OECD Raises China Growth Forecast And Risks To It

THE OECD HAS edged up its growth forecast for China this year to 6.7% from the 6.6% it projected in November but holds its 2019 forecast unchanged at 6.4%. The revised numbers are contained in the newly published interim Economic Outlook from the rich countries’ think tank.

Overall, the OECD sees a steady or improving expansion across most G20 economies thanks to the bounce back of trade and private investment, with fiscal stimulus in the United States and Germany providing a boost to short-term growth, while inflationary pressures are subdued. Specifically, on China it says

Growth surprised on the upside in China in 2017, helped by a strong rebound in exports, but is set to soften to just below 6½ per cent by 2019. Macroeconomic and regulatory policies are gradually becoming more restrictive, the working age population is now declining and credit conditions are less expansionary. Regulatory efforts are continuing to reduce financial risks, deal with overcapacity in some sectors and improve environmental quality. Fiscal policy is now broadly neutral, but additional measures could be implemented if output growth were to slow more sharply.

However, the risks to its general forecast all threaten particular vulnerabilities of the Chinese economy: tightening monetary policy in the advanced economies, high debt and asset valuations, and a potentially damaging escalation of trade tensions.

The importance of tackling high debt levels is illustrated in this chart.

Chart of G20 total debt, public and private non-financial sector, as % of GDP, 2001-2017. Source: OECD

The OECD calls on Beijing for policy initiatives to reduce the high level of corporate debt, in particular.

The OECD also makes a point of the importance of safeguarding the rules-based international trading system. China has repeatedly been saying the same thing, if somewhat self-servingly and with itself as the guarantor, since long before the Trump administration announced import tariffs on steel and aluminium. It is likely to echo the call again as the United States readies a Section 301 action on intellectual property rights and technology transfer practices aimed at what the US president has flatly called China’s theft of US technology.

Meanwhile, the Trump administration has reportedly told Beijing that it has to come up with a plan to reduce China’s $375 billion trade surplus with the United States by $100 billion within a year.


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Breakthrough Or Blunder, Trump-Kim Talks Trouble China

Composite image of North Korean leader Kim Jong-un (left) and US President Donald Trump.

CHINA HAS LONG held that talks are the only way to de-escalate tensions between North Korea and the United States. It now has talks — or at least the promise of them — following US President Donald Trump’s surprise acceptance of an offer to sit down with North Korean leader Kim Jong-un by May for a face-to-face discussion on denuclearization.

The White House confirmed the talks, as it does, by Twitter.

The downside of this development for Beijing is that it will not be at the table (unless by some chance it manages to host the talks), at least initially.

Foreign ministry spokesman Geng Shuang made the right supportive noises about ‘dialogue and discussion’ in response to the announcement in Washington by the South Korean officials who had recently met Kim in Pyongyang. However, it did not escape this Bystander’s notice that he also slipped in a call to start multilateral meetings to advance the process of peacefully resolving the Korean nuclear issue, and that China would continue to make efforts on this.

Beijing will, of course, welcome the sudden prospect of diplomacy after months of belligerent invective between ‘the Dotard’ and ‘Little Rocket Man’. It will also be conscious that that diplomacy may be short-lived; it is difficult to be certain of Kim’s motives, and the history of arms control negotiations involving Pyongyang argues for caution about possible outcomes.

The previous attempt to get Pyongyang to disarm by negotiation was the Six-Party Talks involving the two Koreas, China, Russia, the United States and Japan that followed North Korea’s first nuclear weapons test in 2006. The deal on the table was that Pyongyang would shut down its nuclear and programme in exchange for aid and sanctions lifting. However, what could not be agreed was how to verify the North’s compliance. The talks broke down in 2008. Pyongyang resumed nuclear testing the following year, and Beijing signed on for the first time to sanctions against North Korea.

This time around, Beijing perhaps as much as Washington will be wary that Kim is again just buying time. And its red line remains no North Korean regime collapse that ends up with US or US-allied forces on its border.

The risks in bilateral talks between North Korea and the United States, should they turn out well (at this point a long shot, to our mind), is that North and South collectively end up more aligned with the United States and less with China, providing Washington leverage to use North Korea as a strategic balancing power in the region, a role that would give Kim some of the aggrandisement he craves.

The Global Times, a voicepiece on international affairs for the Party, noted that “as a major power, it is unnecessary for China to worry about North Korea ‘turning to the US’” — a comment that suggests Beijing is worried about just that.

Talks driven by Seoul, Pyongyang and Washington sideline Beijing, not a comfortable position for ‘a major power’.

