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Will China's Economic Collapse Save the South China Sea?

"So the silver lining in China’s economic maladies is that Asia’s new sick man is not as threatening as when he was strong."

Minxin Pei
August 27, 2015
 

Premier of the State Council of the People's Republic of China Li Keqiang, China's head of government and one of the leading figures behind Chinese economic policy (Image: Wikimedia/Marcelo Camargo/Agência Brasil)

Not too long ago, the Chinese economy appeared to defy both gravity and doomsayers. Despite years of unbalanced growth, Beijing has managed to rely on investment to power its economy and keep growth high. The country’s binge on credit since 2009, which has brought the debt-to-GDP ratio close to 300 percent, a perilous level for an upper-middle income country, has not triggered a financial crisis. Its real estate bubble, perhaps the largest the world has ever seen in terms of completed but unoccupied residential housing, is leaking air but has yet to crash totally.

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On the economic front, China has committed over $100 billion to capitalize the Asian Infrastructure Bank (AIIB), the New Development Bank, and the New Silk Road Fund, a set of financial institutions and vehicles designed to extend Chinese influence abroad and actively compete against existing international financial institutions such as the Asian Development Bank and the World Bank. In the developing world, China has also bet heavily on exploiting natural resources and large infrastructure projects. In Latin America, China has loaned out nearly $120 billion since 2005. In Africa, Chinese investments and development loans are estimated to have exceeded $100 billion. Faced with a rival backed by nearly $4 trillion in foreign currency reserves, all the West could do was to worry privately but complain publicly about China’s inadequate environmental and human rights practices in its investment activities abroad.

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Now that China’s economic engine is finally stalling and its weaknesses are inescapably visible, the obvious question is whether China can continue to sustain its assertive foreign policy. Based on past Chinese behavior and existing hard constraints, it seems that, if there is anything positive coming out of China’s economic unraveling, it will be a less assertive foreign policy.

Despite the enormous foreign policy risks taken by President Xi Jinping, cautious pragmatism has been the modus operandi of Chinese leaders in the post-Mao era. Xi’s three predecessors, Deng Xiaoping, Jiang Zemin, and Hu Jintao, were all keenly aware of the disparity of power between China and the West, particularly the United States. As such they made substantial foreign policy concessions when China’s economic weakness dictated a cooperative foreign policy. For example, Deng did not allow the issue of American arms sales to Taiwan to block the development of U.S.-China commercial relations. Jiang exercised enormous restraint over the Taiwan issue in the late 1990s so that the United States could support China’s entry into the WTO.

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Most importantly, continuing economic weakness will necessitate redeploying China’s limited financial resources to sustain domestic growth. Since the Communist Party’s rule rests on its economic performance, if President Xi is forced to choose between external glory and regime survival, no one should doubt which choice he will make.

So the silver lining in China’s economic maladies is that Asia’s new sick man is not as threatening as when he was strong.

Minxin Pei is the Tom and Margot Pritzker ’72 Professor of Government at Claremont McKenna College and a non-resident senior fellow of the German Marshall Fund of the United States.

http://www.nationalinterest.org/

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