Agenda: Challenges Facing China's Leadership
Video Transcript:
Analyst Rodger Baker examines the current challenges facing Beijing from internal security to foreign companies moving out of China seeking lower production costs.
Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, STRATFOR cannot guarantee their complete accuracy.
As Pakistan seeks to strengthen its relationship with China, including the reported offer of a strategic deep-water port at Gwadar, Beijing's leaders have their hand's full with a myriad of problems, an usual but unwelcome bomb attack on government offices in Fuzhou, a crackdown on religious groups and a trend starting of business moving out of China because it's just too expensive. Is unrest and inflation slowing China down?
Colin: Welcome to the Agenda. I'm joined this week by Rodger Baker. Rodger, let me put that question to you.
Rodger: Well we certainly see some issues going on in China in regards to social stability and economics and in the question of how the political situation is playing out socially. The economic slowdown we're seeing in China right now, in some sense is engineered. The government is holding back on certain types of loans. It's trying to slow the economy a little bit and, by some estimates, by the fourth quarter we may be seeing only about 8 percent growth for the quarter. This is all right for the Chinese right now; it's helping to keep inflation in check, but they do have the concerns with rising commodity prices, with changes in manufacturing, and overall though we've seen the Beijing government be a little bit concerned about social problems. We saw the Jasmine unrest earlier. We see the government being a little bit more concerned about what's going on with religious organizations, with potential dissidents and we see a very tense Chinese government that on its foreign travels it tries to appear fairly friendly but domestically is really, really cracking down these days.
Colin: The authorities seem worried. I saw a video by a Beijing correspondent which highlighted the surveillance and harsh treatment of religious groups.
Rodger: Yes, we're seeing what looks like an uptick in the Chinese cracking down on religious organizations and part of that seems to be related again to their concern with the Jasmine protest. They see the Jasmine protests from earlier this year as a foreign-instigated attempt to undermine the Chinese government domestically. And one of the problems China has always had with organized religion is that, particularly with Christianity, it's seen as being a foreign religion and not a domestic Chinese religion. And it has connections into foreign missionaries, into foreign religious organizations, and many of these organizations also promote human rights, promote other rights throughout the world, so the Chinese view religion sometimes as a potential threat, as a potential way for foreign influence to work its way into China and to start turning people against their own government system.
Colin: International corporations have billions staked on China being successful. They have no interest in promoting instability but they are worried about the prospect of it and rapidly rising costs. Coach, the American accessories company for example, is shifting half its production out of China.
Rodger: If you talk to some of the companies who have been in China for a long time, they've said really over the past five years they've seen a fairly substantial rise in the cost of doing business in China. Some of that comes from a wage increases, government-mandated wage increases, some of it is from changes, of course, in commodity prices, which are going to impact operations in most locations. But there's also some costs that may not be able to be reflected immediately in the price of input. So there's been a tightening on Internet connectivity. There's been increasing attention by the Chinese security services of what they consider to be economic espionage and these are causing troubles with some of these foreign companies. We're seeing more companies start to look at China and say, well the low-end manufacturing is still fairly competitive here but we're starting to get better deals in Vietnam or Laos or Bangladesh. And we're seeing companies start to move in that way, and we've even seen some signs of Chinese companies moving down to some of these other countries as well.
Colin: And they've also been reading reports of the essay written by General Liuo Yeun saying present top leaders have sold out to foreign interest and calling on the Communist party to turn the clock back and return to their old ways. How strong is the urge for the military to fly the red flag again?
Rodger: Well it may not be just in the military. Certainly there are some elements in the military that view this as its time for China to show some strength but we're seeing it in the political spectrum as well, if you look in Chongqing and you watch Bo Xilai, he has an entire initiative that's basically pulling back towards a red China rather than focusing on the business. There are other initiatives of this sort going on, whether they're focusing on social harmony or whether they're talking about trying to have everybody feel happy. And these are in some ways I think a reflection that the Chinese Communist Party has just about reached its limits within the economic growth and in some ways within the social growth and social changes in China. For the party to retain its legitimacy, it's no longer sufficient to just say, well everybody's going to get rich so just wait. That's certainly not happening any longer. The Chinese are reaching really the top end of this economic rise. At best they're going to go into what would be the more normal economic cycle like you would see in other countries. And that means there are going to be slowdowns, there's going to be economic problems, there's going to be maybe even industrial sectors that start to collapse inside China. And if your party is seen as purely being judged on economic performance, that leaves it very, very vulnerable. So I think we see these changes towards talking about being more red or being more social or things of that sort as a way for the government to try to reclaim legitimacy in a measurement system that's different than measuring pure economic growth.
Colin: China is now countering these perceptions by some very active soft diplomacy.
Rodger: They're going around: with the United States, it is let's talk about economic cooperation, let's restart military to military talks and let's not talk about the places where we have differences. We see them in Australia, we see them trying to mend fences with India, certainly with ASEAN on the Chinese route into Europe into other places. They're really trying to change that perception. For a few years, there was the sense that China, particularly in Asia, was seen as very assertive if not aggressive and so they're pulling back from that, trying to create a little bit of space again for them to be able to focus on these internal issues. I think that in some ways highlights how difficult and how significant the Communist Party is viewing some of the problems inside that reflect the economic changes, that reflect these changes in the social structure and in societal acceptance of where China is going in general.
Colin: You mention a number of countries. A further complication is Pakistan, which could turn out to be a closer friend than Beijing had expected.
Rodger: Well certainly we saw Pakistan, following the killing of Osama bin Laden, turn towards China. There was a political requirement inside Pakistan to do this; there was a lot of pressure on the Pakistani government about their relationship of the United States and they wanted to show that they have other allies. The Chinese have taken a slightly more cautious approach to this. So while they certainly embraced this relationship with Pakistan, on the port deal for example, the Pakistanis allowed it to be leaked that they had offered the Chinese not only management of the civilian side of the port but suggested that the Chinese build up and even be able to utilize a port in Gwadar as well. The Chinese came out fairly quickly and said we've never heard of any such deal; we don't know which talking about; it's not an issue for us. So Beijing is looking at the situation and, yeah they're very complicated here. They don't want to be seen as pushing it aggressively. At the same time they want to give Pakistan a little bit of breathing room and maybe put just a little bit of nervousness in the United States and even in India.
Colin: Rodger Baker, thanks very much. That's Agenda for this week. I'm Colin Chapman.
