China Dream - ISPI · China Dream will ostensibly have led to a moderately prosper-ous society –...

China Dream: Still Coming True?

Edited by Alessia Amighini

ISBN 978-88-99647-17-9 ISBN (pdf) 978-88-99647-18-6 ISBN (ePub) 978-88-99647-19-3 ISBN (kindle) 978-88-99647-20-9

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The Italian Institute for International Political Studies (ISPI) is an independent think tank dedicated to being a resource for go-vernment officials, business executives, journalists, civil servants, students and the public at large wishing to better understand in-ternational issues. It monitors geopolitical areas as well as major trends in international affairs.Founded in Milan in 1934, ISPI is the only Italian Institute – and one of the few in Europe – to place research activities side by side to training, organization of international conferences, and the analysis of the international environment for businesses. Comprehensive interdisciplinary analysis is achieved through close collaboration with experts (academics and non-academics alike) in political, eco-nomic, legal, historical and strategic studies and through an ever-growing network of think tanks, research centers and Universities in Europe and beyond.

Contents

Introduction Paolo Magri .............................................................................7

1. Waking from the China Dream Filippo Fasulo ..........................................................................13

2. Beijing’s Economy: Dream a Little Dream of China?Alessia Amighini ......................................................................33

3. Financial Markets: the Pain of Reform Before the GainChristopher Balding.................................................................49

4. Chinese Foreign and Security Policies: Dream at Home, Nightmare Abroad?Axel Berkofsky .........................................................................65

5. China’s G20 Presidency: Coming at the Wrong MomentAndrea E. Goldstein .................................................................81

6. Silk Road Economic Development: Vision and PathWang Wen and Jia Jinjing ........................................................95

Conclusions. Implications for the EUAlessia Amighini ......................................................................115

The authors ...............................................................................119

Introduction

At a time when economic tremors in China are rippling through world markets and the country – already the second-biggest mili-tary spender in the world – is further increasing military spend-ing at double-digit rates, it is key to assess how far President Xi Jinping has gone in fulfilling the China Dream. One of his main slogans (somehow evoking the American Dream), it spells out a specific doctrine of Beijing’s ascendance to cultural, economic and military prowess by 2049, precisely 100 years after the founding of the People’s Republic of China. As Xi’s plan unfolds, China has already reached a series of symbolic milestones. The yuan’s inclu-sion in the IMF’s Special Drawing Rights (SDR) made it one of the world’s reserve currencies; a new China-led multilateral institution has been established (the Asian Infrastructure Investment Bank - AIIB); China was recognized as a market economy by a number of countries, and it keeps pressing the EU and the US to do the same. Moreover, the China Dream laid the ground for the One Belt One Road (OBOR) initiative, which aims at connecting existing and planned global routes to and from various Chinese provinces. Last but not least, the Chinese 2016 G20 Presidency may prove to be a timely occasion for China to define its role in global economic gov-ernance. However, in a context of growing economic and geopoliti-cal headwinds (sluggish economy, aging population, and political opposition), progress on domestic political and economic reforms is lagging behind expectations.

In a nutshell, will Xi be able to fulfill his promises and lead his country to prosperity?

Xi’s policies are meant to deal with the inevitable transforma-tion China has already been going through over the last few years.

http://www.scmp.com/news/china/economy/article/1856882/chinas-premier-rules-out-quantitative-easing-stimulate-slowing

8 China Dream: Still Coming True?

All the multiple facets of his strategy are directed towards a Chi-nese renaissance – or, in his words, rejuvenation – that should turn the most populous country in the world back to central stage both at the regional and world level. However, today’s China is still a country ripe with contradictions. Skyscrapers and innovative indus-tries abound along with dramatically poor peripheries and rural ar-eas. Despite greater and greater attention to its international agenda, China is still positioned somewhere between a regional and a global power. Besides, its political system still appears far from conclud-ing its journey from a revolutionary party-led system to a stable and institutionalized structure.

The China Dream raises several questions about China’s political and economic identity in the 21st century. The main is whether China will succeed in developing its own model or have to fully embrace the Western liberal order. In the meantime, China’s international as-pirations also seem to have reached a turning point. When Xi Jinping came to power he adopted a more assertive approach that shook up the status quo among international economic governance institutions and scaled up tensions with the United States and most of the coun-tries within the Asia Pacific region, mainly due to maritime disputes. The future evolution of China’s international role will be highly dependent on Xi Jinping’s ability to balance China’s revisionist de-mands – which, according to the China Dream, are simply requests for recognition of its natural and historical position as a great power – with the inevitable reaction and containment they provoke.

When moving to the domestic level, the main question is wheth-er Xi’s China Dream will turn out to be the country’s dream or his own. Political power struggles are heating up and the General Sec-retary is facing growing resistance within the Party. He quickly at-tained the rank of most powerful leader since Deng Xiaoping or even Mao Zedong, but he still has to strike a final deal between the interests of the political and economic elites and those of the peo-ple, also in light of the rising social costs that the ongoing economic transformation will soon bring about.

Against this background, the purpose of this volume is to high-light the viability and major challenges of the China Dream. The

9Introduction

opening chapter by Filippo Fasulo places the spotlight on the gen-esis of the China Dream and its links to earlier policies in tradition-al and Communist China. Indeed, Xi Jinping developed the China Dream recalling past policies and putting the narrative of “national rejuvenation” at the heart of his agenda. In concrete terms, China should be “great again” and, to this aim, economic reforms need to be implemented. Unfortunately, Xi’s reformist agenda implies political costs for economic and political stakeholders at the local and the national levels who are attempting to downsize the reach of the reforms. To contrast this opposition, since the 3rd plenum in 2013, Xi has outlined clear-cut policies: political centralization, implementation of the rule of law, ideological radicalization and a sweeping anti-graft campaign. The China Dream’s middle goal of doubling 2010 GDP per capita by 2020 (thus reaching the sta-tus of moderately prosperous society) forces Xi Jinping to achieve substantial economic success in the short term. Should he fail, Xi’s China Dream might be questioned even more.

In Chapter 2, Alessia Amighini points out that, despite artfully evoking the American Dream, the China Dream is rather vague in content, scope and horizons, and therefore purposefully serves Xi’s political objectives without the need for him to actually deliver on specific outcomes. In particular, it provides a powerful slogan to revitalise domestic confidence in the future of the country, at a time when the ongoing rebalancing of the sources of economic growth in China implies a sensible slowdown compared to Hu’s times, and painful restructuring in many sectors and regions. By evoking the American Dream, Xi aims to reassure the country’s new middle class that China will eventually be able to achieve prosperity, but economic growth has been and will continue to be slower under his leadership, and structural reforms are lagging behind, in the finan-cial sector and in State-Owned Enterprises (SOEs) as well. As the author puts it: the new middle class might have to dream a smaller dream of China than what Xi has evoked so far.

The urgent need for reforms in the financial system is Cris-topher Balding’s main focus in Chapter 3. A rising dependence on debt is evidence that financial reforms are stuck in the back-


rooms of decision-makers in Beijing. The current domestic fi-nancial system, marked by an underdeveloped banking industry, is holding back the economic transition needed for achieving the China Dream. The renminbi is a decisive issue too, but its full liberalization – planned for completion by 2020, when the China Dream will ostensibly have led to a moderately prosper-ous society – is a risky undertaking that might threaten a fragile financial system.

When it comes to the foreign and security field, China’s chang-ing approach to the regional context might transform the China Dream into a nightmare in disguise for many Asia-Pacific coun-tries. In chapter 4, Axel Berkofsky warns against the contradiction between the China Dream as a peaceful concept and the escalation of its territorial claims in the East and South China Seas. Since Xi Jinping came to power, China replaced its “Hide and Bide” strat-egy – adopted since Deng Xiaoping’s leadership – in favor of a more proactive stance. The China Dream and its global reach are questioning the traditional Chinese “non-interference” policy due to Beijing’s rising political and economic interests abroad. It re-mains to be seen if China will eventually be a revisionist power of a global order or will adapt to the current status quo.

So, the Chinese Presidency of the G20 comes at a sensitive mo-ment, as Andrea Goldstein explains in Chapter 5. China’s hosting of the summit is the recognition of the greater role that China is play-ing in global governance. At home, the G20 might be helpful in es-corting China along its multiple transitions (e.g. domestic demand instead of exports, consumption instead of fixed capital formation, services instead of manufacturing, private business instead of state-owned enterprises, innovation instead of capital accumulation). Moreover, at the international level, it also helps China strengthen-ing relations with other emerging economies and promoting IMF reforms. Nonetheless, cooperation among G20 leaders is a prereq-uisite to achieving sustained and sustainable growth and ultimately Beijing’s success in chairing the G20 Summit will depend on its ability and willingness to bridge Western economic powers and emerging economies.

11Introduction

The last chapter by Wang Wen and Jia Jinjing focuses on a key Chinese undertaking, whose impact may be anything but negligible for both Beijing and the rest of the world: the “One Belt, One Road” (OBOR) initiative. OBOR is presented by China as an opportunity for enhancing development along its Eurasian route, and its ambi-tion is to pave the way to shared prosperity built upon mutually beneficial cooperation. Moreover, the announcement of a revival of the Silk Road is already drawing a lot of attention in China and cre-ating heavy competition among Chinese provinces to reap the ben-efits of infrastructural projects and new trade routes. Indeed, OBOR is mainly intended to favor the poorest Chinese provinces on the northwestern and southwestern borders, and it could therefore make a difference in terms of economic prospects for such provinces.

The China Dream may mark a turning point for both China and the rest of the world. However, its vagueness leaves room for skep-ticism and concerns. It is up to Xi Jinping to fine-tune this concept, but in so doing he needs to implement difficult reforms while facing mounting opposition at home. At the same time, Xi needs to scale up the Chinese role at the regional and global level, while avoiding painful retaliations. Definitely not an easy task, but one Xi needs to successfully accomplish. If not, he would have to admit that the China Dream is just that: a dream.

Paolo MagriISPI Executive Vice President and Director

1. Waking from the China Dream

Filippo Fasulo

China is in transition and its leader needs a narrative to make his po-litical agenda a success. This is the reason behind the China Dream, a political slogan and a long-term pledge at the core of the political initiative of Xi Jinping, the Chinese President and the Party General Secretary. The China Dream promises the modernization of China by the middle of the 21st century and is aimed at giving back the prominent international role that China lost after the First Opium War. In order to fulfill his commitments, Xi Jinping has to face po-litical and economic obstacles. The political ones are represented by party cadres and economic circles interested in maintaining the status quo. They will pose a serious challenge, slowing down the implementation of national policies both at the central and at the local level. For what concerns the economic hurdles, they emerge in an economy facing a structural reorganization that will inevitably have costs in terms of political and social dissatisfaction, economic setbacks and unemployment. China will achieve its Dream if the political authorities are capable of properly addressing those issues.

This chapter deals with the political implications of pursuing the China Dream. It starts by analysing the choice of the slogan with reference to some of the previous experiences within China’s politi-cal debate and its linkage to events that occurred in China’s history in the last two centuries. Then the chapter analyses the political and economic context in which the China Dream is inserted. The time of economic restructuring is also the time of a political power struggle and the success of the China Dream is also the success of the rule of the Communist party over China. Xi Jinping must balance between


reforms and the status quo to advance his political agenda without upsetting the equilibrium among the party leaders and between the party and society that allowed China to experience such outstand-ing growth in the last decades. Finally, the chapter will list the tasks that Xi Jinping has to complete to make the China Dream a reality.

What the China Dream is

Since Xi Jinping came to power in 2012, he has been promoting a significant shift within Chinese politics under a new and catchy label: the China Dream. Even if this idea appears to be easy to un-derstand, it hides minor but important meanings that are not so self-evident, especially for a Western audience. Although from a shal-low analysis it might seem that China is mimicking the American Dream1, Xi’s version differs significantly in terms of genesis, scope and dimension.

Xi Jinping introduced the China Dream (Zhongguo Meng) into contemporary political debate on 29 November 2012, just days af-ter being elected General Secretary of the Central Committee of the CPC2. The occasion was a visit by the newly appointed seven-member Politburo Standing Committee to the National Museum of China’s permanent exhibition named “The Road of Rejuvenation” (Fuxing Zhilu). Xi Jinping called for China to win back the role of world-class country. As it was, for example, at the beginning of the 19th century when China accounted for about one-third of the world’s GDP at purchasing-power parity3. In Xi’s view “to real-ize the great renewal of the Chinese nation is the greatest dream for the Chinese nation in modern history”. Accordingly, China will

1 The American Dream was presented for the first time by James Truslow Adams in 1931. It is a national ethos promoting the achievement of individual success without regards to birth and class origin.2 Xi Jinping became the CCP’s General Secretary during the 18th Party Congress held in Beijing on November 2012. 3 The Economist published a chart showing the share of global GDP at purchasing-power parity. See “China’s economy. Hello America”, 6 August 2010, http://www.economist.com/blogs/dailychart/2010/08/chinas_economy

15Waking from the China Dream

be “an affluent, strong, civilized and harmonious socialist modern country” in time to celebrate the 100th anniversary of foundation of the People’s Republic of China (PRC) in 2049. Prior to that, China should accomplish a middle-term goal “to complete the building of a moderately prosperous society in all respects”. This intermediate stage coincides with the 100th anniversary of Communist Party of China foundation in 20214.

From the occasion and the words used by Xi Jinping, it seems clear that a central element of the China Dream concept is the idea of rejuvenation (Fuxing). This feature is connected to China’s his-tory in the XIX and XX centuries, when the Middle Kingdom lost its status as most civilized nation in the world (according to the Chi-nese view) and was reduced a to semi-colony subjected to foreign will5. The period between the First Opium War (1839-1842) and the foundation of the PRC is labeled the century of humiliation, and it is described as crucial in shaping the Chinese narrative since the fall of the millenniums-old Chinese empire in 1911. Thus, the idea of rejuvenation, which is connected to this long-term historical view, claims for China and its rulers the moral duty to regain the role once played. As it is officially presented, the China Dream is not an idea of rising to become a world superpower, but to gain back what can be described as a sort of “natural” (for China) leadership.

The genesis of the China Dream cannot be simply described as an intuition developed by Xi Jinping, but is instead connected to images, narratives and slogans that have been part of the CCP’s toolkit for decades. As stated, the idea of rejuvenation was present in China even before the end of the century of humiliation and has been refreshed many times since. For example, as Wang reported6, Jiang Zemin and Hu Jintao extensively promoted “the great reju-venation of the Chinese nation” from the early 1990s. This con-4 Xi pledges “great renewal of Chinese nation”, Xinhua, 29 November 2012, http://news.xinhuanet.com/english/china/2012-11/29/c_132008231.htm5 Wang Zheng analyses the rejuvenation narrative in the light of the CMT complex (Choseness-Myths-Trauma) underlying how this event deeply shaped the Chinese identity. See Wang Zheng, “The Chinese Dream: Concept and Context”, Journal of Chinese Political Science, 2014, vol. 19, no. 1, pp. 1-13.6 Ibid., p. 6.


cept is present both within the Reports at the 16th and 17th Party Congresses – read, respectively, in 2002 by Jiang and in 2007 by Hu – and in the White Paper on Political Democracy published in 20057. The same holds true when it comes to the concept of China Dream. Earlier accounts of the use of “China Dream” date back even to the VIII-VII century B.C. and, according to Ryan Mitchell, it was adopted both by imperial poets and within plays in the late 1980s8. The most recent uses of the term are connected to an op-ed written by New York Times’ Thomas Friedman, who, in October 2012 – right before the 18th Party Congress that cele-brated Xi as new paramount leader of China – claimed that “China Needs Its Own Dream”, referring to recent Chinese publications9. This article was quoted by the Chinese media and The Economist suggested it can be listed as one of the main sources for the resur-gence of the concept10.

The historical narrative contained within the China Dream helps underline its main difference from the American Dream. While the latter focuses on the individual goal of achieving happiness and per-sonal success, the former focuses on the collective dimension en-rooted within common development at the nationwide level. There-fore, the China Dream is the dream of the whole nation. Although it should also be fulfilled through personal commitment (since 2012 Chinese streets have been covered by tens of thousands of posters stating “China Dream, my dream”), individual success will not be complete without China becoming a modern nation. 7 See Jiang Zemin, Report at the 16th CCP National Congress, Beijing, 14 November 2002, http://en.people.cn/200211/18/eng20021118_106983.shtml; Hu Jintao, Re-port at the 17th CCP National Congress, 24 October 2007, http://news.xinhuanet.com/english/2007-10/24/content_6938749.htm; and State Council Information Of-fice, The White Paper on Political Democracy, 19 October 2005, http://www.china.org.cn/english/2005/Oct/145718.htm8 R. Mitchell, “Clearing Up Some Misconceptions About Xi Jinping’s” “China Dream”, The Huffington Post, 20 August 2015, http://www.huffingtonpost.com/ryan-mitchell/clearing-up-some-misconce_b_8012152.html.9 T.L. Friedman, “China Needs its Own Dream”, The New York Times, 2 October 2012, http://www.nytimes.com/2012/10/03/opinion/friedman-china-needs-its-own-dream.html?_r=010 “The Chinese Dream. The Role of Thomas Friedman”, The Economist, 6 May 2013, http://www.economist.com/blogs/analects/2013/05/chinese-dream-0


From this very brief review of the genesis of the China Dream, it is possible to draw some points. First of all, the idea of an ultimate national goal is deeply rooted within Chinese politics and it has been promoted through history, sometimes with the same name, some-times with a different one (communist society, substantive democ-racy, modernization or harmonious society), and commitment to the long-term is consistent with Chinese political philosophy. Likewise, the crucial point of national rejuvenation was largely adopted by Chinese political actors even before establishment of the Commu-nist Party of China. Secondly, the term bounced from China to the West and back many times, so many that the specific original source of the concept is no longer clear. The fact that the Chinese media referred to Western media in order to promote the China Dream, even if the concept was well presented within their cultural instru-ments, might be a sign that Xi Jinping’s version is aimed at achiev-ing a leading role in international discourse. The Chinese media themselves played on the ambiguity of the China Dream versus the American Dream, strengthening the consideration that the Chinese model can represent an alternative to American soft power11.

In this light, the China Dream is also intended as a way to re-shape the global balance of power, advancing a counterweight to the international liberal order. Promoting the New Development Bank (BRICS Bank) and the Asian Infrastructure Investment Bank (AIIB) are both elements of this strategy12.

Briefly, Xi Jinping’s innovation in terms of the China Dream and national rejuvenation is to label them as the core of his political agenda and to give them a global stage. In doing so, under Xi Jin-ping the China Dream is no longer a domestic issue but has achieved global resonance; on the one hand, through the innovative technolo-gies available in 2012 (e.g. social media), and on the other to a specific willingness to promote a national dream tailored to every civilization and localized to every country. During several meetings

11 Shi Yuzhi, “Zhongguo Meng qubie yu Meiguo Meng de qi da tezheng” [Seven major characteristics differentiating the China Dream and the American Dream], Qiushi, 20 May 2013. 12 See chapter 4 in this volume.


with foreign leaders, Chinese officials and the media spoke about the African Dream, the Asia-Pacific Dream and the Latin American Dream13. As a consequence, Xi Jinping paved the way for a Chinese development model that denies the universality of the so-called “Washington consensus”, making it clear that reforming China does not mean democratizing the country in the Western-liberal sense. According to Wang14, the China Dream is a major strategic concept that is linked to the general issue of the legitimacy of the Chinese Communist Party. Many scholars affirm that the party can survive the collapse theories – that predicted the fall of the CCP almost dai-ly since October 1st 1949, the PRC’s foundation15 – thanks to win-ning economic performance16. A long-term narrative like the China Dream helps Chinese leaders postpone the time for checking attain-ment of the good governance promised. Stating that China will be a fully modernized country by the middle of the 21st century allows the Chinese Communist Party to justify possible economic setbacks in the short term. The long-term perspective is helpful in presenting the Chinese government as committed to the people’s wellbeing even without an electoral legitimacy. In sum, the China Dream is an instrument to recall past dreams of Chinese glory along with an

13 See for example, on the African Dream “‘Chinese Dream’ and ‘African Dream’ reso-nate”, People’s Daily, 23 August 2013, http://en.people.cn/90883/8375185.html; for the Asia-Pacific Dream After “‘Chinese dream’, Xi Jinping outlines vision for ‘Asia-Pacific dream’ at Apec meet, South China Morning Post, 9 November 2014, http://www.scmp.com/news/china/article/1635715/after-chinese-dream-xi-jinping-offers-china-driven-asia-pacific-dream; for the Latin American Dream Yan Huan and Ding Gang, “El ‘Sueño Chino’ contribuye al ‘Sueño Latinoamericano’, Peoples’ Daily, Spanish Edi-tion, 2 December 2013, http://spanish.peopledaily.com.cn/31619/8472533.html14 Wang Zheng, op. cit.15 A recent example is constituted by David Shambaugh’s scholarship, who warned against the start of the CCP’s collapsing process. See D. Shambaugh, China’s Future, Polity Press, Cambridge, 2016. He developed a similar hypothesis within an op-ed pub-lished by the Wall Street Journal, D. Shambaugh, “The Coming Chinese Crackup”, The Wall Street Journal, 6 March 2015, http://www.wsj.com/articles/the-coming-chinese-crack-up-1425659198 t of the CCP’s collapsing process (link)16 On the regime legitimacy in China see Zeng Jinghan, “The debate on Regime Le-gitimcay in China: bridging the wide gulf between Western and Chinese scholarship”, Journal of Contemporary China, vol. 23, no.88 pp. 612-635, 2014; Tong Yanqi, “Morality, Benevolence, and responsibility: Regime Legitimacy in China from Past to the Pres-ent”, Journal of Chinese political Science, vol. 16, no. 2, 2011, pp. 141-159.

http://en.people.cn/90883/8375185.html

http://www.scmp.com/news/china/article/1635715/after-chinese-dream-xi-jinping-offers-china-driven-asia-pacific-dream




aspiration to lead on the international stage, putting an end to the “weak China paradigm” that characterized the last two centuries.

In order to successfully achieve the long-term goal, Xi Jinping and his predecessors prepared the intermediate stage by borrow-ing the name xiaokang shehui from Confucian heritage. In fact, when Hu Jintao advanced it, it was interpreted as a clear signal of a Confucian revival after the condemnation of Confucianism during the Cultural Revolution17. The term, which is usually translated as “moderately prosperous society”, was fully adopted by Xi as a core element of his political agenda and listed in Xi’s strategy called the “Four Comprehensives”. This political theory is supposed to repre-sent Xi Jinping and the Fifth Generation’s theoretical contribution to the Party’s core values. Actually, the Party constitution clearly associates a theoretical contribution with each of the five genera-tions of Chinese leadership. Along with Marxism-Leninism there is Mao Zedong’s Thought (first generation), Deng Xiaoping’s Theory (second generation), the Three Represents (third generation, linked to Jiang Zemin), the Scientific Outlook on Development (fourth generation, promoted by Hu Jintao). The Four Comprehensives are a kind of summation of Xi Jinping’s main policies conveyed in the Party’s language. They are set to comprehensively deepen reform (first), to govern the nation according to the law (second) and to strictly govern the Party (third) and are linked, respectively, to the Third Plenum’s reforms, to the push towards rule of law promoted during the Fourth Plenum and to the massive anti-graft campaign. The fourth and last component is to build a moderately prosperous society, which can be referred to the first part of the China Dream. As said, Xi plans to achieve this moderately prosperous society by 2021, when the Party will celebrate its hundredth anniversary.

