Editor’s Note: Over the coming days, The Cipher Brief presents some of our most incisive coverage on key issues of 2016 and a look ahead at what is yet to come in 2017.
The oppressive smog that overtook China in late December covered 3.9 million square miles, put 24 cities at their highest alert level, and forced thousands of factories to shut down until the toxic cloud dissipates. Events such as this, which pose risks to public health and economic output, are increasingly common, and highlight the costs of China’s growth and the challenges of sustaining its global rise.
In 2016 China maintained its growing power and influence while fending off international and domestic crises. Government intervention narrowly averted a stock market crash while the yuan won recognition by the International Monetary Fund as a global reserve currency—a long-held goal of the Chinese Communist Party (CCP). But while China made strides in its One Belt One Road (OBOR) and Asia Infrastructure Investment Bank (AIIB) soft-power initiatives that seek to place it at the center of global trade and financial networks, its manufacturing sector has begun to flag and its combined public and private debt has ballooned to 250 percent of GDP.
Beijing has slowly and inexorably added to its South China Sea claims—adding missile defense systems and airplane hangars to islands reclaimed from the sea—while dismissing the International Court’s ruling that China’s “Nine-Dash Line” is invalid and does not represent a legitimate territorial claim.
For China, this year has been characterized by economic strains and opportunities, growing regional tensions, and at the center of it all, the power consolidation of President Xi Jinping.
Xi Jinping: The Most Powerful Chinese Leader Since Mao?
China’s leader Xi Jinping began 2016 as President and General Secretary of the CCP. He has since earned the title of Commander-in-Chief and status as a “core leader.” Within the intricate and befuddling CCP, these titles signal a growing consensus behind Xi Jinping’s leadership and place him as the most powerful Chinese leader since Mao Zedong himself. His ongoing consolidation of power has localized more control within his purview, while also making the overall decision-making process in Zhongnanhai more opaque.
Xi’s consolidation efforts run concurrent with his drive to rid the CCP of corruption and largesse. While some experts see positives in this campaign—China’s bureaucracy has suffered from endemic corruption for decades—most also see it as a ploy to solidify his position for reelection at the 2017 Congress. With that reelection would come the ability to elect the seven members of the Politburo Standing Committee—the most powerful Party decision makers, second only to Xi.
But, with Xi’s greater standing and influence over Chinese policy, he will be held responsible not only for China’s successes, but also its failures.
Economic Strain and Opportunity
China began 2016 by officially overturning its “one-child policy” on January 1st. After decades of this 1979 population control endeavor, the reversal was an effort to stabilize a drop off in the working age population that would jeopardize China’s future economic – and therefore political – stability. Beijing believes this is key to maintaining economic growth into the future.
Weighing heavily on that effort is the question of how to transition from a manufacturing economy to a services economy. A combination of rising labor costs and low return on manufacturing and infrastructure investment—China must now borrow six dollars for every one dollar in GDP growth—means China must move its economy up the value chain. By advancing its OBOR and AIIB initiatives, China has positioned itself to be a global financial hub while shifting its manufacturing overseas where wages remain low.
This transition is threatened by a dependence on cheap credit. Despite directives from Beijing, provincial governments are finding it hard to break old habits, and use loans to drive growth into projects that are unnecessary. The glut in steel production and thousands of uninhabited apartment buildings illustrate how difficult it is to break old bureaucratic habits and to shift to a service economy that demands highly skilled labor and transparent regulations in order to run smoothly. If China cannot achieve its new economic goals as quickly as its manufacturing base loses its competitive edge, the debt bubble could very well burst.
The South China Sea
In 2016 China continued its land reclamation efforts in areas it considers to be under its sovereign control in the South China Sea. A total of nearly 3200 acres of land have been reclaimed since 2013, and the most recent evidence concludes that China has taken this one step further: advanced air defense systems installed on these islands signal to the international community that China intends on militarizing them. Additionally, China continues to invest in dredgers and white-hull coast guard ships to build and patrol its claimed territory.
While China is not the only country doing such reclamation—Vietnam and Taiwan do the same—the scale and resources that only China can bring to bear make others in the region nervous. China’s challenges to, and at times disregard for, the sovereign claims of other countries and to the UN Convention on the Law of the Sea (UNCLOS) pitted it against the Philippines in a landmark International Court case that ruled overwhelmingly in Manila’s favor this July. On the books, China lost the case, but its warm relations with new Filipino president Rodrigo Duterte, who appears indifferent to Manila’s win, so far shows Beijing has come out ahead.
China’s claims pit it against the interests of the United States, which is committed to freedom of navigation and the security of many treaty allies in the region. To this end, the U.S. has engaged in several Freedom of Navigation operations and flyovers in the South China Sea, much to the consternation of Beijing. As long as China and the U.S. remain committed to their respective interests, the region will remain a tense one.
Looking to 2017
Elsewhere in the world, 2016 brought unpredictable elections and referendums in Western democracies, a coup in Turkey, the ever-present danger of terrorism, alongside economic underperformance. But in the Middle Kingdom, despite the economic strains and continuous regional tensions, China under Xi Jinping’s Chinese Communist Party maintained a steady course in pursuit of its policy priorities.
There are no easy solutions for China’s problems, and now more than ever it must count on Xi to see through the haze.
Will Edwards is an international producer at The Cipher Brief. Follow him on Twitter @_wedwards.
