Are East Asian Economic Models Sustainable?  (2009+)


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Introduction + Introduction

This document will suggest that the methods that have been the basis of 'economic miracles' in East Asia since the 1960s are likely to be unsustainable under a liberal Western-style economic and political order and that the attempt that is being made to create a new international economic order like that which prevailed in Asia prior to Western expansion faces severe obstacles.

Several years ago it was common to suggest that China's / East Asia's growth might be decoupling from US growth.  The global financial crisis (GFC) initially suggested that this assumption was premature. Though some of the region was then able to recover rapidly, because of a lack of direct exposure to financial losses, this seemed likely to be temporary because those economies remained dependent on the strength of others' (mainly US) financial systems. Moreover in the medium term East Asian societies faced severe difficulties in creating the more macroeconomically balanced economic regimes that would be needed in reducing that dependence.

In brief this document, after outlining the origin in the 1980s of the present writer's efforts to understand the intellectual basis of East Asian economic models, suggests that:

  • a key feature of such models appears to involve coordination of economic production through social relationships rather than by search for financial profitability. While this can be effective in creating strong production capabilities, financial institutions would tend to fail unless large current account surpluses are maintained to provide sufficient cash flow to obviate the need to borrow in international markets;
  • the apparent incompatibility of East Asian economic models and the prevailing global financial regime led to increasing difficulties including Japan's stagnation after 1990, the Asian financial crisis of 1997 and subsequent efforts across East Asia to accumulate large foreign exchange reserves to guard against financial risks;
  • this adversely affected prospects for sustainable global growth - a risk that was temporarily concealed by economic globalization and innovations in monetary policy that allowed the US, as the 'consumer of last resort' to compensate for demand deficiencies that have been intrinsic to the East Asian economic models;
  • these financial imbalances were a major factor in the GFC but have been overlooked by G20 efforts to deal with that crisis, because analysts lack information about the cultural features of East Asian economic models which necessitate such imbalances. 
It is concluded that, as the US's financial system won't be strong enough in the post-GFC environment to support large financial imbalances, the export-oriented industrialization strategies that have been the basis of rapid growth and development in East Asia can no longer be viable.

However, attempts to develop alternative strategies (eg domestically driven growth in a China-centred economic 'world' or even the creation of a new 'Asian style' international political and financial system as an alternative to Western-style democratic capitalism) are anything but assured.

There are also environmental, social and political sources of potential weaknesses in East Asian models of socio-political-economy that are not addressed here. For example:

  • there are difficulties in ensuring that people act in accordance with socially-desirable (eg Confucian values) values seems to conflict with the Daoist rejection of moral authority that is vital for neo-Confucian methods of achieving economic success (see Conflicting Values in China?);
  • the social hierarchy that is implicit in a neo-Confucian system is incompatible with the social equality that apparently has strong grass-roots support in (say) China.

None-the-less attempts seem to be made to create a neo-Confucian-style international financial and political order in competition with the liberal Western-style international order that was established after WWII.  The incompatibility of the Western and East Asian systems of socio-political-economy are a significant factor in military tensions in the Asia Pacific as suggested in Comments on Australia's Strategic Edge in 2030.

Background Background

The present writer was involved in detailed study of global debates about economic development strategy for much of the 1980s on behalf of an Australian state government. At that time Japan's industry policy methods were seen as very significant because of the perceived 'miracle' of its rapid growth and development to the point where it was viewed as the major economic rival to the United States.

As a result of earlier involvement in, and study of, organisational development using 'strategic management' methods, theories about a systems approach to economic development were developed and these were found to help in understanding the methods that Japan used as the basis of its economic 'miracle'. 

Explanation: 'Strategic management' is a technique, which in effect involves accelerating learning within an organisation in response to new information. This was widely adopted in the 1990s as an alternative to the 'strategic planning' methods which had emerged to deal with faster changes in organisational environments in the 1970s. The latter had involved centralized attempts by planning staffs to determine the implications of that information (see Strategy Development in Business and Government, 1997).

'Strategic management' techniques had (unknowingly) been used with some success for organisational development by the Queensland Government in the 1970s - because of a decision to build on existing capabilities / systems in learning to respond to then 'issues of critical concern' (ie regional development and environmental management).