However, while the long-term goals by nature cannot be fulfilled by the current political leadership, the middle-term goal is increas-ingly close. This is true especially because the CCP clearly defined the concrete meaning of a “moderately prosperous society” and put

17 On Hu Jintao and Confucian heritage see for example D.A. Bell, “China’s leaders rediscover Confucianism”, The International Herald Tribune, 14 September 2006.


it at the center of the Thirteenth Five-Year plan. The goal for 2020-2021 is to double China’s 2010 GDP. Not fulfilling such a goal – which can only be achieved by maintaining an average growth rate of 6.5 per cent for the next five years – would not simply imply a slowing down, but could mean that China falls short of pursuing the right path towards the long-term goal. Therefore, quantifying the substance of the moderately prosperous society might force Xi Jinping into a “performance cage” that will certainly constrain his policies in the near future. China’s economy must be reformed and a first “examination” is approaching. The choice to clarify the char-acteristics of xiaokang society in terms of economic performance might represent a critical point, since China has been gradually get-ting over a sort of GDP-growth-rate-fever that poisoned its policies both at the national and local levels. The rush towards a higher GDP growth rate was one of the factors behind a growth model that re-spected neither the environment nor high quality standards. China’s so-called new normal, the new growth model that should shape the present and future Chinese economy, focuses on quality, environ-ment and sustainability, ending the tyranny of GDP target growth. This is in contradiction with achieving the xiaokang society in five years and it will be a sensitive issue for China to keep the focus on quality if economic growth proves too slow to double per capita GDP.

Political and economic challenges

The China Dream is a pledge of economic success and Xi Jinping must be sure that his term is the one in which China strides the global stage, not the beginning of the end of China’s miracle. The new normal is useful in making clear that the country needs to be reformed as soon as possible. However, China’s reforms have been facing both political and economic obstacles.

On the economic side, Xi Jinping is promoting a titanic shift from one development model to another. This shift is essentially to move from an economy driven by low-quality exports and pub-


lic investments to an economy with a stronger role for services, domestic consumption and high-quality goods. However, time and cost constraints threaten Xi’s capacity to fulfill his commitment. When the stock exchanges in Shanghai and Shenzhen crashed in the summer of 2015 and again in early January 2016, the effect on the Chinese economy was relatively limited because stock trading is less extensive in China. However, it showed the world and the Chi-nese people that something in the Chinese economy was no longer sustainable. The rationale behind the new normal was eventually clear to everybody. This is one of the setbacks that Xi’s China might face during the transition to structurally reforming its development model and that might put pressure on the president due to a poten-tial loss of international and domestic trust that could affect China’s foreign direct investments and consumption demand.

Nonetheless, the financial system is not the major threat to the China Dream. Indeed, during the era of double-digit growth (from the 1990s until the aftermath of the recent crisis), the rising social contradictions were easily resolved with more job opportunities that could be easily found elsewhere in an economy that was ex-periencing a decade-long boom. Today China needs to redesign its industrial structure, promoting new sectors and closing non-productive industries. The decision taken after the global financial crisis in 2008 to invest 4 trillion RMB to balance the negative effect of falling global demand generated the current overcapac-ity crisis. A significant share of China’s economic reforms fore-sees the closure or downsizing of what are now labeled “zombie firms”. Steel, aluminium, glass and cement are among the most affected sectors and are all connected to the construction bubble that emerged in the last few years. As a result, the decision to shut down many firms will lead to significant job losses in the sectors involved. According to a report published by Reuters in March 2016, the Chinese government has planned to cut up to 6 million jobs in the coal and steel sectors and it will spend 150 billion RMB to cover layoffs till 201918. The Economist Intelligence Unit

18 Be. Kang Lim, M. Miller, D. Stanway, China to lay off five to six million workers, earmarks


estimates that steel-related unemployment might reach 500,000 workers by the end of the decade19. These figures are quite signifi-cant even for a huge country like China, especially if considered at the local level. However, the impact will vary across regions, due to different installed capacities, average profit margins and reduction plans. The state of the Chinese steel industry at the pro-vincial level is a central issue in the government’s political agen-da. The history of the steel industry is connected to that of State-owned Enterprises (SOEs) and to their ambiguous role in terms of productivity (increasingly lower), employment and local and national tax rates. Reforming SOEs has traditionally been a cycli-cal problem to tackle for the Chinese authorities20. The reforms occurring in the late 1990s almost doubled the unemployment rate during the period 1996-2002 (from 6.8 to 11.1 per cent)21 that was lessened only after 6 years of high growth rates. Although this was a major goal shared also by the Third Plenum, the effective imple-mentation of the policies has been quite disappointing. Therefore, Xi’s government has been keen to promote the reforms signaling that their implementation is a priority. One of the reasons why reforming the SOEs is complicated is the political costs they bear. A traditional Chinese proverb states: “Heaven is high and the em-peror is far away”. It indicates that in the eyes of the people the local government is more responsible for local issues than the cen-tral authorities. As a consequence, local authorities have broad autonomy in implementing central policies in their constituencies, utilizing them to further their own political and economic inter-ests. It follows that central plans for closing coal mines and steel factories might well suit Xi’s goal of reforming the Chinese eco-

at least $23 billion, Reuters, 3 March 2016, http://www.reuters.com/article/us-china-economy-layoffs-exclusive-idUSKCN0W33DS19 Economist Intelligence Unit, The Implication of Steel Capacity Cuts, 12 May 2016, http://country.eiu.com/article.aspx?articleid=804209864&Country=China&topic=Economy&subtopic=Regional+developments20 For a brief history of Soe’s reforms see Li Weiyue and Louis Putterman, Reforming China’s Soe: An Overview in Josef C. Brada, P. Wachtel, Dennis Tao Yang (eds.) China’s economic development, Palgrave Mcmillan, London, 2014, pp. 114-140. 21 Economist Intelligence Unit, op. cit.


nomic model, but at the same time they clearly conflict with many provincial governors’ plans to boost local economic growth and fight unemployment. Once again, the steel industry represents an example of the constraints that the central government has to face in implementing its policies. In fact, 66 per cent of China’s steel is produced by thousands of small and medium-sized local firms that might be unwilling to follow government instructions22. In this regard, it is not uncommon for Chinese and foreign newspapers to report on firms celebrating their re-opening, which is an event intended to revitalize the cities’ economies that are dependent on that sector23, showing at the same time how hard it is for authori-ties to keep them closed.

What is perhaps even more important, Xi Jinping’s ambitious plan to restructure the Chinese economic model must also over-come the economic interests of the political elites. As the journal-ist Bill Bishop put it24, there are some questions about the support he can gain among the strong power-holders in Beijing. Nonethe-less, this is related to the way Xi Jinping achieved his paramount position, which still remains unclear. He succeeded in becoming the Party’s General Secretary as a man of compromise between the two factions of the former top leaders Jiang Zemin and Hu Jintao. Once in power, however, Xi overshadowed his second-in-command – the Prime Minister Li Keqiang – and launched a fierce anti-graft campaign that severely wounded both Hu’s and Jiang’s inner circles. Xi Jinping thus reshaped the power balance within the party by carefully working to build his own faction, which now seems to be composed of some of the loyal friends and colleagues of Mr. China Dream25. In this regard, according to many sources, the connections to his ancestral home, the Shaanxi province, and to those who served with him in Fujian, Zhejiang and Shanghai are strong. The faction-building process is therefore instrumental 22 Stratfor Analysis, The Story of Steel in China, 1 June 2016.23 Reuters, China’s top steel making province bans reopening of mills ordered closed: Xinhua, 26 April 2016, http://www.reuters.com/article/us-china-steel-hebei-idUSKCN0XN0D124See B. Bishop, The Sinocism China Newsletter 03.01.16, https://sinocism.com/?p=1161725 Cheng Li published on Hoover Institution’s China Leadership monitor a series of article dealing with Xi’s inner circle. Check from Issue 43 to Issue 49.


to the 19th party Congress, to be held in 2017, when Xi could profit from his powerful position to promote his allies within the Cen-tral Committee and the Politburo. Xi Jinping’s political strength does not, however, silence questions about how he rose to that position. As mentioned before, he was a man of compromise, and still very unclear is what actually happened in (and the political meaning of) the few weeks before the 18th Party Congress in 2012. For about a month the General-Secretary-to-be disappeared and it is not yet clear whether he was engaged in a power struggle or if he was really injured, as reported by the Chinese media. In any case, the climate within the party in the last four years – since the scandal surrounding Bo Xilai erupted as breaking news in the major world media26 – has been far from harmonious. Those who see their political status and revenues threatened by reforms and the anti-graft campaign cannot be pleased with them. Some scholars speculate that Xi Jinping himself might be worried for his own safety. Whether this is true or an exaggeration/specula-tion, a complete analysis of the Chinese political situation must take into account events such as the anonymous letter published on 4 March 2016 asking for Xi Jinping’s resignation27. The letter blames the General Secretary for numerous misbehaviours, such as nepotism, a power struggle masked by the anti-graft campaign, an aggressive shift in foreign policy, layoffs and power centraliza-tion. According to the unnamed “loyal Communist members” who wrote it, Xi Jinping’s policies are undermining the PRC’s politi-cal and economic stability, which, in their own words, “may also bring risks to the personal safety of you [Xi] and your family”. The Chinese government’s response to the letter was investigation and detention for the director and employees (and their relatives) of the website that published the letter. In general, the letter con-26 The Bo Xilai case involved the Communist Party Chief of Chongqing Municipality Bo Xilai in 2012. He was a prominent and popular politician who was running an ultra-leftist campaign and eventually was investigated and found guilty for corruption. His quick fall, just few months before the 18th Party Congress, shook the apparent inner stability of the CCP and exposed to the public an on-going power struggle. 27 The text of the letter can be find at http://chinadigitaltimes.net/2016/03/open-letter-devoted-party-members-urge-xis-resignation/.


tributed to increasing the level of state control over the media and academia, a trend that has been ongoing in the last few years.

This all is to say that the party is undergoing a vibrant power reshuffle, a shake-up that is also affecting the institutionaliza-tion process that led to a stable and peaceful succession from the fourth (Hu Jintao) to the fifth generation (Jiang Zemin). In 2012, scholars were quite sure that China had found its own way to deal with changes in top leadership. Ten years per generation, a power shared by a multitude of actors, strong limits to one-man-rulership and a division of labour between the president (political affairs, domestic and international) and the prime minister (economic governance). Xi Jinping is questioning this whole system. He is now also in charge of economic governance through creation of the Central Leading Group on deepening reforms. His leadership in economic affairs is evident also from the fact that while at the time of his appointment the media were largely promoting Liko-nomics as the main theoretical framework for economic policies, in 2016 all the interest is in Xi’s supply side structural reform. Xi Jinping also strengthened one-man rulership, re-proposing the wording of hexin, core of a generation. This terminology was sus-pended after Deng Xiaoping’s term, in favour of the collective leadership system, and this is why Jiang and Hu’s theoretical con-tributions do not include their names.

Moreover, through creation of the Central Leading Group on deepening reforms he put all the political issues under his control. In addition, he also created a new security group and a military po-sition that have led many to agree with Geremie Barmie’s definition of “Chairman of everything”28. Finally, some commentators even question the 10-year term. Li Keqiang now seems not so sure to be re-confirmed as prime minister in 2018. Back in 2012 the second term was considered to be automatic, but that prediction now turns out to be wrong. It was based on the ten-year term led by the duo Hu Jintao and Wen Jiabao, who held the positions of president and 28 Geremie Barmiè labelled Xi Jinping “China’s CoE, Chairman of everything”. See G.R. Barmé, L. Jaivin, J. Goldkorn (eds.), Shared Destiny: China Story Yearbook 2014, Australian National University Press, Canberra, Australia, 2014.


prime minister for the entire duration of their generation’s decade (2002-2012). However this is an assumption based only on a single case. The alternative scenario might see Li Keqianq “promoted” to chairmanship of the National People’s Congress (NPC) and re-placed by one of Xi’s loyal followers, such as Wang Qishan, the man currently in charge of the anti-graft campaign. These dynamics would replicate the process occurring during the third generation (1992-2002) when, with Jiang Zemin in charge as General Sec-retary and PRC President, Li Peng served first as prime minister (1993-1998) and then in the NPC, while Zhu Rongji served as loyal prime minister in the five years from 1998 to 2003. Another case has been made by prominent China-watcher Willy Lam who sug-gests that, considering Xi Jinping’s efforts in building a strong per-sonality cult, he might not be willing to abandon power by 2022, at the end of his ten-year term. According to Lam, Xi might revive the role of Party President from the 1970s and thereby retain power while not breaking the rule of a decade-long term for Party General Secretary29.

While Xi Jinping is struggling internally with those dissatis-fied with his policies, he is believed to be scoring high in terms of popular consensus. As shown in a survey published by Harvard’s Kennedy School of Government in December 2014, Xi Jinping was the world’s most popular leader, with more than 94 per cent of support from his citizens for his management of domestic af-fairs30. Such a high popularity rate is common in authoritarian states, and even though he can rely on state-controlled media, the result is an evident sign of large consensus among the Chinese people. This element was also confirmed in another survey, this time by the Pew Research Center31, that listed corruption, pol-

29 W. Lam, “Xi Jinping Forever”, Foreign Policy, 1 April 2015, http://foreignpolicy.com/2015/04/01/xi-jinping-forever-china-president-term-limits/30 Tony Saich, Reflections on a Survey of Global Perceptions of International Lead-ers and World Powers, Ash Center for Democratic Governance and Innovation John F. Kennedy School of Government Harvard University, http://ash.harvard.edu/files/ash/files/survey-global-perceptions-international-leaders-world-powers_0.pdf?m=142619129831 R. Wike, B. Parker, Corruption, Pollution, Inequality Are Top Concerns in China, Pew


lution and the income gap as the main concerns of the Chinese people. Xi Jinping’s initiatives, comprising the harsh anti-graft campaign, the new normal with its dual focus on a more sustain-able growth model and doubling GDP seem to be in accordance with his people’s will. Moreover, the same survey indicated that almost two-thirds expect corruption to be reduced in the next five years and, while pessimism persists with respect to pollution lev-els, a large majority is happy with the current economic situation and almost all the Chinese interviewed are confident that their liv-ing standards are higher than that of their parents.

Therefore, an apparent contrast exists that might be worthwhile noting. In the year 2016 China is staging a very low-key celebra-tion of the start of the Great Cultural Revolution fifty years ago. The contrast lies in the fact that while part of the political elite questions Xi’s central leadership, he is securing central leadership through popular support. In the 60’s one of the main slogans of the Cultural Revolution was “bombard headquarters” and it was aimed at sup-porting the paramount leader – Mao Zedong – against the party leadership. Even though there are obvious differences, from current events it is always interesting to see how the people were instru-mental in promoting a political agenda designed by the paramount leader and opposed by some in the party at the time. It is, indeed, the people’s support that should secure Xi’s position more than any faction-building operation either within the party or the army. At this stage, with the China Dream on course, if the political elite dissatisfied with Xi’s policies tried to delegitimize him they would only succeed in delegitimizing the party itself. As a consequence, Xi Jinping’s political course could be described as the race of a man of compromise who built a strong personal cult and significant popular support and eventually relied on that support to end the compromise that permitted his rise to power.

Research Center, 24 September 2015, http://www.pewglobal.org/2015/09/24/cor-ruption-pollution-inequality-are-top-concerns-in-china/


The next steps toward the China Dream

In order to successfully promote the China Dream, Xi Jinping set a long-term goal – in accordance with the Chinese and the Com-munist tradition – that is instrumental in strengthening the party’s legitimacy and his own personal consensus. The economic reality and fulfillment of the intermediate stage of the China Dream forced him to put forward a reformist political and economic agenda since the very first day of his term. To fulfill his commitments to China’s full modernization, as pledged in the China Dream, Xi Jinping has to accomplish the following tasks:

1. Reform the economy2. Strengthen the party leadership3. Manage political and economic costs among political elites and

local power-holders4. Manage social costs

The first task is the most pressing. The Chinese economic model is no longer sustainable and a structural change is needed. The politi-cal leadership that started its term at the 18th Party Congress is char-acterizing its political agenda as a matter of economic reform. How-ever, in order to reform the economy Xi Jinping must be sure he has the capability to effectively control the party. Indeed, since chang-ing the economic model will reshape the inner-party power balance, he will face growing resistance. This is the reason behind most of his policies. As a matter of fact, Xi Jinping adopted three initia-tives to secure him control of the party. First of all, he promoted the anti-graft campaign, that, under the guidance of his follower Wang Qishan, reduced the influence of the existing factions. Secondly, during the Third Plenum he established the Central Leading Group on comprehensively deepening reform, a decision-making body that puts all political power in the hands of the General Secretary, reducing the role of the other members of the Politburo’s Standing Committee. Moreover, on the occasion of the Fourth Plenum, Xi


Jinping promoted reform of the rule of law that, far from represent-ing a limitation for the central party’s power, instead constituted a way of reducing the influence of local power-holders.

Therefore, the third task is to contain dissatisfaction among members of the party elite. As the case of Zhou Yongkang demon-strated32, there is a strong connection between political power and economic power. Reforming the SOE’s and pushing the anti-graft campaign affects the business of the established cliques. Xi Jinping needs to curb internal opposition and for this reason he is running a campaign about adhering to the party line. The media and academia are urged to strictly adhere to Xi Jinping’s decisions, with the de-clared aim of strengthening national cohesion. However, censor-ship and ideological radicalization will not be enough to keep the party united. Xi Jinping will probably have to find compromises to balance the loss of economic gains among party elites and lo-cal constituencies. The continuous delays in implementing the SOE reforms33 follow this logic. Nonetheless the economic goals to be achieved in 2020 pressure Xi Jinping to speed up his political agen-da. He will have to carefully promote political allies at the central and the local level, granting subsidies and preferential policies to specific sectors.

Finally come the people and the management of social costs. Economic reforms will not only affect the big economic interests in the country (i.e. private entrepreneurs and public managers), but most of all the workers. In fact, the successful economic perfor-mance that is meant to legitimize both the Party and Xi Jinping’s rule might be threatened by rising unemployment during the transi-tion from one economic model to the other. Xi Jinping’s actions will have to address two issues. On the one hand, a main problem is to

32 Zhou Yongkang is the former Security Chief of China. He was the first member of the Politburo’s Standing Committee to be investigated and found guilty since the Gang of Four in the late 1970s. His conviction is, among other things, due to a bribe given to the former head of the state-owned China National Petroleum Corporation. Indeed, Zhou has been linked to the national oil sector industry.33 L. Hornby, “China rows back on state-sector reforms”, Financial Times, 15 June 2016, http://www.ft.com/intl/cms/s/0/92e52600-31f7-11e6-ad39-3fee5ffe5b5b.html#axzz4Bd6uCjCO


find the right formula to make the layoffs gradual and to redistribute them across sectors and provinces. If only a few sectors located in selected provinces were to be affected, the Chinese political system might be exposed to a threat too big to be solved. This is due to the structure of Chinese political institutions. The absence of a proce-dural-democratic system means the lack of a relief valve for social tensions. For this reason, the economic transition could be the oc-casion for introducing innovations to China’s system of political and interest representation. In this regard, Xi Jinping has strongly rejected political reforms that adhere to the principle of Western democracy, while he has promoted democracy with Chinese char-acteristics. This model does not limit the role of the leading party. On the contrary, it calls for a mechanism of consultation with local and sectorial stakeholders34. The name of this system is consultative democracy and, if well developed, may help Xi Jinping absorb the social costs that will arise when the transition presents its bill.

Conclusions

The China Dream is aimed at both economic and political success. The long-term perspectives allow Xi Jinping to resist sudden eco-nomic setbacks with the promise of future national prosperity. Once achieved, this goal would make China great again, ending a two-century journey that took the Middle Kingdom from prosperity and honour to a semi-colonial condition and poverty and back. However, in line with Chinese tradition and with more recent Communist slo-gans as well, the China Dream aims also at reaching an intermedi-ate stage called xiaokang shehui (moderately well-off society). This intermediate stage, to be achieved by the end of the decade, poses a narrow limit that will constrain Xi Jinping’s political agenda over the next five years. According to Chinese plans, the 100th anniver-sary of foundation of the Communist Party of China in 1921 should 34 A first analysis of this topic was carried by Steve Tsang. See S. Tsang, Consultative Leninsm: China’s new political framework?, Discussion Paper 58, China Policy Institute, The University of Nottingham, March 2010.


be celebrated by doubling China’s 2010 per capita GDP. In order to achieve this goal, China has to grow at a 6.5 per cent average rate for the next five years, the target set by the Thirteenth Five-Year Plan. If China does not succeed in reaching the xiaokang shehui, the China Dream and party legitimacy based on economic perfor-mance might be contested. Therefore, Xi Jinping has an urgent need to complete transformation of the Chinese economy’s development model. He has to overcome the opposition he will face within the party and to manage the transition costs represented by a slowing economy and job layoffs.

2. Beijing’s Economy: Dream a Little Dream of China?

Alessia Amighini

Dream talking

Since the beginning of his mandate in late 2012, Xi Jinping, the cur-rent head of the Communist Party (CCP), chose the “China Dream” as his doctrine, following Chinese tradition since Mao to identify a personal slogan for each term1. The “China Dream” artfully evokes the American Dream – “the notion that the American social, eco-nomic, and political system makes success possible for every indi-vidual2” – but in fact is far less individualistic and utilitarian than its American counterpart, and actually refers to the aim of a prosperous society in collective terms. As the Chinese economy is expected to overtake America’s within a decade, by evoking the American dream, Xi aims to reassure the country’s new middle-class that they will eventually be able to reach prosperity, despite economic growth being slower under Mr Xi than it was under Mr Hu.

At the same time, the China Dream doctrine cleverly shows off Xi’s ambitions to restore China’s role in the world3. After decades of extraordinary rise, China is today the world’s second largest eco-nomy, with hundreds of millions of Chinese lifted out of poverty and hundreds of millions who joined the middle class, but that rise

1 See chapter 1 in this volume.2 American Dream, Collins English Dictionary, avalaibale at collinsenglishdctionary.com.3 See chapter 4 in this volume.


has not yet gone along with a comparable rise of China’s position in global economic governance. With a GDP now around 90 per cent of U.S. GDP in purchasing power parity terms, and about one-sixth of the world’s total, China is rapidly recovering the position it had in the early 1800s, when China was the largest manufacturing country in the world and its GDP was one-third of the world’s total. Dreaming of a day when China’s economy becomes once more the biggest in the world, Xi secures the support of nationalists, particu-larly within the armed forces, who have been allured with the mes-sage that the “strong-nation dream of a great revival of the Chinese people” is in effect a “strong-army dream”, in contrast with the libe-rals’ ambitions to remove the army from the party’s direct control4.

