John Bruton

Opinions & Ideas

Category: China (Page 1 of 2)

HIGH NOON IN BUENOS AIRES

The G20 meeting in Argentina, which took place last weekend,  simply postponed a confrontation between the US and China which could prove to be as momentous for Ireland as the Brexit vote in the House of Commons on 12 December.

Will a deal be possible in 90 days time?

The omens are mixed. Some US officials say China is offering nothing concrete to bridge the gap between the countries, just promises. President Trump is particularly sensitive about imports in the wake of thousands of lay offs by General Motors last week, which he blames on import competition.

President Trump has already imposed a 10% tariff on a wide range of Chinese goods in an effort to rebalance trade between the US and China. He has said he will increase the tariff rate from 10% to 25% on 1st January, if he does not get satisfaction from the Chinese.

He has threatened further measures to follow.

His concern is about the alleged theft on US intellectual property by China, Chinese subsidization of exports through state supported companies, and the supposed under valuation of the Chinese currency to boost Chinese exports.

A full fledged trade war could start if matters are not sorted out in the next 90 days.

One might think that a dispute like this might be referred to an arbitrator, who could adjudicate on the facts and the arguments. The WTO dispute panels are there to do this. But the US is refusing to appoint judges to sit on these panels, and President Trump has even threatened to withdraw from the WTO altogether.

A Trade War between the US and China would be very bad news for Ireland.

More than any other EU country, Ireland is dependent on the US as a destination for our exports. If the trade dispute with China hits US growth, the effect of that would be felt in Ireland more than in any other EU country.

As an export oriented country, Ireland has also invested heavily in building an export trade to China. We rely on a growing Chinese middle class to consume our meat and dairy products.

We also depend disproportionately on multinational companies, who use global supply chains, which would be disrupted drastically by a trade war between the world’s two biggest economies.

President Trump feels that China has gained unduly and unfairly from its membership of the World Trade Organisation (WTO) since 2001. Since then, while still being a state directed economy, China, through its membership of the WTO, has been able to get easy access to the markets of the world under the WTO’s Most Favoured Nation principle (MFN).

MFN requires a WTO member state not to discriminate between countries, and to charge the same tariffs of goods from all WTO members, including China, unless it has a comprehensive trade agreement with that other country (in which case it is allowed to discriminate in favour of that country).  

President Trump’s deeper worry is that China is using the profits it is making from its export industries to build its military and naval strength in the Western Pacific, where the US also has bases and alliances.

The US sees its bases in Korea, Japan, Thailand and the Philippines as defensive. After all, the US has had a military presence in the western Pacific, in the Philippines, since its war with Spain in 1898. But to China, these US bases, ringed across the sea lanes China uses to survive, are a threat.

To break out of its encirclement, China has increased its own military spending substantially. But it is still spending less than a third of the US defence budget.

So this is not a simple trade dispute that can be settled easily.  

China will continue to want to break out of ring of US bases on its eastern flank. Indeed its much publicised “One Belt One Road” initiative, to develop transport links from western China all the way to Europe, could be seen as an attempt to break free of its dependence on the Pacific sea routes, where it confronts the US and which the US could block in the event of confrontation between the two countries. Japan faced a similar situation in 1941.

The growing trade dispute is already having an effect. China’s economy is showing some signs of stress. New car sales there have declined. Corporate borrowing is high and could be hit by a rise in interest rates, which might be forced on China if it needed to revalue its currency to meet one of President Trump’s complaints. The biggest increase in global debt in recent years has been in China. It is an important element in the global banking system. A slowdown in China would affect the rest of the world.

China acknowledges it has a surplus in goods exports to the US, but believes this is compensated by services exports by the US to China, and by the privilege to US enjoys because its currency, the dollar, is the world’s reserve currency.

To an extent, China and the US are talking past one another. The Americans are even complaining about having to translate Chinese trade proposals from Chinese into English!

Given the complexity of the rivalry between the US and China, the best outcome one can hope for in 90 days time is a some form of combination of minor agreements and postponements.

The really important battle for Ireland and for the EU will be that of defending and strengthening the WTO.

