Chapter 9: China’s Impact on the Global Balance of Power
External Financial Initiatives and Internationalizing the RenminbiSince implementing a “go global” investment strategy in 2009, China’s Outward Direct Investment has grown at nearly 20% annually and is forecasted to overtake the United States as the world’s largest by 2020.For the technocrats, internationalizing China’s currency is actually a Trojan House to encourage the much- needed reforms in the financial sector for the renminbi to become eventually a major global currency. For the political leadership, the objective is to reduce China’s vulnerability to a global financial system that America has used before as a weapon to complement its diplomatic objectives. Thus, security concerns more than economic gains may be driving the political support for promoting the renminbi as a global currency.
Xi Jinping’s “China Dream”Whether it is China’s plans to build rail infrastructure through Greece to Eastern Europe or a $46 billion infrastructure spending plan in Pakistan to open new trade and transport corridors across Asia, the new linkages have the potential to connect Europe to China through routes that may become more important than its current links to the West through the Pacific.Yet this approach is not being received with unbridled enthusiasm by China’s neighbors. Many are worried about the middle kingdom’s objectives and their own potential loss of independence. Some have expressed concern about the economic viability and social consequences of the proposed projects, and uncertainties about the governance principles being applied which could eventually reverberate negatively on China both financially and politically. Others note that China’s inclination to deal exclusively with the political elites in authoritarian regimes is prone to failure when the wishes of the broader civil society are not engaged.
Tensions Escalate from the Island DisputesIn September of 2012, Japan moved to reassert control in the East China Sea, with the governor of Tokyo formally purchasing the islands from a private owner. According to an International Crisis Group report, the Chinese interpreted this action as “final proof that Japan had disrespected the tacit understanding and … freed Beijing from adhering to the status quo.” On September 10, Beijing announced territorial sea baselines around the islands, shocking Tokyo.The implications were not fully understood at the time, but even before formally assuming Party leadership in November, Xi Jinping had already been put in charge of the Leading Small Group on the Protection of Maritime Interest. From 2013 to 2015, many events illustrated China’s changing position. These included creating a unified coast guard with more concentrated capabilities, setting up an air defense identification zone (ADIZ) in the East China Sea in November 2013 and subjecting all noncommercial air traffic to submit flight plans over most of the East China Sea, moving an oil rig into waters contested with Vietnam, and embarking on unprecedented land reclamation activities in disputed waters. Thus far, President Xi has walked a fine line in his foreign diplomacy between hard-power assertiveness over maritime disputes and calls for cooperative regional development.The affected countries have repeatedly called on China to resolve disputes through multilateral forums rather than through bilateral negotiations. Such demands intensified after China seized control of the Scarborough Shoal from the Philippines. Much attention had been focused on the case brought by the Philippines based on the United Nations Convention Law of the Sea (UNCLOS) at the Permanent Court of Arbitration.The July 2016 ruling provided a clear victory for the Philippines and went beyond what was expected. The court ruled that there is no legal basis for China’s historical claims based on the nine- dash line that would give China the EEZ rights normally accorded to the ownership of islands. It also clarified what constitutes an island — as opposed to rocks, which are not capable of generating their own EEZ. Thus China’s claim that it had such rights because of alleged sovereignty over various rocks was invalid. The ruling also went further in criticizing some of China’s reclamation works as infringing on the rights of the Philippines and causing environmental damage.Beijing reacted with a predicted refusal to recognize the validity of the ruling and threatened to introduce an ADIZ zone in the South China Sea as it had done in the East China Sea. China pointed out, as have others, that the United States has never ratified the UNCLOS and has at times ignored similar international rulings. If China continues with reclamation activities on disputed land formations, increased tensions would seem to be inevitable. In particular, moving forward with any construction activities on the Scarborough Shoal, which is seen as the red line, would likely trigger a round of counter actions on the part of the United States, the Philippines, and other affected parties.Some observers have suggested that the ruling could help clarify the situation and nudge China and the other contestants to initiating serious discussions. Soon after the ruling, China did come out with a “white paper” and announcements that downplayed the role of the nine-dash line and differentiated between sovereignty and maritime rights. This distinction is important since it is the enforcement of the maritime claims rather than sovereignty per se— which the rule did not address— that has generated the tensions. Meanwhile Philippines President Duterte has signaled a greater willingness to negotiate with China and act more independently of the United States. This has introduced a new and possibly game- changing factor into the dynamics of the conflict.