Backed by the overall aim of the China Dream, Xi has so far aimed at orchestrating domestic policy reforms his own way with the support of constituencies and forces whose support is essential for the reform process to be effective. One such constituency is the new middle class. According to Li Chunling, “since the beginning of this century, a social group with higher income, higher education and higher occupational prestige has been emerging in Chinese cit-ies5”. This followed the beginning of a major ideological and policy shift in 2000, when Jiang Zemin “in contrast to the Marxist notion that the Communist Party should be the “vanguard of the working class”, argued that the CCP should broaden its base of power to include entrepreneurs, intellectuals, and technocrats, all of whom regularly occupy the ranks of the middle-income stratum, the of-ficial euphemism for the middle class”6. Although it has been called “middle class” by the public media, the official jargon has never adopted such a term, but a number of nuanced versions of it, and a lively scholarly and public debate has since been ongoing about the definition of middle class in China7. Since then, the so-called middle

4 “Chasing the Chinese Dream”, The Economist, 4 May 2013.5 Li Chunling, Profile of Middle Class in Mainland China, p. 1, http://e-sociology.cass.cn/pub/pws/lichunling/grwj_lichunling/P020090525597135469507.pdf6 Li Cheng “Introduction: The Rise of the Middle Class in the Middle Kingdom”, in Li Cheng (ed.), China’s emerging middle class: beyond economic transformation, Washington, D.C.: Brookings Institution Press, 2010, pp. 3-31.7 Ibid

35Beijing’s Economy: Dream a Little Dream of China?

class has been considered a political ally of the party’s supremacy, being those who most benefited from China’s rapid growth over the last three decades. Their support is therefore vital to pursuing the economic and political reforms on which their future economic and social advancement depends. What really threatens the party’s rule is the rising divergence in living standards within the Chinese popu-lation, and the latent, but increasingly worrying conflict between rich and poor, which could seriously undermine the aim to reach a “harmonious society”8.

The middle-income groups have become an important con-stituency for the Chinese government and their satisfaction and support a clear policy objective of the government. This is due to their dual economic and political role. Their material advance-ment has fuelled consumption and is more and more vital to sus-tain domestic demand in the ongoing transition towards a new de-velopment strategy, from an investment-led to a consumption-led growth model. Moreover, they serve as a proof that the party’s rule is not inconsistent with material well-being. The importance of the middle-income groups has long been publicly recognised by the Chinese authorities, who have called for “enlarging the size of the middle-income group” since at least 2002. More re-cently, the middle-income groups confirmed their economic im-portance during the recent global crisis and recession: they have grown in size, in contrast with a shrinking of the middle class in the West. This has purposefully served the aim of Chinese au-thorities to publicize the idea that China is entering the “golden age” of its middle-class development9. Yet according to Li10, the status of China’s emerging middle-income groups is the subject of scholarly debates. Not everyone in middle-income groups is better off today than before the crisis, “partly due to the loss of jobs and financial assets as a result of the global financial crisis

8 Ibid.9 Lu Xueyi, “Xianzai shi Zhongguo zhongchan jieceng fazhan de huangjin shiqi” [It’s the “golden age” of Chinese middle-class development], Zhongguo qingnian bao, Chi-na youth daily, 11 February 2010.10 Li, Cheng, op. cit.


and partly because of the rapid rise of housing prices in urban China11”. Only a subset of the middle class, including officials and managers of SOEs, grew, according to Mao Yushi, and to the detriment of other subsets of the middle class12. The rise of the new middle class has been the sign of China’s embarking on the road to prosperity, and now its further economic advancement is vital to increasing overall domestic consumption and demand. To their ears, the China Dream provides a powerful slogan to revitalise domestic confidence in the country’s future prospects, at a time when they are increasingly anxious about being nega-tively affected by the transition to a new growth model, since the ongoing rebalancing of the sources of economic growth in China implies a sensible slowdown compared to Hu’s times, and painful restructuring in many sectors and regions.

Although Xi implicitly reassures that the “new normal” will not force the new middle class to tighten their belts, there are increasing signs showing that in fact they might have to dream a smaller dream of China than what Xi has evoked so far. Even more importantly, the opacity of Xi’s slogan makes it difficult to understand whether the China Dream, in contrast to its American namesake, actually aims at something more than middle-class material comfort – further ex-pansion and advancement of the middle-income groups – or in fact something different from middle-class material well-being – i.e. overall national prosperity and ascendance in global governance.

However, – as described in chapter 1 – the definition of the China Dream is rather vague in substance, scope and horizons, and there-fore purposefully serves Xi’s political objectives without the need for him to actually deliver on specific outcomes. Opacity about sub-stance allows Xi to defend any policy measures and their exact op-posites as avenues for the Dream to come true, with little possibility for assessment. This gives him comfortable space for manoeuvring any kind of policy backtracking on both economic and political re-forms. In fact, compared with the first half of Xi’s term, when mo-mentum was high to accelerate on both, the times are now changing 11 Ibid12 Ibid


quite substantially and structural reforms are lagging behind in the best case, reverting in the worst case. Similarly, opacity about the scope allows Xi to justify any policy initiatives as contributing to the Dream, from tighter Party control of the economy to massive dismissal of former state workers, from reduction of subsidies to ex-porting firms to increasing military spending and initiatives. Dream talking magically acts as an ex-ante validation for any kind of in-tervention in the economic, political, cultural, and military spheres. Finally, opacity about horizons allows Xi to easily spread the alleged policy outcomes over an unspecified time span, ranging from a few quarters up to 2049. Again, this does not allow for ex-post assess-ment and postpones political responsibilities to an indefinite future.

However difficult an assessment might be of whether China is still heading to its own dream or is simply talking about it, a number of elements are available for discussion of the direction the country is taking, given the current policy stance.

What does the China Dream mean for China’s economic model today?

As the “new normal” leit motif has repeatedly insisted on since the beginning of 2015, China’s future growth must rely on different drivers compared to the past. From 1990 to 2014, Chinese gross sav-ings as a percentage of GDP and gross fixed investment as a percent-age of GDP both increased significantly (to 50 per cent and 45 per cent of GDP in 2014 respectively), while private consumption as a percentage of GDP declined sharply (to about 35 per cent of GDP in 2014, compared to 60 per cent of GDP in more advanced econo-mies). As indicated by Morrison, “China’s gross savings as a per-centage of GDP and gross fixed investment as a percentage of GDP are the highest among the world’s largest economies, while China’s private consumption as a share of GDP is among the lowest”13.

13 Wayne M. Morrison, China’s Economic Rise: History, Trends, Challenges, and Im-plications for the United States, Congressional Research Service, October 21, 2015.


The imbalances on which China’s rapid economic growth relied on in the past three decades need to be resolved by rebalancing the sources of growth from fixed investment towards more private consumption. Morrison also reported that according to a “2009 In-ternational Monetary Fund (IMF) report, fixed investment related to tradable goods plus net exports together accounted for over 60 per cent of China’s GDP growth from 2001 to 2008 (up from 40 per cent from 1990 to 2000). This percentage was significantly higher than in the G-7 countries (16%), the Eurozone (30%), and the rest of Asia (35%)”14. In response to the global financial crisis, which led to a sharp fall in demand for Chinese exports, and sharply re-duced China’s trade surplus, the Chinese government reacted in part by sharply fuelling fixed investment (with easier credit access for firms) and, therefore fixed investment as a share of GDP rose from 40.5 in 2008 to 45.9 per cent in 2013.

The rapid growth of fixed investment is no longer sustainable, due to a number of factors including overcapacity in some manu-facturing sectors, as well as in the real estate sector (which largely fostered economic growth from 2009 until 2014, when the after-

14 Ibid.

Source: World Development Indicators, World Bank


maths of the recent recession had depressed foreign demand for Chinese goods), and decreasing profitability and increasing debt accumulation by State-Owned Enterprises (SOEs). Together with increasing fixed investment, private savings have also increased. The major reason for this is the lack of an adequate social safety net (such as pensions, health care, unemployment insurance, and education), which induces households to save a large portion of their income.

A number of additional reasons contribute to the high saving rate in China, such as the unequal distribution of wage increases across different population groups. The highest gains went to the highest percentiles of urban residents, who already show a lower margin-al propensity to consume (while wage earners in lower percentile groups have spent a much higher share of their income gains). As a result, the wage gains did not translate into more consumption, but instead into more savings: between 1982 and 2012, the average urban household saving rate rose from 12 to 32 per cent 15.

Last but not least, the gender gap, notably far more evident in China than in any other country (due to the perverse impact of the one-child policy), is a specific factor behind the high saving rate in China. In fact, the excess of men over women in marrying-age groups forces would-be grooms (and therefore their parents) to ac-cumulate saving to provide sufficient funds to increase the probabil-ity of finding a bride. The business sector is also a major contributor to the high savings rate in China. As many Chinese firms, especially SOEs, do not pay dividends and retain most of their earnings, they prevent households to consume out of the income received from their unpaid dividends.

Finally, in a country that places restrictions on the export of cap-ital, households are forced to keep a large share of their savings in domestic banks. And since the Chinese government often sets the interest rate on deposits below the inflation rate, to allow Chinese firms to get credit at low interest rates, the result is lower household

15 T. Choukhmane et al, The One-Child Policy and Household Savings, LSE working papers, London School of Economic, 18 September 2014.


income – personal disposable income in China as a share of GDP was lower in 2014 (44%) than it was in 2000 (47.9%), and lower household consumption.

The need to rebalance the economy requires major structural re-forms, including:

• banking sector reforms to rebalance the relative cost of funding and to reduce the implicit tax on households savings;

• financial sector reforms to provide an alternative funding me-chanism for firms and an alternative investment channel for hou-seholds;

• welfare system reform to reduce households’ savings for retire-ment and health;

• industrial policy reforms, aimed at restructuring debt-burdened SOEs and reducing overcapacity in many sectors.

In many of these sectors, though, reforms are lagging behind, as state control of the economy is still widespread, or even worse, they are being reversed in a retreat from market mechanisms back to state dirigisme.

Reforms lagging behind

Although the XIII Five Year Plan has confirmed the need for sup-ply-side reforms (gongjice), there is no clear-cut view or proposal about the substance of these reforms. According to the National Development and Reform Commission (the main Chinese develop-ment agency), China should become more innovative and efficient in producing the type of goods Chinese consumers want to buy. But the reforms they suggest, such as tax reductions on electric car pur-chase, are more demand stimuli than supply-side interventions. Un-fortunately Xinomics is light years away from the Reaganomics of the 1980s (which now inspires, at least in words, Xi’s supply-side reforms), both in diagnosis, and in prescriptions. At the moment it is not much more than the name given to awareness that large SOEs


and sectors and provinces where they are dominant (heavy industry in the northeast of the country, today already in recession) must be the protagonists of the new course of reforms, otherwise they will drag the entire country into recession.

Unfortunately, however, while the reform process is lagging be-hind in many sectors, it is in fact being reversed precisely where most urgently needed, in industrial policy and financial sector re-forms, where the drive towards market mechanisms to improve the allocation of resources has stopped, and Party control has been on the rise again.

Industrial policies and SOEs

Since the late 1990s, China’s industrial sector was significantly transformed through policy changes that allowed large state com-panies – SOEs – to open up to individual investors, and created new ones, mainly through consolidation of existing firms. After reforms in the late 1990s, China’s SOEs – which date from the early 1950s, when private businesses as well as any infrastructure that survived the previous decades of war were nationalised – remained in “pillar industries” where they were reassembled into national champions.

Under the slogan “Grasp the Large, Let Go of the Small”, the Fourth Plenum of the Communist Party’s Central Committee in 1999 announced industrial reforms aimed at merging large SOEs into profit-maximizing industrial conglomerates while privatizing or closing smaller firms. As a result, the share of China’s industrial output from state-owned firms fell from 50 per cent at the end of the 1990s to 30 per cent in 2014. This dramatic shift has convinced some experts that a rapid transition to a market economy has been going on in China and that the private sector has been largely re-sponsible for the rapid growth of the economy over the last 15 to 20 years.

However, “although the number of SOEs has declined sharply, they continue to dominate a number of sectors (such as petroleum and mining, telecommunications, utilities, transportation, and vari-


ous industrial sectors); they are shielded from competition; they are the main sectors encouraged to invest overseas; and they dominate the listings on China’s stock indexes. One study found that SOEs constituted 50 per cent of the 500 largest manufacturing companies in China and 61 per cent of the top 500 service sector enterprises”16.

According to Hsieh and Song, the SOEs reform campaign launched in 1999 has transformed the state sector in China, but this is due only partly to an effective change in corporate ownership structures, and partly to what is in fact a form of camouflaging existing state-owned or -controlled firms. Relying on micro-data from the Chinese Bureau of Statistics, in 2012 more than half of the state-owned firms were registered as some form of privately owned firms17. Over time the na-ture of China’s SOEs has become increasingly complex. Many SOEs appear to be run like private companies and made initial public offer-ings in China’s stock markets and those in other countries, although the Chinese government is usually the largest shareholder.

By analysing data from China’s Annual Survey of Industries on all state-owned and private companies with revenues of more than 5 million RMB, the authors show that the downsizing of the state sector actually boosted labour productivity and total factor pro-ductivity (TFP), narrowing the gap with privatized companies. Al-though corporate restructuring freed labour and other resources into the more productive private sector, the TFP of newly established state-owned companies actually exceeded that of private compa-nies. The authors calculate that the surviving SOEs accounted for more than 13 per cent of aggregate growth in the industrial sector during 1998-2007, newly formed SOEs accounted for 7 per cent of growth, while private firms accounted for only 3.2 per cent. Howev-er, state-owned firms made far less progress in capital productivity (i.e. output per unit of value of fixed production assets), which re-

16 Morrison, op. cit.. The study cited here is Xiao Geng, Xiuke Yang, Anna Janus, “State-owned Enterprises in China, Reform Dynamics and Impacts”, in Ross Garnaut, Ligang Song, Wing Thye Woo (eds.), China’s New Place in a World in Crisis: Economic, Geopolitical and Environmental Dimensions, ANU Press, 2009, p. 155.17 Chang-Tai Hsieh, Zheng (Michael) Song, Grasp the Large, Let Go of the Small: The Transformation of the State Sector in China, NBER Working Paper no. 21006., 2015.

http://www.nber.org/people/chang-tai_hsieh

http://www.nber.org/people/zheng_michael_song


mained significantly lower than that of private firms, which means that SOEs use fixed capital stock inefficiently compared to private firms (mainly due to overcapacity).

Despite public announcements as recently as last September to make SOEs more efficient and market-oriented, in order to over-come the problems of corporate debt accumulation and overcapac-ity, today the Party is giving greater power to Party cells within ev-ery SOE, reversing nearly two decades of attempts to remodel them along the lines of Western corporations. As a result, boards of direc-tors will possibly be discouraged to make decisions based on mar-ket conditions, profitability and hard budget constraints. According to the Financial Times, an article written by the State-Owned Assets Supervision and Administration Commission in the influential party magazine Qiushi, or Seeking Truth, writes “all the major decisions of the company must be studied and suggested by the Party commit-tees. Major operational management arrangements involving mac-ro-control, national strategy and national security must be studied and discussed by the Party committees before any decision by the board of directors or company management”18. Still today, almost all executives at SOEs are party members and their corporate status is equivalent to that of the government officials who regulate them. The heads of the largest SOEs also enjoy senior party ranking.

According to the World Bank, of the 95 Chinese firms on the 2014 Fortune Global 500 list, 82 were identified as having govern-ment ownership of 50 per cent or more19. Moreover, “China has become one of the world’s most active users of industrial policies and administrations”20. While many observers used to think that it has not been clear so far to what extent the Chinese government has actually attempted to influence decisions made by the SOE’s that have become shareholding companies, now things are getting clearer, although not in the direction one would have expected.

18 L. Hornby, “China rows back on state-sector reforms”, Financial Times, 14 June 2016; L. Hornby, “China reverses industry’s free-market drive”, Financial Times, 15 June 2016.19 “Global 500”, Fortune, 2014, http://fortune.com/global500/20 The World Bank, China: 2030, 2012, p. 114.


Financial sector, banks and the stock exchange

Despite extensive reforms over the past three decades, the Chinese financial system is still largely underdeveloped with the banking sector still largely controlled by the central government, and the stock market heavily regulated (see Chapter 3 in this volume). Following the financial turmoil in mid-2015 (although the decline in China’s stock market was a normal correction and would have eventually occurred), the way monetary authorities handled the cri-sis was largely criticised for introducing possibly even more uncer-tainty in the stock market, although aimed at the opposite result. What the Chinese government did was to increase its control over listings, and backtrack from its commitment to enhancing free mar-ket reforms.

More recently, at the time we are writing, a further confirmation that the Chinese financial system – more specifically the stock mar-ket system – has not fared sufficiently well on reforms was given by the MSCI, the New York-based stock index provider, which has refused to include mainland Chinese shares in its Emerging Mar-kets Index. This is because although Goldman Sachs had put the chance of approval at 70 per cent, and the IMF recently agreed to include the yuan as one of the currencies in its basket for Special Drawing Rights, A-shares of Chinese companies are mainly held by local investors and are in any case off-limits for foreign inves-tors. According to Chang Liu, the China economist with Capital Economics, “… the MSCI’s decision primarily reflects the fact that financial reforms in China haven’t yet gone far enough rather than worries that policymakers will back-track on already implemented reforms”.21

According to the Financial Times, the MSCI cited two reasons why it did not list Chinese stocks. One of them is China’s decision to impose a 20 per cent limit on repatriation of funds by foreign investors during share sell-offs, in order to reduce the volatility of

21 As quoted in Saibal Dasgupta, “China misses out on MSCI Emerging Markets index”, The National, June 15 2016.


the yuan and the stock market. The global compiler also called for removal of the Chinese rule that allows local exchanges in Shang-hai and Shenzhen to impose pre-approval restrictions on launching financial products.

Although official statements say that the Chinese government will continue with capital market reform plans to develop a more market-oriented and properly regulated market, in order to establish long-term stability and a healthy capital market, there are no signs of such a progress so far.

Toward market economy status

After three decades of widespread economic reforms, more than 80 countries have already granted China Market Economy Status (MES), including BRIC (Brazil, Russia, India and China) countries, such as Russia and Brazil, but also advanced economies, including Switzerland, Singapore, Australia and New Zealand, but not any of its major trading partners, including the EU and the US.

The European Union has not yet granted China MES, based on its latest assessment conducted in 2008, evaluating the influence of state intervention on prices and costs in China. Requests for MES are evaluated based on five criteria regarding government inter-vention in the allocation of resources or business decisions in the economy, as follows :

1. a low degree of government influence over the allocation of resources and decisions of enterprises, whether directly or in-directly (e.g. public bodies), for example through the use of state-fixed prices, or discrimination in the tax, trade or currency regimes;

2. an absence of state-induced distortions in the operation of enter-prises linked to privatisation and the use of non-market trading or compensation system;

3. the existence and implementation of transparent and non-di-scriminatory corporate law which ensures adequate corporate


governance (application of international accounting standards, protection of shareholders, public availability of accurate com-pany information);

4. the existence and implementation of a coherent, effective and transparent set of laws which ensure respect for property rights and the operation of a functioning bankruptcy regime;

5. the existence of a genuine financial sector which operates inde-pendently from the state and which in law and practice is subject to sufficient guarantee provisions and adequate supervision”22.

As the European Union Academic Programme (EUAP) in Hong Kong noed, “China must fulfil all five criteria for the EU to grant it MES, but according to the EU China has met only criterion 2 since 2004. The 2008 assessment acknowledged the progress that China has made in reforming the economy and law but the remaining four criteria were still unmet. Therefore, the EU has still not yet granted MES to China”23. The United States Department of Commerce is much stricter than the EU when examining whether a country is eligible for MES, as it also takes into account interference in trade union affairs – indeed state control of trade union organisations – and the lack of free collective bargaining.

According to Section 15 of China’ Protocol of Accession to the World Trade Organization (WTO) accession agreement signed in 2001, China argues that it is automatically entitled to MES by the EU after December 2016, but some legal analyses would show that there is no legal automaticity in the EU granting MES to China after that deadline and a range of organisations representing Euro-pean industry strongly contests the suggestion that China should automatically be granted MES in 2016. According WTO rules, each importing WTO member can decide whether they treat China as a market economy or not based on their national law.

22 “One-year to go: The debate over China’s Market Economy Status (MES) heats up”, Policy Department, Directorate-General for External Policies, Bruxelles, European Union, 2015, DG EXPO/B/PolDep/Note/2015_33023 European Union Academic Programme Hong Kong, “The issue of granting the Market Economy Status (MES) to China by the European Union”, February 23 2016.


As the Financial Time stated, ”attaining market economy status has been one of Beijing’s main goals in international economic di-plomacy since it joined the WTO in 2001”24. According to Beijing, the state’s presence in the economy has shrunk drastically in the past 15 years, while the role of the state has actually increased in several EU economies. One simple way to assess the size of the public sector is to measure general government revenue as share of GDP, which remains far higher in the Eurozone on average (50%) than in the United States (35%) and twice as high as China (25%).

It is hard to argue that China, particularly given the massive dis-tortions from its state-directed lending, is a market economy, and the Chinese government itself claims that China is in fact a socialist market economy. This is why most countries have reasonably “con-cluded that China does not meet the criteria whereby its lending and production decisions are substantially made without state di-rection”, [while] “Beijing has been much keener to lobby for MES than to reform its own economy to attain it on merit”25.

Why is being recognised as a market economy very important for China’s leaders? Partly for domestic propaganda: it would prove to the Chinese people that the Party’s rule is not only consistent with but provides the right system to reach economic well-being, while protecting the people from the vagaries of free markets. More practically, as the Financial Time underlines, “securing mar-ket economy status would benefit China by requiring global trade regulators to compare the price of Chinese exports to its domestic market – instead of higher-priced third countries – in anti-dumping cases and thus limit their ability to impose tariffs”26.

After US complaints to the World Trade Organisation, China has recently withdrawn subsidies for its exporters, but the recent reversal in the Communist Party’s control of SOEs management boards makes it harder for China to argue that it deserves being granted MES by major world economies, especially the EU (since the United States has already refused to grant MES to China).

24 “China’s flawed case for market economy status”, Financial Times, May 11 201625 Ibid.26 “China fights for market economy status”, Financial Times, May 9 2016.


A dream for the nation, much less for the people?

In an inspiring report/article on the China Dream at the beginning of Xi’s term27, The Economist reported that a number of journalists went on strike in early 2013 in protest over a censored version of an article in a state-controlled newspaper, Southern Weekend, titled “The Chinese dream: a dream of constitutionalism”. While the orig-inal article said that only a division of powers could allow China to become a “free and strong country”, the published version did not mention the constitution.

According to a famous song by Ms Sisi Chen, the Chinese dream is “A dream of a strong nation […] a dream of a wealthy people”28. But Mr Xi is facing increasing difficulty in convincing the people that China can be “rich and strong” while remaining a one-party state. If the China Dream is not the American Dream, what is it? For the time being Mr Xi is keeping the course he will be following un-clear. At the beginning of his term, Mr Xi had to stick to the Party’s long-term plans to achieve a “moderately well-off society” by the time of the Party’s 100th anniversary in 2021 (one year before Mr Xi would have to retire) and creation of a “rich, strong, democratic, civilised and harmonious socialist modern country” by 2049, the 100th anniversary of the Peoples’ Republic of China. But demands for clarity mount as the middle-income groups grow increasingly worried about environmental degradation and social unrest. In the meantime, they are probably dreaming their own dreams for the near future, hoping they are not too different from Xi’s.

