China starts 2019 with a host of challenges — a slowing economy at home, Trump’s US, and concerns about Belt and Road Initiative.
China is ending 2018 on a sticky wicket. But just a year ago, it seemed that the stars were aligning for Beijing. The year 2017 saw Xi Jinping being heralded as the saviour of globalisation, with the world coming to grips with the uncertainty unleashed by the rise of US president Donald Trump.
In the summer of that year, the Belt and Road Forum was held with great fanfare in Beijing, and the consensus appeared to be that Xi’s massive infrastructure plan would change the world order, rapidly eroding American dominance and heralding Chinese ascendance.
What a difference a year makes. China will begin 2019 confronting a host of challenges, from Trump and a slowing economy at home to rising global concerns, not only about the Belt and Road Initiative (BRI) but about the larger implications of China’s increasing global swagger.
The next three years are seen in Beijing as crucial for the future of the country, and the Communist Party. It’s being called the period of the three anniversaries: the 70th anniversary of the People’s Republic of China that falls next October; establishing what the government calls “a moderately prosperous society” and eliminating absolute poverty by 2020; and most importantly, marking the Communist Party’s (CPC) 100th anniversary in 2021.
As China moves towards these targets, here are the five biggest challenges that stand in its way in the coming year. How China resolves them will have implications for India and the world.
The US trade war
Look back a year, and it appears that the Xi government made a grave error in underestimating Donald Trump. Beijing officials openly said they saw him as a deal-maker – his The Art of the Deal was widely read in China. In fact, Beijing breathed a sigh of relief that they didn’t have to deal with Hillary Clinton – Trump was seen as transactional in contrast to a seemingly more ideological Hillary Clinton. Beijing’s calculation that Trump could be won over with a few big-ticket deals – and large doses of flattery that were on display when Xi hosted him in the Forbidden City – proved wrong.
Now, China is feeling the pressure of the over 100-day trade war and the slapping of tariffs on its exports. Beijing has already begun looking at diversifying its sources of agricultural imports from the US.
In the short-run, this could open doors for India. Beijing has already told India that it would be keen to import Indian soybean and other agricultural products after it imposed retaliatory tariffs on the US. This could, however, be temporary because Beijing’s major hope in 2019 will be to cut a deal with Trump, but as explained next, that’s easier said than done.
The trade war is complicating Xi’s next big challenge – a slowing economy at home and rising debt. Growth in 2019 may slow to 6.2 per cent, down from an expected 6.5 per cent this year. Beijing faces a dilemma: it hopes to make its economy less reliant on investment-driven growth, but doesn’t want the growth to take a hit, mindful of social and political consequences at home ahead of a key time for the party.
Complicating its efforts of upgrading its economy is the trade war.
Recent reports have said that to assuage Trump, the Xi government has gone silent on what was once trumpeted as its key domestic economic plan – the ‘Made in China 2025’ plan. This was aimed at establishing China as a tech power in new fields such as smart manufacturing and Artificial Intelligence. This, more than the trade imbalance, is at the heart of the dispute with America, which is angered by both the massive state support to firms envisaged under the plan, and its focus on acquiring overseas technology.
Recent reports have said that China is mulling a new law to protect foreign firms from technology transfers, which has been a key Trump demand. Many experts, however, have suggested that his focus on this issue has both exaggerated the problem and ignored the more structural causes of the imbalance. Still, here, China is in a lose-lose position. If China doesn’t make meaningful changes, Trump is unlikely to relent. If China does, it will hamper its own domestic economic priorities as well as its efforts to close the gap with the US.
The Belt and Road Initiative
When China convened the first Belt and Road Forum (BRF) in the summer of 2017, India was the lone absentee. Delhi flagged its concerns about the model, from a lack of transparency to debt burdens foisted on host countries. India was then warned of its isolation, including by commentators at home. As China hosts its second BRF in 2019, the landscape has changed considerably. From Sri Lanka to Pakistan and now Kenya, concerns about the financing aspects of Chinese projects are growing louder. Here again, Beijing is in a dilemma. For Chinese companies, the attraction of BRI was in finding new markets overseas to export their excess capacity when faced with the economic changes at home.
For China’s companies, the Belt and Road Initiative is a commercial enterprise. Yet, many BRI countries are now expecting financing that isn’t commercial, but concessional.
Failure to meet that expectation could derail the plan. Meeting it could hurt Chinese companies. How Beijing manages this dilemma remains to be seen, but what might work in its favour is the persisting absence of any alternative for the infrastructure-hungry countries.
Concerns over China’s rise
The concerns over the BRI are, in some sense, a manifestation of a global debate on the implications of China’s rise. This is a question that many countries are confronting much earlier than they expected, thanks to Trump’s emphasis on “America First” and his championing America’s retreat from many spheres of global governance, from climate change to trade pacts.
Pre-Trump, the tendency among many countries, particularly in China’s backyard, was to welcome China’s economic ascendancy. They rushed headlong into an economic embrace of Beijing – while remaining supportive of America’s continuing military presence in Asia, which was seen as a needed counterweight to China’s muscle-flexing in territorial disputes, such as the South China Sea. Both these assumptions have now been thrown into uncertainty.
China ended 2018 with an effort to make nice with its neighbours as it deals with rising competition from the US – note the Wuhan summit and Shinzo Abe’s remarkable visit to China, as well as reports of Xi Jinping making an early 2019 visit to India. China’s strategists still see the current period of uncertainty as a glorious opportunity to accelerate efforts to establish Beijing as the region’s preeminent power centre. Which impulse holds sway in 2019 remains to be seen.
Keeping the Party going
The most important yet hardest-to-assess challenge, given the black box that is Chinese politics. The Party has defied all predictions of its demise as it prepares for its 100th anniversary in 2021. Yet Xi’s rise hasn’t been without its stresses. Both the corruption crackdown, which has also witnessed a purging of high-ranking officials, and the rewriting of political rules to remove term-limits have certainly placed the political system under new stress. But how much stress – and whether it will lead to any internal pushback – is impossible to assess.
What we do know is that the abiding objective of navigating each of the four other challenges, both external and internal, ultimately lies at home. More specifically, it is in meeting the challenge of ensuring the continuity of the Party’s – and Xi’s – leadership. In the final analysis, nothing else matters.
The author is a Visiting Fellow at Brookings India, and was previously China correspondent for India Today and The Hindu.
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