Red Flags: Why Xi’s China Is in Jeopardy

271 Pages·2018·1.88 MB·English

by  George Magnus

RED FLAGS

Copyright © 2018 George Magnus All rights reserved. This book may not be reproduced in whole or in
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10 9 8 7 6 5 4 3 2 1
To Lesley, Daniel, Kerri and Elias, Jonathan, Rachel and Ben
CONTENTS
Acknowledgements

Introduction
1 Echoes
2 From Mao to Modernity
3 The End of Extrapolation: Rebalancing and Reform
4 Debt Trap
5 Renminbi Trap
6 Demographic (Ageing) Trap
7 Middle-Income Trap
8 Trade Dogs of War
9 The East Wind Prevails Over the West Wind
10 Xi Jinping’s China

Endnotes
Select Bibliography
Index
ACKNOWLEDGEMENTS
While writing this book, I was driven to emphasise at various points that
President Xi Jinping’s China was turning out to be different from the China that
most of us have known for the last twenty to thirty years. None of us can know
now whether he will be the equivalent of a good or bad emperor, but the one
thing we can say with some certainty is that the outlook for Xi’s China cannot be
drawn with lines from the past: it has reached the end of extrapolation. In a
rather curious way, then, I feel I owe a small debt of gratitude to President Xi,
because he has inadvertently added some frisson to my title. It is his China, and
he will take all the credit or shoulder all the blame for whatever happens on his
now extended watch.
I wanted to write an accessible book about the prospects for and challenges
facing Xi’s China because, as the twenty-first century matures, I think we all
need to understand more about the Middle Kingdom. Regardless of what
happens, it will certainly play a prominent role in shaping the world and
affecting our lives and those of our progeny. It all came together thanks to some
important recent developments in China, and two meetings.
In 2015–16, China succumbed to significant financial and economic
turbulence. Until then Xi Jinping hadn’t paid much attention to economic
matters, but in the spring of 2016 I was visiting China when the now well-known
‘authoritative person’ front-page interview in the People’s Daily appeared,
warning that China had to change course. Speculation about the person’s identity
centred on Liu He, then head of the National Reform Development Committee,
and now vice premier and in charge of economic and financial affairs overall.
Everyone knew the intervention was important. At the same time, speculation
about the following year’s 19th Party Congress was starting. It felt at the time as
though important changes in China were afoot. And so it has proven to be.
The decision to get on with drafting emerged during a typically convivial
lunch with HSBC’s senior economic adviser, Stephen King. Stephen is a wise
and thoughtful economist, and when he revealed the title of his forthcoming
book, Grave New World (published by Yale University Press in 2017), I thought
this was one of the most inspired non-fiction titles I’d ever come across. I had a
chronic case of title envy, and try as I did to find a comparable play on great
titles applied to a China book, it eluded me. Nevertheless, it spurred me to get on
with the organisation of my own ideas and start writing.
Soon after, I had a meeting with Taiba Batool, commissioning editor at Yale
University Press, who approached me to discuss the possibility of writing
something that would slot into the company’s economic book series. The last
piece of the jigsaw fell into place, and the die was cast.
At various points in the drafting, I sent longer or shorter parts of the book for
comment to a few people, who kindly responded with helpful suggestions,
reminders and corrections. Guy de Jonquières, former Asia and trade editor of
the Financial Times, and now senior fellow at the European Centre for
International Political Economy, ploughed through the whole of an early draft.
Victor Shih, political economist at the School of Global Policies and Strategy at
the University of California, San Diego, and Chris Balding, formerly associate
professor at the HSBC Business School in Shenzhen, also provided useful
comments and tips on considerable sections of the book. Taiba Batool also
laboured through the later drafts of the book offering her own expertise and
suggestions to improve the content, flow and sequencing. A draft of the book
was also sent out to three expert readers, who were anonymous to me, but who
all reverted with comments that gave me cause for thought, and the opportunity
to sharpen up. Thanks are also due to Rachael Lonsdale for her editing labours,
and Ruth Killick for her work on promotion.
