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14 March, 2017 11:29:01 AM
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China within the East Asia paradigm in 2017

aThe emergence of Trump on the other side of the Pacific has underlined more than ever the importance of China and its economy being the center of gravity within the Asia-Pacific region
Muhammad Zamir
China within the East Asia paradigm in 2017

Analysts are noting that after three decades of rapid economic growth fueled by low-cost exports and state-led infrastructure investment, China is presently facing the early stages of a shift toward a different kind of economic growth model based on private consumption and high value-added manufacturing.
Economists are also realizing that increased consumption will hopefully be able to reduce the economic pain for the rest of 2017 that is being caused by relatively stagnant exports and weak growth in the construction sector. They are consequently underlining that Chinese leaders will have little option but to use state-led infrastructure investment not only to maintain the country's economic health but also ensuring its social and political stability. 
The world will consequently wait and watch President Xi Jinping’s forthcoming efforts to consolidate power over the Communist Party and over the State’s institutions ahead of the 19th Party Congress, which is expected to take place around October. Xi’s administration in this context will obviously take all necessary measures that they feel will help to contain any social or economic instability that might threaten his political objectives and status within the Party. This might mean sidelining some of his potential rivals and moving allies into key government posts. This equation will assume greater importance because five of the seven members of the Politburo Standing Committee may retire this year. Sinologists are mentioning that the effort to control the dynamics might see the President’s followers using the anti-corruption drive to remove rivals and threats to the President’s power.
It would however be foolish to think that such political maneuvering would be at the expense of economic reform.  It is clear that where appropriate, relevant authorities will take measured steps with regard to initiatives such as a nationwide property tax and property registration system. In all likelihood they will also continue to encourage consolidation in heavy industries. It is being expected that the government will also use credit creation and robust state-led spending on infrastructure and other construction-related industries to maintain growth. Creating stability through such a measure will help the President to gain greater control over the political system.
Western economists are however pointing out that such a mixed economic strategy will not be without risks. They are drawing attention to the fact that corporate debt in China has climbed to dangerous heights and is presently disproportionately concentrated in resources, construction and other heavy industries that suffer from overcapacity and now constitute the major share of nationwide nonperforming loans. It is also a matter of great concern that corporate debt is maturing more quickly than ever across all industries, especially heavy industries and the construction sector. This is forcing companies to take on even more debt to invest and to cover old debt. This matrix has taken on a more awkward situation because despite unprecedented credit creation and robust government spending in 2016, the real estate sector – on which many of the above industries depend – saw continued decline in completed investment and construction starts in the recent past.  
Nevertheless, it would be worthwhile to point out that despite growing difficulties in its efforts towards macroeconomic management Beijing still has the resource for maintaining its economic status quo in 2017.  
However, the above scenario will be but only one facet among the many other daunting external challenges that China will have to face and overcome towards its continued economic stability. That will include the potential Eurozone crisis and new trade policies under the Trump Administration. 
One should not forget that Trump, during his presidential campaign, accused China of being a currency manipulator and threatened to impose across-the-board tariffs on U.S. imports of Chinese goods. This will probably not materialize. However, the new U.S. Administration has already walked out of the TPP and if it so wants might end up imposing tariffs and anti-dumping restrictions on imports of goods- such as steel from China. Many consider that such measures would severely impact on China. Such a scenario however appears to be unlikely and some are even terming that it would be fairly inconsequential. Economists generally believe that targeted protectionist measures would have a marginal impact on China's economic trajectory and would only encourage corporate supply chains to diversify in other parts of Asia with cheaper labor and large consumer markets. This dynamic would then create tensions between the two economic superpowers –and this could spill over into other spheres of U.S.-China relations.
We have already seen Trump taking steps that indicate that he is willing to transcend diplomatic norms governing U.S.-China relations. Through this he has affirmed that he intends to use the question of Taiwan’s status as a bargaining chip in negotiations with China on other fronts, including cyber security, North Korea's nuclear program and trade. Beijing is however unlikely to make any concessions on Taiwan and Washington knows this. Instead of fundamentally re-evaluating Taiwan's status, the Trump administration might then try to use the Taiwan issue to enhance more open confrontational actions in the South China Sea or elsewhere. 
