As far as cyber-warfare itself goes, there’s no question that both the US and China spy on one another. But whereas spying for national security purposes passes as fair game, the US has clearly reached the point where it sees intellectual property (IP) theft to gain economic advantage for state owned enterprises (in which the Peoples’ Liberation Army has strong interests) as a bridge too far. This sort of IP traffic is predominantly one-way, that is, into China. Much of it occurs through foreign companies’ investing in China, and is in keeping with the local long-standing strategy of ‘indigenous innovation’ under which China wants to be able to compete at the highest level of technological excellence.
But stealing IP in the ways alleged has clearly crossed a red line for the US. The tension over IP isn’t going to go away, because as the Chinese economy slows down further and has to restructure, it is going to rely more on technology and innovation to realise sustained growth in living standards. Although China has proven itself adept and competent in the production of high value manufactures and the incorporation of advanced foreign technologies, it is not yet regarded as a top dog in product, process, and organisational innovation and technologies.
The reasons are complex, but in a nutshell, they come down to weaknesses in the quality of institutions, and in the structure of legal, governance and tertiary educational systems. China boasts a leading global position, for example, in patent registrations and scientific journal publications, but these plaudits are rather overshadowed by a lowly position in cited patents and articles, and research and development effectiveness, and by allegations of duplication and fabrication. It is small wonder that China has become more assertive in its quest for IP, one area, at least, where the US retains a commanding global lead. But Chinese assertiveness is, of course, not confined to IP.
In international relations, China has been no slouch in pressing maritime claims in Asia, building bilateral relations across the emerging world, especially in Africa, and generally making its presence felt. The build up in incidents and tensions between China and its regional neighbours has been noted widely, but these simply comprise the most recent in a phase dating back to 2010—long before the US “pivot” in foreign relations away from Europe and the Middle East, and towards Asia—in which the conduct of Chinese international relations has become distinctly more truculent.
Most people know now of the periodic flare-ups between China and Japan over some disputed, uninhabited islands in the East China Sea known as the Diaoyu by China, and the Senkaku by Japan. No doubt, a more nationalistic Abe government in Japan has played a role too, but China has not shied away from playing the nationalist card either, and the South China Sea has also become a source of rising tension. China’s main maritime supply routes run across that sea, which contains not only many disputed islands but also potential oil and gas drilling opportunities. It is also a natural home for China’s steadily expanding navy.
In recent weeks, China provoked a violent reaction in Vietnam following the deployment of a gigantic oil rig in disputed seas. Not just a rig, in fact, but also a large flotilla of ships, helicopters and low flying aircraft to protect it, some of which have clashed with Vietnamese vessels. Vietnam’s Prime Minister, Nguyen Tan Dung, has threatened to take the Chinese action to an international court, following a case in which the Philippines took China to arbitration in the Hague in March over a challenge to China’s maritime claims.
Whether it is cyber-warfare or geopolitical muscle-flexing, it is hard not to conclude that China’s economy lies at the heart of these tensions—and in paradoxical ways. Economic strength has given China the ability to exert power, demand respect, and stake claims. But its behaviour in trying to gain economic and commercial advantage through corporate espionage, for example as outlined earlier, reveals a different story of economic weakness, or inadequacy. Popular stories about world class educational attainment standards by Chinese school pupils don’t gel with weaknesses at university level, or with equally popular stories about how those that can, send their children to university in the West. China’s economic strength has persuaded many people, both in the West and in emerging countries, that we are becoming increasingly dependent on China. But at the same time, China remains highly dependent on the rest of the world: for commodities and raw materials, for export markets, for technology, and on the US in particular for financial investment purposes. Being a great power that depends on the rest of the world for so much should make for a bit of humility, and certainly for some anxiety.
Anxiety is also fully compatible with the fact that China’s economy is going through enormous changes that could easily become disruptive, and even destabilising. They have certainly convinced Xi Jinping, China’s most powerful President since Deng Xiaoping, that the Communist Party’s continued rule and legitimacy depend on rebalancing the country’s economic model, disposing of political enemies and vested interests (the anti-corruption campaign), and putting China’s inflated credit and property genies firmly back in their bottles. The trouble is that all of these are leading the economy into a transition in which growth is bound to tail off.
Economic growth has already slowed down from 10-11 per cent a few years ago to about 7 per cent, and will most likely decelerate further to around 5 per cent over the next 2-3 years. perhaps even lower. Chinese property, including both residential and commercial, probably the most important sector in the world economy, is already in recession. Property investment, taking in steel, cement and other construction materials, now accounts for about 16 per cent of GDP, more than twice that of the US in 2007. The sector is suffering from increasingly transparent ailments, including over-supply, rising inventories, faltering transactions, and a growing incidence of falling prices and discounts. Just as property sector adjustment in the West has taken 5-6 years since the bust, so in China the full consequences will take years, not months, to transpire. Just as deleveraging in the Western world has been a painful but necessary process to endure, so in China it will happen and last some years.
Eventually, these changes could help to re-energise the Chinese economy, and all the more so if a growing and increasingly aspirational middle class were to find a political voice, and political and judicial reforms were ever to be embraced seriously. For the foreseeable future, though, such reforms are definitely not on the agenda. The primacy of Party and State remain central to all economic and governance changes. We should be prepared for a difficult economic transition with uncertain outcomes. This will be reflected in political leadership that is ostensibly strong, but anxious, uncertain and increasingly nationalistic underneath. Chinese leaders are surely not alone in this respect, but potentially erratic and unpredictable behaviour in wannabe powers has always been something to beware.
China's anxiety
May 23, 2014
