China’s economic downturn could get nasty

Newswire - Dr. David Asher

How might China’s economic downturn impact Japan, the US and the world? Beacon Reports editor-in-chief Richard Solomon put that question to one of the leading experts in the subject, Dr. David Asher.

Dr. Asher is Adjunct Senior Fellow at the Center for a New American Security based in Washington D.C. He provides thought leadership to the US diplomatic, military, law enforcement, intelligence and financial communities. He is a historian, holding a Ph.D. in international relations from Oxford University with a specialization in economics. He took part in the Six Party Talks to end North Korea’s nuclear program involving the US, China, Japan, North and South Korea and Russia. A former resident of Japan, Dr. Asher offers our readers a chilling insight into the geopolitical risks of an economically faltering China.

Dr. Asher began by recounting the story of when he once asked a senior Chinese official how China managed its economic policy, given the nation’s wild real estate bubble. The Chinese official said that he felt as if he was riding a tiger and then asked the rhetorical question, “Do you know what the problem is with riding a tiger?” After a pause the official answered, “When you fall off, the tiger eats you.”

Dr. Asher is concerned about what Communist Party officials might do to save their own skins in a severe and prolonged economic downturn. Official statistics suggest Chinese economic growth slowed to a rate of 6.9%. He reckons the real growth rate may be much lower, based on the unreliability of statistics in service industries, which increasingly underpin China’s economy.

China has huge productive overcapacity and not enough industrial growth. At the same time the nation is experiencing a significant downturn as its leaders try to rebalance their economy. Massive amounts of official and shadow lending are also being channeled into asset markets to support the financial system – just as loan demand is collapsing. Similar state directed lending has caused chronic real estate vacancies and factory overcapacity. Rather than let capitalist forces adjust these imbalances, Dr. Asher believes the Chinese government simply ignores or covers it up.

He’s afraid that China’s transition to a service-based, consumption led economy will not be successful. There may be a temporary respite because of interest rate cuts, but he thinks eventually statistics will catch up with reality. A real growth rate of 3% – 5% would be “an absolute threat” to Communist Party stability, he warned.

“Do you know what the problem is with riding a tiger…? When you fall off, the tiger eats you.”

Should China begin to unravel, Communist Party leaders might be tempted to divert attention from economic problems to unify the nation in a way consistent with the Communist Party’s main doctrine – to reclaim territories lost in the historic past. These include Taiwan, the Korean Peninsula and the maritime domain of the South China Sea.

“Chinese leaders are riding an economic tiger that represents an internal threat to the stability of Communist Party rule,” said Dr. Asher adding, “At the same time they are doing what other leaders in similar situations have done in the past by stirring up nationalist senses of grievance and injustice – in their minds fully justified – that underlies the potential to take action.”

For example, China might reclaim Taiwan in a similar way that the Russians annexed Crimea in 2015. Such ‘anti-imperialism retracement’, is fully justified under Communist Party doctrine. It seeks to reverse the historical injustices imposed by imperialist nations (i.e. the US and especially Japan). The apocalypse of 1894, when China lost control over Taiwan and the Korean Peninsula to the Japanese during the First Sino-Japanese War, “never escapes the minds of senior Chinese policymakers on a daily basis,” he said.

Never mind that China has greatly benefited from the US’s policy of benign hegemony, which has allowed globalization to flourish for nearly five decades. Despite the income inequalities which remain, free trade, capitalism and democracy have enhanced global growth to greatly lift people’s livelihoods worldwide – including those of the Chinese people. China’s ‘economic miracle’ lifted half of its urban population from poverty into the middle class. This was only made possible through the Communist Party’s embracement of foreign trade and foreign direct investment under the US alliance system.

“Chinese leaders are riding an economic tiger that represents an internal threat to the stability of Communist Party rule.  At the same time they are… stirring up nationalist senses of grievance and injustice that… underlies the potential to take action.” 

