China on the Edge

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April 16, 2014

By Gordon Chang

There is something very wrong in China at the moment. China, I believe, has just passed an inflection point. Until recently, everything was going its way. Now, however, it seems all its problems are catching up with the Chinese state at the same time.

The country has entered an especially troubling phase, and we have to be concerned that Beijing-out of fundamental weakness and not out of strength-will lash out and shake the world.

So what happened in the past decade?

To understand China's new belligerent external policies, we need to look inside the country, and we might well start with the motor of its rise: its economy.

Everyone knows China's growth is slowing. Yet what is not obvious is that it is slowing so fast that the economy could fail.

The Chinese economy almost failed in June. There were extraordinary events that month including two waves of bank defaults. The Industrial and Commercial Bank of China, the country's largest bank-the world's largest bank-was obviously in distress: it even had to shut down its ATMs and online banking platforms to conserve cash. The Bank of China, the country's third-largest lender, was also on the edge of default.

There was panic in China in June, but central government technocrats were able to rescue the economy by pouring even more state money into "ghost cities" and high-speed-rail-lines-to-nowhere.

Doing so created gross domestic product-economic output-but that was the last thing Beijing should have been doing at that-or this-moment. China, at every level of government, is funding all its construction with new debt. You think America has a debt problem; China's is worse.

As one economist told us recently, every province in China is a Greece.

China, after the biggest boom in history, is heading into what could end up as the biggest debt crisis in history. This is not a coincidence.

Soon, there must be a reckoning because the flatlined economy is not able to produce sufficient growth to pay back debt. If we ignore official statistics and look at independent data-such as private surveys, corporate results, and job creation numbers-we see an economy that cannot be expanding in the high single digits as Beijing claims.

How fast is the country really growing? In 2012-the last year for which we have a full set of employment statistics-the number of jobs in China increased 0.37% over 2011. This indicates that China could not have grown by more than 2.0%

In 2013's third quarter, preliminary surveys show the number of jobs decreased 2.5% from Q3 in 2012 and 4.0% from Q2 2013. That is an indication that China's economy has already begun to contract both year-on-year and quarter-on-quarter.

And why are China's severe economic problems relevant to us? Because for more than three decades the Communist Party has primarily based its legitimacy on the continual delivery of prosperity. And without prosperity, the only remaining basis of legitimacy is nationalism.

The People's Liberation Army, which is configuring itself to fight the United States, is the embodiment of that nationalism.

China's militant nationalism is creating friction in an arc of nations from India in the south to South Korea in the north. Let us focus on the Philippines and Japan.

Nearly two years ago, Chinese vessels surrounded and seized Scarborough Shoal from the Philippines. Washington, not wanting to antagonize Beijing and hoping to avoid a confrontation, did nothing to stop the Chinese taking over the shoal despite our mutual defense treaty with Manila.

The Chinese, however, were not satisfied with their seizure. They are now pressuring Second Thomas Shoal and other Philippine territory, also in the South China Sea. Beijing claims about 80% of that critical body of international water as an internal Chinese lake.

As soon as the Chinese took Scarborough, they began to increase pressure on Japan's Senkaku Islands in the East China Sea. The barren outcroppings are claimed and administered by Japan, but Beijing, which calls them the Diaoyus, claims them as well. As a matter of international law, the claim of the People's Republic is weak-Beijing acknowledged they were Japanese until 1971, when it first asserted sovereignty over them.

Yet the weakness of the claim is not the problem. Many countries pursue weak territorial claims. The problem is China's tactics. Beijing is using forceful tactics to try to take the Senkakus, regularly sending its ships into Japanese territorial waters surrounding the islands and sometimes flying planes into Japanese airspace there.

Many people ask why the Japanese should care about eight barren outcroppings. The reason is that the Chinese are acting like classic aggressors. They were not satisfied with Scarborough, so they ramped up pressure on the Senkakus. They will not be happy with just the Senkakus. Chinese policymakers-and state media-are now arguing that Beijing should claim Okinawa and the rest of the Ryukyu chain.

And recently, Beijing expanded its Air-Defense Identification Zone to include airspace over Japan's sovereign territory, a clearly hostile act and one that can lead to conflict.

There has been a noticeable increase in the tempo of China's territorial incursions during the last year. This uptick has generally coincided with the elevation of Xi Jinping as China's new ruler in November 2012.

Of course, we all want to understand what is going on inside Beijing's political circles and what is causing this new aggressiveness.

There are two theories. First, some think Xi Jinping has quickly consolidated control and that he is really an ardent nationalist, that he is the one pushing the military to act aggressively.

There is some support for this conclusion because it has been repeatedly reported that he is personally directing Beijing's hostile campaign to take the Senkakus.