A parallel approach to economic development which the present writer developed in the 1980s involved accelerating 'learning' within the real market economy in response to emerging opportunities and threats - involving techniques that could be referred to as 'strategic market management'.  The basic principles were incorporated into a 1993 book, and are explored online in Defects in Economic Tactics, Strategy and Outcomes (2000), and Probable Breakthrough in Understanding Economic Development (2004).

Practical experiments conducted using this technique in the 1980s showed that the method could be reasonably effective, but great care was needed in managing the relationship with the democratic political process because the latter would tend to: (a) be out-of-date in terms of potentially-commercially-relevant options (see Economic solutions are beyond politics, 1995); (b) be subject to rent-seeking interest groups; and (c) over-ride the market-responsive outcomes required for economic success in terms of increasing productivity. Methods to manage these relationships in democratic societies were suggested in Developing a Regional Industry Cluster (2000), and in A Case for Innovative Economic Leadership (2009). The latter described a possible method for enhancing the ability of Australian firms to innovate out of the severe economic downturn in 2009.

This background aided in understanding the basis of Japan's economic model in terms of (say): the practice of 'bottom-up' decision making; Total Quality Management (involving the development of production systems to prevent defects from arising in the first place); industry policy techniques such as MITI's vision development and administrative guidance (which was a technique to accelerate real-economy learning); and the strict control of government by bureaucratic elites behind a democratic 'face'.

These involvements led in turn in the late 1980s to concept development for the Queensland Government's response to a proposal  for a centre for technological and cultural exchange put forward by Japan's Ministry for International Trade and Industry (MITI).

As a result of research undertaken for that project, a substantial document ('Towards an Understanding with Japan', unpublished) was produced. This gave an account of the intellectual basis of Japanese society and economic methods in ways that the writer had not seen from any other source. Japanese connections took this to a 'philosopher' in Japan who (without contradicting it) elaborated it with hundreds of detailed notes. Similar work was described by Chalmer's Johnson (author of MITI and the Japanese Miracle) as dealing with matters on the leading edge of the social sciences.

Understanding East Asia's Neo-Confucian / Bureaucratic Systems of Socio-political-economy Understanding East Asia's Neo-Confucian Systems of Socio-political-economy

Despite (misleading) assertions to the contrary [1], the intellectual basis of the economic model that Japan originated, and apparently encouraged other East Asian ethnic communities with a Confucian cultural heritage to adopt in the 1960s and 1970s, seems radically different to that which has been the basis of Western economic methods.

The Foundation

An account of both the different ways of using information and the practical consequences in terms of the nature of  power, governance, strategy and economic goals was outlined in East Asia (in Competing Civilizations, 2001) and is also referenced in Background Note and in  Competing Thought Cultures.

In brief the former refers to:
  • the lack of the universal values and the notion that abstract ideas usefully model reality (ie that there is such a thing as truth) that Western societies derived from their Judeo-Christian and classical Greek cultural heritage - and thus:
    • an orientation to intuitive consensus within ethnic hierarchies rather than rational / analytical problem solving by independent individuals / groups;
    • valuing outcomes that are 'real' or 'concrete' - with little importance attached to 'abstracts' such as ideas, ideals, law, financial returns, statistics or intellectual property;
    • a lack of universalist ethics, or obligations towards those with whom one does not have a direct relationship (ie doing evil behind a polite face is seen as sometimes necessary);
  • the incorporation of Daoism (China's traditional religion which rejects claims about the relevance of abstract ideas and about any clear difference between good and evil) into neo-Confucianism, which allowed learning from others (as traditional Confucian learning mainly from a study of history had led China into centuries of backwardness after contacting expanding Western influences);
  • an emphasis on order within society as a whole, rather than on the welfare and capabilities of individuals;
  • concepts of power in terms of being high in a social hierarchy, rather than having the right to make decisions;
  • exercise of power through: (a) control of access to information which influences subordinates' and outsiders' thinking / decisions; and (b) choosing which of various alternatives that groups of subordinates may advocate to 'smile upon' / favour;
  • government by educated elites whose role is as teacher and guide in what amounts to a virtual 'whole of society' bureaucracy;
  • a preference for invisibly by those who are truly powerful;
  • coordination of economic activities through social relationships amongst elites and Confucian obligations of subordinates to superiors with capital made available on the basis of consensus and a desire to maximize 'real' economic production (ie market share and cash flow) with limited regard to financial calculations (see indicators);
  • facilitation by social elites in learning across organisational boundaries about industry-wide economic opportunities - because such societies are effectively 'whole of society' bureaucracies;
  • the financing of enterprises primarily by debt, because of the desire to avoid equity owners affecting business decision, and the consequent limited buffer in the event that losses are incurred;
  • the unreliability of official statistics;
  • a strong savings ethic - noting Confucian notions that wealth should be accumulated by limiting consumption;
  • communitarian / mercantilist (rather than commercial / capitalistic) economic goals;
  • strategic methods - featuring deception and the absence of distinctions between war, business, politics, social relationships and even criminal activity (all being orchestrated by bureaucratic elites);
  • traditional strategies to defeat 'barbarian' invaders by serving them, and thus making the 'barbarians' dependent and weak.

