By Geoff Raby
Published on 17 December 2019 on Australian Financial Review
In one of the most turbulent years in recent times, President Xi Jinping will reflect with some satisfaction on a year of adroit statecraft. At a time of stuttering global economic performance, trade wars, political turbulence in Western democracies, strains on alliances, and violent international protests, including in Hong Kong, China ends the year more prosperous, confident, and secure than when 2019 began.
While China’s rate of economic growth is slowing with the impact of the US trade war and debt deleveraging, it is still in the order of 6 per cent per annum. In a slowing world economy, it remains one of the fastest growing major economies and well above India’s.
China’s official growth numbers may be far from forensically accurate, but it is China’s economic growth that is underpinning continued strong commodity prices from which Australia’s own rate of growth and fiscal consolidation are being supported. This is particularly so with iron ore, notwithstanding the benefit from Vale’s tailings dam disasters.
Travel beyond China’s eastern seaboard and see cities of millions of people, of which few outside China have heard, going through construction booms and being connected by China’s ever denser high-speed rail network. Much of this development utilises Australian iron ore and coking coal, while the newly middle-class consumers in such places look increasingly towards Australian beef, dairy and wine.
Domestic debt levels remain China’s major economic risk. While the rate of increase of debt over the past eight years has been the biggest worry, the absolute level of debt, although high at over 300 per cent of GDP, is not an outlier and not much beyond Japan and the US.
Unlike other emerging markets, China’s debt is more manageable, and its government has more levers at its disposal. China’s debt is almost all domestic and is denominated in yuan. China manages its exchange rate, so a run on the yuan is not a potential risk.
Similarly, China’s capital account is still tightly controlled and capital flight unlikely. Over the past four years, tighter capital controls have been applied which demonstrate the continuing effectiveness of policy to determine the rate of capital flows in and out of the country. China also holds some $US3 trillion ($4.4 trillion) in reserves and its major state-owned banks are strong and well capitalised.
Accordingly, financial risk is relatively low at the national level, althoughthe local and shadow banking sectors are exposed to the government’s deleveraging. Some went under during the course of 2019. More can be expected to do so next year.
With a weaker global economy and the trade war, Beijing eased credit. A controlled capital account and currency allows the luxury of itself largely determining the pace of deleveraging.
Trade war triumph
The year has ended with a stepping down of the trade war, largely in China’s favour. It was ever going to be thus. In return for not imposing self-lacerating additional tariff increases, scheduled for December 16, China has agreed to the politically helpful (for Donald Trump) gesture of an increase in imports of agricultural goods and to a continuation of talks on sensitive areas. This will also help meet China’s ever-growing demand for imported foodstuffs – a “win-win” for Xi.
During the course of the year, Xi eventually got Trump’s measure in the trade war and his policy flip-flops. When its impacts on the Chinese economy turned out to be relatively muted, Beijing settled into a waiting game on the US electoral cycle. This will strengthen Xi domestically.
Xi’s biggest threat in 2019 were Hong Kong’s mass demonstrations that started mid-year and their sporadic violent nihilist elements. Xi’s enemies within the Party must have seen this as the long-awaited moment for a misstep. Instead, sensibly, Beijing left it up to the inept government led by Chief Secretary Carrie Lam to blunder through.
Or so it was presented publicly. Conceding little other than the now abandoned, hated, extradition law, authority has been retained and at year’s end a semblance of normality is returning. Beijing will ensure Hong Kong is never the same again.
Internationally, Xi’s signature Belt and Road Initiative went from strength to strength. China’s relationship with Russia continued to deepen as a balance to the US. For the first time, China and Russia held joint naval exercises in east Asia. Two more countries from the Pacific shifted diplomatic recognition from Taipei to Beijing, notwithstanding Australia’s newly minted “Pacific step-up”. The Japanese Prime Minister is about to visit Beijing, breaking an 11-year stand-off and marking resumption of normal relations, underlining Japanese unease at US reliability as an alliance partner.
Domestically, Xi presided over the gala 70th anniversary of the Chinese Communist Party, which culminated in a massive military parade projecting power and unity to both domestic and foreign audiences. Beijing’s “re-education” of its minority Uighur population was widely condemned by a number of foreign governments and international human rights bodies, but this would have fed into Xi's nationalist narrative. In any event, with the US administration showing little interest in pursuing vigorously a global human rights agenda, international reaction has been muted. Xi may have calculated for this.
Although always difficult to know with much confidence in view of the opaqueness of China’s political system, Xi would seem to have finished the year at least as strong, if not more so, than at its beginning.
Many in Australian policymaking circles may find it distasteful to reflect positively on Xi’s achievements in 2019. Many would wish it to be otherwise. An entire intellectual and policy industry has grown up around wishful-thinking, collapsist dogmas of China’s imminent demise. And yet another year has passed, and reality continues to confound such hopes.
The challenge to the old world order of a continually rising and confident China is the contemporary reality Australia’s and, more broadly, the West’s statesmen must contemplate. Their task then is to craft policies that protect and advance Australia’s interests in a world as it is, not as we might wish it to be.