Even some in the Xi-is-strong camp acknowledge the incompleteness of the leadership transition, however. For instance, Kenneth Lieberthal of Brookings, who is one of Xi's defenders, believes that the new leader is a domestic reformer but cannot get on the wrong side of the ugly nationalism the Party has fostered in the past. Lieberthal believes Xi is allowing the military to engage in provocative behavior so that he will have the political capital to push through economic reforms at home.

Second, others, including me, believe the transition has not been completed. More than Lieberthal, I see a weak leader who does not control the military. People who share this view, which is a minority one, are concerned that flag officers are either making their own policies independently of China's civilian leaders, or essentially telling civilian leaders what policies they will adopt.

In short, I believe we should be careful speaking of "Beijing this" or "Beijing that," but should be looking instead at the factional messiness inside the Communist Party and realizing that the People's Liberation Army is now the Party's most powerful faction.

Xi Jinping has, in fact, no faction of his own. People say he heads the "Princelings," but that term merely describes sons and daughters of either former leaders or high officials.

These offspring have views that span the political spectrum and do not form a cohesive group.

Xi became China's supreme leader because he appealed to all factions, in large part because he had no faction. He was, in short, the least unacceptable candidate. And because he still has no identifiable faction, he cannot afford to offend the generals and admirals, who, in my view have been driving the bus for some time.

Some political analysts even joke that the military is now Xi Jinping's faction.

In any event, China's external policies are of deep concern. It is not just that Beijing is hostile; its foreign policy now makes little sense. In the past, Beijing threw tantrums and even started wars when it wanted to punish a neighbor. Chinese leaders were always smart enough to direct their anger at just one or two targets to make sure they got what they wanted. And many times they were successful.

Today, Beijing is taking on many others, all at the same time, especially countries to its south and its east and the United States. How many adversaries does a country need?

The Party is lashing out, and that is not a good sign. If nothing else, it betrays a lack of strategic thinking. It is not promoting worldwide revolution, as it did in the early years of the People's Republic, but it is trying to upend the existing international order, something that Mao also attempted. So we have to be prepared to face the fact that China is no longer a status quo power.

Is China really going back to its Maoist origins? On the face of it, this sounds absurd. Almost everybody believes China has left its past forever, but that belief does not accord with the facts. The Chinese political system, thanks to Xi Jinping, is now going on a bender, with his Maoist and Marxist "mass line" campaigns, one right after the other; his prolonged attack on civil society; and his new movement promoting "ideological purification."

If the dominant view is correct-that Xi Jinping is now firmly in control of China-it means that he must really believe in his extremist positions.

Either way, Xi is roiling Chinese politics at the moment. For one thing, he is purging political opponents under the guise of a crackdown on corruption. One of these probes, against Zhou Yongkang, breaks the most sacred rule of Chinese communist politics. To heal the Party's grievous wounds caused by Mao Zedong's decade-long Cultural Revolution, leaders in the early part of the 1980s, after the trial of the Gang of Four, decided that no member or former member of the Politburo Standing Committee could be investigated. Those at the apex of political power were immune from prosecution.

The theory was that if leaders knew they would not be hunted down, as they were in the Cultural Revolution, they would be willing to withdraw gracefully after losing political struggles. In other words, Deng Xiaoping, Mao's crafty successor, reduced the incentive for political figures to fight to the end and, as a result, tear the Communist Party apart.

Xi Jinping, however, is reversing the process and upping the stakes, something evident in the tribulations of Mr. Zhou, the former internal security chief, as well as the more famous Bo Xilai, once China's most openly ambitious politician, who is now serving a life term after an incompetently run show trial last August. The widespread use of criminal penalties is a sign that China is returning to a period that many thought was long past.

Last year, then Premier Wen Jiabao warned that China could descend into another Cultural Revolution. Observers at the time thought he was being melodramatic. He probably was not. China is on the edge, taking wrong turns at the moment.

Most foreign policy establishments in Washington and other capitals are doing their best to ignore what is happening in Beijing. They have always hoped that China could become a partner for the U.S., rather than another Soviet Union or, worse, a 1930s Germany or Japan.

And this leads us to the central question in Sino-U.S. ties today: How are we going to develop good relations with a China that, out of weakness or strength, is roiling the world?

Almost everyone says we need to talk to the Chinese because we talked to the Soviets. Talking, the argument goes, will build good relations or, at the very least, will avoid miscommunications and misunderstandings.

The argument sounds compelling. After all, who can be against good relations? Who can be in favor of miscommunication and misunderstanding?

Since the early 1970s, however, the U.S. has talked to China in every conceivable format, formal and informal, bilateral and multilateral, secret and announced. Discussions have been held in Washington and Beijing and many places in between. There have been state visits, the Strategic and Economic Dialogues, and even the "shirtsleeves summit" in southern California in June.

During the previous administration, the number of ongoing bilateral forums between China and the U.S. reached fifty. Today, there are about 90 of them.

Yet as the interactions between American and Chinese officials have increased dramatically during the Obama administration and the last one, ties between the two nations have remained strained.