Arbitration, rather than confrontation, should be the way to resolve trade disputes.

CHINA TRANSFORMED …..A NEW BALANCE OF POWER

china-flag-mapThe economic transformation of China is the most important global economic event of the past forty years. It has changed the balance of power on the Eurasian landmass, in ways we are only beginning to comprehend.

The economic transformation of China happened because, since 1979, there has been lively economic competition within China, something that was not allowed in the Soviet model.  China’s economy grew, while the centralised Soviet system stagnated. This explains why Communism survived in China, but collapsed in the Soviet sphere. China also grew thanks to the opening up of global trade, under successive rounds of trade liberalisation, which allowed China to build a powerful export sector.

Now China is having to transform itself again. Its export led model has reached its limits. Labour costs are rising because the big transfer of labour from farming to industry is over, and the Chinese population is beginning to age. The working age population of China peaked in 2015 and will decline from now on. Chinese exporters are being undercut by lower wage economies like Vietnam.

The Chinese economy has also reached environmental limits. The pollution level in some cities is dreadful, and the air is dangerous to breathe, even on an apparently clear day. I  experienced  this for myself when I visited China in the past fortnight on business.  Environmental losses reduce China’s GDP by 10%.

The proportion of its population living in cities will grow from 20% in 1978, to 50% today, and to 75% by 2030. This will lead to even more pollution, unless the cities are built to a different model. China is devoting a lot of research to this and may soon become an exporter of green technology. Necessity is the mother of invention.

Meanwhile China has an increasing number of well off, high spending, consumers. The Boston Consulting Group recently estimated that what it calls the “upper middle class” ( a group that can afford regular foreign holidays) will rise from 53 million today, to 102 million by 2020. Interestingly it estimates that, by 2020, the upper middle class in will reach 73 million in Indonesia, 32 million in India, and 21 million in Thailand.

At the other end of the scale, China has not got a well developed welfare system. The income gap is very wide. Stress is high. Parents are left looking after grandchildren back in rural China while sons and daughters seek work in the cities. There is a two tier labour market, under which long established city residents qualify for social supports, but recent arrivals in cities do not, and can remain in a precarious situation for years.

Nationalism is very strong in China, and one can foresee a clash between the American nationalism of Donald Trump, and the Chinese nationalism of the Communist party.

Both can exploit suspicion of the other, to rally political support internally.

The United States should be cautious. The abandonment of the Trans Pacific Partnership, by both Donald Trump and Hillary Clinton, will leave China in the driving seat, as far as trade policy in East Asia is concerned.  It is ironic that China increasingly sees itself as the defender of an open world trading system, while the United States adopts protectionist rhetoric.  Adding a conflict over the status of Taiwan to this mix could have unpredictable results.

If, under Donald Trump, the US moves closer to Russia, the EU may find its interests aligned more with those of China in some fields, like climate change.  This will be reinforced by the anxiety many of the central European members of the EU feel about Russian intentions, and Russia’s view that some of them should properly belong in a Russian sphere of influence, rather than being so closely aligned with Western Europe through the EU. Russian support for west European politicians like Marine le Pen is part of a strategy to undermine the EU.

Historically, China has been a supporter of EU integration, while Russia has been hostile, because it felt itself excluded from pan European security structures.  Russia feels itself hemmed in. Russia’s seizure of Crimea, and its involvement in the Syrian Civil War, can also be seen as attempts to break out of its strategic isolation and gain access to the Black Sea and the Mediterranean.

It is also to break out of its sense of isolation, that China has promoted its “one Belt, One Road” policy to link itself with Western Europe.

As a continuing member of the European Union, it will be in  Ireland’s economic and political interests  to play its full part in building a  balanced structure of peace on the Eurasian land mass, that protects the rights of small states, but  which also one that ensures that no great power feels itself hemmed in, or isolated. For that is how wars start.

 

NATIONALISM’S UNEXAMINED LIFE…….

NYT obituaryAn ideology that does not have all the answers.
 
I  was in Asia when I read the New York Times obituary of Benedict Anderson posted above.
 