Perhaps the best analogy for the latest developments is a chess match. Kim has just made an audacious move, which he will have thought through carefully. Trump has responded instinctively. We do not yet know if one or both men have played the breakthrough winning move or have blundered badly.

If Trump comes to feel he has been deceived or belittled, he will likely retaliate punitively. And that may be the worst outcome from Beijing’s perspective of a match at which, for now at least, it is on the sidelines.

For one, it would test Beijing’s commitment to implementing its 1961 Friendship treaty with the North that obliges it to intervene on Pyongyang’s side in the event of military ‘aggression’.

While we have been here before with the Six-Party Talks, what may different this time is that the North now has nuclear weapons that can reach the mainland United States. Historically, after they have acquired a nuclear arsenal, ‘rogue’ nuclear states, move onto legitimising their nuclear status and then finally to casting off the sanctions they incurred along the way.

If Kim is preparing to take the second step and Trump thinks he is stopping Kim from taking the first, where does that leave Beijing?

Arguably it still maintains the most leverage of any of the involved parties over its neighbour. But how can it use that to broker a compromise that provides the regional stability that it most desires within a multilateral framework to deliver it in which it can play a leading role when it is not in the room?

In that regard, much may turn on the personal relationship between Trump and President Xi Jinping, who again talked on the phone on Friday with Xi nudging Trump to develop bilateral talks with Kim into multilateral ones.

As we have noted before, Beijing has two sets of relationships to manage, one with Pyongyang and the other with Washington. Both have highly unpredictable players on the other side — and now both those wild cards are going to sit down together.

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Steady GDP Growth Target Reflects Measured Derisking

Chinese Premier Li Keqiang delivers his work report at the first session of the 13th National People's Congress in the Great Hall of the People in Beijing, March 5, 2018. Photo credit: Xinhua.

THE OFFICIAL GDP growth target for 2018 is ‘around 6.5%’, the same as last year, when the outcome was a forecast 6.9%, Prime Minister Li Keqiang (above) told the National Peoples Congress in his annual work report. However, the aspirational text from last year on the upside of the target has been dropped for this.

More significantly, the deficit target has been cut for the first time since 2012, to 2.6% of GDP from 3.0%, and monetary policy is to remain neutral, suggesting a tightening of the fiscal screw as authorities’ preferred way to de-risk the financial system.

If the 6.5% growth target is hit, China will be comfortably on course to achieve the goal set in 2010 of doubling per capita GDP by 2020 and thus making it a ‘moderately well-off society’. Growth needs to average only 6.3% between 2018 and 2020 for the target to be achieved.

Less certain is the extent to which quality of growth will replace quantity, as advertised at October’s quinquennial Party Congress. Li repeated the intention to reduce debt-fuelled investment, pollution, poverty and industrial overcapacity, in line with the Party line, but a 6.5% growth target would imply more economic stimulus or less fiscal drag than might otherwise be expected under the managed long-term slowdown and rebalancing of the economy.

That continues incrementally. He Lifeng, head of the National Development and Reform Commission, said on the sidelines of the NPC that consumption is likely to contribute around 60% to economic growth in 2018, up from 58.8% last year and barely 56% five years ago.

He also identified plate glass, cement and electrolytic aluminium as among the next round of target industries for capacity cuts.

The new GDP growth target also implies that the pace of structural financial reform will remain cautious, as it has been for some time. Deleveraging via cracking down on corporations, as happened to Anbang and more recently CEFC China Energy, will continue to be a way of removing excess financial risk from the system while serving the twin goal of aligning private sector foreign direct investment with the national interest.

Similarly, on the debt issue, Finance Minister Xiao Jie indicates that administrative action will be taken against irregularities in local government financing. Local governments account for 55% of the combined debt of central and local governments of  29.95 trillion yuan ($4.75 trillion) at the end of last year.

While some progress has been made on both reducing local government debt levels and structural reforms to local government financing, local governments remain overly dependent on land sales, with the concomitant risk of abuse.

However, a trade war, depending on its severity and duration, might make all that moot.

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China Tries To Mend US Relations While Preparing For Trade War 

TRADE WARS ARE good, and easy to win, tweets US President Donald Trump.

This Bystander would contend that trade wars are bad, and no one wins.

The United States’ plan to impose across-the-board tariffs of 25% on imports of steel and 10% on those of aluminium following a Section 232 investigation will have less effect on Chinese exporters than those from many other countries, despite the fact that Beijing bears the brunt of Trump’s rhetoric about ‘unfair trade’.