What is periodically referred to as giving effect of 'Asian values' apparently involves an aspiration to build social and economic systems on a foundation of interpersonal relationships (thus creating what could be regarded as as 'family-like states') and the use of quasi-bureaucratic methods for decision making (ie promoting collegiality and consensus) rather than reliance on the universal / abstract values (eg  a rule of law, profit-oriented accounting principles) that are the organizational basis for Western societies by facilitating independent initiative by rational / responsible individuals as citizens, employees, employers, investors or political leaders.

Within such frameworks, Confucian bureaucratic methods for exerting power have a very long history (eg see A Simple View of Confucianism). This involved highly educated bureaucratic elites (as agents for emperors in the past) in:

  • taking a neutral stance (ie not detectably having opinions of their own) and on that basis claiming a 'mantle of heaven' (ie that their only concern is with the good of their ethnic community - not their personal interests). How such methods (which parallel those used by top-level bureaucrats in governments worldwide) can achieve practical action by supporting the consensus reached from consulting leading / powerful stakeholders is suggested in Acquiring Soft Power below.;
  • using those methods to act as teachers and guides to the community (rather than as enforcers of laws under which citizens / organization take independent actions) in inculcating 'desirable' social and economic behaviours in that community as a whole through hierarchical social networks - this being an extension of the East Asian notion of 'education' as inculcating desired behaviours, rather than facilitating abstract understanding;
  • determining what is 'desirable' by reference to history and by seeking a consensus within networks of the most powerful and influential in their community;
  • ruthlessly using state power to ensure that such an consensus was actioned by the ethnic community as a whole (and any dissent was suppressed) ; and
  • continually increasing their own stock of information (and thus their ability to 'teach' / influence others) as a by product of their involvement in 'consensus-forming' processes.

Implementation

In the post-WWII era Japan was heavily influenced by US occupation forces. However it seems likely that (behind the democratic 'face' implied, for example, by the political role of the so-called Liberal Democratic Party from 1955) Japan's government was in practice long controlled in relation to financial and economic affairs by a modified Confucian bureaucracy while ultranationalist gangsters played key behind-the-scenes roles as facilitators on behalf of Emperor Hirohito (see reasons for suggesting this in Broader Resistance to Western Influence and The Dark Side of Japan).

Examples: Japan's post-WWII bureaucracy seems likely to have operated to at least some extent under an imperial (not a political) mandate, and has been claimed to have used methods developed by Japan's military in Manchuria in the 1930s to orchestrate Japan's pre-1990 'economic miracles'. The role apparently played by ultranationalist Yakuza gangs in putting this in place is outlined in Establishing Japan's Post-WWII Political and Economic Systems. And, as the latter noted, a notorious ultranationalist and Yakuza boss (Ryochi Sasakawa), who may (according to some observers) have worked with Yakuza organisations in developing infrastructure in Manchuria to facilitate Japan's invasion, was apparently one of three behind-the-scenes 'kuromaku' / 'fixers' managing the relationship between politics, business and the bureaucracy (and, in Sasakawa's case, approving gambling-sourced funding for 'special' MITI projects).