I confess I had never read any of his books but was struck by the huge contemporary relevance of the quotations from him in this  fascinating obituary.
 
Many of the disturbances in the world today are driven by the phenomenon Anderson spent his life analysing…..nationalism.
 
For example,
  • it is nationalism that lies behind the tension between China and its neighbours over islands in the South China Sea.
  • It is English nationalism that lies behind the UK effort to detach itself from the EU, while still enjoying its benefits.
  • It is French nationalism that is fuelling the growth in support for the Front National.
  • And it is, of course, a particularly virulent form of  American nationalism that lies behind the anti Muslim, and anti Mexican, rhetoric of Donald Trump and friends. 

 

 
Nationalism frequently defines itself by the people it is AGAINST, rather than by the values it is FOR.
 
US Senator Cruz exemplified  this aspect of nationalism when ,in a recent speech, he called for “moral clarity” in US foreign policy, defining moral clarity as knowing how to identify America’s enemies!
 
Unfortunately nationalism often has to pick on violent events to provided cohesion for the “imagined community” that is the “nation”.
 
In Ireland, for example, we are embarking on a year of celebration of killings and death, in the Dublin rebellion of Dublin in Easter Week 1916,  and this rebellion, and the Proclamation that launched it, is being presented as the  “founding event” for the Irish nation. 
 
This is historically inaccurate.
 
The Irish national identity was built,  much earlier, by peaceful agitation, by people like Daniel O Connell, Charles Stewart Parnell and others, much more than it was, by the killing and dying of the 1916 to 1923 period. In fact O Connell’s movement was arguably the first peaceful mass democratic movement in the world. 
 
But I fear that will not be not the message that will be conveyed to Irish school children during 2016. 
 
One interesting thing about nationalism is that is so un self critical.
 
It does not examine the assumptions it makes, whether about
+ who belongs to the nation,
+ who can opt out of the nation,
+ whether a nation is about territory or people and
+ whether the nation comes before the individual or vice versa.
Another thing to note is that nationalism is modern, and not an ancient, ideology.
 
It came about, as Benedict Anderson says, because  the other forces, that  previously sufficed to persuade people to cooperate such as a shared religious belief or a shared allegiance to a ruling dynasty, had lost their force . Nationalism has replaced Communism in Easter Europe since 1989.
 
Nationalism also uses simplifications of history, and mysticism, to  avoid asking difficult questions of itself.
 
This is evident in Japan, in its approach to China and to the legacy of its  war in China from 1936 to 1945.
 
Similar over simplifications and blindness to the other side are also present in the dispute between Israeli and Palestinian nationalisms.
 
These conflicting interpretations of history make it difficult for people, whose objective interests may actually largely coincide, to cooperate fruitfully with one another.
 
That is why I believe there should be an open debate about what nationalism really means.
 
The 150 traditional “nations” of the world ,who met in Paris on our global climate,  are all  of them far too small to cope on their own with the  challenges of global interdependence, global waste, and global environmental degradation. Nationalism does not have an answer to that problem.
 
While nationalism will always be with us, it needs to accompanied by other, more global, foci for loyalty and common action.

THE LITTLE KNOWN WOMAN WHO RULED CHINA FOR OVER FORTY YEARS

Empress Dowager Cixi
I immensely enjoyed reading “Empress Dowager Cixi” by Jung Chang, published by Vintage Books in 2014.
 
It tells the story of a well read young girl, named Cixi, from the Manchu aristocracy, who was selected to be one of the concubines of the Chinese Emperor.  In 1861, the Emperor died young, without a male heir by his wife. Cixi ,had, however, borne him an infant  son, and this son  became Emperor
 
Power was to be exercised on his behalf by Regents.
 
But, with the surprising connivance of the legitimate wife of the late Emperor,  the  infant Emperor’s mother, Cixi succeeded in dismissing the Regents,  and, along with the old Emperor’s widow, the exercised full power on her sons behalf.  
 
In 1875, her son, the Emperor, died,  not long after he reached maturity. Cixi  then managed to have another infant, a nephew of hers, named as Emperor.
 