China now ranks tenth in the list of sources of US steel imports, at 2.9% of the total — one place below Taiwan (3.2%) and far below table-topping Canada (16.7%). The United States is the world’s biggest steel import market at 35.6 million tonnes (2017), but China’s exports had already fallen by 30% from the previous year following Obama-era anti-dumping duties imposed two years ago. In only one category of steel imports, long products (rebars, drawn wire and the like), is China a top-five supplier.

The US import market for aluminium is smaller, at 6.8 million tonnes a year. China ranks fourth in the foreign suppliers list, with an 8.8% share of imports. Canada, again, tops the list, followed by Russia and the UAE.

Beijing’s public response to the Trump administration’s announcement has been the expected call for restraint, urging the United States to abide by multilateral trade rules and do nothing to damage the fragile global economic recovery. It is also quite content for the EU to take up the running as the belligerent critic in this case.

Behind the scenes, there is a growing sense of urgency about the probability of further such measures to come from Washington and the countermeasures that might have to be taken.

Chart of US exports to China by category, 2016. Source: MIT's Observatory of Economic Complexity.

The Ministry of Commerce is already investigating imports from the United States of sorghum, a cereal grain used to feed livestock, in response to previous tariffs from the White House on solar panels and washing machines.

Agricultural products are a fat target for Beijing to retaliate against. The scale of farm trade between the two countries is large, and US farmers have a heavy reliance on the Chinese market. The US runs a nearly $17 billion trade surplus with China in agricultural products.

US soya beans would be the bullseye, as the chart below of US vegetable product exports to China shows (the chart, like the one above is drawn from MIT’s Observatory of Economic Complexity data). They account for $14.2 billion of the $21.4 billion of annual US agricultural products exports to China (2016 figures) — or 12% of total US exports to China. The second biggest export category, ‘coarse grains’, essentially sorghum in this context, is only a $1 billion export market for US farmers.

Chart of US vegetable products exports to China, 2016

An alternative target for Beijing could be in aerospace. China is one of the largest export markets for US aerospace products, with sales of $13.2 billion in 2016, accounting for 58% of China’s total imports in the aviation sector. This would be a political target in that it would hit the high-skilled industrial jobs in the United States at companies like Boeing that Trump has said his America First trade policies are intended to restore.

The word doing the rounds (admittedly with no firm evidence) is that if tariffs start to cost Chinese exporters $10 billion a year that will be the trigger point for retaliation.

More tariffs are likely to be forthcoming from the Trump administration. As we have noted before, the president is ‘itching’ to impose tariffs on China. Trade is the one issue on which he appears to have long-standing, consistent and deep beliefs that foreign competitors and large trade deficits ‘cheat’ the United States. Also, ahead of November’s midterm Congressional elections, he needs to motivate his voting base, which holds China to the root of all the ill that has befallen it since the global financial crisis.

The steel and aluminium tariffs would follow a series of duties already announced on a range of goods including the solar panels washing machines mentioned above.

The particular concern in Beijing now is a Section 301 investigation into China’s practices in technology transfer, intellectual property and innovation. The Trump administration has already moved to constrain inward direct investment that would give Chinese companies access to US technology. The number of Chinese acquisitions of US tech firms in 2017 was 12% down from its 2015 peak.

While some of that can be attributed to tighter Chinese capital controls, on the US side, this has been achieved both formally through regulatory intervention and informally by, for example, Congress leaning on US telecoms firms AT&T and Verizon not to buy equipment from Huawei and ZTE — and the administration pressing allies to follow suit (though how imposing trade tariffs against allies like Canada, Japan and South Korea engenders the necessary goodwill is difficult to see).

Beijing’s efforts to re-engage the diplomatic and back-channels through which the economic relationship with Washington has been more or less successfully managed for many years are proving less fruitful, despite an assiduous courting of Trump from the outset of his presidency. In many cases, long-standing working points of contact between US and Chinese officials have halted.

Liu He, the Harvard educated economist who is close to President Xi Jinping and the architect of much of China’s economic policymaking since Xi came to power, was in Washington this week. He met senior administration officials, including US Treasury Secretary Steven Mnuchin, White House economic adviser Gary Cohn and US Trade Representative Robert Lighthizer, but not, notably, Trump, in what looks like a calculated snub on the president’s part.

There is no doubt to this Bystander’s mind that Trump’s realization of America First through measures such as tariffs moves the global economy into more dangerous territory because the risk of a tit-for-tat trade war is escalated.

