Tuesday, 19 April 2016

NZ, China and Xi Jinping’s emerging dictatorship

New Zealand Prime Minister John Key visited China as part of a 40-strong trade delegation this week, hoping to boost ties to Asia’s largest economy.

Chinese media, including Xinhua and the Global Times, warned any mention of the territorial disputes in the South China Sea during Mr Key’s stay could put at risk the improvement of trade ties. While Mr Key dismissed the media’s caution, it highlights China’s strengthening of state press control and helps obfuscate exactly what is happening in its economy.

The New Zealand delegation will hope its trade with China isn’t threatened by such propaganda, but it is nevertheless intriguing to watch the central two major trends in the country buffet the economic dreams of a country thousands of kilometres away in the South Pacific. In the future, New Zealand business will be dealing with a far different China than in the past decade, both economically and politically.

The official data helps paint the outlines for the first of the trends. The Chinese economy expanded 6.7% year-on-year for the first quarter, down from 6.8% in the final three months of 2015 and the country’s slowest quarterly growth since 2009. However, China’s Bureau of Statistics registered an 11.5% year-on-year increase in exports after nine straight months of decline.

According to a statement from the bureau, the economy saw “sound development” and showed “positive changes on major indicators.” Indeed, China's home sales jumped 71% in March from a year earlier, the country’s largest monthly year-on-year increase since at least 2015.

Already the numbers are being described as evidence of a stabilising economy. Yet in March 2015, the bureau registered a 15% contraction in exports compared with March 2014. So placing these figures together shows an increase of 11.5% this year doesn’t repair the total downturn of a 15% decrease 12 months ago. The overall trend actually shows a slowing economy, which isn’t what investors want to hear.

What probably encouraged the New Zealand delegation to visit China was that although the Chinese economy isn’t faring as it was five years ago, the growth numbers are still much rosier than any other country of equivalent size. Europe, for instance, would love a growth rate of 6%. There is also an illusory belief amongst New Zealand business that China’s problems are temporary and it is only a matter of time before the economic engine returns to 2005-7 levels.

But this is the new normal. Currency reserves are dwindling, capital flight is increasing, unemployment is higher than the government is willing or able to admit and – as a result – the dangerous threat of non-performing loans is becoming a real danger to the integrity of the wider system. This is not yet doomsday, but it will be important to heed former trade minister Tim Groser’s policy action of not over-relying on China for New Zealand’s growth ambitions.

New Zealand can count itself lucky it has products the Chinese middle class desire, because as a country’s wealth rises its demand for protein increases, but imagine how Australians feel now that China’s factories aren’t demanding as much coal or iron ore. The 2008 tightening of Western consumer belts was always going to take time to trickle across the world, but exporting countries, including both Australia and China, are now slowing down as a result of low US and EU demand.

The other major trend stems from the first, which the New Zealand delegation felt on the edges. It is the increasing paranoia of the Chinese elites. To adapt to the rapidly changing economy, President Xi Jinping and the ruling Chinese Communist Party (CCP) won’t be able to rely on the existing model, that much is already certain. So altering economic policies is understandable. But it is Mr Xi’s movements to alter the status quo political structure that concerns many China watchers.

Mr Xi is positioning himself more as a dictator every day. He has ruffled the military by disbanding hundreds of thousands of personnel, removed some of his most dangerous political rivals and ramped up an anti-corruption campaign that looks very much like a purge. And as Mr Key’s delegation found out, an effective tool for political machinations is to leverage even more control over an already heavily controlled state media.

A discussion about the effects on social cohesion due to increased internet usage is important, but the traditional media is still how most Chinese citizens consume information. And media is not escaping a paranoid Beijing. An official investigation into seemingly innocuous editorial mistakes in the Southern Metropolis Daily newspaper found Chinese characters forming a non-dissenting sentence in the horizontal but became dissenting when read in the vertical. Editors deny any malevolence.

Mr Xi knows he may not be able to complete the necessary changes to the wider Chinese economy without greater control and unwavering loyalty in its politics, so he cannot allow dissenting voices – not at this crucial moment. Yet as he and the CCP attempts this transition it will only feed the paranoia, and the risk of inappropriately warning a friendly foreign leader and potentially imprisoning editorial staff for design mistakes may compound the problem rather than fix it.

There is a noticeable level of pushback from editors, along with rumours that some of Mr Xi’s rivals are still hiding in plain sight, but the way he is shifting the political reality to line up behind only himself appears to be unstoppable. Whatever lessons the trade delegation brings back from China, those doing business in the country must monitor these two trends as they start to merge into one.

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