27 “Chasing the Chinese Dream”, The Economist, 4 May 2013.28 Ibid.

3. Financial Markets: the Pain of Reform Before the Gain

Christopher Balding

In a series of symbolic milestones China has recently reached, the yuan’s inclusion in the International Monetary Fund’s SDR (Special Drawing Rights) made it one of the world’s reserve currencies and increased international credibility for the yuan, the “people’s cur-rency”. Few had believed this would happen in the near future. The IMF itself in its previous assessment review of basket composition in 2010, had rejected the yuan, saying it didn’t meet the necessary criteria. Politics and expectation of future reform and growth seem to be bigger drivers pushing RMB inclusion in contrast with what has been actually achieved. As IMF Managing Direction Christine Lagarde so pointedly notes: “The renminbi’s inclusion in the SDR is a clear indication of the reforms that have been implemented and will continue to be implemented and is a clear, stronger representa-tion of the global economy”.

RMB internationalization is needed to improve capital alloca-tive efficiency. Beijing currently maintains an iron grip on both capital pricing and flow. Whether it is the financial repression of the citizenry or implicit subsidies given to favored state owned enterprises, control over finances and currency are used as means to protect firms. Beijing cannot reform its economy without fun-damentally addressing the problems with state control of capital allocation.

Beijing is approaching a turning point of needing to liberalize the RMB or to restrict its mobility in the long-term. There is very little middle ground where China can allow the RMB to float but


also control the flows and the price which it so badly wants. Con-versely, liberalizing the markets too rapidly now risk large outflows and rapid depreciation given the clear currency pressures. With the large drop we have seen in international investment inflows into China and MSCI (Morgan Stanley Capital International) exclusion, a primary concern focused on the capricious policy making and capital flow restrictions. China cannot pursue reform that makes it a dynamic economy and leader in financial services without funda-mental reform.

Reforming Chinese financial markets: vital for economic growth

China is attempting a historical rebalance of its economy. Since the Global Financial Crisis (GFC) in 2008, China has relied on ever-increasing levels of debt and investment to drive economic growth. This rapid accumulation of debt has prompted concern in a range of financial institutions, from the Bank for International Settlements (BIS) and the IMF to Citibank and the Royal Bank of Scotland. The Chinese debt level has become one of the dominant concerns in international finance. Reforming capital markets to improve allocative efficiency will be key to facilitating a transi-tion to a service- and consumption-led economy relying on inno-vation and technology.

As Chinese growth has decelerated in official terms over the past few years to an official rate of 6.8 per cent in 2015, debate both within China and outside has focused on potential reforms to the Chinese economy. In the real economy, Beijing has announced plans to shift away from heavy industry like coal and steel, target-ing cuts in surplus capacity to drive this shift. In finance, China’s announced plans focus on deleveraging, improving capital markets specifically in fixed income, and greater RMB liberalization. There has been no shortage of official announcements and plans designed to ease concern about the increasingly urgent need to reform Chi-nese capital markets.

51Financial Markets: the Pain of Reform Before the Gain

In practice, however, there is real reason to doubt the veracity of these reform announcements and what exactly Beijing hopes to ac-complish. In December 2015, the National Party Congress released the preliminary Five Year Plan stressing the importance of delever-aging and in January 2016 new loan figures grew an astounding 67 per cent. Subsequently, PBOC (People’s Bank of China) governor Zhou Xiaochuan commented on the need to reduce the growth of debt. Then the People’s Daily published an interview with an “au-thoritative person” on the need to deleverage. Debt through April 2016 was up more than 30 per cent from the same period in 2015 belying Beijing’s ability to reduce its debt addiction.

Investors know Beijing’s dilemma well. Anticipating announced stimulus and investment plans, investors drove up the traded price of base commodities like steel, prompting many mills targeted for closure to re-open at profitable rates and hampering Beijing efforts at capacity reduction. There is a profound moral hazard enveloping the economic policy-making efforts in Beijing. If Beijing does not increase the risk investors face, it runs the risk of shouldering in-vestor losses; conversely, if it does induce investor losses, crossing this psychological Rubicon runs the risk of inducing panic in the marketplace, causing significant volatility or worse.

However, even beyond China’s ability to achieve reform objec-tives, there are serious questions about what Beijing even means by reform in financial markets. Beijing has declared the importance of increased market risk pricing in financial markets for debt products but mandates prices at which local government debt will be pur-chased by banks. After the RMB joined the IMF special drawing right (SDR) basket in 2015 with full portfolio accounting to begin in 2016, offshore deposits of RMB have declined by more than 25 per cent as the PBOC has intervened to restrict offshore liquidity and mainland borrowers have moved foreign debt obligations on-shore through repayment. This has caused a de-internationalization of the little amount of RMB outside of China that did exist.

This framework begs the question as to what exactly is happen-ing with Chinese financial reforms and what the expected outcomes are with regard to their impact on the real economy and firms. The


direction and outcome of Chinese financial reforms will have a ma-jor impact on the world economy and Chinese firms for the years to come. To address the questions, I will proceed by providing more detail on the macroeconomic background to lay out the framework, then focus on the major financial markets including stock, bond, currency, and shadow banking contributions to growth, finishing with an analysis combining these various markets and the reform impetus.

The Chinese economy: debt dependent and loving it

After the 2008 global financial crisis, China embarked on what UC Berkley economist Barry Eichengreen described as “hard to point to another credit boom of this magnitude in recorded history”1. Despite the often-used term “fiscal stimulus”, Beijing pursued a public-private partnership spending-spree with most of the capital provided by quasi-private sources. The official headline figure from Beijing was approximately US$ 500 billion but in reality, the stimu-lus was structured so that local governments and firms would take the funds to local banks and receive additional leverage. The official US$ 500 billion stimulus with bank lending turned into an approxi-mate US$ 2 trillion stimulus with local governments and firms on the hook for Beijing’s largesse.

The 2008 GFC demarcates the beginning of the great Chinese debt binge. The McKinsey Global Institute estimated in 2015 that from 2007 to 2014 Chinese growth quadrupled from US$ 7 trillion to US$ 28 trillion2. In eight years, Chinese debt ballooned from 158 per cent of GDP to 282 per cent. Given the continued rapid growth in debt since the report was released, this number has only

1 Barry Eichengreen writing in Project Syndicate dated 11 May 2016 and accessed 12 May 2016 at https://www.project-syndicate.org/commentary/china-bad-loan-solutions-by-barry-eichengreen-2016-052 McKinsey Global Institute, February 2015, Debt and (Not Much) Deleveraging accessed on 10 May 2016 at http://www.mckinsey.com/global-themes/employment-and-growth/debt-and-not-much-deleveraging

https://www.project-syndicate.org/commentary/china-bad-loan-solutions-by-barry-eichengreen-2016-05

https://www.project-syndicate.org/commentary/china-bad-loan-solutions-by-barry-eichengreen-2016-05

http://www.mckinsey.com/global-themes/employment-and-growth/debt-and-not-much-deleveraging

http://www.mckinsey.com/global-themes/employment-and-growth/debt-and-not-much-deleveraging


increased. Even as Chinese economic growth continues to slow, debt growth continues to accelerate causing a worrying growth in leverage raising concerns about economic reform and strategic ob-jectives.

There is no clearer way of demonstrating the lack of impact con-tinued debt growth has had on the Chinese than looking at the level of new debt relative to GDP growth. In 2015, new debt was nearly four times the absolute level of new GDP and this ratio has been growing steadily since the global financial crisis. In other words, new debt is having a smaller and smaller impact on growth despite increasingly larger injections of capital. In still other words, to gen-erate not just the same but a smaller level of GDP growth, Beijing is having to borrow more and more money every year. This is a worrying and unsustainable trend.

The rising debt levels are not a fundamental break with long run Chinese economic policy as much as shifting where the capital comes from. The Chinese economic has focused heavily on capital accumulation. After joining the World Trade Organization (WTO) in 2000, this necessitated a policy of running large current account surpluses driven by an undervalued currency. The trade surpluses were sterilized with money growth that drove rapid capital accumu-lation. Sterilization prompted high levels of investment via public savings where the additional money supply was lent through the banks that sold the incoming dollars to the PBOC. While 2008 may demarcate the shift into debt, it does not signal a fundamental shift in economic policy due to the overall reliance on rapid growth in capital accumulation. After 2008 however, it became apparent that the relative level of trade surplus was not enough to continue to drive growth and it was reaching its political limits.

However, the political reliance on high levels of growth pushed Beijing to find new sources of capital, shifting to a debt-driven capital accumulation rather than trade surplus. China has not fun-damentally changed its economic growth model of rapid capital accumulation since 2000. This implies that the transition China is undertaking is not simply attempting to reduce its reliance on debt-fueled growth but focuses on the much larger issue of shifting to a


more sustainable model of growth driven by innovation and con-sumption. Unless Beijing can recalibrate its entire growth model, it will be unable to transition its economy away from physical capital accumulation requiring debt and trade surpluses.

To accomplish this transition, Beijing has declared its intention of reforming capital allocation through banking, currency, stock, and bond markets. However, truly targeting these areas means mak-ing State-owned Enterprises (SOEs) less reliant on subsidized and politically allocated capital and Beijing less influential. This is not merely a tweak to the financing model but a revolution in economic governance. The shift in economic drivers as simply moving away from debt understates the enormity of the challenge facing China. Debt can be managed but remaking an economy is more challeng-ing.

Trapped in a state-run underdeveloped banking industry

Despite the attention paid to other sectors like bonds, stocks, or shadow banking, the Chinese economy remains a financial market dominated by commercial bank lending. Furthermore, the major national state-owned banks continue to dominate the market. Of the top ten banks in China, which have over 80 per cent of the market, only one is not state-owned. Despite the overall funding dominance, the model for Chinese banks is changing, given both regulatory and market-driven pressures. These shifts reveal a number of unique facets of how we can expect the reform path to proceed.

The Chinese banking industry is marked by a number of factors that make either systemic or financial reform difficult. A dispropor-tionate share of lending is short-term in nature. If we just take of-ficial on-balance-sheet lending, which for reasons we will see later distorts the overall picture, since January 2012 only 55 per cent of new bank lending has been medium-term in nature. It is not uncom-mon for banks to have upwards of 70 per cent of on-balance-sheet lending maturing in less than one year. Listed firms have on average


75 per cent of their liabilities under one year. The short-term nature of debt in China is worrying.

This excessive reliance on short-term funding lowers some risks but in this case raises short-term concerns such as rollover risk. Es-pecially given the relatively high level of fixed asset investment, by nature a long-term asset, having such a high relative level of short-term funding, creates a troubling asset and liability mismatch. It also raises the risks of funding constraints if depositors do not provide the necessary level of funding to continue rolling over the loans.

Also, Chinese banks are heavily tilted towards the corporate sector and specifically large state-owned enterprises. Since January 2012, only 36 per cent of new loans have been given to households compared to corporate borrowers. The primary motivation of the Chinese banks is to funnel the large pool of savings to SOEs at generous rates, providing a type of quasi-subsidy. This promotes the accumulation of physical capital by firms and puts the policy importance of state-owned banks at the center. Given the divergent interest-rate costs applied to favored firms and households, it also acts as an implicit subsidy giving these firms an enormous advan-tage.

However, due to the political allocation of capital, Chinese banks face a rising tide of bad loans. Though officially at 1.8 per cent, with questionable loans raising the total to nearly 6 per cent, skeptics have argued that the non-performing loan ratio either has or will top 20 per cent. Even within Chinese financial circles, reports have been circulated and questions raised about the seriousness of the explosion in bank lending. As SOE firms run into difficulty, there is little incentive for an SOE bank to tighten lending terms but rather lend more or roll over questionable loans.

Recent policy moves to prevent the rising tide of bad loans from becoming a flood, however, have only inspired skepticism at Bei-jing’s ability to face up to the problem. For instance, a proposed debt-for-equity swap whereby banks take equity stakes in borrow-ers unable to make payments does little to resolve the underlying problems of excessive indebtedness and poor cash flow. In fact, it


may even exacerbate the problem, as firms with lower debt levels may feel emboldened to assume new debts or lower prices in an already deflationary environment.

Furthermore, banks seem unprepared to become a major share-holder in non-bank firms. Banks are struggling to manage their own businesses with rising bad loan levels, much less turn around fail-ing firms with a political mandate to preserve jobs. Nor is it clear how a bank will receive cash flow, essentially via dividends, from a failing firm for their equity stake or how they would liquidate their holdings should they need to cash out. There is little incentive for the bank to reform the firm or itself to tackle bad loans.

The central government in Beijing owns a golden share through a number of holding companies. The banks, however, have become increasingly independent, pushing back at Beijing diktats although ultimately surrendering to political orders. Given their pre-eminent position in Chinese finance, there can be no talk of reform without prior reforming the banking system. Beijing seems unwilling to re-lease its grip on the primary source of capital allocation in China and unwilling to face the costs of its poor record of capital alloca-tion. The inevitable recapitalization of banks’ balance sheets, rec-ognition of bad loans, and ultimate release of the banking system to make commercial rather than politically driven loans seems an unlikely though needed outcome.

Bond market growth: less than meets the eye

Beijing has targeted the bond market as a source of financial market reform to reduce bank-driven financing and, at least officially, in-crease market pressures for risk pricing. In the past 12-18 months, the bond market has witnessed a surge measured in offerings and volume. However, there is less to this surge in offering than ap-pears on the surface. Bond market offerings remain dominated by government bodies or SOEs and rising defaults have only signified delayed payments before eventual bailouts rather than greater risk pricing. As with all aspects of the Chinese economy, it is important


to dive beneath the surface to understand the details of what is hap-pening and its potential impact.

Beijing wants to increase bond market influence over capital al-location for a number of reasons. The bond market may better price risk than politically motivated bank loans. Beijing actually recog-nizes that political influence has motivated vast amounts of lend-ing and the price charged for that risk is not accurately reflected in the price of lending. However, Beijing wants to increase risk pric-ing without actually changing the price or permitting the failure of weak firms. As with many parts of financial reform, Beijing appears to want the benefits without the costs.

Additionally, tapping the bond market opens a vast new pool of capital for potential borrowers. Banks in China typically offer average deposit rates of 1 per cent while direct security investment on loans offers significantly higher. Just because banks are under or-ders to reduce top-line lending does not mean borrowers are under orders to reduce indebtedness or leverage ratios. However, given the implied levels of non-performing loans, banks are having diffi-culty remaining liquid enough to roll over existing loans that cannot be repaid. To increase capital, targeting investors seeking higher rates of return than bank deposits, Beijing is encouraging growth in the bond market to tap investor capital.

However, there is less to this “market” development than initial appearances might indicate for numerous reasons. First, bond issu-ance is dominated by various levels of government and state-owned companies like policy banks. Through April, the corporate sector excluding policy banks were responsible for only 270 billion RMB in issuance out of 6.4 trillion RMB. This is an almost irrelevant amount of new issues. Even the corporates that do issue are pri-marily state-owned corporations like major national banks or other national champions in which the government has a major stake. In other words, the government is preventing the bond market from allocating capital efficiently.

Second, a primary purpose of the explosion in bond market is-suance is a debt swap from higher-cost shorter-term bank loans into longer-term lower-yielding bonds to stave off a debt crisis. Begin-


ning with the local government debt problems that threatened to morph into a larger catastrophe, Beijing has pushed for troubled local governments and corporates to swap debt maturities and costs. Given the known riskiness of much of the corporate and local gov-ernment issuance, this should not be considered a positive devel-opment but an attempt to stave off much larger short run default waves.

Third, Beijing has essentially mandated bond duration and pric-ing to bailout indebted firms and governments. In many cases, local government debt is sold at sovereign prices and subsequently trades at a lower yield than Chinese sovereign debt. By mandating dura-tion changes and pricing, Beijing is short-circuiting the ability of the debt market to enforce discipline by pricing the risk of the issu-ance. Furthermore, rather than use the breathing space as a chance to put their fiscal house in order, many provinces and firms continue to engage in rapid debt buildups that do not portend stabilization.

Beijing is looking to the bond market as a source of new financ-ing, not for its transparent discipline. Despite the pleasant-sounding rhetoric about market risk pricing and imposing discipline, Beijing is preventing the exact mechanisms which accomplish these tasks by mandating bond purchases, pricing, and duration. While the move to encourage growth in the bond market should be considered a positive step, it needs the proper context to understand exactly what is and is not happening. There is much less reason to believe the market is being allowed to impose the type of financial disci-pline Beijing claims to want.

Shadow banking: out of the shadows and part of the machine

While shadow banking draws comparisons to illicit money flows, it has gone increasingly mainstream in China given the reluctance or inability of major financial institutions to serve the needs of entre-preneurs, households, and non-state-owned enterprises. Non-bank financial institutions grew out of a demand to meet the financial


service needs of individuals and companies not being served by the major commercial banks. However, their rapid growth has increas-ingly worked closely with major financial institutions but focusing on a different client base of small and medium-size enterprises.

The Chinese shadow banking sector has moved out of the shad-ows and into the mainstream. It is a misnomer to call them shad-ow banks, given their funding sources and client base among both borrowers and lenders. For instance, just the big four state-owned banks in China, hold 15.7 trillion RMB in “Financial Investments” on their balance sheets, which is just one place they hold securi-ties from non-bank financial institutions, primarily in the form of short-term fixed-income securities in wholesale funding. As a point of reference, this amounts to roughly 23 per cent of nominal GDP.

There are a number of specific problems when we consider how to reform the shadow banking industry to build a more sustainable foundation for economic growth. First, these financial institutions are large enough to be systemic risks and should not be treated as some backwater of Chinese finance. Shadow banking is intimately connected with mainline commercial lenders acting as either major sales channels or wholesale funders. Given the size of assets under management and their importance to an increasingly larger segment of society, shadow banking should not be treated as systemically unimportant. To this day, non-bank financial institutions exist in a legal gray area with little formal regulatory oversight for shadow banks, P2P lenders, and related non-bank financial institutions. It is important that the regulatory and reform framework incorporate them into the financial system and devise how best to serve their clients and funders. Shadow banks are systematically important in-stitutions.

Second, inclusion into a larger regulatory structure should not prevent non-bank financial institutions in China from serving their primary clientele of households and small to medium-sized enter-prises. Commercial banks in China primarily serve major SOEs while P2P and shadow banks grew rapidly to serve households and non-SOEs. While there is a substantial need for non-bank finan-cial institutions to be brought into the larger regulatory structure,


it would be counter-productive if this change closed off financial channels for segments unable to access bank finance. Reform of the shadow banking sector with an eye to economic growth should focus on building up the sector and its independent nature rather than trying to incorporate it into the mainline commercial sector. Shadow banks grew to meet unserved demand.

Third, while bank loans have risen in the past year or two, the primary driver of lending growth has come from non-bank finan-cial institutions. As banks have restrained lending, non-bank fi-nancial institutions have overseen an explosion in lending. Banks, however, have been major funders of shadow banks. Banks ben-efit with higher rates of return and reduce their capital risk weight-ing by lending to financial institutions. This only shifts their risks largely off their balance sheets in disguised ways. The net result is that a lot of lower-quality borrowers are migrating from banks to non-bank FI’s with banks acting as wholesale funders. This means that the risk level has continued to rise as banks are now at an arm’s length from the end customer even though they continue to act as the primary funder. This process raises serious risk manage-ment issues.

RMB liberalization: the dragon in the room

Arguably the greater risk to the Chinese economy and financial markets is the issue of RMB liberalization. This also has the po-tential to enforce the greatest level of discipline and reform upon Beijing and the entire Chinese economy. Unsurprisingly, this is also the one Beijing is resisting the most and the one most at risk to shocks outside its control. However, Chinese citizens and firms are not cooperating, shifting large amounts of capital out of the coun-try and thereby forcing Beijing to impose ever tightening capital controls. This quiet step backwards in the year the RMB officially joins the IMF SDR basket is a major embarrassment to Beijing but represents potential to push toward financial reform to drive long-term economic growth.


While Beijing maintains its official stance that it intends to com-plete full liberalization of the RMB by 2020, the last few months of 2015 and first half of 2016 have seen nothing but steady retreat from this position. Offshore RMB deposits have been falling around the world, with the major offshore center in Hong Kong seeing a 25 per cent fall in the past year. This was driven by the onshoring of foreign denominated debt by Chinese corporates and PBOC intervention en-suring the CNH (CNH is the ISO Code for the Chinese Yuan when traded offshore) stayed near parity with the Chinese yuan (CNY). Both moves, while individually rational, were driven by concern over the state of the RMB and de-internationalized the RMB.

The greater risk to RMB liberalization is the risk level of Chi-nese assets perceived both by domestic and international investors. Through April, depending on the specific metric used, capital flows into China were down almost 40 per cent from 2015 while outflows were up more than 30 per cent. International investors who have be-come increasingly concerned about China really changed their risk acceptance in the fourth quarter of 2015 and through the first half of 2016. Rapidly rising debt levels and potential currency risks were no longer something to keep in mind, but shifted to major concern. This has caused a near collapse in capital inflows with declines in both direct and portfolio investment.

The rising capital outflows, while motivated by broadly similar concerns, are also more nuanced and structural in nature. Driven less by short-term foreign central bank interest-rate decisions, Chi-nese outflows have been rising steadily since 2012 when a unique confluence of events came together to start the process. In 2012, China changed its foreign payment system, liberalizing most cur-rent account transactions while retaining a tight grip on the capital account. This prompted many Chinese businesses and individuals to move money abroad via fraudulent current account transactions by overpaying for imports. In 2015, this amounted to approximately US$ 750 billion.

Additionally, although the exact date cannot be specified, eco-nomic activity began a slow downward trend sometime in 2012 through the first half of 2013. The rising capital outflows that began


in 2012, were an indicator that real economic investment opportu-nities were declining and capital was looking elsewhere for good opportunities. This was exacerbated by the government transition with Xi Jinping assuming the position of General Secretary of the Chinese Communist Party in late 2012. Already concerned about politically motivated financial seizures and quality-of-life issues, the corruption crackdown caused many to accelerate their plans to leave China.

These factors have combined to place enormous pressure on the RMB. Liberalizing the currency might be the largest structural and psychological bridge for Beijing to cross. Allowing capital to flow freely out of China risks triggering deposit outflows from already stressed banks, prompting liquidity or credit crunches as firms would be unable to rollover debts. Psychologically, the sacrosanct link between the RMB and the US$ occupies a central place in the Chinese national psyche.

RMB liberalization would open up large amounts of new liquid-ity to flow into sectors and companies deprived of capital. How-ever, it would also withdraw liquidity from financial institutions and firms teetering on the edge. In May 2016 the concern focused on the potential risks from continued liberalization, which led to intervention to reduce RMB deposits and firms to onshore foreign-denominated debt. RMB liberalization will prove a net positive, but it is risky given financial fragility, lack of demand for RMB assets, and Chinese demand for foreign assets.

Financial market reform and economic growth in China

China’s financial market was created to allocate capital for politi-cal purposes rather than economic efficiency. Discussing financial reform in the shadow of the ensuing political consequences requires an understanding of the implications. In the absence of either the political will or reform to allow increased capital allocation effi-ciency, any discussion of financial reform is moot.