Cixi thus continued to be the real power in the Chinese Empire, until her death in 1908.
 
She  opened China up to modern ideas in public administration, transport and education. She wanted to learn from the West, so that China would not be dominated by the West.
 
But Japan had been modernised twenty years earlier than China, and had developed a far stronger army and navy. Japan wanted to control China, or at least the Chinese market. When it did not get its way, Japan defeated China in a war over Korea in 1894.  As a result , Japan obtained huge reparations, which further weakened China economically and politically..
 
Other powers then made  demands on China, which, in 1900, provoked a popular, anti foreigner, uprising known as the Boxer rebellion.
 
Cixi sympathised with the Boxers, and was forced to flee Beijing when her capital  was taken by foreign troops from a number of nations, including Britain, Germany and Japan, who had intervened to suppress the Boxers. 
 
The foreign troops  could not , however,  fully  control China without the legitimation of a native Chinese government.  Cixi was thus able to return to power in Beijing after the foreign troops had left.
 
At this stage, having learned the lesson of the failure of the Boxer revolt,  she set out to prepare dramatic reforms of China, including an elected parliament and turning the Empire into a constitutional monarchy. The laws for this were passes, but Cixi  died before these could be brought into effect.
 
A few years after her death,   the Empire itself was replaced by  a Republic . This Republic survived, but not as a democracy as Cixi had  envisaged, until 1949.
 
This book is a dramatic story on intrigue, tragedy and extreme ruthlessness. The character of Cixi, and of her advisors and opponents, is drawn out very skilfully.  So also is  self satisfied and inefficient  social structure of mid nineteenth century China, which Cixi did so much to change, long before China became a republic in 1911. 
 
Cixi’s role has been downplayed  by both the Nationalist and the Communist Chinese  leaders, because both want to claim the full credit for the modernisations she had, in fact, initiated. 
 
Above all  this book is the story of how an intelligent  a woman was able to exercise immense power, in what appeared, on the surface, to be a completely male dominated society.
 
It is also the story of the humiliations suffered by the people of an ancient nation at the hands of foreigners, and explains why China today, is so determined to equip itself to resist unwanted external interference.

DEMOGRAPHY IS DESTINY

CHINA CHANGES ITS ONE CHILD POLICY ………………..
AFRICA COULD BE THE WORLD’S 21ST CENTURY ECONOMIC GIANT

I was in China this week. The purpose of the visit was to promote Chinese investment in Ireland. 

I met the Irish Ambassador, Paul Kavanagh and his small team, who are working very hard to promote links between Ireland, and what is now the largest economy in the world.

The Chinese economy is being rapidly restructured.

Services are now the largest sector, 48%, as against 41% in manufacturing. There is now less reliance on exports and more on the home market.
Last Thursday, it was announced that China is to end its one child policy. This is a response to the fact that labour shortages will eventually be a problem for China.

This one child policy was first brought into force in 1980.

It  has been very effective.  The Total Fertility rate globally is 2.5, in developing countries it is 2.7, in the poorest countries it is 4.4, but in China it is only 1.6! 

The Chinese population will peak in 2027 and begin to decline thereafter. In this, China is like Europe.

In contrast, the population of Africa could increase from 1.1 billion to 4.8 billion by the end of the century.  Africa’s labour force will grow whereas that of Asia will remain stable, and Europe’s labour force will fall. As a result, Africa’s economy could enjoy the fastest growth in the world, over the next century, if it can maintain political stability.

A labour shortage is already evident  in China. The number of young people in the 18 to 24 age group today is 108 million, as against 124 million in 2008.   The number in that age group will fall by 7 million in each of the next 10 years. 

At the other end of the age spectrum, the number of retired people will start to grow rapidly. That is bound to have an effect on the overall productivity of the Chinese economy.

More and more Chinese families now consist of four grandparents, two parents, but only one child.. Growing up as an only child is a very different experience from growing up in a  large family and it remains to be seen what effect this will have on society.