Summary of Extract from and Comments on 'The Transition from Technocracy to Aristocracy in Japan 1955-2003' (North C., 2007)

Introductory CPDS Note: This book was extremely useful in summarizing debates about the relationship between the bureaucracy and politicians as the key to understanding Japan's political economy.  It sought in particular to identify: (a) who was making policy; (b) how much authority was delegated to the bureaucracy; (c) whether the influence of the bureaucracy has declined (which was suggested to have occurred due to lesser bureaucratic recruitment into the LDP) .

However the book presumed that 'governing' involves determining 'policy' which is then implemented. It also refers to claims that Japan's bureaucracy 'picked winners' as a factor in Japan's economic 'miracles'. However under a neo-Confucian system, government traditionally involves directly inculcating behaviours within hierarchical social / economic systems through bottom-up consensus forming by the subordinates of a bureaucratic elite. Power in East Asia does not involve making decisions, but rather having subordinates who make them (see East Asia: The Realm of the Autocratic and Intuitive Ethnic Hierarchy). This involves a 'socio-political-economy' - not a 'political economy'. The role of the political system (in relation to economic affairs) would not be to determine policy but to seek and distribute a share of the 'goodies' to the interests they represent.   The extent to which the bureaucracy 'influenced' the LDP would not be not critical, because (economically) the LDP would have been 'a decoration' (with largely ceremonial functions) not the core of government.  If 'political' groups have increased  their power relative to the 'bureaucracy' (which some observers dispute) this could imply that some in the LDP are taking on the 'bureaucracy's role (ie as the 'aristocratic' head of social / business hierarchies) not that Western-style political processes are becoming significant, though the fact that the LDP lost power in the early 1990s would have made this less likely.

Chalmers Johnson's development state theory suggests that politicians delegated industrial and financial policy making to the elite Ministry of International Trade and Industry (MITI) and Ministry of Finance (MOF) - though politicians frequently intervened in other ('pork barrel') ministries. Johnson argued that 'bureaucrats rule, politicians reign'. Others have suggested that politicians had acquired enough technical knowledge to reduce bureaucratic dependence - though bureaucratic influence may have declined because bureaucrats took fewer key political posts.  Bureaucrats had been recruited to political life because after WWII many politicians were purged. But recruitment slowed when LDP was formed. Over the years MOF's ability to control fiscal policy declined. When LDP was first formed, there was a distinction between 'bureaucrats' and 'party' people. In the 1980s the distinction was between bureaucrats and 'tribes' of politicians with specialized interests.  The main debate about Japan's political economy has been between those (eg Chalmers Johnson) who see Japan being ruled by bureaucracy and pluralists who see LDP's policy tribes holding their own. In the 1950s and 1960s the main debate about Japan's political economy was between Marxists and neo-liberals. Now the debate is between 'revisionist' (who argue for bureaucratic government); 'pluralists' (who emphasize politicians role in policy making); and liberals (who also argue for bureaucratic government and blame this for Japan's long economic slump).

Chalmers Johnson started writing about Japan in 1970s when interest arose in relation to its economic 'miracles'. Explanations beyond neo-classical market-based theories were sought. Johnson focused on bureaucracy's role. He suggested that the bureaucracy made most major decisions, drafts legislation, controls the national budget and is the source of all major policy innovations - and that this continued in 1995. His explanation of the bureaucracies ability was based on: elite recruitment; ability to avoid 'pork barrel' influences; control of foreign exchange; ability to direct national savings to policy rather than market goals; politicians' inability to deal with economic issues on their own; bureaucracies focus on 'market-conforming' policies. Others argued in the 1980s that Japan's bureaucrats actively intervened to 'pick winners'. Prestowitz argued that Japan's capitalism differed from neo-classical model. Its policies were producer (not consumer) oriented. Profits were not important - as emphasis was given to market share. Exporting was emphasized, while access to domestic market was constrained.  In 1996 Vogel argued that the MOF was not just a powerful bureaucracy but a political institution in its own right. Reforms of the bureaucracy and MOF were not seen to involve de-regulation but rather re-regulation to ensure the bureaucracy maintained its power.