Redefining protectionism as a matter of US national security rather than as a matter of economic fairness, as the steel and aluminium tariffs will do, allows all countries to claim the same.

This is the new world of hard-power realism, and it will have its costs, perhaps very heavy ones.

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Xi Jinping Extends His Power

THE PARTY’S PROPOSAL to scrap the clause in the state constitution that limits the presidency to two five-year terms has caused more of a popular backlash, at least among those online, than the Party might have been expecting if the hurried after-the-fact propaganda blitz is any measure.

But then Party officials might have been blind to their biases. It is second nature to them that paramount power resides in Xi Jinping’s post of Party general secretary, not the presidency, regardless of where the rest of the world focuses its attention.

The constitution frames the president’s powers and duties expressly in terms of “in pursuance of the decisions of the National People’s Congress and its Standing Committee”, both firmly under the Party’s sway with the Party under the General Secretary’s. China’s presidency does not have the independent executive authority of, say, the president of the United States.

Xi has already consolidated that sort of authority to himself, and more. As Party general secretary and chairman of the Central Military Commission as well as president, he is head of the Party, military and state.

He has been designated the country’s core leader. His Thought is enshrined in the Party constitution, making a challenge to him a challenge to the Party, and since his ascendence to power in 2013, control over national security and the economy has fallen directly under him as head of the new bodies overseeing those two areas, the National Security Commission and the Central Leading Group for Comprehensively Deepening Reforms.

Neither the general secretary nor the chairman of the Central Military Commission is term-limited, so Xi would be able to continue in both roles, effectively running China, for as long as he wished or could keep the jobs.

Last year, Xi set himself up to continue as leader of the Party for another term by failing to appoint a clear successor at the five-yearly Party Congress. The latest proposal is merely a bit of bureaucratic tidying up as much as anything, putting the terms of the presidency in alignment with the other two posts in the ‘trinity’ that forms the apex of power.

Xi could have installed a figurehead president to succeed him without significantly diminishing his power, though it would have deprived him of the international spotlight that he appears to enjoy as the face of China and the international platform he needs to advance his vision of China in the world.

Not doing so also sends twin messages: internally, that he is no lame duck, and will not be for the foreseeable future; and externally, that China has strong and stable leadership, even if that cannot be said these days for many democracies.

We should also note that abolishing presidential term limits is not the only change being proposed. A more consequential one, to this Bystander’s mind, is writing the Party’s leading role into the constitution.

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Anbang Nationalisation Underlines China’s Financial Stability Priority

Logo of Anbang Insurance Group. Photo credit: Mighty Travels. Licenced under Creative Commons.

WU XIAOHUI, THE politically well-connected chairman of the giant insurance group Anbang (his wife is Deng Xiaoping’s grand-daughter), has been in detention by authorities since last June. Now he is to stand trial for economic crimes, code for fraud and embezzlement, and the company run by personnel from the China Insurance Regulatory Commission for a year or two, an extraordinary move. The state assuming control of a private-sector business, and particularly one of this size and prominence, is unusual.

Anbang has been on an aggressive international acquisitions drive, buying such foreign trophy investments as the Waldorf Astoria in New York and a string of other luxury US hotels. Chinese firms, with official encouragement, have ‘gone global’ in recent years, rapidly expanding their international mergers and acquisitions activity.

In 2016, China overtook Japan to become the world’s second-largest overseas investor. Non-financial outward direct investment that year exceeded $170 billion, a 44% increase from the previous year, according to the Ministry of Commerce. However, such activity entails tremendous financial risk from the leverage taken on, a risk exacerbated by Chinese firms’ lack of experience with the integration and management challenges that M&A brings, especial in deals that cross national and cultural borders.

Anbang appears to fall squarely in this camp. On some estimates (its finances are notoriously opaque), it has encumbered itself with debt to the point that it is fast approaching technical bankruptcy despite having more than $300 billion of assets.

That also makes it ‘too big to fail’. State administration will provide the funding to keep its core life and non-life insurance business operationally solvent. The insurance regulator says the company’s current operations remain stable but that its solvency is seriously endangered by its ‘illegal operations’ unspecified but which presumably include its investments in prestige prime US real estate.

Last August, authorities announced a list of sectors hat should be off-limits for Chinese firms as the foreign investment spree into things like European football clubs and Hollywood entertainment businesses was exacerbating debt concerns.