The financial risks are very real. Corporate China suffers from high leverage ratios and an industrial environment stuck in a de-flationary spiral for more than four years. Revenue across most in-dustries has been flat even as liability growth increases by double digits. Financial market reform must be considered as one half of a larger economic reform package.

However, financial and economic reform in China if anything appears to have regressed. Despite an emphasis on deleveraging at the 2015 Congress, 2016 has witnessed a return to rapid debt-fueled growth and a tightening of economic policy that is scaring off for-eign investors. The supposed transition to an innovative, service-led economy is in reality a return to the debt-fueled heavy industry growth of the past decade. Capital controls have been tightened and SOEs propped up rather than the promised gradual reform and opening up.

Probably the most problematic issue facing Chinese policy-makers and financial market reform is tackling moral hazard. There is a profound belief that Beijing will save investors, which has re-sulted in the widespread belief that asset prices can only move in one direction. While policy-makers try to nudge risk and potential losses onto investors, so far, although defaults have risen, virtually all companies have ultimately been bailed out. Some companies have even engaged in M&A sprees while in default and others saw their debt rise well past face value, indicating the confidence inves-tors have in being made whole.

Consequently, while Beijing may pay lip service to accepting the costs of real economic and financial reform, investors and firms act against the policy diktats. There is little belief that Beijing will allow an indebted firm or bank to collapse and risk either social or financial instability that may cascade across the system. The results of this moral hazard policy are seen throughout the financial system. Investors buy the bonds of firms in default in the belief that Beijing will backstop losses, ultimately bailing out the default. Local gov-ernments have used the local government debt swap of short-term high-interest bank loans for long-term low-interest debt not as an opportunity to get their fiscal house in order but to engage in an-


other debt spree. Until Beijing begins imposing losses on investors and firms, rather than just entering default as more of a standstill, moral hazard will remain the dominant investment paradigm.

The financial system that has evolved in China is acting as a drag on the economic transition China wants to undertake. As long as Beijing remains unable or unwilling to make systematic reforms to capital allocation in China, it will face enormous difficulties transi-tioning to a high-growth middle-income country.

4. Chinese Foreign and Security Policies: Dream at Home, Nightmare Abroad?

Axel Berkofsky

After the conclusion of the 18th National Congress of the Commu-nist Party of China in November 2012, President Xi Jinping for the first time put forward the idea of the “China Dream” (Zhongguo meng) on a visit to the exhibition “The Road towards Renewal” at the National Museum of China. During the visit, Xi announced that the “Great rejuvenation of the Chinese nation is a dream of the whole nation, as well as of every individual.” While the contents of the “China Dream” continue to remain fairly vague1, details on what Xi means when he talks about “resurrecting” Chinese power continue to emerge every once in a while. The conceptual and lin-guistic origins of the “China Dream” (or “Chinese Dream”2), how-ever, go back to the year 2010 and a book published by Liu Mingfu, senior colonel of China’s armed forces: The China Dream: Great Power Thinking and Strategic Posture in the Post-American Era. The book argues that China should regain its position as the most powerful nation in the world, a position it had held for a thousand years before its humiliation by Western powers.

In December 2012, during an inspection tour of the navy in southern China, Mr Xi then announced what he called a “Strong Army Dream”, emphasising that the army will continue to remain under exclusive control of the Party, i.e. under control of himself3.

1 See chapter 1 in this volume.2 The literature uses the terms “China Dream” and “Chinese Dream” simultaneously. 3 Also see “An Uneasy Friendship”, The Economist, 9 May 2015, http://www.economist.com/news/china/21650566-crisis-ukraine-drawing-russia-closer-china-

http://www.economist.com/news/china/21650566-crisis-ukraine-drawing-russia-closer-china-relationship-far-equal



In Xi’s view, Chinese foreign policy should help realise two goals for the country: the doubling of China’s gross domestic product (GDP) from 2010 levels and achieving what he refers to as the “re-newal” of the nation by 2049, the 100th anniversary of the Com-munist Party takeover of power in China. While the first objective is clear and tangible, the second is not, at least not yet. Then again, China’s currently very assertive policies related to territorial claims in the South China Sea are somehow hinting at what Xi means when he speaks of “renewal”: the unilateral “renewal” of China’s territorial borders. Indeed, over the last three years – at least so it seems – China’s (very) assertive and at times aggressive policies related to territorial claims in the East and South China Seas have been an instrument to help “resurrect” Chinese power as declared in the “China Dream”. Unilateral territorial expansion in the South China Sea, accompanied by the construction of civilian and mili-tary facilities on islands claimed also by other countries must in-deed be interpreted as a demonstration of Chinese (military) power and the ability to reclaim and occupy what – at least in Beijing’s view – has belonged to China since “ancient times”. Given that the “China Dream” aims at re-building the power and influence China had in the past (before its clash with Western powers and Western colonialism and imperialism in China and elsewhere in Asia), re-claiming and occupying territories China claims to have possessed in the past is hence only logical – at least and arguably only from a Chinese point of view. However, that China is no longer – at least formally – an empire and Southeast Asia no longer a group of Chinese vassal states, seems to be completely irrelevant in Chinese policymaking circles.

For those in Asia who are feeling the results of Chinese dream-ing of returning to a “glorious past” and an undisputed “Middle Kingdom” status, the overall quality and level of Chinese peaceful-ness and/or belligerency will also have to be measured by China’s regional foreign policies and their impact. As it turns out, unilater-ally reclaiming islands in the South China Sea and building civ-

relationship-far-equal


67Chinese Foreign and Security Policies: Dream at Home, Nightmare Abroad?

il and military facilities on them is in Southeast Asia (and pretty much elsewhere too) perceived to be the very opposite of the kind of “peaceful development” and “Sharing the China Dream” Xi Jin-ping has been promising since 2012.

“Hide and bide no more”?

The “China Dream” seems to replace Deng Xiaoping’s “Hide and Bide” approach to international affairs. When Deng came to power in China in the late 1970s, he wanted China to put a focus on economic development and growth and therefore wanted the country to take a very low profile in international politics. This was not least decided in view of the country’s very limited resources and expertise after 30 years of Maoism, China’s international isolation and foreign policies that were driven by ill-fated ideology and resistance to alleged U.S. global imperialism. After the events on Tiananmen Square in June 1989 Deng is cited as having “invented” the slogan “Bide its time, hide its brightness, not seek leadership, but do some things”4. How-ever, there is no evidence, as U.S. China scholar David Shambaugh writes, that it was Deng who invented and propagated that slogan in 19895. Either way, “Hide and Bide” became the mantra of Chinese foreign and security policies and it was, as Shambaugh writes, for-mer Chinese President Jiang Zemin, who picked up the slogan and officially attributed it to his predecessor Deng. The “Hide and Bide” policy is a policy that has kept China from getting politically or mil-itarily involved in international conflicts and was accompanied by China deciding to make neither allies nor enemies.

This policy approach, however, has been transformed over the last three years and this is where the “China Dream” and a new 4 In Chinese: Taoguang yanghui, bu dang tou, yousuo zuoweo. 5 Shambaugh argues that the slogan neither featured in Deng’s speeches nor was published in Deng’s book Selected Works. Instead, Deng only once during his so-called ‘Southern Tour’ in 1992 announced that “We will only become a big political power if we keep a low profile and work hard for some years, and then we will have more weight in international affairs.” See D. Shambaugh, China Goes Global, The Partial Power; Oxford University Press New York 2013, p. 18-19.


approach to regional and global Chinese foreign policies becomes relevant. China’s ever deeper integration into the world economy – accompanied by its global trade ties with and foreign direct in-vestments (FDI) in many politically unstable countries – makes it much more difficult (i.e. impossible) to passively stick to Deng’s “Hide and Bide” paradigm. This also means that it has become in-creasingly difficult for Beijing to adhere to its sacred “Principle of Non-Interference”6. China denying others the right to “interfere” in any of what China refers to as its “internal affairs” is (very) deeply embedded in Chinese foreign and security policy thinking and mak-ing and Beijing will continue to take on board only the kind of ad-vice on its foreign and security policies that comes nowhere near to resembling “interference”. Chinese policymakers have over recent years insisted that no outside party in general and the U.S. in par-ticular has the right to take a position on, i.e. “interfere in”, China’s domestic and foreign policies, in and beyond Asia7.

What’s more, the kind of foreign and foreign economic policy initiatives Beijing is proposing today obviously exclude the U.S. Xi has repeatedly proposed creating a new regional security archi-tecture that would exclude the United States, and Beijing has been very active in regional security forums of which the U.S. is not a member: the Shanghai Cooperation Organization (SCO), ASEAN plus 1, ASEAN plus 3, and the Conference on Interaction and Con-fidence Building Measures in Asia (CICA). For Southeast Asian countries8, however, a new Asian security architecture under Chi-nese leadership remains very problematic. Indeed, against the back-ground of Asian territorial and maritime disputes involving China, a Chinese leadership role is from a Southeast Asian perspective cur-

6 See e.g. M. Duchâtel, O. Bräuner, Hang Zhou, Protecting China’s Overseas Interests-The Slow Shift from Non-Interference, SIPRI Policy Paper 41, International Peace Research In-stitute (SIPRI), Stockholm, June 2014, http://books.sipri.org/files/PP/SIPRIPP41.pdf 7 See e.g. F. Godement, “The End of Non-Interference?”, China Analysis, The European Council on Foreign Relations/Asia Centre, October 2013, http://www.ecfr.eu/page/-/China_Analysis_The_End_of_Non_interference_ October2013.pdf; See also M. Duchâtel, O. Bräuner, Hang Zhou, op. cit.8 Not to mention East Asian countries such as Japan or South Korea.

http://books.sipri.org/files/PP/SIPRIPP41.pdf

http://books.sipri.org/files/PP/SIPRIPP41.pdf

http://www.ecfr.eu/page/-/China_Analysis_The_End_of_Non_interference_October2013.pdf




rently all but inconceivable. And not only from a Southeast Asian perspective as it turns out. Closer to home, too, China’s tactics and policies hardly correspond to the kind of regional “win-win” reali-ties, which according to Xi Jinping would result from the “China Dream”. When Taiwan’s newly-elected president Tsai Ing-wen took office at the end of this May she was reminded several times to stick to the so-called “1992 consensus” acknowledging that there is only one China9. Tsai has so far chosen not to do so and she and her country might sooner or later become subject to some of the “Mov-ing earth and shaking mountains” policies Xi threatened Taipei with in case it opted for policies aimed at turning Taiwan’s de facto inde-pendence into a formal one.

Sweet dream versus bitter reality

State Councillor and former Chinese Minister of Foreign Affairs10 Yang Jiechi wrote in an American newspaper in September 2013 that “The Chinese dream requires a peaceful and stable internation-al and neighbouring environment, and China is committed to real-izing the dream through peaceful development. Since the “China Dream” is closely linked with the dreams of other peoples around the world, China is committed to helping other countries, develop-ing countries and neighbouring countries in particular, with their development while achieving development of its own”11. That sounds good on paper, but the reality of Chinese regional foreign and security policies arguably does not get reflected in that expla-nation of the “China Dream”. Unilaterally occupying disputed is-lands in the South China Sea is – at least from the perspective of those countries also claiming the islands China is already building civilian and military facilities on – the very opposite of the kind

9 See “Rocking Boats, Shaking Mountains”, The Economist, 28 May 2016.10 Between 2007 and 2013.11 See Yang, Jiechi, “Implementing the Chinese Dream”, The National Interest, 10 Sep-tember 2013, http://nationalinterest.org/commentary/implementing-the-chinese-dream-9026?page=3

http://nationalinterest.org/commentary/implementing-the-chinese-dream-9026?page=3

http://nationalinterest.org/commentary/implementing-the-chinese-dream-9026?page=3


of “peaceful development” Yang Jiechi mentioned at the time. To be sure, officially, the “China Dream” is a continuation of China’s so-called “Peaceful Development Strategy” announced and propa-gated by Xi’s predecessor Hu Jintao. The origin of Hu’s “Peaceful Development Strategy” was the “Peaceful Rise Strategy” (heping jueqi) as proposed by Zheng Bijian, from the Central Party School in 2003. “Peaceful Rise” became “Peaceful Development”, which in turn was complemented by the “Harmonious World” (hexie shi-jie) slogan to calm Western anxiety about China’s rise, be it “peace-fully” or “harmoniously”.

Today, however, the concept of a “harmonious world” is no lon-ger part of the official Chinese foreign policy rhetoric and seem-ingly not a concept belonging to the “China Dream” either. When Chinese policymakers, journalists and scholars talk about the “China Dream” and the return to the “Glory of the Middle King-dom” in the same sentence, the alarm-bells go off immediately in Southeast Asia. Indeed, the return of the concept/strategy of China as the “Middle Kingdom” in Southeast Asia recalls the bad old days of the Ming and Qing dynasties, during which the “Middle King-dom” dominated much of Southeast Asia, treating states as “vas-sals” on the “periphery” of the Chinese Empire12. In January 2014 Liu Zhenyu, journalist of the Chinese People’s Daily Online news-paper13 wrote an article in the online newspaper The Diplomat, in which he explicitly linked the “China Dream” to the term “Middle Kingdom”: “I dream that the Chinese people will one day fully re-cover from the trauma of the “Century of National Humiliation”, when China was bullied at the hands of Western and Japanese in-vaders, and the Middle Kingdom will restore its former glory”14.

12 Indeed, long before Xi’s “China Dream” became part of the official Chinese foreign policy rhetoric, Beijing’s decision to again use the term “Middle Kingdom” created anxiety among Southeast Asian policymakers and scholars. The concept of China as the Middle Kingdom today implies for Southeast Asian countries that China is the political, economic centre of the region, while Southeast Asia finds itself again existing at the “periphery” of the Chinese Empire, confined to a “vassal state” status.13 Generally referred to as the ‘mouthpiece’ of China’s Communist Party; the newspa-per is run and owned by the Communist Party. 14 Liu, Zhenyu, “I have a Dream, a Chinese Dream”, The Diplomat, 12 January 2014,


Indeed, there is little doubt that there is in Chinese policymaking circles a conceptual connection between the “China Dream” and the Middle Kingdom15. That connection becomes evident in Xi’s project to revive the ancient Silk Road trading route from China to Europe: indeed, the very same version of the Silk Road when China was the “Middle Kingdom”16.

Dream interpretation

Given that the “China Dream” is a slogan as opposed to a well-defined concept explaining in detail the allegedly new qualities of Chinese foreign policies, it is obviously difficult to qualify and quantify which, how and to what extent China’s foreign and se-curity policies are in Beijing’s view designed to help achieve that “dream”. That said, however, if strengthening and expanding Chi-na’s regional and global foreign and security policy profile and positioning is part of that “dream”, then it can be concluded that Beijing’s (very) assertive policies related to territorial claims in the South China Sea serve that purpose. In other words, reclaiming and occupying islands in the South China Sea which are also claimed by other countries is – from a Chinese perspective – an instrument to help the Chinese government convince the Chinese people that it is able and indeed very prepared to make the de facto expansion of Chinese territory a part of the “China Dream”.

And China is arguably getting fairly good at this. Large parts of the territorial waters in the South China Sea are disputed and China is the country that acts on these disputes by in essence de-claring that there are no disputes: the disputed territories all belong to China as far as China is concerned. In the South China Sea that includes the Paracel Islands (also claimed by Taiwan and Vietnam), http://thediplomat.com/2014/01/i-have-a-dream-a-chinese-dream/ 15 Various interviews this author conducted with Chinese ministry officials and poli-cymakers in 2014 and 2015 confirm this. 16 See Shi, Ting, D. Tweed, “Xi Jinping Outlines ‘Big Country Diplomacy’ for China”, The Sydney Moring Herald, 2 December 2014, http://www.smh.com.au/world/xi-jinping-outlines-big-country-diplomacy-for-china-20141202-11yaj5.html

http://thediplomat.com/2014/01/i-have-a-dream-a-chinese-dream/

http://www.smh.com.au/world/xi-jinping-outlines-big-country-diplomacy-for-china-20141202-11yaj5.html

http://www.smh.com.au/world/xi-jinping-outlines-big-country-diplomacy-for-china-20141202-11yaj5.html


the Spratly Islands (claimed by Taiwan, Vietnam, the Philippines, Malaysia and Brunei) and the Scarborough Shoal (claimed also by both Taiwan and the Philippines). To put all of this on paper, Beijing took the so-called “Nine-Dash Line” (a line marking the borders of Chinese territorial waters as viewed from China dating back to the 1940s) out of the drawer, providing alleged “evidence” that more than 90 per cent of the South China Sea is part of Chinese sovereign territory. Over the last three years, China has in the South China Sea pursued a rather effective approach that is also referred to as a ‘”combination of punches”. Firstly, deploying law enforcement units on the sea to assert its power while at the same time avoid-ing direct military clashes with other claimant countries. Secondly, using economic power to divide ASEAN countries’ stances on ter-ritorial disputes with China. This dual tactic, however, has in 2014, 2015 and 2016 been complemented by something more concrete: unilaterally declaring that what is disputed really belongs to China. In 2015, for example Beijing increased the construction of facili-ties on and around disputed islands, including military facilities. After declaring in June 2015 that the process of building seven new islands by moving sediment from the seafloor to reefs was close to completion, Beijing in the second half of the year undertook ef-forts to build ports, airstrips and radar facilities on disputed islands in the South China Sea. In April 2015 China built an airstrip on reclaimed land on the Spratly Islands and unless there is a dramatic shift in Chinese territorial policies – which is as unlikely as it gets – we have not yet seen the end of China re-claiming and building facilities (including military bases) on disputed islands in the South China Sea. To be sure, Beijing does not get tired of pointing out that that it is merely reclaiming land and islands that have always – since ancient history – belonged to China17.17 Panda Ankit, “Vietnam Slams Chinese Naval Drill in South China Sea”, The Dip-lomat, 27 July 2015, http://thediplomat.com/2015/07/vietnam-slams-chinese-naval-drill-in-south-china-sea/; also D. Watkins, “What China has been Building in the South China Sea”, The New York Times, 29 February 2016, http://www.nytimes.com/inter-active/2015/07/30/world/asia/what-china-has-been-building-in-the-south-china-sea-2016.html?_r=0; “Who Rules the Waves”, The Economist, 17 October 2015, http://www.economist.com/news/international/21674648-china-no-longer-accepts-ameri-

http://thediplomat.com/2015/07/vietnam-slams-chinese-naval-drill-in-south-china-sea/

http://thediplomat.com/2015/07/vietnam-slams-chinese-naval-drill-in-south-china-sea/

http://www.nytimes.com/interactive/2015/07/30/world/asia/what-china-has-been-building-in-the-south-china-sea-2016.html?_r=0



http://www.economist.com/news/international/21674648-china-no-longer-accepts-america-should-be-asia-pacifics-dominant-naval-power-who-rules



In sum, the “China Dream” suggests that China is bound to become more proactive in international politics and security and could, as some analysts point out, begin to seek military alliances. Up until today, however, Beijing insists that it does maintain mili-tary alliances with any country, including North Korea and Rus-sia. The literature suggests that Moscow and Beijing will maintain what is also referred to as an “axis of convenience” as opposed to anything resembling a military partnership that goes beyond joint opposition to U.S. and Western policies18.

Dream for some, nightmare for others?

Chinese state-controlled media warn on a regular basis that while Beijing has nothing against U.S. economic involvement in East Asia per se, the expansion of U.S. security and defence ties in Asia through its “Asia pivot” is aimed at keeping China from pursuing the “China Dream” of “National Rejuvenation”19. While that does arguably sound a bit alien and overly dramatic to Western ears, it is very serious business for China as China’s most well-known schol-ar of international relations Yan Xuetong20 argued in 2013 during a debate with U.S. scholar John Mearsheimer21. China under Xi’s leadership, Yan argued at the time, will be able to tell friends from enemies, allowing those who – as he put it – “Play a constructive role in China’s rise to profit from it”. This is arguably a Chinese version of a “carrot and stick policy”, “rewarding” those who play by China’s rules and “punishing” those who are daring enough not

ca-should-be-asia-pacifics-dominant-naval-power-who-rules18 See Yun Sun, “China-Russia Relations: Alignment without Alliance”, PacNet, no. 67; CSIS - Center for Strategic and International Studies, 7 October 2015, https://www.csis.org/analysis/pacnet-67-china-russia-relations-alignment-without-alliance 19 “Chasing the Chinese Dream”, The Economist, 4 May 2013, http://www.econo-mist.com/news/briefing/21577063-chinas-new-leader-has-been-quick-consoli-date-his-power-what-does-he-now-want-his 20 From Tsinghua University of Beijing. Yan is known for being an outspoken scholar and commentator with nationalist and anti-West/anti-U.S. tendencies.21 The full debate can be accessed on YouTube at https://www.youtube.com/watch?v=wBrA2TDcNto


https://www.csis.org/analysis/pacnet-67-china-russia-relations-alignment-without-alliance

https://www.csis.org/analysis/pacnet-67-china-russia-relations-alignment-without-alliance

http://www.economist.com/news/briefing/21577063-chinas-new-leader-has-been-quick-consolidate-his-power-what-does-he-now-want-his



https://www.youtube.com/watch?v=wBrA2TDcNto

https://www.youtube.com/watch?v=wBrA2TDcNto


to. While that might sound plausible from a very confident and arguably nationalist point of view (somehow smelling of plans to install “hegemony” and Chinese “supremacy”), one may wonder where the “China Dream” ends and the nightmare for the rest of the world begins. But not so fast. The basis and fundament of rising Chinese global influence and power over the last 10 years has been an economy producing double-digit growth rates. Double-digit Chinese economic growth rates, however, are a thing of the past and today the country is confronted with enormous economic and financial difficulties, which need to be addressed very urgently and very profoundly. China’s debt – public and private debt combined – could, according to The Economist, already amount to close to 300 per cent of the country’s GDP22 – not exactly the strongest position from which to “reward” or “punish” those who are and who are not playing by China’s rules. To be sure, there are Chinese policymak-ers and scholars also warning of a Chinese “imperial overstretch” and arguing that Beijing is already overplaying its foreign policies hand23. China is indeed faced with enormous economic and social problems and tough foreign policy talk and action is probably also meant to distract from the country’s economic ills. Xi Jinping’s “strong-man” behaviour, his grandiose rhetoric associated with the “China Dream” and his very assertive at times belligerent warnings to the West and anybody else about not interfering in any of the country’s domestic and foreign policies are arguably not necessarily a sign of self-confidence and strength but rather the opposite: inse-curity and deep-seated concerns that the Chinese people could, as in 1989, turn against the government and the state should the state not be able to provide the people with the public goods – in this case, strong economic growth accompanied by prosperity – that it prom-ised to do. Following that logic, the more Xi and like-minded poli-cymakers talk tough and conduct megaphone diplomacy warning

22 “The Coming Debt Bust”, The Economist, 7 May 2016, http://www.economist.com/news/leaders/21698240-it-question-when-not-if-real-trouble-will-hit-china-coming-debt-bust23 This author’s off the record interviews with Chinese scholars in Beijing in 2015 confirm that.

http://www.economist.com/news/leaders/21698240-it-question-when-not-if-real-trouble-will-hit-china-coming-debt-bust




others not to meddle with the country’s internal and external affairs, the more insecure the leadership seems to feel. Chinese policy-makers and scholars do obviously disagree and typically react very defensively when confronted with Western assessments of how un-stable and insecure the Chinese leadership and/or the Communist Party is24. Indeed, Beijing usually refers to such critical analyses of the state and the Chinese leadership’s control over China and the Chinese people as unfounded and “malicious” speculations and Western attempts to drive a “wedge” between the leadership and the Chinese people.