Eisuke Sakakibara also sees the Japanese economic system as so different from that of the United States that it need not even be called capitalist, and chooses the term ‘non-capitalist market economy’ to describe it. One reason for Sakakibara’s insistence that Japan is not capitalist is that cross shareholding works as a built-in mechanism against hostile takeovers of firms. Another reason is that firms are governed by their employees rather than owners. Furthermore he cites the considerable public sector of the economy in the form of government-owned financial institutions and corporations and also heavy government participation in the management of agriculture and construction. The revisionists are not uniform but share a core belief that Japanese capitalism differs from western (and particularly Anglo-American) varieties. They see Japanese government taking a much greater role in the economy, not through ownership but through direction. Moreover they agree that this government direction of the economy, in the form of industrial policy, mobilizes resources for production at the expense of consumption. There is also a consensus that that the bureaucracy generally has primacy in policy making. … Revisionists offer an explanation for bureaucratic domination of policy making – namely bureaucratic eliteness, which leads to control of the LDP by former bureaucrats.

The traditional methods by which Confucian bureaucracies governed on behalf of emperors were apparently varied to create what can be called neo-Confucianism (see Beyond Confucianism). Traditional Confucian methods for exerting bureaucratic influence involved providing wisdom from a study of history to influence their subordinates' consensual responses (see also Look at the 'Forest' rather than the 'Trees').  Those traditional Confucian foundations were modified (by including Daoism and thus become neo-Confucianism).  Daoism (China's traditional religion which makes no clear distinction between good and evil) went even further than Confucianism in disputing the relevance of 'knowledge' and 'understanding'. What was learned by Confucian scholars from a study of history to guide their social / business subordinates was then expanded to include what was learned from a study of the successes of Western societies.

Elaboration: Such methods:
  • are likely to be familiar to those at the top of any bureaucracy (a situation that the present writer had the opportunity to observe for many years). Facilitating the development of a consensus amongst agencies with diverse interests is necessary because no central authority could ever acquire all the relevant information. In doing so access to strategic (ie new and significant) intelligence will be gained which increases the coordinator's power. And later introducing that strategic  information to a process whereby other groups with diverse interests are being required to reach a consensus will affect the conclusions reached. In Western societies, hierarchical consensus-forming methods are usually confined to use within governments. However in East Asia, however such methods have traditionally been used by Confucian bureaucracies to influence the society as a whole - ie  by developing consensus amongst / stimulating action by amongst the most powerful groups in the society;
  • have parallels with the traditional approach to education in East Asia, which involves inculcating behaviours rather than enabling individuals to 'understand'. The core precept of China’s traditional religion (ie ‘The Dao that can be named is not the true Dao’) epitomizes the perceived futility of understanding. This makes sense because rationality (whose failure is recognised in complex situations by Western social science) fails even more in societies that lack the simplified social spaces that Western societies have been able to create  (because of their Christian-sourced emphasis on individuals as potential children of God rather than as instruments of an ethnic state). Establishing a rule of law, for example, eliminates individuals' need to second-guess the reactions of the powerful and thus improves the reliability of 'rational' decisions based on the abstract ways of thinking that western societies inherited from classical Greece. However when there is no real rule of law (because hierarchical social relationships guide behaviour), attempts by individuals to make 'rational' decisions will be much less reliable (because those low in the hierarchy would never be able to second-guess the pressures from other parts of the hierarchy that the powerful will bring to bear), and it will reasonably be concluded that there is little value in understanding;
  • can be very effective because of the positive whole-of-society-wide feedbacks that can be generated;
  •  have (for reasons suggested below) been the basis of its non-capitalistic pre-1980s economic 'miracles';
  • appear then to have been adopted elsewhere in East Asia including: North Korea as a means for giving effect to a non-market variant of Maoist Communism; and China in the late 1979s in the guise of 'socialism with Chinese characteristics' (where the neo-Confucian catalytic role seems to have been taken by the so-called Communist Party rather than by the bureaucracy - presumably because under Mao the Confucian bureaucracy had been seen as oppressing the masses). In 2015 it was noted that there were many similarities between Japan's and China's economic systems - and that (despite the official cooling of relationships between Japan and China from 2012) there had been a great deal of informal collaboration because China faced a risk of a financial crisis like that which Japan suffered in the early 1990s and there was a determination that China should learn from Japan's mistakes [1];
  • are very difficult for many Western observers to understand (see Why Understanding is Difficult). Under Western traditions power is equated with 'rational' decision making (which is not an East Asian characteristic) rather than with using hierarchical status and strategic information to influence / manipulate the thinking / behaviours of others and to seek gains primarily from the synergistic relationships amongst diverse activities (rather than, say, the profitable use of capital for specific activities);.

