Asia rising, Asia falling?
July-September 2017
By: Andrew Phelan

This is a fine, measured work of analytical myth-busting that provides multiple stakeholders, from diplomats to business leaders to students, a primer on the real risks and challenges the broader Indo-Pacific region faces at it strives to attain a “Western quality of life.” Its publication, coincident with the swearing in of a new US president, could hardly have been more timely. Auslin’s Asia risk map has us navigating five hazards: failed economic reform; demographic risk; lack of political community; unfinished political revolutions; and the threat of war. All these risk areas overlap, so I’ll highlight some of them to give you a flavor of what to expect from this essential piece of work, as it would be impossible to touch upon them all in a book review.

Auslin starts out with Monday, June 15, 2015. When the Shanghai stock market opened on that day, it had been on a tear. A three-year bull run had it up 106 percent since the summer of 2014. China’s stock market now had a capitalization of more than $10 trillion, but on that Monday the bubble burst. By the end of the northern summer its stock market, despite some desperate measures, had lost one-third of its value. The Chinese government values two things above all else: control and stability. It was now caught, seemingly, like a deer in the headlights, not knowing from a policy point of view quite what to do.

China had viewed 2008 as a tipping point in its own rise and the decline of its strategic rival, the United States. The global financial crisis, spawned by the untrammeled greed and recklessness of a handful of Wall Street investment banks, was proof to Beijing that the American system was not only not infallible, but perhaps inferior to its own centrally directed one-party system. But here was a development dilemma, one faced in different ways by Japan and South Korea but unique to China. How does a system that values so much state control allow free markets to self-regulate under an independent legal system and a free stock exchange? The answer is: it doesn’t. Much of that pre-2015 investment had proven to be highly speculative. Chinese money has a history of running for the exits – think late 1940s – and given the opacity of Chinese markets, the stock sell-off led to an unprecedented flight of capital out of the country in the form of investments in overseas real estate, the US stock market and in many cases prior to President Xi Jinping’s crackdown, casinos outside of mainland China.

Since 2015, the rate of growth of China’s economy has slowed and recently even recorded its first current account deficit. The challenge for the Chinese leadership now is to plot the next stage in the maturation of its economy. According to Nicholas Lardy, of the Peterson Institute for International Economics, simply merging state-owned enterprises (SOEs) into bigger ones is not the answer. Measured by return on assets, China’s SOEs are rank underperformers compared to their US counterparts. In the recently concluded National People’s Congress, President Xi boldly announced that SOEs would have to behave more like private companies. China’s total debt to gross domestic product is believed to be in the order of 250 percent, so a reorientation of the economy away from shadow banking and a bloated state-owned sector and toward a more market-oriented private economy and more consumption would be a massive shift – one not without the risk of social dislocation.

China’s wealth is already very unequally distributed, and there is widespread anger among ordinary people at the wealth of its ruling elites, something the Communist Party goes to great lengths to conceal. One World Bank report states that since 1998, China has seen 800 million of its citizens lifted out of poverty. What it should read, though, is “extreme poverty.” The World Bank defines poverty as $1.90 per day. Try getting by on that in Beijing or Shanghai. According to the Pew Research Center, there are 900 million people in China who are “low income,” defined by making less that $10 per day. A slowing Chinese economy represents not only the risk of more social instability, but may also add fuel to China’s already fervent nationalism. More on that later.

Please login to leave a comment