The west got it all wrong, of course

China itself cannot find anything aggressive about any of its re-gional foreign and security policies. It is – at least from its own perspective – merely reclaiming what has belonged to China since “ancient times”. In fact, there is very little (if any) room for nego-tiations with China about whom disputed territories in Asia belong to, even if Beijing continues to insist that it is – at least in prin-ciple and strictly on a bilateral basis – prepared to talk to other claimant countries about conflicting territorial claims. However, this is arguably only in principle and theory because there are no indications whatsoever that Beijing is prepared to seriously nego-tiate any ownership of islands in the South China Sea. And with good reason, according to the Chinese (U.S.-based) scholar Zheng Wang, who – like many other Chinese scholars too – talks about “misperceptions” between China and some of its neighbours over sovereignty issues25. “Misperceptions”, however, is arguably only one way of putting it. Unilateral territorial expansion at the ex-

24 A case in point is the American China scholar David Shambaugh, who in 2015 made himself rather unpopular among Chinese colleagues and indeed also policy-makers when he concluded (in, among others, the Wall Street Journal) that Beijing’s very assertive domestic and foreign policies are also a result of an insecure leadership. 25Zheng, Wang, “Not Rising, But Rejuvenating: The ‘Chinese Dream’”, The Diplomat, 5 February 2013, http://thediplomat.com/2013/02/chinese-dream-draft/

http://thediplomat.com/2013/02/chinese-dream-draft/


pense of militarily weaker Southeast Asian countries is the way that Southeast Asia and pretty much everyone else sees it. Zheng Wang’s explaining that the West and Southeast Asia have it all wrong is telling and stands for much of what is wrong with the “China Dream”, at least for those who are faced with the dream’s not-so-dreamlike consequences. “Although outsiders almost al-ways speak of China’s ‘rise’, the Chinese like to refer to their im-pressive recent achievements and future planned development as ‘rejuvenation’ (‘fuxing’)”. The use of that word underscores an im-portant point: the Chinese view their fortunes as a return to great-ness and not a rise from nothing. In fact, rejuvenation is deeply rooted in Chinese history and the national experience, especially with regard to the so-called “century of national humiliation” that began with the First Opium War (1839-1842) and lasted through the end of the Sino-Japanese War in 1945. It seems inconceivable to the Philippines and Vietnam that China’s historical evidence of sovereignty over islands in the South China Sea should take pre-cedence over modern international law. Consequently, these coun-tries and others perceive China’s claims and efforts to defend them as inherently aggressive, and in turn demonstrate that China is a revisionist power, Zheng Wang writes. The trouble, however, is that China cites “evidence” that is Chinese evidence and Chinese only. The maps China today refers to were drafted by China and are not acknowledged as “evidence” of Chinese territorial claims anywhere else outside of China. Or put differently: Chinese ter-ritorial claims in Asia have been “dreamt up” in China – as part of the “China Dream”. Either way, while a number of Southeast Asian countries would beg to differ (very strongly), the “China Dream” is about getting back what has always belonged to China. China, Zheng Wang therefore concludes (erroneously) is a status quo power. “The Chinese see their country as a status quo power whose actions are inherently defensive. From this perspective, the Chinese are merely trying to protect their ancestral rights – as laid out in historical documents – from the encroachment of others”. Xi Jinping’s ambitions, the Chinese scholar Feng Zhang argues, do not stop there. “Xi isn’t content with making China a great power


in the region and beyond. He also wants to make China the domi-nant power in key areas of Asia-Pacific regional relations. Indeed, as a keen student of history, Xi may be trying to restore the role of China in the contemporary East Asian system to its historical height during the era of the Chinese empire (221 BC–1911 AD)”26 – arguably the worst-case scenario for the rest of Asia.

The answer to U.S. containment?

From a Chinese perspective, the U.S. military presence in East Asia in general and the U.S. “Pivot to Asia” announced in 2011 in particular is standing in the way of China achieving regional political and military supremacy, which – as we have established above – seems to be part of the “China Dream”. If China perceives itself to be the subject of U.S. containment policies accompanied by the strengthening of Washington’s security and military with traditional decades-old allies (such as Japan and South Korea) and the development of new defence ties with countries such as the Philippines, Vietnam, Australia and India 27, then the realization of the “China Dream” is also a response to U.S. containment. And that would be the part of the dream which, as mentioned above, seeks to re-configure China’s current to past territorial boundaries. In turn, the strengthening of U.S. defence and military ties with Southeast Asian countries is aimed at helping Southeast Asia to keep China from controlling the territories it did when it was the “Middle Kingdom”. Hence, it all makes sense, albeit potentially in very destabilizing way.

26See Feng Zhang, “Xi Jinping’s Real Chinese Dream: An ‘Imperial’ China?”, The National Interest, 18 September 2015, http://nationalinterest.org/blog/the-buzz/xi-jinpings-real-chinese-dream-imperial-china-13875 27 For details on the contents and objectives see e.g. K. Campbell, B. Andrews, Ex-plaining the U.S. Pivot to Asia, Chatham House, August 2013, https://www.chatham-house.org/sites/files/chathamhouse/public/Research/Americas/0813pp_pivottoa-sia.pdf

http://nationalinterest.org/blog/the-buzz/xi-jinpings-real-chinese-dream-imperial-china-13875

http://nationalinterest.org/blog/the-buzz/xi-jinpings-real-chinese-dream-imperial-china-13875

https://www.chathamhouse.org/sites/files/chathamhouse/public/Research/Americas/0813pp_pivottoasia.pdf




Conclusions

The jury is still out on whether the “China Dream” is the conceptual basis for China to become a revisionist power aiming to remodel the global order or whether Beijing will content itself with remaining a status quo power28. Indeed, much of what the “China Dream” will and will not entail will have to emerge and become (much) clearer in the years ahead. For now, however, it is fair to conclude that the ‘China Dream’ – a “peaceful” concept according to Beijing’s afore-said explanation – does not stand in the way of Chinese not-so-peaceful policies related to territorial claims in the East and South China Seas. Whatever the “China Dream” turns out to be and “in-structs” Chinese policymakers to do, China’s foreign and security policies will have to be measured by their quality and results rather than by high-sounding and nice-sounding “China Dream” rhetoric. To Western ears, the “China Dream” concept sounds – like many other slogans of Chinese domestic and external policies over the decades – alien. A slogan meant mostly for domestic consumption. In turn, Western scholars and policymakers often find themselves confronted with Chinese accusations of not being able to “under-stand” China, its history, culture and everything else about China if and when Western scholars and policymakers point out that slogans like the “China Dream” mean less or indeed very little in a West-ern context. Indeed, accusing non-Chinese scholars and policymak-ers of criticizing China out of ignorance or inability to understand China continues to remain an important “defence mechanism” against Western criticism, finger-pointing and more generally West-ern “interference” in China’s internal affairs. However, China’s “non-interference” policy has gradually been transformed over the past years, due to China’s ever deeper involvement in the global economy, making it more difficult for Beijing to stick to Deng’s above-mentioned “Hide and Bide” paradigm29. Consequently, it is

28 See Li Xing, “Interpreting and Understanding ‘The Chinese Dream’ in a Holistic Nexus”, Fudan Journal of the Humanities and Social Sciences, vol. 8, no. 4, 2015, pp. 515-520, http://vbn.aau.dk/files/218980898/Fudan_Journal_2015.pdf 29 See e.g. Qin Liwen, “Securing the ‘China Dream’: What Xi Jinping Wants to Achieve

http://vbn.aau.dk/files/218980898/Fudan_Journal_2015.pdf


probably secondary whether the “China Dream” entails “instruc-tions” to modify, adjust or indeed overcome the “principle of non-interference” in view of the fact that China’s increasingly global economic and political interests demand that already and anyway. While China under Xi Jinping has not – at least not yet – officially replaced the “Hide and Bide” strategy, China’s current foreign and security policies in general and those in the region in particular have very little in common with how Deng intended to conduct foreign and security policies. To be sure, Deng’s China did not have the resources and economic power and influence to conduct the kind of foreign and security policies Xi is conducting today.

with the National Security Commission (NSC)”, China Monitor, no. 4, Mercator Insti-tute for China Studies (MERICS) Berlin, Germany, 28 February 2014, http://www.merics.org/fileadmin/templates/download/china-monitor/China_Monitor_No_4.pdf

http://www.merics.org/fileadmin/templates/download/china-monitor/China_Monitor_No_4.pdf



5. China’s G20 Presidency: Coming at the Wrong Moment

Andrea E. Goldstein

The G20 presidency with its core themes of “Towards an Innova-tive, Invigorated, Interconnected and Inclusive World Economy” and “breaking a new path for growth” comes at a sensitive moment for China. In an integrated international economy, chairing the G20 is both an opportunity for shaping global economic governance and an instrument for promoting China’s domestic development agenda.

On the one hand, the 4-5 September G20 Leaders Summit in Hangzhou (Zhejiang Province) allows Beijing to showcase its unique route to development and poverty reduction, so effectively shepherded over the past three decades, and the “China dream”, put forth by President Xi Jinping, to build a moderately prosperous society and realize national rejuvenation by the middle of the cen-tury. In this sense, heading the G20 is a timely opportunity to define China’s role in global economic governance, by setting goals that are both ambitious and realistic and by promoting its own initiatives and principles for the global common good.

On the other hand, the presidency may appear an unwelcome dis-tractions from the burning issues that the Chinese leadership must tackle this year: a slowing domestic economy, subtle and yet clear cracks in the social contract and serious flash points in the U.S.-China relationship (in particular the question of America’s naval role in the Western Pacific and China’s claims to a nine-dash line). For all the well-deserved satisfaction of hosting the club of those who hold the decision-making power at the international level, a lot remains for China to do before completing its full modernization.


At the same time, China this year is the first non-Western power (considering that Russia is a sui generis case and in fact was a G8 member when it hosted the G20 in 2013) to chair the world’s pre-mier body for international economic cooperation. Under Chinese stewardship, the discussions on the value of the G20 take renewed importance. This relatively new format of global governance is in-creasingly criticized for being an empty talking shop, where state-ments follow declarations with little impact, and even less success in giving new impetus to the global economy. In 2016, a number of new challenges are coming to the fore: world GDP growth is pro-jected to fall below its long-term average, global trade is slowing down, international investment flows are declining when due atten-tion is paid to financial gimmicks.

The principal aim of this chapter is to analyse the contribution of the G20 to global governance and coordination in different policy domains (macroeconomic stability, development, trade, investment and, prospectively, migration) and the role of China therein. A sec-ondary objective is to understand how the G20 can in turn influence the reforms that China, now the world’s second-largest economy and the largest contributor to world growth, has embarked in since the Third Plenum of the Chinese Communist Party’s 18th Congress.

Is the G20 underperforming?

While the G20 has not superseded the G7/G8, and there are indeed important topics that it does not cover while they recur in the indus-trial nations’ summits, ever since the 2009 Summit in Pittsburgh the former has come to represent the real pinnacle of informal global governance. From the legitimacy viewpoint, the participation of emerging economies gives the G20 a more inclusive nature. The risks, however, are multiple. One is that the grouping may have become too large and heterogeneous to move fast and effectively. A definite advantage of G7/G8 gatherings have been frank exchang-es – a modus operandi that made it possible to reach consensus and make progress in many delicate economic and political areas.

83China’s G20 Presidency: Coming at the Wrong Moment

The G20, much more than the G7/G8, also suffers from the lack of a permanent secretariat, although the creation of a Troika system (composed in any given year by the current Chair with the past and the following ones) goes in the direction of securing greater insti-tutional continuity.

The position of China on these founding matters remains un-clear. Beijing (as indeed Tokyo in the G7/8) has always adopted a very conciliatory tone in G20 exchanges, reflecting the consensual nature of (East) Asian diplomacy. Exemplary in this sense is the difference with Reserve Bank of India Governor Raghuram Rajan, who has openly called on the International Monetary Fund (IMF) (and the G20 more broadly) to examine the effects of quantitative easing and unconventional monetary policy not just on the G7 coun-tries that implement them, but also on the rest of the world. Con-cerning the establishment of some kind of formal structure, the IMF and the Organisation for Economic Co-operation and Development (OECD) would be natural candidates to assume this role, with their complementary competencies in macroeconomic and structural policies. Beijing (and the other BRICS, in fact to an even greater degree) was initially adamant in its opposition to the OECD (of which China is not a member) in the G20, although in recent years initial concerns have given way to a much closer relationship.1

As Jean Pisani-Ferry observed in 2012, “whereas warding off de-pression [from Washington to Pittsburgh] was conceptually simple, the aftermath was more complicated because it involved addressing a conceptually debatable and politically delicate issue: the so-called global imbalances”2. According to the IMF, G20 members have made progress in reducing large current account imbalances and (to a more limited extent) internal imbalances. However, G20 actions have been insufficient to both achieve more balanced and stronger growth and reduce disequilibria between surplus and deficit economies.

1 For an unofficial view, see Xu Hongcai (2016), “G20 to Benefit from a Secretariat and a “5+1” Policy Coordination Body”. The author is Director-General of the Eco-nomic Research Department, China Center for International Economic Exchanges.2 “Macroeconomic Coordination: What Has the G-20 Achieved?”, in Think Tank 20, New Challenges for the Global Economy, New Uncertainties for the G-20.

http://www.brookings.edu/~/media/research/files/reports/2012/6/think-tank-20/tt20_pisaniferry_g20.pdf


In recent years the accumulation of reserves in China (and other emerging economies) has continued. In 2006, the BRICS held 30 per cent of global foreign exchange reserves, China alone 20 per cent: these percentages have grown in 2014 to 40 and 31, respec-tively. This strategy has a considerable social cost, of the order of 1 per cent of GDP, which corresponds to an insurance premium against financial crises3. Emerging economies are also holding less sovereign debt, and they have created bilateral and regional currency-swap arrangements. Partly as a result of this, they act as financiers to the Global South and increasingly to the old North. In addition, well over 110 countries have deployed macro-prudential measures since the 2008 global financial crisis and there is evi-dence that foreign currency-related measures are more effective for emerging markets4.

These broad trends suggest that emerging economies still feel very vulnerable to sudden shifts in financial market conditions. There have been numerous appeals to greater global coordination and G20 statements to that effect, but they are unlikely to have much effect. The description made of the Plaza and Louvre decisions of the G7 – i.e. “deliberations hammered out in innumerable meetings with the aim of influencing the exchange rates, more through decla-rations than with actual intervention [with] no precise trend [of the exchange rates] in the direction of self-regulation” – also applies to the G20. The success of international cooperation in addressing global macroeconomic challenges requires realistic expectations about what can be accomplished and greater determination to better integrate different policy issues5. Broadening the focus of the G20 growth strategies (in particular by balancing fiscal consolidation and monetary expansion) and reinvigorating the mutual assessment process should be priorities for China in 2016.

3 R. Dani, The Social Cost of Foreign Exchange Reserves, NBER Working Paper, no. 11952, 2006.4 E. Cerutti, S. Claessens, L. Laeven, “The Use and Effectiveness of Macroprudential Policies: New Evidence,” forthcoming, Journal of Financial Stability, 2016.5 See A. Triggs, “The G20 and macroeconomic policy cooperation”, in The Chinese 2016 G20 host year, Lowy Institute for International Policy, G20 Monitor, no. 19, 2016.


China’s multiple transitions

At the same time as international economic cooperation needs to be grounded on more deliberate commitments, many of the world’s largest economies are facing internal challenges. China’s economy is rebalancing towards new sources of growth – domes-tic demand instead of exports, consumption instead of fixed capi-tal formation, services instead of manufacturing, private business instead of State-owned enterprises (SOEs), innovation instead of inputs’ accumulation. This switch and the accompanying arrival of the “new normal” of below-7 per cent growth and industrial slowdown will have some negative consequences for the global economy, although excessive pessimism is unwarranted. Produc-ers of raw materials, such as copper, oil and minerals, and inter-mediate goods, in particular parts and components used for the production of consumer electronics, are already seeing the biggest changes. In a world of global value chains, even in OECD coun-tries, value-added exports to the world often pass through China and that economy’s slowdown has noticeable effects on their ex-port performance. On the opposite side of the coin, some lower-cost producers can benefit from the relocation of production in industries where China used to enjoy absolute dominance, partly by attracting more foreign direct investment.

There is a lot of uncertainty about the current speed of changes in China and a lot seems to hinge on policies to make SOEs more efficient and market-oriented6. As recently as September 2015, au-thorities aired their commitment to accelerate attempts to remodel them along the lines of Western corporations. Even more recently, a government drive was announced to recognise and address indus-trial overcapacity in sectors such as steel and shipbuilding which are heavily dominated by SOEs. The International Monetary Fund has also recommended China create a task force that would help restructure debt-laden SOEs.

6 “Party seeks tighter control of state enterprises as Xi consolidates power”, Financial Times, 15 June 2016.


Recent development, unfortunately, do augur badly. The govern-ment and, even more so, the ruling party are moving to tighten their grip on SOEs (and civil society, the military and media, for that matter). The initiative announced in June by the State-owned Assets Supervision and Administration Commission in Qiushi, or Seeking Truth, an influential party magazine, gives greater power to party cells within every SOE. It runs counter to previous moves to estab-lish boards of directors and let them or company management make decisions independently7. Now the line of command emphasizes macro-control, national strategy and national security over respect for Chinese corporate law.

The continuation and in fact acceleration of market reforms is important for the domestic economy, but also for China’s interna-tional economic relations and henceforth the G20. On the one hand, reducing the role of the state in the economy contributes to the right macroeconomic strategy of lower savings, more services, and an appreciation of the yuan (the “three-handed approach” suggested by Blanchard and Giavazzi and only partly realized8). National, provincial and local SOEs binged on debt during the stimulus pro-gramme after the global financial crisis, remain hugely subsidize, and continue to invest even in sectors where global over-capacity is clear. On the other hand, SOEs are major outward investors and, as long as their actions are perceived to be guided by non-market considerations, Chinese officials cannot be surprised if they are met with scepticism, resistance and sometime outright protectionism.

International finance and trade – the evergreens

Against this background, China may also be tempted to export its way out of the slowdown. The problem of course is that countries using negative interest rates (including, most recently, Japan) are,

7 Almost all executives at SOEs have a rank equivalent to the government officials who regulate them. The heads of the largest SOEs also enjoy senior party ranking.8 O. Blanchard, F. Giavazzi, “Rebalancing Growth in China: a Three-Handed Ap-proach”, China & World Economy, vol. 14, no. 4, 2006, pp. 1-20.


by forcing currency devaluation, already exporting weak demand – ultimately a zero-sum game. Curbing external global imbal-ances, reducing distortions, and taming volatility in capital flows, exchange rates, and relative prices is what the G20 should do bet-ter, setting the ground for more technical work at the IMF. For this reason, modernization of international financial institutions is ex-pected to receive much attention in the lead-up to the Summit. The pace of IMF reform, that is vital to its long-term legitimacy and its cornerstone role in global architecture, is disturbingly slow. And an election year is not the most auspicious time for the U.S. Congress to ratify a package of quota and governance changes that would address the issue of BRICS countries and emerging economies rep-resentation. No matter how little progress has been achieved so far, it is time already for negotiating the 15th General Review of Quotas. As Triggs (2016) notes,

China can […] seek to drive a political agreement among G20 members to extend the IMF’s temporary bilateral resourcing until a more permanent resourcing solution can be agreed. Such di-scussions will not be easy, but if they are handled astutely, they have the potential to insert momentum back into a long-stalled process and demonstrate positive Chinese leadership in setting global rules.

China’s hand in this poker could be stronger if the emerging world were stronger. In an increasingly interconnected world, Brazil, Rus-sia, India, China, and (later) South Africa have come together eco-nomically as a group since 2009. This initiative has reflected more the perceived inability of the global economic order in satisfying their respective interests and needs, than the strength of common BRICS views. The transformation of the BRICS into a full-fledged mechanism of current and long-term coordination on a wide range of key issues of the world economy and politics is proving peril-ous. As the economic slowdown bites in the BRICS, diverging eco-nomic interests make policy coordination mechanisms even more demanding than in the past. At the same time, the BRICS them-


selves have not yet become an alternative source of growth for the world economy, but they still heavily rely on growth in advanced countries. China will try to use the BRICS in 2016 to improve their cohesiveness and G20 influence in terms of agendas, organization and deliverables. It will be a difficult task, considering that India, where the eighth BRICS Summit will be held in October, will be very attentive to maintain its prerogatives as the host nation.

Trade is another area in which the G20 has had a rather mixed record so far. Its role amounts to a circuit breaker in overcoming seemingly intractable international economic issues – among which multilateral trade liberalisation figures eminently. On the one hand, it has been largely effective in securing the application of the protec-tionism standstill; on the other hand, repeated calls to conclude the Doha Round have fallen on deaf ears, thus damaging the G20’s cred-ibility on trade policy. Instead, the shift to ‘mega-regionalization’ of trade policy by major G20 members has gained momentum, adding to the strains of the World Trade Organisation (WTO). Whether the G20 eventually succeed in restoring multilateralism will depend in part on actions to facilitate the dialogue between arrangements such as the TPP (Trans-Pacific Partnership), TTIP (Transatlantic Trade and Investment Partnership), and RECEP (Russia-European Cen-tre for Economic Policy) and the WTO. After 2009, the great trade collapse has been a major culprit of the global slowdown and the G20 has a major responsibility in building consensus on concerted policies to restore trade as a driver of growth. Slower growth in the advanced economies has also weakened trade flows, adding to the headwinds.

The G20 should pursue a more ambitious trade agenda and China has a lot to gain from this, given its pivotal position in the international division of labour through global value chains. Con-crete actions that can be implemented by individual governments on a concerted basis to reduce trade costs and improve access to services for firms, an opportunity that reform-minded Chinese of-ficials can also seize to break the domestic deadlock. More effec-tive monitoring of trade policy broadly defined (including sub-sidies and investment incentives) can also be effective in giving


momentum to global negotiations – and the coincidence of both China (20 - 22 July) and the United States (19 - 21 December) go-ing through the Trade Policy Review Mechanism in 2016 cannot be wasted.

The G20 can also call for multilateral analysis of the impact of the many preferential trade agreements involving China, the EU and the US, the world’s largest trading powers. This would be important to secure a modicum of policy coherence. Development became a G20 priority under the Korean presidency in 2010 and has remained central to global summitry ever since. The G20 has formally in-volved itself in the post-2015 process from the St. Petersburg Sum-mit in 2013 and placed the Sustainable Development Goals (SDGs) as one of its core priorities in 2015. The SDGs as defined in the 2030 Agenda cannot be achieved globally if they are not realized in all G20 countries, high- and middle-income alike. At the same time, the SDGs cannot be achieved in the low- and middle-income countries outside the G20 unless the G20 itself provide support and coherent action.