More broadly, in the drive for financial stability and to forestall any systemic financial shocks, President Xi Jinping has been asserting greater control over state enterprises and reining in sprawling private conglomerates, notably the ‘big four’ — Angbang plus Dalian Wanda, Fosun International and HNA Group — that have expanded rapidly via debt-fuelled foreign acquisitions.

That quartet that accounted for 20% of Chinese foreign acquisitions in 2016. Also, there has always been a nagging suspicion that, given the quartet’s political connections, some of this M&A acted as a conduit for senior officials to get their money out of the country.

All have been ‘urged’ to sell assets and pay down their debt while state banks were told to rein in their lending to them. In January, the chairman of the Banking Regulatory Commission, Guo Shuqing, warned that ‘massive, illegal financial groups’ posed a grave threat to financial reforms and the stability of the banking system and that China would address the issue ‘ in line with the law’.

Taking Anbang into state control may be the prelude to a series of moves against the layer of private conglomerates below the ‘big four’, a group of some 25-30 companies said to be in the regulators’ sights. Despite or perhaps because of his connections, Wu’s treatment, in particular, is intended to show that no tycoon is immune from being ‘deterred’ from risky borrowing and investment overseas, or from being reminded that private M&A strategies should be integrated with national investment priorities.


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China And The United States: Reverse Merger

US President Donald Trump and China's President Xi Jinping walk in the grounds of Trump's Mar-a-Lago resort in Florida, April 2017.

SINCE AT LEAST World War 2, the lodestar of US foreign policy has been to steer authoritarian regimes towards norms of free-market democracy on the American model through engagement backed by the United States’ economic and military supremacy.

On basic empirical measures, the policy has been successful. In 1946, there were 21 democracies; today there are more than 80. The number of people living in democracies has risen to more than 4 billion from 385 million over that time, and the biggest authoritarian empire of the second half of the 20th century, the Soviet Union, has collapsed.

US President Donald Trump has thrown out that notion. He has declared that engagement with authoritarian regimes, including China, and perhaps particularly China, to bring them into convergence with the international system does not work for the United States, but diminishes it.

He has thus reverted to the late 19th century-early 20th-century view of international relations as a contest between great-power nation-states in the pursuit of national interests, with hard power being the final arbiter. This is what students of international relations call realism. They contrast its competitive and conflictual nature to the cooperation and shared values emphasised by liberalism.

The America First agenda on which Trump campaigned for office was a clear exposition of realism. The Trump presidency has now enshrined that as policy. Three newly published documents, the National Security Strategy (NSS), the Pentagon’s National Defense Strategy (NDS) and the US Trade Representatives annual report on China’s WTO compliance, lay out that sea-change in America’s stance in the world.

As far a China goes, it is now declared a revisionist power and a geostrategic rival along with Russia, Iran and North Korea.

It has been a policy switch in the making since the September 11, 2001 attacks on New York and Washington. The United States then started to act unilaterally to overthrow regimes perceived to be hostile through military intervention or the encouragement of local uprisings in Europe, Asia and the Middle East.

That was followed by the challenge that the global financial crisis of 2008 posed to both the Western model of free-market capitalism and the underlying assumption that the US was the nonpareil of economic strength.

The decade since 2008 has opened space for China to demonstrate that it has an alternative economic model — and one that is appealing to many regimes in as much as it came without the accompanying baggage of political liberalism. In place of untrammelled free trade, free capital flows and large-scale cross-border migration, China offered a model that uses markets to allocate some resources but in which the state continues to run the economy (and in China’s case the Party also runs the state).

The United States’s new NSS suggests this model of state-run capitalism has cost the United States hundreds of billions of dollars a year of commercial technology conveyed to China as a result of either the openness of the economic relationship on the US side or, as the Trump administration prefers to emphasise, through plain theft.

Trump has declared that that will stop. He repeated his intention in his first State of the Union address last month and has already made it evident by tariffs imposed on solar panels and refrigerators and stricter screening of inbound foreign investment on security grounds. (China has already countered with an investigation into alleged US subsidies of sorghum grain.)

Trump has said he has held off on more punitive trade actions against China only because he needs its help on pressing North Korea’s leader Kim Jong-un to halt his nuclearisation programme.

This year is likely to test Trump’s patience in this regard, especially as this is a Congressional election year in the United States. The political support base that Trump needs to mobilise in the Republican cause, and particularly deindustrialised blue-collar workers, believe China to be the cause of everything ill that has befallen them. He will need to rile them up to vote.

