China’s great fall: The end of Beijing consensus?

In Soft Power: The Means to Success in World Politics, American political scientist Joseph Nye emphasizes the importance of utilizing non-coercive means for achieving desirable strategic outcomes. For great powers, reliance on persuasion, attraction, and co-optation – the bedrock of soft power – are ultimately more sustainable means of maintaining hegemony than outright demonstration and exercise of force.

Soft power is about wielding authority based on respect and awe rather than fear and coercion.  

As the Harvard academic correctly points out, great powers will have “to set the agenda and attract others in world politics, and not only force them to change by threatening military force or economic sanctions.” Throughout its repeated cycles of rise and decline, soft power was also at the heart of Imperial China’s enduring tributary system in East Asia, which reached its zenith under the Tang dynasty (AD 618-907). In Day of Empire, Amy Chua shows how it was primarily China’s civilizational prestige and gigantic economic resources that undergirded its status as the preeminent power in the region until the advent of European colonialism.  

Modern China, specifically towards the latter years of Deng Xiaoping’s rule and thereafter, also leveraged commercial diplomacy to enhance Beijing’s influence across the region. But as China’s (state-dominated) economy begins to evince serious vulnerabilities, Beijing’s ability to win friends and disarm rivals by employing aggressive commercial diplomacy will become increasingly untenable. From mid-June to July, China’s stock markets lost a staggering $3.4 trillion, with the Shanghai index losing 32 percent of its value. China’s stock markets have lost more than 40% of their value since their pick in June, driving millions of private investors into panic, with August 24 posting the biggest one-day fall since 2007. 

Meanwhile, exports suffered an 8.3 percent year-on-year decline in July and August numbers aren’t looking good. There are growing indications that China will struggle to meet its 7 percent growth target this year, which, if achieved, will be the slowest in nearly 25 years.  Some experts expect China to just grow by 5% this year, as falling exports and financial jitters threaten the slowest growth rate since the country’s economic opening more than three decades ago. 

China’s era of double-digit growth and unfettered economic expansion may have come to a decisive end, as the Asian juggernaut enters a ‘new normal’ of more modest economic growth, driven by domestic services and innovation rather than export-oriented manufacturing. Its current economic predicament also shows the ruling regime’s struggles with keeping up with the country’s vast and evolving policy challenges. And there is growing discontent among ordinary citizens, who have been promised unmitigated prosperity in exchange for political subservience.

The so-called Beijing Consensus – a Sino-centric economic order – is approaching a critical juncture, as China confronts a slowdown and an uncertain economic transition. 

A new international order 

As far as (post-Mao) China is concerned, commercial diplomacy took two interrelated forms.

First, rapid capitalist expansion encouraged China to actively employ the diplomatic apparatus of the state to expand China’s trade and investment relations globally, particularly with respect to the industrialized world as well as resource-rich countries in Africa and Latin America.

Second, overtime a prosperous China began to actively leverage its newfound wealth – thanks to a successful neo-mercantilist strategy based on currency manipulation and an aggressively export-oriented industrial base – for facilitating specific strategic goals overseas. 

Dissatisfied by the outcome of Structural Adjustment Programs (SAPs) and policy prescriptions of the World Bank and the IMF, under the so-called “Washington Consensus,” many developing countries welcomed the emergence of China as an alternative global creditor under apparently no-strings-attached arrangements that were dubbed as the “Beijing Consensus.” Initially, China’s commercial diplomacy seemed as largely benign and beneficial to the developing world and the global economy. But it didn’t take long before China employed its commercial diplomacy to challenge the existing order. With the 2008 Great Recession undermining Western economies, China began to speak its mind. 

In the 2009 World Economic Forum in Davos, the usually soft-spoken Chinese Premier Wen Jiabao joined Russia’s firebrand leader, Vladimir Putin, in lambasting (Anglo-American) capitalism. He lamented the West’s “inappropriate macroeconomic policies,” its “unsustainable model of development characterized by prolonged low savings and high consumption,” its “blind pursuit of profit” and the widespread “failure of financial [regulatory] supervision” in the United States.China’s assertiveness reached a new level under the succeeding administration. 