Prisoner’s Dilemma and the Island DisputesThe United States sees this issue as a challenge to its position as the dominant regional power. China sees itself as having broader sphere of influence claims based on historical factors and seeks to establish itself as a regional great power on par with the United States. In contrast, Vietnam and the Philippines are driven primarily by the potential energy and marine resources in the South China Sea, which are significant relative to the size of their economies and financial needs.From each side’s point of view, any sign of moderating while the other continues to become more aggressive would be evidence of weakness that would encourage the other side to be even more aggressive. Conversely, more forceful behavior if the other side moderates would lead to superiority. If both choose to become more aggressive, however, they would still want to avoid pushing the other into a military conflict— an untenable outcome for everyone.If both sides choose to moderate the situation, conflict could be avoided, and everyone would be better off. For this to happen, a neutral outsider is needed to mediate a mutually acceptable solution. Finding such a mediator with the credibility and stature to put forward a proposal acceptable to the two great powers and regional claimants would appear to be an insurmountable challenge, yet the outlines of such an agreement are out there.Any acceptable solution would have to address the broader concerns of China and the more specific claims of the various affected parties. Each would have to feel that it was getting something of significant value, thus making it worthwhile to compromise. This might mean giving each party clear ownership rights to particular land formations that they already control or have “developed,” along with the associated resource rights in limited surrounding waters. This would likely need to be supplemented by an agreement for joint development of maritime resources in areas with conflicting claims, such that everyone would agree to leave issues regarding sovereignty uncontested. Ensuring freedom of navigation and providing for security arrangements with the backing of both the United States and China would have to be part of the agreement.For China to align its rhetoric for peaceful regional development with such an understanding would require recognizing that some of the broader issues entail a multilateral resolution process and toning down provocative activities. Acknowledging China’s ownership of specific “island- like formations” and giving it a recognized role in regional security arrangements on par with the United States might provide the necessary incentives. America’s credibility would be enhanced if it signed on to the UNCLOS and gave up rights that it has claimed by treating certain land formations in the Pacific as islands when they are in fact rocks if judged against the Tribunal’s recent ruling.Should China act more aggressively in the South China Sea, Southeast Asian countries will turn to the United States, while if the United States exacerbates tensions by acting overly militaristic, these countries will bear much of the consequences and argue that they should not be forced to choose. Most of the neutral Asian players realize that having both the United States and China in the region can be a positive force, contributing to a balance that provides options rather than domination by any one power.
China, the “Abnormal” Great PowerChina also faces a peculiar challenge in that it is getting old before getting rich. Even by 2030, only about 10% of China’s population will be relatively well off (defined as within the top decile of global incomes), compared with about 90% of the population in the United States and Europe.China’s economic rise has pushed it into the unique position of becoming a superpower earlier than expected. Some see Beijing as being able to exercise considerable influence, but in reality, its ability to do so is limited. In transitioning from the passive approaches characterizing the Deng era, China’s institutional base and experience in dealing with sensitive global issues lag well behind its impressive economic achievements, placing it at a disadvantage in working with other major powers.The leadership in China recognizes that if it ever succumbs to a major economic crisis, adequate financial support from the global community is unlikely to materialize not only because of the sheer size of its needs but also because of differences in shared values with other major powers.
Dealing with Differing Perceptions and Rising TensionsOn the part of the United States, perceiving China’s economic revival as a threat to the established order has actually made it more likely that China will become one. American actions or inactions give China cause to promote alternatives to the status quo, such as when America delayed the proposal to allow China a larger voting share within the IMF and World Bank. This encouraged China to pursue its own type of institution, with the AIIB being the outcome.