The critical question about the trade measures that Trump takes against China — and it seems a matter of when not if — is their scope; whether they are narrow and targeted, say, anti-dumping duties on specific products such as types of steel and aluminum, as recommended by the US Commerce Department last week, or broad and sweeping, such as high duties on virtually anything shipped from China and a blanket ban on inward Chinese investment to the US.

If it is the former, the damage to the global economy (and US multinationals’ supply chains) would be containable; if it is the latter, the damage could be considerable.

The latter might satisfy Trump’s appetite for ’fair trade’ but at a massive cost to both the US and global economies.

As national security is the other pillar of Trump foreign policy, the proposed build up the US military and the expansion of the US nuclear weapon arsenal is also aimed at China. It has elicited the expected denunciation by Beijing, which accused Washington of reverting to a ‘Cold War mentality’.

It would be a mistake to regard the shift in US policy towards China as being particular to Trump. The latest issue of Foreign Affairs, the house journal of the blue-chip US foreign affairs think tank, the Council on Foreign Relations, carries an article entitled the The China Reckoning. The authors, Kurt Campbell, a former senior Obama-era official the State Department, and Ely Ratner, a former deputy National Security Advisor to the same administration, and who thus would both have been involved in President Barack Obama’s ‘Asian pivot’, write:

Neither carrots nor sticks have swayed China as predicted. Diplomatic and commercial engagement have not brought political and economic openness. Neither U.S. military power nor regional balancing has stopped Beijing from seeking to displace core components of the U.S.-led system. And the liberal international order has failed to lure or bind China as powerfully as expected. China has instead pursued its own course, belying a range of American expectations in the process.

This shift of position is also endorsed increasingly by US business, which has hitherto has been a strong advocate of engagement to open China’s vast and growing market to foreign trade and investment.

One of the intangible dangers in the new policy is the possibilities of missteps and missignalling resulting from a weakening of working relationships between officials at all levels. Many agency-to-agency channels built up over the past decades are on hiatus, and relatively few US officials are visiting China (or anywhere else). Of the high-level government-to-government economic dialogues only the military-to-military one appears still to be open, mostly on account of the need for channels on North Korea.

More broadly, the new policy will also likely reverse the long-standing practice by the United States of making unlimited provision of visas to Chinese journalists, researchers and students to visit, work and study in the United States while China strictly regulates the flow of their American counterparts in the opposite direction.

FBI director Christopher Wray told a US Senate Intelligence Committee hearing last week that Chinese students could be a threat since they could be gathering intelligence for China while studying in the United States.

A cutback in the number of foreign graduate students studying or researching in science and technology disciplines is under consideration by the White House as the FBI now considers them an intelligence risk. Wray told the Senate committee:

One of the things we’re trying to do is to view the Chinese threat as not just a whole of government threat, but a whole-of-society threat, on their end. And I think it’s going to take a whole-of-society response by us. It’s not just the Intelligence Community, but it’s raising awareness within our academic sector, within our private sector, as part of defense.

Wray also said that his agency was monitoring ‘warily’ the Confucius Institutes. The risk to the bilateral relationship is that such investigations stoke xenophobia public sentiment against Chinese activities in the United States.

Beijing’s soft power campaigns to influence politics and civil society abroad are also likely to fall under greater US suspicion, especially in light of the Mueller investigation into Russian attempts to interfere with US elections.

For its part, Beijing no longer describes its policy objectives in terms of convergence with international norms. Instead, it emphasises the differences brought by doing everything ‘with Chinese characteristics’. It has been building an alternative architecture, such as new multilateral mechanisms like the Asian Infrastructure Investment Bank and the Belt and Road Initiative, even as it continues to seek more influence in existing institutions such as the IMF, WTO and United Nations.

Beijing has been taking a more aggressive foreign-policy posture since 2008 when it believed it saw a United States entering into a period of accelerating relative decline which created an opportunity for it to act more assertively on the global stage. This posture has intensified since Xi Jinping’s rise to power in 2013. In particular, it has become more transparent about its desire to displace the United States as the preponderant regional power.

Two examples that are cases in point: island building and increasing military deployment in the South China Sea to reinforce China’s claims over the waters and resources off its eastern coasts; and its disruption of trade and tourism with South Korea following Seoul’s decision to permit deployment of the US THAAD missile defence system.

That goes hand in hand with the modernisation of the People’s Liberation Army, and particularly the PLA-Navy, which, eventually, will challenge US naval control of the Western Pacific.

There is a certain irony in two powers pursuing their national interest using not dissimilar mercantilist and military-minded means. China and the United States are following a similar model, though perhaps in not the way round that Washington had for so long imagined.


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