It is being felt that such an evolving scenario might then provide Taipei with some breathing room from China. Nevertheless, it is also clear that this island will be more careful during possible changes within the existing matrix. Taipei will consequently try to carefully manage cross-strait ties to avoid a direct confrontation with Beijing. China on the other hand, consistent with their past courses of action can be expected to use diplomatic isolation, military intimidation and targeted economic coercion to increase pressure on Taiwan, a critical nodule in the global tech supply chain that is deeply integrated with the mainland. 
It is also clear that Beijing will also try, overtly or otherwise, to ensure that there is less instability in Hong Kong. In this context, it is certain that they will try to ensure that a favorable candidate prevails in Hong Kong’s forthcoming Chief Executive Election, which is set to take place in March. This election will definitely incite protests, but it is also most likely that this will provide an opportunity for Beijing and Hong Kong to improve their relationship — even though Beijing, quite clearly has designs to integrate Hong Kong further into the mainland. 
Nevertheless, it must be clearly understood that Hong Kong and Taiwan will draw particular attention from Beijing but this will be only one of the important factors in their policy decision making chain within China's evolving strategic environment. It is certain that throughout 2017, eager to boost the economy's slow but steady shift up the industrial value chain, China will attempt to promote overseas investment into sectors such as high-tech manufacturing and information and communications technologies. It will most certainly also try to capitalize on the opportunity created by the Trans-Pacific Partnership's demise. Japan, Vietnam and South Korea have already observed that China is now trying to promote its own alternatives that it has been endorsing through the Regional Comprehensive Economic Partnership and the Free Trade Area of the Asia-Pacific. 
It would however be pertinent here to also refer to the fact that China will try its best to combat economic weakness at home through strong government initiative aimed at curbing illicit capital outflows. This in turn might somewhat slow the momentum of Chinese outbound investment but it is unlikely that it will halt its efforts to enhance infrastructural, economic and security ties to Central and Southeast Asia. China might however face some obstacles in this context with regard to its grand initiative ‘One Belt, One Road’ — the massive development and infrastructure strategy aimed at better connectivity between China to the rest of Asia, Europe and East Africa. This might include challenges arising out of local opposition and security risks in places such as Central Asia, Afghanistan and Pakistan.
This analysis would not be complete without some reference also to the travails that China might face this year with regard to its changing strategy in the South China Sea. China's influence has steadily grown in recent years within this area. This has partially taken place due to its campaign aimed at expanding and modernizing its military presence and through the development of most of the islands in that maritime area. The pace of expansion appears to have slowed down somewhat last year in 2016 but this was probably due to the international court of arbitration's ruling against China's maritime territorial claims. It is presumed that this year, in 2017, China in all likelihood will replace its strategy of aggressive expansion with a policy that, in addition to coercion will leave some room for cooperation. This trend will encourage it to seek greater cooperation with potentially amenable claimants, such as Malaysia and the Philippines through conciliatory gestures on economic and maritime issues. Such an approach will also be consistent with its strategy of handling disputes on a strictly bilateral basis. This will then create the opportunity of being able to extend concessions to areas such as energy development and also being able to potentially sign a code of conduct within the framework of bilateral relations. Such a course of action eased maritime tensions somewhat in 2016 but might have more mixed results in 2017 due to potentially strained relationships with the United States and over Vietnam’s continued ventures into maritime construction activities. To this will be added further tension with the entry of countries such as Indonesia, Singapore, Australia and Japan into regional maritime security affairs. It must also be remembered here that Beijing will be particularly concerned about Japan, which is trying to expand economic and maritime security cooperation with other key South China Sea claimants.  
One thing is however clear. Greater involvement by Japan will definitely persuade China to seek a more balancing role in its relationship with members of the Association of Southeast Asian Nations (ASEAN).

The writer is a former ambassador,  an analyst specialised in foreign affairs, right to information and good governance. He can be reached at <mzamir@dhaka.net> 

 

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Editor : M. Shamsur Rahman
Published by the Editor on behalf of Independent Publications Limited at Media Printers, 446/H, Tejgaon I/A, Dhaka-1215.
Editorial, News & Commercial Offices : Beximco Media Complex, 149-150 Tejgaon I/A, Dhaka-1208, Bangladesh. GPO Box No. 934, Dhaka-1000.

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