Yet rather than support the prevailing alliance on which Communist Party survival depends and which arguably has prevented World War III, they are challenging it. For example the Chinese reject their role as global stakeholders. “We tried to talk to them…They never responded to our inquiries… They would rather just give us lectures why they should be able to control Taiwan,” recalled Dr. Asher, who at the State Department participated in a number of mind-numbing strategic dialogues with the Chinese.

Worryingly, China is using its newfound power and wealth to militarize. It is building a formidable blue-water navy and parading “incredible” new weapons of war that can strike US and Japanese aircraft carriers with hypervelocity and precision. Many were paraded for the first time in Beijing during the 70th anniversary of Japan’s surrender at the end of World War II. At the same time Chinese government backed websites published simulated pictures of missiles striking US aircraft carriers.

Of particular alarm during the parade was the 121-step march by the Communist Party’s official guard of the People’s Liberation Army. The march recalled the Chinese sense of injustice and deprivations of the past. Each step signified one year since the beginning of the Sino-Japanese War in 1894, which ended with China’s losing control over Taiwan and the Korean Peninsula.

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Another cause of worry are three 9,000 – 10,000 ft airfields able to land military aircraft that China is building on newly made reef-constructions in the South China Sea. The artificial islands are roughly halfway between Taiwan and Guam on which much of US strategic capability is based. Dr. Asher believes the Chinese are creating the perception that they can cut off America’s capacity to defend Taiwan and the Korean Peninsula.

He calls their construction ‘reefer madness’, noting that the Chinese are trying to change the status quo balance of power. “It’s very provocative and worrying,” he said. Should Taiwan pro-independence Democratic Progressive Party leader Tsai Ing-wen win January’s general election and act on pledges to increase political distance between itself and the mainland, the Chinese “might have something to say about that,” said Dr. Asher. China could intervene after 2017 when the reef-based airfields are expected to be fully operational.

“We should be thinking about the incredible dangers that exist ahead of us, not in the long-term distance but in the immediate to medium-term that could set back everything we’ve built… and send it back decisively and destructively.”

Less probable, but still of concern, is the fate of the Korean Peninsula, already well under Chinese sphere of economic influence. While South Korea distrusts China, it finds the prospect of a united peninsula very appealing. Dr. Asher thinks it unlikely that China would take the peninsula back by force. However, it might try to orchestrate a plan for reunification by 2065 on terms acceptable to both the North and South. That could be a problem, should the plan not alter the North’s regime enough or leave its nuclear weapons intact for the supposed benefit of a unified Korea. It would be a “massive threat to the long-term stability of the US and Japan,” thinks Dr. Asher.

Should a faltering economy cause China to challenge the US-Japan alliance by restricting freedom of passage through the South China Sea or by testing US commitments to its allies, Taiwan or Korea, the entire strategic balance of power – the system the US created after World War II – could unravel. The likelihood may not be high, but there are good reasons to expect the unexpected in the next 24 to 36 months. “Investors aren’t thinking about it at all,” he said.

More broadly, the US alliance is being challenged on multiple fronts in the South China Sea by the Chinese, in the Gulf by the Iranians and the Russians, and in Eastern Europe by the Russians. If not properly addressed, the entire alliance system could fracture. “Our hegemonic credibility is weakening very rapidly,” said Dr. Asher.

He thinks the world could be nearing the end of a peaceful 70 – 80 year cycle, as complacent hegemonic powers and the dawn of new weaponry cause ascendant nations to believe they can upset the balance of power and not be subject to severe retaliation.

“We should be thinking about the incredible dangers that exist ahead of us, not in the long-term distance but in the immediate to medium-term that could set back everything we’ve built…. and send it back decisively and destructively,” Dr. Asher cautioned. “We need to look ahead and not backwards (to pre-1945). That should apply to China, Korea, Taiwan, Japan and everybody.” There is no time left to debate historical wars when the potential for new, massive, and destabilizing conflict is on the horizon. 

Listen to the podcast of the full interview

David Asher Bio 640

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