Broadly-based learning about economic opportunities can be facilitated by neo-Confucian social elites (through what amount to strategic management techniques, which in the case of Japan's Ministry of International Trade and Industry were referred to as 'vision development and administrative guidance').

Explanation: The application of neo-Confucian practices were the foundation of accelerating economic development, when instead of inculcating what Confucian elites' study of history suggested were moral behaviours, emphasis was placed on inculcating behaviours based on study of world-best economic practices.

This process did not involve setting commercial priorities in terms of the profit expectations of independent enterprises (see Evidence), and assessing abstract concepts such as 'profitability' is largely incompatible with East Asian thought traditions (see Understanding the Cultural Revolution and Competing Thought Cultures).

In relation to China in particular little attention was said to be paid to the profitable use of capital in relation to particular investments - as most gains are expected to flow from the synergistic relationships that can be established between diverse activities.  Production is motivated not by the financial rewards available to enterprises or individuals but by a desire that is inculcated through relationships in a social hierarchy to boost the positions of participants' family or ethnic nation as a whole. 

The present writer's experience in systems approach to coordination in a central government agency in the 1970s and the moderately-successful application of somewhat different methods to accelerate the development of market-led economic opportunities in the 1980s strongly suggested the feasibility of orchestrating economic 'miracles' - even in a democratic capitalistic environment (see Background).

Of particular significance is that the resulting East Asian market economic models tend to be nationalistic, 'communitarian', crony-ist, bureaucratically-orchestrated and mercantilist (rather than 'capitalistic' in the sense that this involves independent profit-focused decisions about investment). Emphasis is given to 'production' rather than to productivity / economic value-adding / profitability of individual activities presumably because:

  • the use of abstract concepts (such as profitability / law / universal values) is not traditionally regarded as a reliable basis for decision making (see Epistemology: The Core Issue). Thus social, economic and political institutions exist involving complex networks which make the expectation about the inadequacy of abstracts self-fulfilling;
  • there is an expectation (eg as indicated in The Rise of the Ferro-dollar and China: Sustaining Growth by Neglecting Profitability) that synergies and externalities can produce better outcomes for an economy as a whole that more than compensate for limited or negative returns on capital investment .
An historical note: It has been suggested that China failed to sustain the relative (eg economic) advantages that it enjoyed over Western nations in the centuries before Columbus because it did not keep proper account of expenses and income. There was a capacity to produce great treasures - but this was done, not to benefit China's people, but rather to make impressive gifts to others. However impressing barbarians did feed the workers who produced those gifts. Thus putting prestige above profit put China into such massive financial difficulties that it had to abandon its expansionist ambitions (see Mangalwadi V. 'The Book that made your world', 2011 which was written by an Indian observer who has studied the practical consequences of the Bible's historical impacts in both India and Western societies. 

Coordination of economic activities depends more on neo-Confucian social relationships amongst elites (called 'guanxi' in China) and the obligations of subordinates to superiors, and the focus tends to be on increasing market share / cash flows (ie 'real' production) while paying limited attention to 'symbolic' outcomes (ie financial measures such as the 'profitability' that Western economies emphasize for reasons suggested below) - see Evidence; Why Japan can't Deregulate its Financial System; Comments by a Former World Bank China Expert; and also Structural Incompatibility Puts Global Growth at Risk (2003).  Savings by the national 'family' tend to be mobilized through state-linked banking systems and provided to state-linked (ie state-owned or state-crony-owned) enterprises that are presumed to have communitarian / nationalist motivations.

