China in Transition (Agenda)
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Editor’s Note: Transcripts are generated using speech-recognition technology. Therefore, Stratfor cannot guarantee their complete accuracy.
Video Transcript:
Colin Chapman: Two days after Americans choose their next president, China will confirm a new leader at the 18th Party Congress. We already know who it'll be, because every 10 years the ruling Communist Party picks a new Party secretary, who then becomes president. The next man is Xi Jinping, age 59, long-term official, who joined the Politburo 10 years ago and has been vice president since 2008. So what can we expect under his leadership?
Welcome to Agenda. I'm Colin Chapman, today talking with Stratfor's senior East Asia analyst Rodger Baker. Rodger, what do we know about Xi Jinping? And what sort of leader will he be?
Rodger Baker: Well Xi Jinping, like his predecessor Hu Jintao, has made it a point to not be incredibly well known. The way in which Chinese leadership is structured right now, while you're in the grooming for the leadership position, it's much more important to not make waves, to not give a clear impression of who you are or how you may or may not be more unique than your predecessor. And so there's a lot of questions as to what he's going to be like. But there's also the reality that in this Chinese system, there is no single strongman leadership and therefore Xi Jinping, no matter who he is, is going to be heavily constrained by the rest of the party elite.
Colin: Is there likely to be more or faster economic reform? Henry Kissinger is on the record in the Washington Post saying he expects significant change.
Rodger: I don't know that we're going to see significant change because of Xi Jinping or because of the leadership transition. If we see significant change, it's going to be because of the overall economic issues that they're dealing with, and that they've been working on these for a while. When you had a strongman leadership in China, you could have a radical rapid change. But when you have this form of collective leadership that we have right now, rapid change doesn't happen because it takes a while for each of the various elements of the elite to balance out their own interest, to balance out their own ideas, before decisions can be made and before change can happen.
Colin: Let's come to the issues. In the short term, the main one is the slowing economy.
Rodger: I think it's not only a short-term issue, I think it's a systemic issue in China. I think that they have reached the end of this economic model. I think that the slowdown in Europe has clearly demonstrated that the Chinese can't keep up that strong export model, and they certainly can't keep up this double-digit growth. And it should have been known for very long time. And the Chinese government certainly knew for a long time that they wouldn't be able to maintain double-digit growth. So their focus is going to be a lot more on development of the interior, but a lot of that comes with, again, additional infrastructure spending. It comes with pushing money to try to find a way to get Central China to become a consuming area, to be an area that is buying product, that's making product and buying its own product and somewhat pull away from their dependency upon the rest of the world. The problem with that though is that they are somewhat resource deficient now. They've reached a point where they have to be importing a lot of resources, so that means that the cost is still going to be high. They're still going to be drawing a lot of resources in but they're not necessarily going to be selling a lot of product out.
Colin: But they've got a buffer to pay for it -- plenty of cash.
Rodger: They've got a lot of cash to buffer that in the short term, but it's amazing how fast you can burn through that cash. The other aspect would be if they start to spend that cash, it's not really cash -- it's in treasuries, it's in other currencies. It's not ways that they can simply just dump it, and if they're going to be slowing down in the export market as well as the overall economy, they don't necessarily want to start cutting down that buffer. They want to be able to hold onto those currency reserves so they can use them to shift and adjust the value of their currency when they're dealing, for example, with commodity imports.
Colin: What about that other problem -- inflation, which is touching China's competitiveness?
Rodger: Well did the inflation hits in multiple ways. On the one hand, we see for example wage inflation in China that technically allows Chinese workers to have by higher consuming power, to be able to buy more on the Chinese market. It also may discourage some elements of low-end manufacturing in China, which is something that I think that the Chinese government is willing to risk. The ability of companies to move a lot of their manufacturing rapidly to other locations is not very easy because very few locations in the world have the heavy concentration of all the factories that are able to produce a lot of the precursor elements. So the Chinese ability to concentrate all the different levels of production in one area still gives them a fairly strong advantage even as the wages increase. Their real risk is going to be in food and the increase in the price of food. That may be in some sense help for example the agricultural, rural workers -- the farmers. But it's going to start hurting a lot of this new consuming class that's in the interior if the food prices start to go up. And so that's where we're going to see the biggest challenge for the Chinese on managing inflation.
Colin: What are the other challenges the new leadership faces?
Rodger: Well I think one of the biggest ones is the social-political challenge, and that is that the Party has asserted its authority and its right to authority based on economic growth. And that economic growth is gone. Propaganda is not a very effective tool by the Party except in some extreme nationalistic senses. And so the connection between the Party and between the population is the gap is widening. And it's being more and more difficult for the Party to retain the respect that it had before. At the grassroots level the population sees corruption and they expose corruption now. And the implications of that go all the way up to the center. And so I think the biggest challenge for the Party is this ability to maintain singular, unchallenged one-party rule as the social and economic changes in China have reached a certain point and the political changes have lagged far behind.
Colin: Do you then see the Party holding on to control?
Rodger: It's very difficult for the Chinese to change, because if they start to give up party control, all of the structures of the elite, all of these people who have a very vested interest in maintaining Party control -- and that stretches across the country; it stretches through the economy -- those people lose.
Colin: And briefly, what about foreign policy?
Rodger: They're drawing economic issues into a foreign policy portfolio. They look like they're going to be bringing an individual into the Cabinet who is going to be focused on the shaping foreign image, foreign policy, on messaging foreign policy. We see a stronger role for the military in shaping foreign policy. And so we see a China that certainly has recognized its need to become more active and more involved internationally. I think we may see a China that feels more comfortable as we go forward in trying to assert its stronger role internationally, but it's still in some sense going to be very cautious because it doesn't necessarily bring a strength. It brings the impression of strength. And if it's challenged it's going to demonstrate the weaknesses of Chinese policy fairly quickly, and what we've seen, for example, with the issue over the Senkaku/Diaoyu islands is that the Chinese can make all sorts of assertions that they want, but they've really been unable to do anything to physically claim those islands. And they're not really willing to take that risk so that in the end all of the noise that they make on the foreign policy front in some sense demonstrates a weakness or an inability, rather than showing how strong and modern and prosperous and powerful China has become.
Colin: Rodger Baker there, ending Agenda this week. Thanks for joining us. See you next time.