At the 2014 Conference on Interaction and Confidence Building Measures in Asia (CICA), a gathering of Eurasian continental nations that includes revisionist powers such as Russia, Chinese President Xi Jinping called for “a new regional security cooperation architecture” where Asian problems will “be solved by Asians themselves,” a thinly-veiled jab at extra-regional powers like the United States, which has stood as the anchor of the Asian order for the past seven decades.

Countering the American-backed Trans-Pacific Partnership (TPP) free trade agreement, which excludes China but includes Vietnam, Xi also called for a pan-regional Free Trade Area of the Asia-Pacific (FTAAP), which will be essentially a consolidation of existing free trade deals between China and other regional economies.  

The problem, however, is that China’s proactive commercial diplomacy has gone hand in hand with territorial assertiveness and rapid military modernization, raising concerns over the motivations of Beijing’s global economic initiatives. 

It has become increasingly difficult to distinguish between soft and hard power and stick to the long-held (naïve) narrative that China is simply interested in a “win-win” economic interaction with the rest of the world, particularly immediate neighbors along the First Island Chain (stretching from waters off the northern coast of Japan to the western edge of the South China Sea that embraces Vietnam and the Malaysian Peninsula). 

The new normal 

Eager to close the military gap, China is turbocharging its military modernization program with double-digit defense budget growth. For some scholars, China’s rising territorial assertiveness in adjacent waters is perhaps indicative of its plans to dominate the First Island China in the medium-term, paving the way for dominating East Asia by pushing out the United States out of the Second Island Chain in the Western Pacific by the middle of the 21^st century. 

In response, a growing number of Asian countries, from treaty allies such as Japan and the Philippines to fence-sitters such as Singapore and former rivals such as Vietnam, have welcomed greater American military footprint in the region and formed – giving rise to an informal “maritime coalition of the willing.” Cognizant of the regional pushback, the Xi administration has launched the so-called “peripheral diplomacy” strategy, which is essentially aimed at leveraging China’s massive economic resources to buy-off the good will of neighbors. 

In the last two years, China has pledged more than $100 billion to various regional economic initiatives, from the Asian Infrastructure Investment Bank (AIIB) to the “One Belt, One Road” Strategy, with another $1.25 trillion allocated for a global investment splurge by 2025. China is estimated to have $4 trillion in currency reserves. To further boost its soft power, China spends as much as $10 billion annually on external propaganda. But as China’s economy enters a “new normal,” it will have to reassess its soft power spending splurge. 

China’s earlier decision to devalue its currency by letting it be dictated by market forces is more indicative of its growing panic over the country’s economic prospects than its attempt to make Renminbi an international currency and part of the IMF’s Special Drawing Rights (SDR) currency basket. With respect to the AIIB, China was initially planning a primarily China-dominated Asian bank, but concerns over the new institution’s commercial viability encouraged it to welcome membership and contributions from Europe and other continents even if it meant that China would have to forego an absolute veto power in favor of a more latent one, which will be applicable only in cases that demand supermajority vote.  

China’s stock market reversals, slowing growth, and desperate currency devaluation are, however, only tip of the iceberg, with even larger bubbles building up in the real estate and (over-leveraged) state-owned banks. The more fundamental concerns are structural and institutional, ranging from China’s impending demographic winter to the rigidity of its regulatory framework and growing fiscal woes. As China specialists such as Salvatore Babones of University of Sydney have noted, these long-term economic challenges will inevitably also chip away at China’s ability to sustain its defense spending splurge. 

In the short run, China’s image as a preponderant economic juggernaut is under assault, and many commodity-exporting countries have also come to resent Beijing’s opportunistic currency devaluation maneuver, which has made imports more expensive and its exports more competitive – adversely affecting the currencies and trade balance of other emerging markets. The Beijing Consensus may have hit the wall, necessitating some fundamental rethinking if China wants to maintain its (commercially-driven) power of attraction and persuasion. 

Make no mistake: China still remains to be among the world’s most dynamic economies, and soon to be the largest. But the recent economic jitters undercut Beijing’s image as the inevitable economic hegemon. Current actions and calculations are based on future expectations, and the world is now beginning to reassess the trajectory of the Asian powerhouse’s long-term economic prospects. – Rappler.com

 

The article is partly based on the author’s presentation at the 2015 Harvard Project for Asia and International Relations (HPAIR) and his expanded essay for the The National Interest in Washington, D.C.