Because of the preference of families for sons over daughters, more female babies are aborted, which has led to an imbalance in society. Abortion is contrary to the tenets of traditional Chinese religions, like Taoism, as I saw in a plaque displayed in a temple I visited in Beijing. But it is the policy promoted by the government. The fact that more girls than boys are aborted has not got much attention from the world feminist movement.

The new two child policy will not become effective straight away. Regional laws have to be passed to bring it into effect, and to remove the severe penalties that still apply to having a second child. 

There are also practical difficulties in the way of parents who may wish to have a second child. Housing is in very short supply in the big Chinese cities and there will simply not be room for a second child. Already many parents, who have gone to work in the cities, have had to leave their only child behind them in a rural village, to be cared for by a relative, because they cannot find room for the child in the city where they work.

A declining labour force and housing shortages are among a number of challenges China must face at the same time.

The country must also
  • orientate the economy away from heavy industry to consumer goods
  • reduce the level of debt of local governments, state owned enterprises, and households. 80% of all public spending in China is done by local governments 
  • reduce reliance on coal as an energy source because coal burning causes so much pollution

WILL CHINA BE ABLE TO MANAGE THE NECESSARY ECONOMIC CHANGES?

The Chinese stock market has fallen 40% from its 2015 peak. By comparison the US market is only 10% down from its 2015 peak, and the Euro zone only 15%.

House prices in major Chinese cities are out of reach of most employees. 

Air quality in the same cities is poor because China relies disproportionately on coal as a source of energy. 

Meanwhile China does not have a comprehensive welfare state, so Chinese families have to rely on savings, sometimes in the form of stocks and shares, and house property, to provide for their retirement. The fall in the stock market will thus have a direct effect on many Chinese families.

I have visited China a number of times in the last few years. 

On one of those visits, in 2013, I drew the attention of my Chinese audience to the then latest IMF report on the country.

It contained warnings that will sound familiar to those who have studied recent Irish economic history.

The IMF talked, even then, of the risks in China of 

  • “a steady build up of leverage eroding the strength of the financial sector”,
  • “a boom in non traditional sources of credit”, and of the need to take
  • “steps to reduce moral hazard to ensure that banks do not engage in potentially destabilizing competition” .


On the other hand, The IMF recognised that China has very well capitalised banks.

Most commentators believed that the Chinese Communist party, with its immense concentration of talented people in key positions, would be able to manage the huge structural changes required in the Chinese economy. It was believed they could impose technocratic solutions more easily than would be possible in a democracy.

The changes required include

  • a  managed  dissipation of the stock market and housing bubbles, 
  • a shift China away from reliance on investment in physical infrastructure to support the economy, to a  western style reliance on consumer spending.At one stage China was pouring up to 40% of its GDP into physical investment. When one is investing to that extent, one is bound to be putting some of the money into projects that will never yield a return.
  • a shift away from coal to cleaner energy sources and
  • the inauguration of a welfare state which would facilitate the development of a consumer led economy and less speculative investment by savers trying to provide for their old age


The fact that the Chinese authorities have now had to revert to a policy of currency devaluation is worrying.

It suggests that the authorities are not as firmly in control of the situation as one might have thought, and may not be able after all to manage the structural changes required, without the sort of political turbulence we have seen in democratic countries.

HOW WILL THE 21ST CENTURY TURN OUT?

In 2009, I read “The next 100 years – a forecast for the 21st century” by George Friedman
George Friedman is the founder of Stratfor, a Texas-based strategic intelligence consultancy advising many major US corporations. Although described as a conservative Republican, his views would mirror those of many foreign policy realists in both parties. 

He assumes that military and economic power will determine the future. As he puts it, “anger does not make history, power does”. 

Looking back at the book six years later, it appears to have been prescient in many respects. 

He argued in 2009  that the United States would remain the dominant global power for the rest of the 21st century, because of its huge natural resources of coal and oil, its geographic immunity from attack in its fortress of North America, and its control of the world’s seas and of space.

Just as England’s strategic goal, as an island nation and a naval power, was to prevent Europe’s unification under one power coalition, America will pursue a similar policy on the Eurasian land mass. It will not want any one coalition – be it of Russia, China, Turkey or Japan – to dominate that land mass.

