
59
Jiang and the Western Development Strategy were not alone in recognizing the increasing inequality and social instability that grew alongside the Chinese economy.
They were followed by the Hu Jintao administration and the fourth generation of Chinese leadership, which advanced a series of socioeconomic goals and philosophies to address these growing issues, including the Scientific Outlook on Development and the Harmonious Society. In contrast to the largely economic-driven Western Development Strategy, the Harmonious Society policy explicitly recognized the societal elements necessary to achieve reform and equality in inland China, but the lack of unifying themes, much less concrete policies, on the part of the fourth-generation leadership transformed the Harmonious Society into a “joke” (Wang Z. , 2013). Furthermore, particularly after the global financial crisis of 2007, the Hu administration shelved plans for reform and equality, and instead focused on strong economic growth and development in hopes of making China wealthy enough to endure the potential setbacks of future reforms (Brown, 2012). The Hu administration presided over a period of significant growth in China, which included an extensive modernization effort, but did not adequately address China’s growing problems.
Superficially, the Western Development Strategy and the BRI share many identical traits. Both policies involve infrastructure development in China’s underdeveloped inland regions. Both policies share the goal of correcting the imbalances in development and wealth distribution between China’s richer coastal regions and poorer inland regions. Implicitly, they are also a continuation of the Chinese strategy of improving standards of living in inland China to placate the grievances of the restive
60
Tibetan and Uyghur populations in Tibet and Xinjiang, who are wary of their status in a Han-dominated state and the growing economic and developmental gulf between themselves and the coast.
However, the specific nuances of these two policies are different. While the Western Development Strategy did include certain connectivity projects, such as the completion of the Qinghai-Tibet railway and the Xianyang Airport, it was primarily an investment-driven program directed towards urbanization and industrialization, executed at a time when China was still reliant on investments to drive its economy, and was primarily aimed at connecting the Chinese interior with the richer coastal provinces rather than with neighboring states (Lai, 2002). The proposed emphasis of the strategy was seemingly placed on investment in specialized tertiary sectors such as science and technology, a contrast to the primary and secondary industrial hubs located in coastal China (Moody, Hu, & Ma, 2011). But even then, the Western Development Strategy ultimately focused in practice on rent distribution over growth promotion, an unsustainable development pattern that only paid lip service to domestic and foreign investment, built on non-performing loans and brought about by internal power struggles that enriched local governments and party bureaucrats (Shih, 2004). In other words, while there are differences, western China under the Western Development Strategy was in some ways functionally a microcosm of the pre-fifth-generation Chinese economy, complete with non-performing loans, an overinflated real estate sector, and weak domestic consumption. This is in contrast to the BRI’s emphasis on connectivity and its goals of transforming western China, Xinjiang in particular, into an international trade
61
hub with Central Asia and South Asia, through which economic activity would be reliant on foreign trade rather than only domestic consumption and domestic wealth transfer.
Rather than understand the BRI, or the Silk Road Economic Belt specifically, as an extension or a “next step” of the Western Development Strategy, it is perhaps better to understand the BRI as a correction to the Western Development Strategy. The Western Development Strategy was established at a time when China was still experiencing miraculous economic growth in an investment-driven command economy wherein China’s state-owned enterprises could subsidize non-performing loans, but maintaining an economy driven by investment had always been a short-term measure that was not meant to be sustainable, and the economy has since slowed. China no longer has the spare funding to carelessly invest, and it is no longer practical to assume that eastern coastal China can carry western inland China’s development as previous generations of Chinese leadership envisioned it. China’s attempt to transform from an investment-driven economy to a consumption-driven economy is, in fact, best exemplified in China’s inland regions, which have been described as being subject to “indiscriminate” and “excessive”
investment as a result of the Western Development Strategy, especially when compared to the more sustainable consumption patterns of the Chinese coastal areas (Lee, Syed, &
Liu, 2013).
It is also worth noting that in spite of the urbanization and industrialization of the Chinese interior, it has not successfully achieved the goal of correcting the imbalances in development and wealth distribution. The Western Development Strategy showed early
62
promise due in part to the worldwide commodity boom that increased demand for raw materials produced in the Chinese interior, but indications have since shown that the wealth gap between the inland and coastal areas is widening (The Economist, 2016). In fact, while paying lip services to the Western Development Strategy, China may have noticed its shortcomings as early as the fourth-generation Hu administration, which may have considered abolishing the strategy entirely (Stratfor, 2003). While the impetus was different, the fourth-generation leadership prioritizing pure economic growth and abandoning western reforms perhaps spoke about their faith in the performance of the Western Development Strategy (Brown, 2012). Inland China has reached a ceiling where continued investment in a possibly faulty policy produces diminished returns that fail to address growing inequalities between the inland regions and the coastal regions, which in turn limits regional purchasing power to meaningfully transform this region into a consumption-driven economy through domestic means alone. Neither the third- nor fourth-generation leadership was able to fix this beyond giving western China an infrastructural facelift (Shih, 2004). So consumption is instead being exported along with China’s oversupply to Central and South Asia, where such projects are being managed by Chinese enterprises and manufactured with Chinese materials (Tan, 2017).
Investment in western China is no longer a solution for its inland woes, and the wealth inequality that western China suffers from relative to eastern China puts the region’s consumption power into doubt. The BRI thus changes these previous strategies of domestic investment, domestic connectivity, and sectorial development to foreign investment, international connectivity, and trade development, congruent with the
63
objectives of the BRI. The initiative is likely relying on foreign means to achieve domestic goals where domestic measures have failed. And, as suggested in Chapter 3, Central Asia is the key.