A Renewed and Warily Regarded Charm Offensive“China’s basic policy of diplomacy with neighboring countries is to treat them as friends and partners, to make them feel secure and support their development. China should create a closer network of common interests, and better integrate China’s interests with theirs,” said President Xi at a seminar on neighborhood diplomacy in October 2013.With a strategy of building enhanced economic integration, China is strategically attempting to link its rise with the rise of the rest. To assuage concerns of its growing economic power among its neighbors, China is looking to trade and investment as a way of creating win- win relationships and maintaining the regional peace it needs for continued development.Still, money and friendly rhetoric will not buy love. Though enhanced trade during China’s previous charm offensive helped to garner goodwill, much of the media’s coverage of its OBOR initiative has questioned its intentions and highlighted the apprehensions of the targeted participants. Commentators have noted the possible harmful side effects to local industries in countries that cannot compete with cheaper and better-quality Chinese manufactured goods; historical animosities and mistrust as in Vietnam; and heightened security concerns in Turkey and India.42 In Central Asia, China’s intentions are viewed warily by potential beneficiaries such as Kazakhstan—who worries about becoming dependent on China—and even by Russia—who worries about losing longstanding influence.Similarly, though investment in infrastructure plays into the hands of what China’s surrounding developing nations want, it is not hard to see how a debtor and creditor relationship can turn sour, as they have many times. In these and other countries, China’s close association in the past with authoritarian regimes and reluctance to engage with other segments of society ultimately leads to reversals when these regimes evolve.If the conduct of a country’s leaders and people do not appeal to others, then that country’s actions will reap little respect. With its increasing crackdowns on public discourse, a new rule limiting foreign nongovernment organizations, suppressed ethnic tensions, and tightening control over the internet, it is no wonder that China is struggling to charm the global community.The fact that US allies like the United Kingdom, Australia, South Korea, and most recently Canada broke ranks to join the China- initiated AIIB despite US calls for caution suggests that most countries believe that working with China is desirable in areas where there is an economic rationale and engagement serves longer-term political objectives. China is thus likely to make progress in strengthening its regional economic links, with newly passed free trade agreements with South Korea and Australia, future agreements like the Free Trade Area for the Asia Pacific (FTAAP), and proposed BITs with the United States and EU.The United States is struggling to balance its military presence in Asia with a stronger economic one, and finding that the game has changed. Moreover, the persistence of conflicts in the Middle East and acts of global terrorism will inevitably divert its attention away from security concerns in Asia. While China might see its own strategy as ultimately a win-win, to the United States it is perceived as win-lose because of the relative decline in its power in the region.
Differing Perspectives on Geopolitical IssuesAs democracies like the United States tend to deal with policy implications according to election cycles, while China’s leaders are more able to formulate long-term policy plans. But events have often forced China to react before it really wanted to. The result is that China’s response is often reactive and not well considered.
Engaging an “Abnormal” Great PowerIn an ideal world, China would not be seen as a threat to be contained but as a strategic competitor that can be brought in when needed to help reduce tensions and ensure more constructive outcomes on sensitive global issues. The choices for the West seem to be either providing China with more say in dealing with these issues to encourage a more cooperative relationship or taking a harsher position to illustrate the costs to China of taking more aggressive positions.Beijing can start by taking the lead in supporting open markets and fighting protectionism as President Xi did in his 2017 Davos speech. This would help China counter criticisms of its trade practices and put pressure on the United States and other developed countries that are moving toward more inward- looking policies as evidenced in the 2016 US presidential elections and Brexit debates.As it seeks to increase its outbound investment, China also needs to support a more level playing field. More open capital markets and bilateral and multilateral investment agreements can help ensure equitable treatment and provide more flexibility to address security concerns. China needs to be sensitive to international norms about its use of aid money, but the West can also learn from China’s more efficient use of assistance for infrastructure investments. Thus, everyone should hope that the creation of the AIIB can help bridge such differences if both the United States and Japan eventually join and China and the United States and Europe begin working toward broader regional trade and investment agreements.