International development, climate change and infrastructure – the recent classics

As the SDGs come to dominate the action of donors and issues of financing take central stage, in Hangzhou the G20 is expected to decide on a 2030 Agenda Action Plan with formal commitments in implementation. China has initiated an interactive process across all work streams to strengthen the overall coherence of the G20 devel-opment work in both the Sherpa and the Finance Track. However, the UN remains the main channel for global negotiations as well as the follow-up implementation and tracking.

China has a unique opportunity to strengthen the G20 develop-mental perspective through a working narrative that underlines the unique role of South-South cooperation and of the BRICS’s agen-


da9. In this context the G20 can also benefit from the experience of the 2007 Heiligendamm Dialogue Process, that for the first time recognized the value of South-South and North-South cooperation, as well as of triangular cooperation in providing an important link that can enhance synergies between the two. Triangular cooperation offers an opportunity for enhanced national and regional ownership as well as an increase in the support, harmonisation and coordina-tion of peace, security and development efforts of the international community.

The other 2015 legacy for the China presidency is the Paris Agreement on climate change which, after years of controversial negotiations, has defined a program for de-carbonization and struc-tural transformation of the global economy. The post-COP 21 agen-da poses unprecedented challenges to all societies and requires new levels and innovative modalities of transformational cooperation and mutual policy learning. In particular, low-income and middle-income countries will require comprehensive external support to reach a pathway of de-carbonization within a short period of time.

There is a general agreement on what the G20 – which pledged in 2009 to “rationalise and phase out over the medium term inef-ficient fossil fuel subsidies that encourage wasteful consumption” – could do:

• Remove fossil fuel subsidies by 2025 and establish carbon pri-cing, channeling revenue streams to support vulnerable social groups and inclusive transformation.

• Call on the International Financial Institutions, including exi-sting Multilateral Development Banks, to mainstream sustai-nable development criteria and to incorporate climate risk into credit rating criteria.

• Initiate early action on policy pathways for de-carbonization be-fore the 2018 stocktaking.

9 See H. Reisen, “How should the G20 promote efforts for South-South coopera-tion and trilateral activities?”, in T. Fues (ed.), G20 and Global Development, German Development Institute, 2010.


On each priority action, China can provide leadership, espe-cially in mainstreaming de-carbonization principles in the activities of the Asian Infrastructure Investment Bank and the (BRICS) New Development Bank. Institutions that so far have seemed driven by short-term interests, rather than a well-developed plan. Of course, the other face of the story is that China’s financial support to users of coal, oil, gas and electricity (setting energy prices at levels below international benchmark prices) was the fifth-largest in 2013, after Iran, Saudi Arabia, Russia, and India.

At the intersection between climate change and development stands the large global infrastructure gap. This has been a high priority of recent G20 presidencies, and seems likely to feature prominently in the Chinese agenda in 2016 as well. G20 Leaders announced the Global Infrastructure Hub (GIH) at the November 2014 Brisbane Summit. The GIH is a rare example of the G20’s capacity to create international bodies. It is now fully operational and has a potentially important role in the G20’s collective efforts to implement its multi-year global investment agenda. The key to attracting private capital into investment projects continues to be bridging data gaps, build government capabilities for project se-lection and preparation, match bankable projects to private sector partners, and secure institutional settings that foster investment. At the same time, in the context of a weak multilateral agenda, many regional initiatives show high potential to become game changers in the long-term, with huge growth and development implications. China will certainly take advantage of the G20 to show case its two major vehicles for infrastructure financing, the One Belt and One Road initiative and the Asian Infrastructure Investment Bank.

New topics - International investment and migration

There are also new topics on the G20 medium-term horizons – no-tably international investment and migration. In each case there have been some early attempts at developing joint action on related policies, namely investment in the broad sense and remittances.


However, despite the number of action plans that countries have announced in recent years to accelerate investment in infrastructure and improve the investment climate, little progress has been made in implementing pledged actions.

In 2016 China has taken the lead by creating a new G20 trade and investment working group with ambitious goals – especially on responsible business conduct, international investment agreements, and the trade-investment nexus in the age of global value chains. Being a major home country for outward foreign direct investment flows, directed to both advanced and developing economies, China is in a unique position to create this additional intergovernmental platform that will allow a continued systematic intergovernmental process to discuss the range of issues related to the governance of international investment. Several outcomes that could be pursued under China’s G20 leadership: non-binding shared principles that could outline the architecture of a universal framework on interna-tional investment; an International Support Program for Sustain-able Investment Facilitation; and the creation of an additional inter-governmental platform to discuss the governance of international investment – preferably paralleled by an informal, inclusive and result-oriented consensus-building process that takes place outside intergovernmental settings.

A further new important topic in the G20 is international mi-gration, the quintessential “ugly duckling” in global governance, as the global community has traditionally shied away from tak-ing any concrete action to regulate cross-border flows of people. In 2015, however, the refugee crisis in the Mediterranean in Eu-rope prompted Turkey to include migration in the Antalya agenda. Emerging economies, including China, should welcome this new orientation, being simultaneously major source and host countries for international migration, which in fact has an increasingly South-South nature. The G20 should take the lead in agreeing on some general principles to guide international cooperation on migration and refugee policies, although politicians often have little to gain from involving themselves in these matters and the general public is misinformed about the costs and benefits of migration.


Conclusions

China is integral to the dynamics of an overall slowing global economy and this interconnection or mutual dependence presents new challenges in terms of imbalances, volatility, instability and protectionism. Against the backdrop of accumulating economic and geopolitical headwinds shaking many countries and regions, G20 leaders need to cooperate more than ever to restore sustained and sustainable growth. Despite initial scepticism and growing decep-tion regarding its effectiveness and accountability, the G20 is in fact playing a unique role as a flexible bridge between traditional economic powers (the G7 in shorthand) and emerging economies. It does it through informal, non-binding exchanges on major hot is-sues such as global imbalances and trade, but also as an ideal space in which to test the waters for new, vital global issues. This facet of informal governance is important in clarifying the mandate for other, more formal multilateral institutions and fora such as the UN system, the Bretton Wood institutions and the OECD (to which China increasingly turns for advice and support). Only the G20 can serve as a forum for dialogue between developed and developing countries (among which China is definitely a primus inter pares, at least on these issues) on the profound implications of such initia-tives for the future of the global economy.

The G20 in September 2016 is also a crucial milestone for the China Dream. It offers Beijing an opportunity to be finally recog-nized as a global leader and promote its global initiatives, in par-ticular infrastructure investment and South-South cooperation. At the same time, China has to show that it is not only a responsible stakeholder but also a promoter of a common agenda for global growth. The G20 can also serve the cause of a reform-minded lead-ership, if commitments taken at the international level can be used to accelerate change at home. From this viewpoint no issue is more important than SOEs’ reform, a sensitive issue full of political traps.

6. Silk Road Economic Development: Vision and Path

Wang Wen and Jia Jinjing

The Silk Road: from past to present

The Silk Road: present and future Due to the significant importance of the Silk Road, a great many pow-erful countries engaged in a fierce rivalry over this region for as long as 100 years, historically known as “the Great Game”. This is how the geopolitics took shape. In the late XIX century a railway network opened up, bringing the Silk Road into a modernized age. In 1896-1903, Russia built “the first Euro-Asia Continental Bridge” connect-ing Vladivostok with Moscow. In 1990, “the second Euro-Asia Con-tinental Bridge” connecting Lianyungang in the Jiangsu province of China with Rotterdam in Holland was completed and further geared up the spread of railway networks along the Silk Road. On 3 June 2014, the 250km/h second double line of the Lanzhou-Xinjiang rail-way in China (the Xinjiang section) opened to traffic, laying the foun-dation for the Silk Road to enter the “high-speed rail era”. Lately, the National Development and Reform Commission (NDRC) disclosed that the overall planning of the Silk Road Economic Belt was in the works, and that Xinjiang would become the core region along the corridor of development to open more widely to the inside and out-side world1. Based on the current estimate of China’s high-speed rail

1 See 21st Century Business Herald released on Jun.11, 2014: NDRC: New Regional Planning


experimental running speed as close to 600km/h2, it is technically possible to cross the Eurasian continent within 24 hours. In addition, there are national highways connecting Northeast Asia, South Asia, Central Asia and China with Russia, Kazakhstan and Pakistan. And the construction of other routes, including the China-Kyrgyzstan-Uzbekistan highway, Tajikistan-Urumchi highway, and Pakistan’s Karakoram highway are in the planning stage.

Railroads lead the way to modern civilization. Railroad lines and corresponding motorways connect separate towns and conti-nents, with new cities and factories emerging and booming along them. An all-weather logistics network is to be built. A brand new blueprint of Eurasia has unfolded.

On 7 September 2013, Chinese President Xi Jinping proposed the concept of “Silk Road Economic Belt” during his visit to Ka-zakhstan; a month later President Xi visited Southeast Asia and un-veiled the “21st Century Maritime Silk Road” project to strengthen regional infrastructure and trade with countries of the Association of Southeast Asian Nations (ASEAN). On 23 March 2015, the Chi-nese government issued an action plan on the China-proposed Belt and Road Initiative, which refers to the Silk Road Economic Belt that links China with Europe through central and western Asia, and the 21st Century Maritime Silk Road connecting China with South-east Asia, Africa and Europe.

Conceptually, the “Silk Road Economic Belt” is essentially a transport network and trading channel which starts within China at one end and links to Europe by extending north to Russia and Cen-tral Asia along the north line, west to countries around the Caspian Sea and Black Sea along the middle line, and south to South Asian countries and Europe along the south line, with North Africa as its extension. Specifically, the Belt runs through over 30 countries in-cluding China, Kazakhstan, Uzbekistan, Kyrgyzstan, Tajikistan,

to Promote the Organic Integration of Opening Up Inwards and Outwards: Overall Planning on ”One Belt and One Road” is Being Compiled, Notably Focusing on the Development Planning of South Xinjiang.2 According to 21st Century Business Herald released on 16 January 2014, the experimen-tal speed of CIT500 made by CSR clocks in at 605km/h.

97Silk Road Economic Development: Vision and Path

Turkmenistan, Afghanistan, Iran, Syria, Russia, Belarus, Ukraine, India, Pakistan, Turkey and several European countries.

The Silk Road Economic Belt is like a golden line connecting many countries having political confidence, developed economies, rich resources and strong national strength, including the world’s top 10 biggest economies (except the U.S., Japan and Brazil). The com-bined GDP of countries along the Silk Road accounts for 55 per cent of the world’s total, whereas their populations and proven reserves may account for 70 and 75 per cent respectively. With such a big economic scale, plus the most competitive economic development speed in the world, it is very likely that the Silk Road Economic Belt will be an economic artery in the era of globalization.

Looking from the perspective of cooperative frameworks, re-gional economic cooperation usually comes in three forms, i.e., re-gional economic cooperation forums, regional trading arrangements, and sub-regional economic cooperation. First, for regional economic cooperation forums, the Shanghai Cooperation Organization has ma-tured over the years. Next, for sub-regional economic cooperation, there is the Central Asia Regional Economic Cooperation (CAREC)

Figure 1 - The China-Proposed “Silk Road Economic Belt” and “21st Century Maritime Silk Road”


mechanism, an important Asian regional economic cooperation mechanism initiated by the Asian Development Bank in 2002. CAREC has 10 member states including China, Afghanistan, Azer-baijan, Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan, Uzbekistan, Turkmenistan and Pakistan, and transport, energy sources, trade fa-cilitation and trade policies are its four key cooperative fields. Thirdly, no Regional Trade Agreement (RTA) has been set up between China and other countries on the Silk Road Economic Belt. Looking from this perspective, the Silk Road Economic Belt serves as more than a road connection. Mechanism connections should also be enhanced to drive and guarantee the development of the countries involved.

Common development: from ideas to action

As China’s relations with European and Asian countries developed rapidly over the past 20 years, the old Silk Road has begun to re-invigorate and take mutually beneficial cooperation between China and other countries to a new height with a new form.

China values development opportunities: instead of seeking domination in regional affairs and carrying out military expan-sion, China advocates that countries should seek common develop-ment and keep enhancing mutual trust, consolidating friendships, strengthening cooperation and boosting common prosperity, creat-ing well-being among people of all countries.

The history of contacts over the past 2,000 years proves that countries of different races with different beliefs and cultural back-grounds are quite able to share peace and common development as long as we cooperate to achieve a “win-win situation” on the prin-ciples of unity and mutual trust, equality and mutual benefit, being inclusive and learning from each other.

New bonds for peaceful developmentDeveloping the Silk Road Economic Belt and making new bonds for peaceful development will bring various benefits in security, de-velopment and stability to all the countries involved.


First of all, construction of the Silk Road Economic Belt will raise the regional security level. Giving each other firm mutual support in key issues concerning national sovereignty, territorial integrity, se-curity and stability represents the essence of China’s development of strategic partnerships with Central Asian countries. Develop-ing the Economic Belt helps eliminate the breeding ground for or-ganized transborder crimes such as terrorism, “three evil forces”3

, drug trafficking and illegal armed groups, etc. At present, terrorism threats exist in countries like Afghanistan

and the Middle East countries that are along the Silk Road. As the U.S. withdraws its troops from Iraq and Afghanistan, security prospects in these regions face uncertainties. On the other hand, it should be noted that major nations in these regions have a tradition of trading, a good cultural foundation for developing economies peacefully. The fact that conflicts in this region seem endless, called “a thousand-year war”, is linked to inadequate communication be-tween races and tribes whose technological conditions are poor. Construction of the Silk Road Economic Belt will undoubtedly put all of inland Eurasia under a common trade framework, thus rooting out violence and terrorism.

Secondly, construction of the Silk Road Economic Belt will boost economic development. China became the world’s largest consumer market in 2013. It is estimated that, during 2014-2018, China’s imports will hit US$ 10 trillion, with direct overseas in-vestment exceeding US$ 500 billion. The development of the Silk Road Economic Belt will provide new potential for economic de-velopment in Middle East countries and contribute to economic links between Middle East countries and Europe. China and Russia have set the goal of increasing bilateral trade volume up to US$ 200 billion by 2020 and the Silk Road Economic Belt can be one of the key impetuses to meeting the target. By taking advantage of the Belt, the Central Asian countries not only have their outlet to the sea but can also integrate into global financial and trading 3 The “three evil forces” are terrorism, separatism and religious extremism. This is an analytical concept frequently used by Chinese authorities within the context of the Shanghai Cooperation Organization (Sco).


systems. For Middle East countries, the Belt will further help them enter China’s energy consumption market, which has tremendous significance considering that the U.S. is committed to localizing its energy supply. For developing countries along the Belt, they can gain the “positive spillover” effect from China’s economic success, certainly significant.

Thirdly, construction of the Economic Belt will boost stability in all the countries involved. Both China and other countries along the Belt are at a critical stage of development and face unprece-dented opportunities and challenges. Their strategic goals are the same, i.e., to ensure long-term and stable economic development and achieve national prosperity and reinvigoration. If all countries can strengthen practical cooperation in an all-around manner by converting advantages such as political relations, regional proxim-ity and economic complementarity into the advantages of practical cooperation and sustainable growth, creating a community of in-terest, a favorable development environment and a stable political environment will be the result.

New blueprint for economic developmentOver past centuries, history has proved that sea power decides the rise and fall of a country. Lacking an outlet to the sea, Central Asian countries lag behind in global evolution. At present, their econo-mies remain at the stage of primitive capital accumulation. If for-eign investment can be drawn into these countries, their economic level will rise significantly.

Looking at their territories, the Central Asian region links together the largest energy base and manufacturing center in the world. To its east is the Asia-Pacific economic rim, which is experiencing rapid economic development, and to its west is the developed European economic rim. There is a considerable economic gap between the region and its western and eastern neighbors despite the fact that they have uniquely abundant natural resources, land resources and human resources. In particular, the region’s mineral products can meet the needs of almost all manufacturing countries, with huge exploration potential. A good thing is that technical advances have removed the


bottleneck restricting the development of countries in the inland part of the continent and, what’s more, the Silk Road Economic Belt will turn their geographical nature to unique advantage.

The Silk Road Economic Belt covers a population of nearly 3 billion, with unmatched market scale and growth potential, as well as cooperative potential between countries in trade and invest-ment. With the Economic Belt realized a new common market will emerge, followed by a new round of economic growth.

China is by far the largest trade partner of each of the five Cen-tral Asian countries. In 1992, total bilateral trade volume was only US$ 460 million but rose to US$ 50.2 billion by 2013. Meanwhile, bilateral trade between China and Central/Eastern Europe experi-enced fast growth too. In 2000, the trade volume was US$ 3 billion and by 2015 the figure topped US$ 56.2 billion4.

4 Refer to the General Administration of Customs of the People’s Republic of China.

Figure 2 - Growth Trend of Trade Between China & Five Central Asian Countries


Referring to the “1+2+3” cooperative landscape mentioned by President Xi on June 5, 2014 at the opening ceremony of “The 6th Ministerial Meeting of China-Arab Cooperation Forum”, we can conceive a “1+2+3” cooperation framework for the China – Central Asian Silk Road Economic Belt as well. Here “1” refers to natural resource cooperation by deepening production-chain cooperation in petroleum, gas and minerals, and ensuring security for pipelines; and based on that, building long-term friendly relationships featur-ing mutual benefit and reliability. “2” means enhancing coopera-tion in key development projects and iconic job-creation programs while promoting infrastructure building and trade and investment facilitation, and making arrangements for promoting bilateral trade and investment. “3” means making great efforts to upgrade practi-cal cooperation and move towards all-round economic cooperation by making breakthroughs in the three sectors of nuclear energy, high technology and new energy.

New focus of world development strategyThe world’s wealth-creation center has shifted at an increasing rate since 2008. Following the financial crisis, the economies in the West remained in a downturn while China contributed 52 per cent of new GDP growth during 2009-2013. The world’s wealth-creation center is shifting from Europe and America to Asia. It is foreseeable that, in the near future, the world’s wealth creation will focus around the Silk Road Economic Belt and the shift of the world’s wealth center will be followed by changes in the global strategic landscape.

Noticing the shift of the world’s economic center towards Eur-asia, American mainstream strategists judged that it was China’s fast rise that broke the strategic balance of international patterns and the world order after the Cold War. Based on this judgment, the U.S. became the first to implement so-called “Resetting the Bal-ance”, and other Western countries followed suit immediately. For the United States, “Resetting the Balance” first refers to a “Return to Asia”, while leading the establishment of Trans-Pacific Partner-

http://www.customs.gov.cn/publish/portal0/


ship Agreement (TPP). For America’s loyal ally, Japan, “Reset-ting the Balance” means reinforcing its military alliance with the U.S., joining the U.S.-led TPP and negotiating with the EU on the Europe-Japan Free Trade Zone Agreement. In Europe, “Resetting the Balance” is the Transatlantic Trade and Investment Partner-ship (TTIP) to establish a European-American free trade zone. In October 2013, the EU and Canada signed a bilateral free-trade agreement, the first among G8 countries to do so and this serves as an excellent example. A host of Western countries headed by the U.S. are driving the strategy of “Resetting the Balance” which could lead to the formation of new international rules. Compared to the previous rules, the new rules will become stricter, more uni-form, more universal and more specific while their non-neutrality becomes more hidden.

Given this situation, the Silk Road Economic Belt will undoubt-edly play a significant role in encouraging developing countries to participate together in the formulation of international rules. China,

Figure 3 - Economic center of gravity

Source: McKinsey Global Institute analysis using data from Angus Maddison; University of Groningen.


Russia and India as representatives of developing countries need a top-level design to “balance” new trade-zone planning dominated by developed countries. Similarly, the five Central Asian countries as representatives of inland economies need and should be in a cen-tral position of trade instead of being marginalized. Likewise, the Middle East countries need new orientation in Eurasia. With all this in mind, the Silk Road Economic Belt is a strategic scheme in the best interest of Eurasian countries in the changing landscape of the global economy.

Overcome difficulties – From communication to cooperation

Resetting the balance among world powers Halford Mackinder’s concept of the “heartland” was further devel-oped by his student, Zbigniew Brzezinski5, making Central Asia a place for world powers to compete for by implementing their spe-cific strategies. How to reset the balance among these strategies is a test for the decision-makers and think tanks of the countries along the Silk Road Economic Belt.

1) America’s “New Silk Road” plan. In July 2011, the then Sec-retary of State Hillary Clinton, at the second U.S.-India Strategic Dialogue held in India, said for the first time that the American con-cept of “New Silk Road” had three aims6. First, to ensure safety after American troops withdraw from Afghanistan; second, to de-velop a regional framework to manage the India-Pakistan relation-ship and improve regional security; third, to play a dominant role in regional development to ensure American influence7. The “New 5 Z. Brzezinski, The Grand Chessboard, Shanghai People’s Publishing House, 2007, p. 35.6 As early as 1997, Senator Brownback and Fred Starr, head of Central Asia and Cau-casus Institute of John Hopkins University submitted a proposal for a New Silk Road. Refer to Yang Lei: “Implementation Targets of American New Silk Road Plan and its International Influence”, Xinjiang Sociology, published in May 2012, pp.70-75.7 Wu Zhaoli: “Analysis on American New Silk Road Plan”, Modern International Rela-tions, 2012 no.7, pp. 17-22.


Silk Road” plan centers around Afghanistan and is designed to con-struct a channel leading from inland Eurasia to the Indian Ocean, which involves five Central Asian countries: India, Pakistan, Af-ghanistan, etc. Although the plan’s designer admitted that the plan would affect the interests of Russia, Iran and China, it excluded these three countries. Looking at the cooperation areas, the “New Silk Road” plan emphasizes, on the one hand, regional free trade and trade facilitation, including reducing trade barriers, improving trade regulation, simplifying customs formalities, and perform-ing policy coordination etc. On the other hand, it also emphasizes energy pipelines and infrastructure development including oil-gas pipeline networks, roads, bridges, electric power and railways etc8. It needs to be pointed out that the “New Silk Road” plan is by no means the core interest of the United States. After Hillary Clinton’s term of office ended, the plan’s importance decreased in American strategic dialogues. If Hillary Clinton wins the 2016 presidential election, the “New Silk Road” plan is likely to become a main framework of American foreign strategy.

2) Russian’s “Eurasian Economic Integration”. On 29 May 2014, Russia, Belarus and Kazakhstan signed the Eurasian Eco-nomic Union Treaty, on the basis of which the Eurasian Economic Union went into effect on 1 January 2015, giving the three countries a free flow of commodities, services, capital and labor force, with the ultimate goal that an economic union similar to the EU will emerge as a unified market with a population of 170 million. This marks significant progress in the Eurasian Economic Integration project initiated by the three countries. Russian hopes for econom-ic integration among CIS countries through closer economic ties. Thus far, the Union has made noticeable progress in trade and tariff cooperation, monetary and financial cooperation and infrastructure building cooperation.

