China 2012: A Year in Review

China 2012: A Year in ReviewThe November accession of new figures to the very top political posts in the People’s Republic of China, and the re-election of U.S. President Barack Obama, have naturally given rise to a deluge of pregnant speculation over the future of U.S.-China relations and the future roles each country will play on the global front.

Since Deng Xiaoping launched China on the road to “Reform and Opening” in 1978, the two countries have grown densely intertwined. China is now the world’s second-largest economy, and will likely become the largest within 20 years.

As China has integrated with the world economy, the ranks of the world’s largest banks and biggest corporations each year include more and more PRC firms. The Chinese export engine, built originally on a foundation of low-cost labor and astounding infrastructure investment, penetrates the lives of all Americans, every day, and China appears bent on raising itself rapidly up the value-added curve.

China and the United States have also developed into crucial trading partners for one another. China’s holdings of U.S. government debt are both large and legendary, and no country comes anywhere near China in terms of the rate of growth of U.S. exports each year. Meanwhile, American companies have billions invested in China, increasingly including the development of sophisticated R&D centers and manufacturing facilities aimed at China’s massively expanding domestic markets.

There are dark sides, as well. The recent near-hysteria over China in the U.S. election season, while ultimately representing a colossal waste of money with virtually no meaningful impact on political outcomes, offered a peek into the dangerous potentialities of the “foreigners don’t vote” syndrome in American politics, and China was distinctly not amused at being both candidates’ punching-bag of choice. It was no accident that Politico recently named the Romney television ad in Ohio claiming that Chrysler was preparing to shut Jeep production in Ohio and move it to China as the single worst lie of the 2012 campaign.

On the Chinese side, the PRC is wandering through a murky mixture of triumphalism and victimization, proudly and sometimes crudely announcing to itself and the world that it has arrived as a great power, all the while complaining that “Western Forces,” meaning the United States above all, are bent on “containing” China and preventing it from realizing its full, historic destiny. Ugly PRC-U.S. frictions play out, above all, along China’s periphery, where the American redirection of military assets to the Asia-Pacific region has set Chinese teeth on edge and the two countries are busily engaged in competitive efforts to woo the smaller countries of the region into networks of special economic ties that leave the perceived great power rival out in the cold.

Moreover, in spite of the myriad official dialogues, cooperative agreements, and commercial business between the two (bilateral trade now exceeds half a trillion dollars a year, and both sides expect to see a rapid increase in Chinese outbound investment headed for the United States in the near future), a kind of malaise has set in between the two countries.

The malaise takes the form of a growing cynicism, an increasingly reflexive distrust, an increasing sense on the part of American companies and their political supporters that a newly strengthened China is stacking the legal and regulatory deck against American firms in favor of specially-privileged Chinese “national champions,” and – perhaps most ominously – a deepening “security dilemma” between the American and Chinese militaries, by which each side raises the ante against the other in an unending cycle of defense moves, ringing alarm bells, and counter-moves.

Thus, when Xi Jinping and his six fellow members of the CCP Politburo filed onto the Party Congress runway on December 14, American reactions were mostly cool.

The entire spectacle of the Congress, of course, gave people every reason to expect that the PRC’s political system would remain frozen, locked into the rituals of its Leninist-Stalinist past and into the factional and interest-group power struggles (usually opaque to outside observers) that had been hinted at by the towering scandals of 2012. Even if Xi himself were at heart a worldly and reform-minded individual, Western observers pointed out, the fact remains that the two most clearly progressive Party figures who might have made it to the Standing Committee (Wang Yang and Li Yuanchao) were left out in the end. Meanwhile, the six who did seem to be dependable products of a political career system tailor-made for crushing creativity or any inclination toward greater political liberalization.

Now, a month into Xi’s incumbency, and three months before the top levels of the Chinese government leadership (as distinct from the Communist Party) move to new hands (new premier, new vice premiers, new State Council, probably some far-reaching institutional reorganizations and consolidations), people inside China and elsewhere are beginning to wonder whether, after all, some real changes might be in the wind.

It is no secret, in fact, that plenty of thoughtful people have publicly expressed the view that China needs big new changes, and right away. There is a raging debate about what is needed, but almost all serious observers would agree that China’s very success over the past 30 years has changed the world around it and created daunting new challenges domestically. Worrying about the “middle income trap” is a breakfast table standard by now, and “reform” is on many minds in China; and is well established in the rhetoric of China’s top leaders. Points for conversation and debate typically include:

  • China’s population leveling off and the working-age population at the brink of contraction
  • Wages rising so fast that China faces a critical loss of competitiveness at the labor-intensive end of the spectrum
  • China approaching the point where massive new capital infusions – and even infusions of foreign technology – will yield diminished returns
  • Environmental degradation posing existential threats
  • The struggling world economy less likely than before to absorb unending floods of Chinese products
  • The need for an effective introduction of a very different economic model

In these early weeks of his incumbency, Xi Jinping has gotten off to a striking start, at least in the realm of symbolic speech and action. Short meetings, lunch in the cafeteria, unscripted remarks instead of the standard eye-glazing wooden orations of his predecessors, taglines about the uselessness of “empty talk,” a visit to Shenzhen (the symbolic starting point for Deng’s 1992 re-energizing of the “Reform and Opening”), and a ringing affirmation that “Reform and Opening” will persist and expand. All of these early activities are sounding the right notes.

Even a smattering of the habitual skeptics are allowing themselves to wonder whether, this time, things might be different. One large question, though, is whether or not Xi will be able to define workable priorities, align the political forces needed to accomplish those priorities, overcome China’s deep-seated historical pathologies (localism, bureaucratic particularism, corruption, regional economic disparities, and so on), and revivify progressive reform in his sprawling nation.

To do all this, he must at the same time recreate, or at least deepen, the Chinese people’s sense of belonging to a great national effort – their sense of shared commitment to a cause greater than their personal and private concerns. He has started, rhetorically, in that direction with a heralded address about the “Rejuvenation of the Chinese Race” and realization of “The China Dream” (both elements of which skirt perilously close to the increasingly cheap and disingenuous theme of China’s continuing victimization at the hands of predatory foreigners).

Time will tell, and it will tell quickly. Certain issues will not wait. In particular, the Bo Xilai case, which exposed just how degraded the Chinese political system had become, and other outstanding cases of official abuse, will have to be dealt with in the very near term. How they are dealt with will speak volumes about whether system-changing “reform” might actually proceed.

But, again, the early signs are more promising than what the ho-hum crowd, both inside China and abroad (very much including American analysts in the media, the think tanks, and perhaps in the U.S. government), were thinking before the new leadership stepped into the spotlight.

And if it turns out that Xi and his companions really are determined to and capable of re-launching progressive economic, social, and (ultimately) political reforms within the PRC, in my view, prospects for a revitalized and productive engagement between China and the United States – an engagement absolutely crucial for global stability and the future of the planet – will in turn become brighter than many of us in recent years have expected.

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The Contributor

China Briefing hosts a wealth of business intelligence on legal, tax, and operational issues in China from a practical perspective. Knowledge, expertise and commentary for China Briefing is regularly contributed by Dezan Shira & Associates´ professional legal and tax staff. Currently located in Futian district, Dezan Shira & Associates has been assisting foreign companies in Shenzhen for 22 years.

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