He was critical of the way American politicians sometimes approached foreign policy. Because America is so powerful, it has a much bigger margin for error than others, and it sometimes overuses that luxury. He said America is “adolescent in its simplification of issues, and in its use of power”. In general, I do not think President Obama can be accused of this, but some of his Republican critics can.

Other less powerful countries have less  margin to make mistakes. 

Most significantly in light of current events, he argued back in 2009 that Russia, following the eastward expansion of NATO to within 100 miles of St. Petersburg, was “in an untenable political position” and “unless it exerts itself to create a sphere of influence, it could itself fragment”. This is a credible explanation, offered beforehand, of Putin’s present actions in Georgia and Ukraine.

Both China and Japan he saw as vulnerable, because they are export economies, and they rely on the all powerful US Navy to keep sea lanes open for their exports of goods and their imports of raw material. Since 2009, China has spent heavily on its navy so this prediction may be overturned.

Friedman said that the European Union was a schizophrenic entity, in that its “primary purpose is the creation of an integrated economy, while leaving sovereignty in the hands of individual nations”. The current economic crisis is putting this proposition to the test, and one hopes Friedman will be proven wrong. But he has a point. EU’s states often set ambitious common objectives for themselves, but fail to match them with the necessary central authority.

He argued that there is a divergence of interest between Germany and others who will want easy relations with Russia, and more easterly EU members, who will fear again being sucked into Russia’s sphere of influence. Chancellor Merkel does seem to confronting this dilemma, if reluctantly.

Surprisingly, Friedman did not see China becoming as a great power. This was  because of what he saw as its inefficient allocation of capital, its corruption, its profitless exports and its unhealthy reliance on US consumers to buy its goods. Its one child policy will also mean that it soon will be an ageing society. It appears that the current Chinese leadership in confronting these challenges, but reorienting its entire economy will be a very difficult process. 

Surprisingly, Friedman saw Japan emerging as the major Asian power, notwithstanding its lack of resources and its very elderly population.  I believe this is incredible.  An elderly country cannot be a powerful country.

He ignored India altogether. I believe this analysis of the long-term balance of power in Asia was quite unconvincing.

He saw Turkey emerging as the major power across all the former Ottoman lands from North Africa to Central Asia. Here his predictions are more robust in light of subsequent events.  He argued in 2009 that Islamic fundamentalism will run out of steam because its real target, the liberation of women, is irreversible. Since he wrote his book, Islamic fundamentalism has actually increased in strength, but he is probably right in the long term.

Friedman speculated about the likely conflicts of the twenty-first century – including its wars. He believed the wars will be conducted by unmanned aircraft using high precision weaponry and guided from space. They will be backed up by small numbers of highly equipped infantry. The aim will be to destroy the electricity generation capacity and close sea lanes of the enemy. There will be modest casualties. Wars, he believed, would be limited, and would end with negotiated treaties. Pursuit of unconditional surrender would be off the agenda, because nuclear weapons would make it too dangerous. All this is true of wars between the big nuclear powers, but are hardly true of what we have been seeing in Ukraine, Syria, Iraq and parts of Africa.

Although some of Friedman’s speculations had a touch of science fiction about them, its basic assumptions about the realities of military power, and it’s reach, are credible and sobering, especially for those who might think that neutrality would protect a country from military conflicts.

THE LONG WAR…..CHINA V JAPAN…… 1937 TO 1945

For China, the Second World War began in July 1937, and did not end until August 1945. China’s casualties in the war were greater than those of any other nation in the world, apart from the Soviet Union.

Whereas the enmities of the Second World War in Europe have largely been subsumed by the economic integration within the EU, they are still very much alive in the brittle relations between Asian states, notably between Japan and China.

I have just finished reading “China’s War with Japan, 1937-1945, the struggle for survival “ by Rana Mitter, which sets out the background to this brutal war and explores all its complexities.