I would also like to acknowledge some of the many people whose thinking
has contributed to the formation of my own understanding of China’s politics
and economics. I am deeply grateful to Rana Mitter, director of the China Centre
at Oxford University, and Steve Tsang, director of the China Institute at the
School of Oriental and African Studies (SOAS), both inspirational academics
who took me on as a research associate. Also Bob Ash at SOAS, still imparting
wisdom and who taught there when I was doing my MSc many years ago.
Others whose work, thinking and counsel I have always held in the highest
esteem merit an important mention. Jon Anderson, a former colleague at UBS,
who was the China, later emerging markets economist, runs the Emerging
Advisors Group out of Shanghai. Simon Ogus, who was the head of Asian
economics at Swiss Bank Corporation when it and UBS merged in 1997, was
briefly a colleague before leaving to do a doctorate and then run DSG Asia out
of Hong Kong. I never tire of reading and listening to Michael Pettis, a former
trader turned professor of finance at Peking University’s Guanghua School of
Management, whom I have met at events in fancy hotels and in his hutong in
Beijing. Joerg Wuttke, permanent representative of BASF in China, and former
head of the EU–China Chamber of Commerce in Beijing, has been a never-
ending source of business and political insight.
It has also been and remains my privilege to attend a regular series of China
lunches in a private upstairs room in a Chinese restaurant in Soho, which is
much less clandestine than it sounds, organised by Guy de Jonquières. The
assembled wisdom of the attendees, who include Mick Cox, Jonathan Fenby,
Roger Garside, Isabel Hilton, Christopher Hum, Nigel Inkster, Charles Parton,
James Richards, Stein Ringen, Geoffrey Yu and Jie Yu is humbling and highly
informative.
To all of these individuals, I would like to record my thanks for sharing their
China acumen with me at various times and in different ways. I have benefited
enormously from our exchanges and interactions, and absolve each and every
one from any errors or misunderstandings in the book, which are, of course,
mine entirely.
Finally, I should like to thank Lesley, my wife, for her love and unswerving
support, especially during the researching and writing of the book, and my
children, Daniel, Jonathan, Rachel and Ben, for their love and humour, often at
my expense. I am sure I am not the only author to succumb to phases of tedium
when the going gets tough, and when social skills become rather blunt. Lesley
fully deserves my thanks for her endearing irreverence, and for keeping her head
while I may have been losing mine.
London, June 2018
INTRODUCTION
In less than forty years, China has quintupled its share of global output, and
transformed itself from a poor country and source of cheap toys and textiles to a
fierce competitor in high-end manufacturing, advanced technologies and military
might. It is the dominant power in Asia and a rival and adversary of the United
States. Xi Jinping, who is general secretary of the Communist Party, chairman of
the Central Military Commission, and president of China, is now one of the most
powerful political leaders in the world. He insists that the primacy of the Party is
indispensable to developing China in the twenty-first century and managing its
growing footprint overseas. If his health holds and his opponents stay subdued,
he could remain a strongman president for life.
Whilst economists and China-watchers have been well aware of the global
consequences of a rising China for some time, Xi’s China is going to resonate
much more for all of us in future. If, as several Chinese thinkers now assert,
China stood up under Mao Zedong and got rich under Deng Xiaoping, it is
becoming powerful again under Xi Jinping, who articulates that China’s troubled
twentieth century now lies firmly in the past as the Communist Party under his
leadership pursues the great rejuvenation of the Chinese nation, based around
‘socialism with Chinese characteristics’. Under Xi, China has become more
controlling, more confident and more assertive. Driven by its own sense of and
pride in millennia of history, it is determined to ‘take back’ its place in Asia and
the world, and consign to history forever what it calls its ‘century of
humiliation’. This was the period from roughly 1840 to 1949 during which
imperial powers fought wars and settled in China, imposing what the Chinese
argue to have been harsh economic punishment.
Now economically strong enough to leverage geopolitical power, China’s
cause has been aided and abetted by President Trump, who is pulling the United