8 G. Pyatt, “Next Steps on the Silk Road”, Chennai, India, 15 November 2011, http://www.state.gov/p/sca/rls/rmks/2011/177179.html


In monetary and financial cooperation, five member states of the Eurasian Economic Community (Russia, Kazakhstan, Belarus, Ta-jikistan and Kyrgyzstan) signed the Anti-Crisis Fund Treaty (ACF) with the observer state Armenia on 9 June 2009. The purposes of the treaty are to help member states combat global financial and economic crises, ensure the long-term stability of economies and fi-nance and promote economic integration among the member states. The fund in ACF is owned by all member states but is under the management of the Eurasian Development Bank (EDB) in accor-dance with ACF fund management agreement9. Currently, ACF has a total of US$ 8.513 billion, to which Russia contributed US$ 7.5 billion, Kazakhstan US$ 1 billion, Belarus US$ 10 million, Arme-nia, Tajikistan and Kyrgyzstan US$ 1 million each. Russia’s fund contribution to ACF is commensurate with its GDP percentage in the aggregate GDP of all countries. This reflects Russian’s domi-nance in the organization.

3) EU-dominated cooperation and assistance. After the former Soviet Union and Eastern Europe changed dramatically, the EU began providing economic and technological assistance to Eastern European and Central Asian countries, with a view to improving democracy and human rights, combating corruption and conduct-ing good governance in those countries. The assistance focuses on personnel training for governmental agencies, laying out rules and regulations, building local government, fiscal and budget reform, healthcare facility building and health care system reform, and ju-diciary system reform. These efforts continue today. For example, at the ministerial meeting held in 2013 the EU declared it would provide 1 billion euro to Central Asian countries for their develop-ment from 2014 to 2020, supporting them to achieve sustainable 9 EDB was founded on 12 January 2006 by Russia and Kazakhstan with legalized capital of US$ 1.5 billion (Russia and Kazakhstan contributed US$ 1 billion and US$ 0.5 billion respectively). Its purpose is to facilitate market economy development and economic growth in the member states and advance trade and economy integration through investment among the member states. So far it mainly finances projects for transport infrastructure, energy and the agro-industrial complex. As of 29 August 2013, assets invested through EDB were as high as US$ 3.857 billion.


natural resource management, social and economic development and regional security, etc. The Development Committee of the Eu-ropean Commission announced that the key cooperation areas in the next seven years will be governance, inclusiveness, and sus-tainable development, mainly targeting the most impoverished and most fragile countries. It is true that the EU has important interests in the Silk Road areas, but the importance has not grown to the life-or-death extent. In economic cooperation, the EU over-emphasizes superstructures such as government and institutions, emphasizing similarity as close as possible to EU patterns and standards, but relatively neglects universal concerns such as ba-sic livelihoods, infrastructure and economic and trade exchanges. This reduces the mutual dependence between EU and Central Asia in structure10.

In addition to the above mentioned strategies for inland Asian dominated by major powers, countries in this region also have their own strategic concepts, e.g., the Silk Wind plan advocated mainly by Kazakhstan and the “Modern Silk Road” (also known as the Middle East Corridor) plan initiated by Turkey.

4) The Trans-Eurasia transportation plan initiated by Kazakh-stan and other neighboring countries11. The “Silk Wind” plan based on railway transportation aims to build a multi-modal con-tainer transport system running from Asia through the Caucasus to Europe. The system was originally proposed by Azerbaijan and Turkey in the framework of the “Transport Corridor Europe-Cau-casus-Asia” (TRACECA) and the participation of Kazakhstan and Georgia in 2012 took the plan to the implementation stage. In No-vember 2012, member states of TRACECA held a meeting of the standing secretariat in Moldova, planning to complete the “Silk Wind” program by 202512. On 22 May 2014, the 9th International 10 “EU increases its assistance to Middle-Asian countries”, http://www.chinamission.be/chn/omdt/t1102869.html11 Refer to “Silk Wind Project in Central Asia and South Caucasus Gains Speed”, Eurasia Daily Monitor, vol. 9, no. 224, 7 December 2012. http://www.jamestown.org/single/?no_cache=1&tx_ttnews%5Btt_news%5D=4021712 TRACECA was initiated by the EU in 1993. Now it has 14 member states, includ-


Conference on Transit & Transport Potential titled “Trans-Eurasia 2014” was held in Astana, Kazakhstan, where Kazakhstan, Tur-key, Azerbaijan and Georgia signed an intergovernmental agree-ment on the Silk Wind program, i.e., enabling container trains to run through China, Kazakhstan, the Caspian Sea area, Caucasus, Turkey and Europe13.

As for a Eurasian road network, Kazakhstan has been proposing to implement a “Western Europe – West China Transport Corridor” plan14. Or rather, it is a “Western Europe – Russia – Kazakhstan – West China” plan designed to connect over 10 cities in the three countries through their existing road networks with a total length of 8998km, 3000km of which is within Kazakhstani territory. Goods will enter Kazakhstan through Khorgas Port, continue on via Alma-Ata, Taraz and Shymkent to Samara in the Volga Basin, Russia, and finally arrive in Western European countries through European road networks. The Transport Corridor reduces the 45-day period on the sea to 11-day road transport.

5) The “Modern Silk Road” plan initiated by Turkey and oth-er countries15. The 3rd Caspian Sea Forum was held in Istanbul, Turkey on 5 December 2013, where Turkey and Azerbaijan an-nounced the plan. Based on the “Silk Wind” plan, the “Modern Silk Road” is a strategy of connecting Silk Road trade routes, mainly including energy transmission networks focusing around the “new global energy center” in the Caspian Sea area, the Baku-Tbilisi-Kars railway line and the Azerbaijan Alat International Seaport project. The project was scheduled to start in 2015, al-lowing China-Europe transport time to be cut from 45 days by sea

ing Azerbaijan, Armenia, Bulgaria, Georgia, Iran, Kazakhstan, Kyrgyzstan, Moldova, Romania, Tajikistan, Turkey, Ukraine, Uzbekistan and the EU.13 Refer to “Kazakhstan to host international conference on transit and transport po-tential”, http://inform.kz/eng/article/265841214 Refer to “Kazakhstan hopes to improve its strategic position in transit through Eur-asia Transport Corridor”, International Online, 11 September 2009, http://gb.cri.cn/27824/2009/09/11/3245s2619433.html15 “Turkey, Azerbaijan lead revival of modern Silk Road”, The Turkish Weekly, 14 De-cember 2013, http://www.turkishweekly.net/news/159839/turkey-azerbaijan-lead-revival-of-modern-silk-road.html


via the Suez Canal to 12 days by road. As a result, China-EU trade volume is expected to double in five or six years.

According to the general summary of the main powers’ cooperation prospects and proposals for this region, we find that infrastructure is the common element for cooperation. It is worthy of note that the differences or the “chasms” to be filled among these proposals are remarkable.

Firstly, with respect to regional power games, there is the very tense relationship between Russia and the U.S. and EU. In many aspects, including the Ukraine Crisis and energy, the disputes and fractures between Russia and the U.S. and EU cannot be resolved in short the term.

Secondly, with regard to infrastructure, the differences in in-tention between these countries are remarkable. The U.S. stresses south-north communication between Central Asia and South Asia. Russia focuses on economic integration between the north of Cen-tral Asia and Russia; the EU hopes to connect Western Europe from the Caspian Sea through Turkey, Central Europe and Eastern Eu-rope.

Thirdly, in terms of cooperation mechanisms, currently, the Silk Road region has been in a fragmented and overlapping trend. Bi-lateral and multilateral mechanisms co-exist, formal and informal cooperation modes develop concurrently, and the large-coverage mechanisms overlap those with small coverage, resulting in unclear regional cooperation paths.

By summarizing all the data and information available, the “Silk Road Economic Belt” Research Group of Chongyang Institute for Financial Studies, Renmin University of China deems that the “Silk Road Economic Belt” is to the benefit of the countries in Central Asia. For more than 20 years since the start of national transfor-mation, while having achieved a great deal in politics, economy, society, etc., these countries have been facing many difficulties. For example, they are all in the hinterland and have no sea ports, some have limited national resources (making it very difficult to devel-op their economies), some are in grave security situations, which


has blocked economic development and weakened the capacity to maintain social stability. Road connections, smooth-flowing trade and, monetary exchange through the “Silk Road Economic Belt” can provide important support for the countries in Central Asia in promoting nation-building and reinforcing connections with the outside world. Roughly, the benefits for the countries in Central Asia include support for the construction of infrastructures such as roads, oil and gas pipelines, power grids and so on, multiplex energy export routes, enriching domestic commodity markets and expanding foreign trade volume, obtaining sea ports and easier in-tegration with the global economy, obtaining the power to improve domestic investment environments so as to increase foreign invest-ment, and furthering connection with the outside, in particular with China and European countries.

The countries in the Middle East are also in favor of China’s project. The strategic dialogue between China and GCC (Gulf Co-operation Council) countries activated in 2010 is the effective plat-form between the parties to discuss how to promote the “Silk Road Economic Belt”. Iran also hopes that, after construction, the land Silk Road open to the west, would help Iran become the most im-portant energy exporter to China. At present, there are petroleum and gas pipelines extending from Iran to Pakistan; in the future, in the “Silk Road Economic Belt” framework, the parties may jointly construct energy pipelines to China through negotiation.

In addition, the countries in Central and Eastern Europe have positive attitudes toward the “Silk Road Economic Belt”. The co-operation initiatives between China and 16 countries in Central and Eastern Europe in transport, energy, etc. show that these regions are also important integral parts of China’s new Silk Road policy. Some scholars suggest that Poland’s cooperation focus should be on western China, for example, the Lanzhou New Zone should be the bridgehead for economic cooperation with Poland.

Without doubt, the “Silk Road Economic Belt” project is en-countering pressure from outside forces. Some international media and experts view the “Silk Road Economic Belt” as a “zero-sum game”, the construction of common interests as the game of big


powers, the cooperation of countries in the region as “apparently of one accord but divided in heart”. Such instigating and misun-derstanding in international opinion and atmosphere are blocking construction of the “Silk Road Economic Belt” and also affecting mutual trust among the countries in the region.

However, as a whole, the countries in the region understand and agree with this initiative more than they doubt or object to it, which has provided a good international foundation for the promotion and implementation of “Silk Road Economic Belt” strategy. On the oth-er hand, the main concerns of the potential partners in the region stem from an insufficient understanding of the specific measures of “Silk Road Economic Belt” strategy, and they are less confident in the implementation of these specific measures. China is playing a more active role and should achieve more through cooperation mechanisms and project innovation as early as possible, and bring forward a development agenda able to realize multi-win outcomes so as to increase confidence, dispel doubts and unify the people.

Compared with the “heartland” strategy of the other big powers, “Silk Road Economic Belt” strategy not only advocates geopolitical strategy on the basis of national demand but also intends to achieve mutual benefit and overall win outcomes; and it is a long-term com-mon development program with a higher pursuit of value. It has the following three features:

Firstly, “Silk Road Economic Belt” strategy is characterized by stronger mutual benefit and higher mutual win. Instead of any spe-cific target, it aims at enhancing friendship and expanding exchang-es between the peoples on the Eurasian Continent, and exploring areas for common long-term development.

Secondly, “Silk Road Economic Belt” strategy is characterized by wider scope and higher inclusion. It directly connects more than 30 countries on the Eurasian continent and focuses on the construc-tion of “5 intercommunications” (as defined hereinafter) rather than a narrow “Free Trade Zone”. Both in geographic scope and in con-notation, it is wider and more inclusive than other strategic plans. It is not exclusive to, and does not repel, the concurrent promotion of the strategic plans of the other countries in the region.


Finally, “Silk Road Economic Belt” strategy is characterized by rich content and a long time span. The foundation of this strategy lies in connecting the hearts of the peoples of the region. On such a basis, it promotes the exchange and cooperation of populations in economy, trade, science and technology, culture, energy, transport, education, security, etc. It is not confined to certain fields. Instead, it is an integrated plan, in the long-term calling for the permanent participation of the countries.

Internal re-coordination of China

After presentation of the “Silk Road Economic Belt” concept, the Chinese Central Government has approved many projects, includ-ing coordination with other major strategic plans. On June 11, 2014, the executive meeting of the State Council of China approved con-struction of a comprehensive solid transport corridor to create the Yangtze River Economic Belt and proposed that this economic belt should be strategically interactive with the “Silk Road Economic Belt” in order to create a new economic support belt and an open a cooperation platform with global influence16.

However, the Chinese Central Government has not announced the domestic scope involved in the “Silk Road Economic Belt”: to be specific, what provinces will be covered? Several local govern-ments regard the “Silk Road Economic Belt” as a major opportunity to speed their own economic and social development and include the project in their administrative targets.

By studying the government work reports and statements of all the provinces, autonomous regions and municipalities in regard to the “Silk Road Economic Belt” in 2014, the “Silk Road Economic Belt” Research Group of Chongyang Institute for Financial Studies, Renmin University of China has found that there are three types of combinations of “Silk Road Economic Belt” strategy these lo-16 See the news report “Premier Li Keqiang holds the executive meeting of the State Council to deploy the construction of comprehensive solid transport corridor to cre-ate the Yangtze River Economic Belt at www.gov.cn.


cal governments envision, as follows: the first type consists of the provinces that regard the “Silk Road Economic Belt” as the main or material route to opening up and have clear local plans and pro-grams connected with the overall strategy, such as Shaanxi, Xinji-ang, Gansu and Ningxia. The second type consists of the provinces that integrate the “Silk Road Economic Belt” into existing local de-velopment plans in order to make full use of the comprehensive co-operation role of different development plans, such as Chongqing, Qinghai, Yunnan, Sichuan, Shanxi, Zhejiang, Jiangsu, Shandong and Hubei. The third type consists of the provinces that connect the “Silk Road Economic Belt” with specific projects and in specific development directions.

With respect to the economic scale of the provinces mentioned, the provinces actively connecting to the “Silk Road Economic Belt” are weak in economy but have large potential. In the 17 provinces mentioning the “Silk Road Economic Belt” in their government work reports, the economy of the first type of province with the strongest intentions accounts for 5.5 per cent of total GDP of all the provinces; that of the 8 provinces invited to participate in the seminars held by the National Development and Reform Commis-sion and the Ministry of Foreign Affairs due to their involvement in the “Silk Road Economic Belt” for 14.2 per cent; that of the 17 provinces, 55.9 per cent.

In terms of Chinese provinces’ dependence on foreign trade, only Fujian, Jiangsu and Zhejiang exceed the national average (45.34%); all the other provinces are far below this average, for ex-ample, Shaanxi, one of the first type of provinces, relies on foreign trade only 7.79 per cent; Gansu only 9.94 per cent; Ningxia only 7.68 per cent; Xinjiang, a little higher, but less than half the na-tional average; Qinghai in northwest China only 4.13 per cent. With regard to investment, whether “internal” or “external”, most of the provinces connecting to the “Silk Road Economic Belt” are below the national average. Regarding inflows of foreign investment, only Jiangsu, Zhejiang, Shandong and Fujian exceed the national aver-age; regarding “outward” investment, only Jiangsu, Zhejiang and Shandong exceed the national average. Therefore, these provinces


long very much for the development opportunities brought by con-struction of the “Silk Road Economic Belt”; and they have rather large development potential and intrinsic drive. These constitute the domestic powers of China for construction of the “Silk Road Eco-nomic Belt”.

Conclusions. Implications for the EU

Alessia Amighini

As the “China Dream” gets stuck into political and economic bottle-necks at home, Xi’s vision of China’s ascendance to cultural, eco-nomic and military power by 2049 gets more and more vague. The cumbersome and sluggish reform process is casting rising doubts, not only on the ability of the Chinese government to handle the transition to a new growth model, but also on the direction the gov-ernment will take to fulfil its mission, and, consequently, whether Xi’s dream is anything like the Chinese people has been dreaming for themselves.

The implications of increasing uncertainty and backtracking about reforms are manifold for long-term relationships with Europe and major world countries. In particular, the following policy rec-ommendations may be provided to the EU:

Understanding China’s own narrative before implementing a EU strategy on China

In order to deal with the rising Dragon, it is of primary interest for the EU to understand the China’s political agenda and the narrative it adopts. The China Dream holds a long-term meaning that is clear for the Chinese people, but not necessarily to the European policy-makers. Indeed, addressing the long-term goals set the by the China Dream would be more helpful with a view to promoting political and economic cooperation between the two side of the Eurasian continent rather than focusing only on short-term issues.


Judging China’s foreign policies by deeds and actions

What the China Dream will mean for China’s regional and global foreign policies will continue to be open to interpretation. The in-ternational audience is left with the task of identifying and under-standing the consequences of a Chinese slogan, which the Chinese leadership in general and Xi Jinping in particular have chosen not to explain in details over the last 4 years. Consequently, outside of China, Chinese regional and global foreign and security policies will have to be judged by deeds and actions and not by slogans ac-companying them.

Speaking with a single voice with China

This year, China chairs a G20 summit dominated by tensions and need for emergency measures. Therefore, Beijing will find little re-sponse to its attempts to weave together new strategies and allianc-es to boost its limping growth, the New Silk Road and the newly-established Asian Infrastructure Investment Bank (AIIB). A single EU position on the Chinese vision for an Eurasian future should be strongly desirable, especially after the main ally – the UK – has just opted out of the EU.

Reconsidering negotiation of a bilateral investment treaty

The recent return to state dirigisme raises doubts on the future course of political and economic reforms. If State-Owned Enter-prises (SOEs) continue to be the largest share of enterprises, and the majority of firms expanding abroad, backtracking on corporate governance procedure means that national strategic decisions will keep laying behind corporate strategies. This makes the need for a bilateral investment treaty (BIT) more urgent, but at the same time more complex to negotiate.

117Conclusions. Implications for the EU

Linking MES to a Chinese path to reform

How could bilateral relations between China and the EU evolve after Brexit? The most debated issue today is the recognition of the market economy status (MES) - an important goal in Beijing’s international policy agenda. The European Parliament has recently issued an unfavourable opinion, with the only member state in fa-vour being the United Kingdom, while major countries in continen-tal Europe are more reluctant, as they contend that Beijing is not fulfilling its commitment to meet minimum criteria of competition and independence of firms from political power. Although MES is clearly a political decision, the EU should emphasise the need for the Chinese government to embark on a clearer path to reforms.

The authors

Alessia Amighini is Senior Associate Research Fellow at ISPI. She is Associate Professor of Economics at the Department of Econom-ic and Business Studies (DiSEI) at the Università del Piemonte Ori-entale (Novara, Italy), and Adjunct Professor of International Eco-nomics at Catholic University, Milan, Italy. She previously worked as Associate Economist at the United Nations Conference on Trade and Development (UNCTAD, Geneva, Switzerland). Her research has been published in international peer-reviewed journals such as China Economic Review, World Development, The World Economy, International Economics, China and the World Economy, European Journal of Comparative Economics, and several books published by Edward Elgar, Harvard University Press, Oxford University Press, Palgrave, Routledge.

Christopher Balding is Associate Professor of finance and eco-nomics at the HSBC Business School of Peking University Gradu-ate School. A recognized expert in the Chinese economy and sover-eign wealth funds, he is a columnist for Bloomberg Views as well as a regular contributor to the Financial Times. His work has been cited by a variety of global media outlets including CNBC, the Wall Street Journal, and the BBC where he speaks regularly on the Chi-nese economy and financial markets. His scholarly work has been published in leading journals such as the Review of International Economics, the International Finance Review, and the Journal of Public Economic Theory on topics such as CDS pricing, the WTO, and the economics of adoption and abortion. He is the author of Sovereign Wealth Funds: The New Intersection of Money and Poli-tics, published by Oxford University Press.


Axel Berkofsky is Senior Associate Research Fellow at ISPI. He formerly held the Gianni Mazzocchi Chair at Pavia University and is currently Assistant Professor of Asian History and Politics. His research interests include Japanese and Chinese foreign and secu-rity policies, Asian security, and EU-Asia relations. Author of more than 200 articles in journals, newspapers and magazines, he has taught at numerous think tanks, research institutes and universities in Europe and Asia. Previously, he was Senior Policy Analyst and Associate Policy Analyst at the Brussels-based European Policy Centre (EPC), and Research Fellow at the Brussels-based European Institute for Asian Studies (EIAS). He has worked as a freelance journalist for the Tokyo-based Asahi Evening News and has been a regular contributor to the Asia Times and to the Zurich-based Inter-national Security Network (ISN).

Filippo Fasulo is ISPI Research Fellow and his research focus is on Asia with a particular interest in China at both the domestic and international levels. In 2014 he earned a Ph.D. in Politics and In-stitutions from the Catholic University of Milan with a dissertation on the concept of power in China’s politics that was awarded with the Cesare Bonacossa Prize by the University of Pavia. In 2012 he gained a MSc in China in Comparative Perspective at the London School of Economics and Political Science. Since 2011 he has been lecturing on China-related topics at the Catholic University of Mi-lan and at the University of Pavia. He is also Academic Assistant at the Class of Far Eastern Studies of the Accademia Ambrosiana in Milan and Analyst for the Italy-China Foundation. Since 2014 he is Board Member of the Institute for Public Administration Science (ISAP – Istituto per la scienza dell’amministrazione pubblica).

Andrea E. Goldstein has a 23-year career in global governance, most recently at the OECD Investment Division in charge of Global Relations. He was previously Deputy Director of the UNESCAP Subregional Office for East and North-East Asia in Incheon (Seoul) and of the Heiligendamm L’Aquila Process (the G8-G5 political di-alogue) Support Unit, as well as Senior Economist with the OECD

121The Autors

Development Centre and Economics Department and the World Bank Group. Since October 2015 he has been Managing Director for policy research and outreach at Nomisma. He has published widely on emerging economies; his most recent books are L’économie des BRIC (La Découverte 2013) and Il miracolo coreano (il Mulino 2013). He also authored 40 articles in refereed journals and news-papers, and has a regular column in Il Sole 24 Ore. Mr Goldstein is an Adjunct Professor at the Catholic University in Milan. He is also President of the Bocconi Alumni Association, Paris Chapter, and participates in the activities of Aspen Italia.

Jia Jinjing is Director of the Macroeconomic Research Department of the Chongyang Institute for Financial Studies at Renmin Uni-versity of China (RDCY). His principal research interests include: international economic governance, financial analysis, macroeco-nomics, geopolitics, policy of innovation and industrial policy. Before joining the Chongyang Institute of Renmin University, he worked in the government and in the private sector in the fields of investment and financing. Jia has also published numerous reports and essays including The Construction of Silk Road Economic Belt: vision and path which won significant attention.

Wang Wen is Executive Dean of the Chongyang Institute for Fi-nancial Studies at Renmin University of China (RDCY). He also holds office as Secretary-General of Green Finance Association of China, Standing Director of World Socialism Research at the Chi-nese Academy of Social Sciences, Special Analyst at the Xinhua News Agency as well as Visiting Professor at many prestigious universities. He worked as chief Op-ed Editor and editorial writer at the Global Times. He participated in the G20 summit for three consecutive years. At the symposium on philosophy and social sci-ences where President Xi Jinping was host and delivered an im-portant speech on 17 May 2016, Wang Wen was among and also the youngest of the ten scholar presenters. He won the honor of “2014 Top Ten Figures of Chinese Think Tanks”, “2015 China Best Commentary Award”, “2015 China Reform and Development Pio-


neers”. Wang has translated, co-edited and independently written about 20 books including Anxiety of U.S., 2016: G20 and China, Theories of World Governance: A Study in the History of Ideas, and G20 and Global Governance, to name a few.

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