Throughout the nineteenth century the central government in China had been steadily weakening. The Emperor had to rely on local warlords, raising their own forces to suppress the Taiping Rebellion between 1856 and  1864. The government had to make major trade concessions to western powers and lost effective control of some of its key port and its trade policy. It  had to allow foreign troops, including Japanese units, on  parts of its territories.

After the overthrow of the Emperor in 1911, the Nationalist Chinese Government of Chiang Kai Shek, began to reduce these foreign privileges, and in 1930 took back control of its own trade policy. This was seen by Japan, which from the early 1930’s could no longer rely on western markets because of the protectionist policies of western powers, wanted to create its own exclusive  economic zone, including China.

Japan decided in 1937 that it would demand that China cut its tariffs on Japanese goods, employ Japanese military advisors, and join a military pact ultimately directed against the Soviet Union. It did not intend to conquer China, just to control it.

But a minor incident between Japanese and Chinese troops near Beijing in 1937 escalated into a general war, because the Chinese did not, as the Japanese expected, back down and apologise.

Japanese troops took over large parts of Northern and eastern China, committing major atrocities including the rape of Nanking. There was no outside intervention to defend the territorial integrity of China, by the United States or anyone else. The Chinese retreated inland but did not surrender or make peace, as most people expected they would.

The war in China was costly and Japan needed more resources, and it  decided it had to choose between seizing territory and resources from the eastern part of the Soviet Union, or from South East Asia. 

It decided on the latter option. 

This led to a response from the United States which, in November  1941, demanded that Japan withdraw its troops from both Indochina and China.

Japan saw what was coming and attacked Pearl Harbour a few days later.

This did not solve China’s problem, because the United States gave priority to rolling back the Japanese in the Pacific, and to liberating Europe, over direct US military  intervention in China. Indeed the Japanese continued to advance further and further into China right up to 1944. China sensed that it was being treated as a second class global citizen, and that shapes present attitudes, both to the West and to Japan.

HANGZHOU, CHINA

I  have been in Hangzhou in the past week attending a Global Investment Conference organised by Euromoney. Hangzhou was for a time the capital of China and the biggest city in the world. It is about 200 km from Shanghai, or an hour’s journey on the high speed train, a trip that I was told costs only 10 euros.


Hangzhou was a centre of the silk business and was visited by Marco Polo. Silk from Hangzhou went along the ancient Silk Road all the way to Europe, thereby making Hangzhou one of world’s first globalised economies.

I spoke in Hangzhou just as the Asia Europe Economic Meeting (ASEM) of heads of Government was taking place in Milan. As the President of the European Council, I attended the first ever ASEM meeting  in Bangkok in 1996. I met the Mayor  of Hangzhou and key commercial and political figures.

Since 2010 there has been a huge surge in outward investment from China in the rest of the world, jumping from 6.1 billion euros to 27 billion euros in just three years. This investment is going into  buying high tech companies, companies with globally known brands, and tourist resorts (like Fota in Cork). Just as China’s export drive enabled it, not only to gain income but also to gain market knowledge, this wave of investment is also designed to strengthen China’s global competitiveness and sophistication. 

Children in the Shanghai are getting the highest test results in Maths, Science and Reading comprehension in the global PISA tests, which shows that they will provide strong competition for European and Irish children in the global economy. Irish Universities are accepting Chinese students and also investing in developing University facilities in China. This will help China to become a high income economy, its people enjoying lifestyles that will make similarly exorbitant demands on global resources, to the ones already being made by  European and American lifestyles consumers.

Wage levels are rising fast in China, as demand for workers is beginning to exceed supply, partly thanks to the one child policy.  China is losing low cost jobs to Vietnam and Mexico, so it has no choice but move higher up the value chain.

There is a shift in the allocation of credit away from big, relatively inefficient, state owned heavy(and often polluting) industries, towards privately owned businesses in the consumer goods sector. While the raw GDP growth rates in China may decline as a result, the life style enhancing quality of future GDP will improve.

China is becoming a middle class country, with middle class tastes and material aspirations. With wealth has come anxiety, with many Chinese wanting to invest some of their savings overseas. This provides opportunities for the Irish international financial services industry.

