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2017 May Be The Year China’s Chickens Come Home To Roost


Before China’s paramount leader, Deng Xiaoping (1904-1997), passed away, he left a four-word Chinese idiom: Tao Guang Yang Hui(韬光养晦, which is roughly translated to “be humble with your strength and focus on overcoming weaknesses,” as a strategic policy guidance for his successors. Like many Chinese words, this four-word idiom has multiple meanings.

Deng probably hoped future Chinese leaders would be humble and restrained, keep a low profile, and instead of broadcasting China’s ambitions or showing off China’s economic or military muscles, quietly focus on overcoming China’s weaknesses, such as economic development. In international affairs, Deng probably would have liked to see China avoid acting like an aggressor. Instead, he would have preferred China shun either causing any international conflict or serving as a leader of any faction within an international conflict.

When Deng passed away in 1997, China was still in its first decade of economic reform and its per-capita gross domestic product was less than $800, so the kind of restrained policy approach he advocated made perfect sense. No one knows how long Deng intended for this policy guidance to last. But Deng’s successors, from Hu Yaobang to Hu Jingtao (they aren’t related), pretty much followed Deng’s policy guidelines until President Xi Jinping assumed power in 2012.

No More Humility and Restraint

It seems President Xi has abandoned Deng’s strategic policy guidelines. On the domestic front, he focused on ensuring his power by purging many political rivals through the anti-graft movement. In October, he was declared the “core” leader of the Chinese Communist Party, a title last used by Chairman Mao.

He coined the term “China dream” to counter “American dream.” While “American dream” is about any hard-working individual living to his or her full capacity in a free society, “China dream” means Chinese people can only live a better life by subjecting themselves to the Communist Party’s absolute rule. Under President Xi, the Chinese government has ruthlessly cracked down on dissidents, including Chinese nationals and foreigners, and China has become a much less friendly place to foreign investors and companies.

On the foreign policy front, China doesn’t lay low any longer. President Xi has been very vocal about China’s ambitions. He seems to believe that China’s rise to replace the United States as the next superpower is unstoppable and the time is now.

He sees at least two trends in his favor. First, there’s a consensus within the Chinese leadership and public opinion that the 2008 economic crisis has produced long-lasting devastating effects to the West: most countries in Europe are still struggling economically while the United States has experienced a very timid recovery. Since China emerged from the 2008 economic crisis relatively unscathed, many people, including Xi, believed that free market economics have reached their end and it’s time to adopt the Chinese-style authoritarian mercantile economic model. Thus, China should replace the United States to set a new economic order.

Second, based on a misguided belief that the world is a better place when the United States gives up its power and authority in a global system established since World War II, President Obama has been ready and willing to acquiesce America’s leadership in international affairs in the last eight years. President Xi quickly sized up president Obama as a weak leader, and sought to expand China’s influence and challenge America wherever opportunities rise.

For instance, President Xi deployed China’s newfound wealth (after decades of double-digit economic growth) to fund ambitious international economic and foreign policy projects, such as launching the Asian Infrastructure Investment Bank (AIIB), as a direct rival to the U.S.-led World Bank.

Despite an international outcry, China aggressively built islands in South China Sea and has now “installed antiaircraft weapons and other arms ” on all these islands. Mostly recently, the Chinese Navy seized a U.S. Navy’s underwater drone in international water before agreeing to return it later.

Along Comes Donald Trump

Then on November 8, Donald Trump was elected to be the next president of the United States. Once the initial shock of Trump’s winning passed, many people began to embrace the pro-growth policy ideas of Trump’s economic plan. The election seems to have unleashed the market’s animal spirit.

Since the election, major stock market indexes are trading at record levels. The Dow Jones Industrial Average index alone was up 8 percent since the Election Day and is less than 100 points away from reaching 20,000. The Wall Street Journal index of the U.S. dollar against 16 major trading partners hit a 14-year high. Many predict that the U.S. economy will experience a renaissance in 2017 and onward.

On the international front, Trump broke the historical diplomacy norm by first taking a phone call from the president of Taiwan and then questioning the one-China policy on national TV. Compared to some harsh criticism Trump received domestically, the response from China has been relatively restrained.

After poking China in the eye and sending shock waves around the world, Trump announced that he picked Iowa Gov. Terry Branstad, who has a long-running relationship with President Xi, to become his ambassador to China. Trump’s “carrot and stick” style one-two punches so far have kept everyone, especially China, guessing what exactly his strategic approach to China will be. But one thing almost everyone is certain is that a Trump presidency will be very different from the “pushover” Obama presidency.

While Americans embrace their reinstated confidence in both economics and international affairs, China seems to be going the opposite direction. Key economic indicators from fixed-asset investments to manufacturing output show the Chinese economy has been slowing down since 2012. Compared to average annual GDP growth rates of 10 percent in the 1990s and 2000s, the official GDP growth in 2016 is expected to be 6.7 percent, but many economists believe the actual growth is probably between 4 to 5 percent. Even this slowed growth rate has been largely pumped up by a lending spree that added about $1 trillion in new liquidity through China’s state-owned banks in the first quarter of 2016.

This type of credit-fueled growth has its limits. China’s outstanding debt reached a dangerously high level. China’s public debt stands at $28 trillion. At 280 percent of GDP, while manageable, it is larger than that of the United States.

China’s Economy Has Structural Problems, Too

A strong dollar and the rising interest rate in the United States sent the Chinese currency to its lowest level against the U.S. dollar in eight years. While a devalued Chinese Yuan helps stimulate China’s export sector, it also has exacerbated the capital outflow. In November, China’s foreign reserves declined by $69.1 billion to $3.05 trillion, the largest drop in 10 months (in 2015, $500 billion fled China). Despite Chinese authorities tightening capital controls in recent months, the better outlook of the U.S. economy, the economic uncertainty in China, and especially the continuing devaluation of the Yuan means more capital will fly out of China in 2017.

China’s stock market is still recovering from several severe crashes, including one at the beginning of 2016. China’s overheated property market built many ghost towns with tall buildings but no residents.

China’s labor force also began to shrink in 2013 due to the lingering effects of the 30-year-old one-child policy. China’s labor force is no longer the cheapest because hourly manufacturing wages in China have risen by an average of 12 percent a year since 2001.

As a $10 trillion economy with $3.0 trillion in reserves, China has a plenty of cushion against an economic downturn. There are also some economic bright spots, such as consumer spending holding up well. But a slowing economy, a devalued currency, and seemingly unstoppable capital outflow all point to the end of the road of the last three decades’ of export-oriented and credit-driven growth model.

The official Chinese New Year is January 28, 2017. According to the Chinese zodiac, it will be the year of the rooster. Maybe for China, this is the year when the chickens will finally come home to roost.