Obviously something is wrong. We have talked about what is wrong in China. We also need to think about what is wrong on our side. There are three things we are getting wrong.

First, we do not understand how the Chinese think. We fervently believe that if we try hard enough, the Chinese will have to respond in kind. This is a product of our reasoning that we are people, the Chinese are people, we respond to gestures of friendship, so the Chinese will respond favorably to our friendly gestures. By now we should have learned that this line of reasoning, which has a surface logic to it, is faulty because it has not in fact produced good outcomes.

Chinese leaders do not distrust us because they have insufficient contact with us. They distrust us because they see themselves as the protector of an ideology threatened by free societies.

The mistrust is inherent in their one-party state. It can never be relieved as long as the Communist Party remains in power. As Ronald Reagan taught us, the nature of regimes matters.

In short, illiberal regimes cannot maintain enlightened foreign policies, at least over the long term. So we should not be surprised that China cannot compromise or maintain good relations with its neighbors, the international community, with us.

The second thing we get wrong about China is that we believe that it is safe to ignore periodic Chinese threats to incinerate our cities and wage war on us, like the reports that appeared in state media in October 2013 boasting how Chinese submarines can launch missiles with nuclear warheads that can kill tens of millions of Americans.

These are real threats and every time we fail to respond to them, the concept of deterrence erodes. Already, Shen Dengli of Fudan University in Shanghai tells us, in public, that we have "no guts" to stand up to China.

Bad things happen when your adversary does not respect you.

The third thing we get wrong about China is that we think is it inadvisable to call the Chinese out in public. In 2012, for instance, we learned that the Chinese military sold the North Koreans at least six transporter-erector-launchers-TELs-for their newest missile, the KN-08. And we said nothing to the Chinese in public.

Why is that omission important? Because we are not that concerned at this moment with North Korea's longest-range launchers being used as weapons. These launchers take weeks to transport, assemble, fuel, and test.

We can destroy them on the pad. We are, however, concerned about the nuclear-capable, road-mobile KN-08, which can hide and shoot. We should remember that the Pentagon last March cited the KN-08 as one of the principal reasons for going ahead with 14 additional ground-based interceptors in Alaska and California.

So Beijing substantially increased North Korea's ability to wage nuclear war on us, and we acted as if it did not matter. Personally speaking, not offending the Chinese is low on my list of priorities.

And our bashfulness has other consequences. The Chinese, with justification, complain that we are not being transparent with them about the "pivot." We keep on saying that the pivot has nothing to do with them, yet we are rotating B-52s through Australia and B-52s and B-2s through Guam and the Chinese have to be asking what that is all about.

We need to be able to say, in public and in clear tones, that the pivot is all about them, that the pivot is about ensuring peace and stability in the region and they are the ones threatening it.

If we cannot say those things clearly, the Chinese will think we are afraid of them. If they think we are afraid of them, they will act accordingly. I repeat: bad things happen when your adversary does not respect you.

Let me put all that we have just talked about into context. Chinese leaders, it is true, have not launched a large-scale invasion since 1979. Instead, they employ salami-slicing tactics, to grab territory in increments, so that they do not invite retaliation. For instance, they successfully salami-sliced Scarborough Shoal.

The Chinese were not the first to use this clever stratagem. We actually know where they learned this because the Chinese were the victims of these same tactics. The hardline Japanese military in the 1930s kept grabbing chunks of northeastern China.

The Chinese then were continually pushed back and humiliated. In the second half of 1937, there was a feeling in Chinese circles that, although Nationalist forces were no match for Japan's, Chiang Kai-shek had no choice but to fight back.

Chiang ultimately made his stand after Japanese soldiers fired on his troops in July of that year in a minor-and undoubtedly accidental-scrap at the Marco Polo Bridge, a few miles southwest of what is now the Chinese capital.

This is, of course, a lesson for us today. The parallels between then and now are striking.

Then, the Japanese military, like the Chinese military today, was emboldened by success and was ultra-nationalist. Then, like now, civilians controlled Asia's biggest army only loosely. Then, the media publicized the idea that Japan was being surrounded by hostile powers that wished to prevent its rise. That is exactly what the Communist Party says today about China.

Instead of ignoring Beijing's current salami tactics, as Washington does, we should be alive to the fact that countries on China's periphery, pushed to the limit by Beijing's unrelenting belligerence, could very well be forced into the same decision that Chiang Kai-shek made in 1937, to resist aggression with force of arms.

Let us all remember, World War II started not on the plains of Europe in 1939 but near Beijing two years before.

We live in an era defined by the absence of major war, but this peace may not last. At this moment, we do not know whether a Chinese political system in turmoil will drive the country to become the aggressor of the 21st century, but we should be prepared.

We live in consequential times.

Gordon G. Chang is the author of The Coming Collapse of China and a columnist at Forbes.com. Follow him on Twitter @GordonGChang. Republished with permission from the Gatestone Institute.

(AP Photo)

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