While I was in Hangzhou, the protests in Hong Kong were still under way. The protesters wanted anybody to be eligible for election, not just candidates approved by a single nomination committee. I read an article on this controversy in the “China Daily”, by an Indian Professor, M D Nalapat,  entitled  “Hong Kong must avoid the democracy trap”, which challenged the notion that, at every level of economic development, democracy is a guarantor of economic success.

He said
“Political chaos can act as a speed breaker for rising Asian economies, dampening the challenge they pose to western counties. Iraq, Egypt, Libya and Ukraine are examples of countries where hundreds of thousands of youths believed that replacing of existing structures through street protest would result in a better life. Instead what they have got are deteriorating living standards and  increasing insecurity.”

This is unfortunately a fair comment, and demonstrates the danger of making exaggerated claims of automatic economic advantages from any change of governmental system. Democracy requires patience and self restraint, sometimes absent in recently liberated societies.

Professor Nalapat went on
“Hong Kong is still moving upward, when the present generation in the US and the EU are worse off than the generations preceding it”

This  is a  superficial comment. Mature economies will never have, or need to have, the same rates of economic growth as economies, like China, which are in the “catch up” phase. Indeed, there is a case to be made that, beyond a certain level of economic development, diminishing returns in human wellbeing and environmental quality set in. 5% plus annual growth rates cannot continue to infinity…..anywhere in the world.

It is not surprising that an article like Professor Nalapats’ should appear in the “China Daily”, but is troubling that it should be written by an Indian, an inhabitant of the world’s largest democracy, a country in which there are 3 million freely elected  legislators at differing levels of government, with real competition between parties unlike the tightly controlled system obtaining in China.

But Professor Nalapat is showing that people in the developing world are watching European and North American democracies, as we squabble about how to restore dynamism and optimism in the wake of the 2008 economic crisis, and are drawing conclusions about our systems of government, and the capacity of those systems to enable us to get our economic act together, and democratically to reconcile citizens expectations with economic realities.

STRATEGIC RIVALRIES IN EAST ASIA HAVE IMPLICATIONS FOR THE WHOLE WORLD

I was in the Far East recently doing some work in Singapore on behalf of IFSC Ireland.

It is a part of the world, like Europe, where a sudden bad political development could easily over turn good economic potential. 

The approach China is taking to oil exploration in the South China Sea, claiming the whole of the sea for itself, is deeply troubling to its neighbours. We see this in the riots in Vietnam in the past few days. There is, unfortunately, no agreement to jointly exploit the resources under the South China Sea, and that is a continuing source of tension, and is leading to an expensive arms race. 
Internal economic problems can often lead to external aggressiveness, as a means of distraction, as we have seen in  the case of Russia.

Many of the players in Asia, notably China, Japan and South Korea, despite their rapid recent growth, have internal problems arising from rising income expectations, indebtedness, and ageing.

Wage inflation in China is running at 18%, which will have a long term effect on its competitiveness. Its banking system has many non performing loans.

Japanese corporations are heavily in debt. The Japanese Government has a debt/GDP ratio of over 200%. Japan is one of the most elderly societies in the world, but is reluctant to allow immigration.

A rise in international interest rate would aggravate all these vulnerabilities. Such a rise will eventually happen.

Meanwhile North Korea, with its nuclear arsenal, remains an existential threat to all in the region. 

Conflict in East Asia could have disastrous implications for the world economy, because it would disrupt the complex, interdependent, and fragile multinational supply chains on which global manufacturing is now based.
Meanwhile, China and the United States are pursuing competing agendas. Each would like to incorporate East Asian countries into rival economic blocs.

The US sponsored proposed Trans Pacific Partnership does not include China, but China is offering an alternative, less demanding, trade deal to its Asian neighbours. The choice is important.

If Senate Democrats continue to deny President Obama the authority to negotiate trade deals, on which the Senate agrees to vote on as a single package rather than pick apart, there has to be a possibility than the Chinese approach will win out.

This would bring about a significant shift in the global balance of power.

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