Decisions are not traditionally made by independent entities based on their profit opportunities and legal obligations, but rather on relationships, consensus and obligations within social hierarchies. And:

  •  an insider to China's system has suggested that it would be impossible for anyone in China to succeed if they tried to operate outside it [1];
  • analysts have pointed to the fact that major Chinese companies that seem to operate commercially are subject to direction by the Communist Party;
  • major companies in Japan were traditionally controlled by senior bureaucrats who 'descended from heaven'.

The rate of saving tends to be very high, because the state (the head of the national 'family') diverts income from households (the 'family') to subsidise investment (by paying low wages and low interest rates on savings, by providing minimal social benefits and by keeping exchange rates low) [1].

Moreover the outcome of these methods is primarily mercantilist (ie they increase the economic and political power of ethnic communities, and of their social elites in particular, more than they increase the welfare of members of those communities whether as consumers, investors or citizens) - see also In East Asia deals always involve politics.

Individuals, in such societies, traditionally tend to place more emphasis on the success of their community as a whole, than on personal benefits (see also: (a) Is China more legitimate than the West? which suggests that the Chinese state is viewed as being like the head of a family which involves all Chinese civilization, rather than any nation state; (b) Debating the Chinese State; and (c) Creating a New International 'Confucian' Financial and Political Order which notes the pre-Western expectation that China's people would work hard for limited reward to ensure that China had a dominant regional political influence).

A strong sense of ethnic nationalism seems to be required to motivate economic efforts and progress - as benefits to individuals as investors or consumers are apparently of limited significance. As noted above Japan's post-war economic miracles seem to have been orchestrated by its nationalistic bureaucracy - at least until the 1980s. This can reasonably be viewed as a continuation of Japan's efforts to build economic strength to resist Western influence that had started at the time of the Meiji restoration.

And China's (so-called) 'Communist' Party seems to have sought community support on the grounds that it was taking the lead in gaining vengeance for China's historical woes (see also The US's Most Significant Intelligence Failure? in relation to the reported 'Hundred Year Marathon' of China's nationalist to gain geo-political dominance). And a basis for nationalistically-motivated endeavour (eg potential conflict) seems likely to be required indefinitely. 

Thus when outsiders now engage insiders in business dealings (or employee them as staff) it is necessary recognize that they may (unless Westernized) be discretely playing a 'Game of Thrones' rather than being simply engaged in profit-seeking commerce. Likewise it is necessary to recognize that academics whose approach to 'education' reflects East Asian traditions are likely to be seeking to influence others behaviour to benefit an ethnic group rather than to enable others to actually 'understand'.

The East Asian neo-Confucian systems can perhaps be likened to a 'soft' form of the 'fascism' which challenged liberal Western systems militarily as a result of the economic disruption of the 1930s.

Fascism (see quote below) involves a radical authoritarian nationalism. It promotes: unifying a nation through an authoritarian state to achieve mass mobilization of the national community; a strong emphasis on the state; nationalism which can approach ultra-nationalism; an emphasis on national rejuvenation and conflicts between nations and races; and a principle economic goal of achieving national self sufficiency and independence through interventionist policies.

A Conventional View of Fascism: "Fascism is a form of radical authoritarian nationalism  .... Fascists sought to unify their nation through an authoritarian state that promoted the mass mobilization of the national community and were characterized by having leadership that initiated a revolutionary political movement aiming to reorganize the nation along principles according to fascist ideology. Fascist movements shared certain common features, including the veneration of the state, a devotion to a strong leader, and an emphasis on ultranationalism and militarism. Fascism views political violence, war, and imperialism as a means to achieve national rejuvenation, and it asserts that stronger nations have the right to expand their territory by displacing weaker nations. Fascist ideology consistently invokes the primacy of the state. Leaders such as Benito Mussolini in Italy and Adolf Hitler in Germany embodied the state and claimed indisputable power. Fascism borrowed theories and terminology from socialism but replaced socialism's focus on class conflict with a focus on conflict between nations and races. Fascists advocate a mixed economy, with the principal goal of achieving autarky to secure national self-sufficiency and independence through protectionist and interventionist economic policies." [Fascism: Wikipedia]

The East Asian neo-Confucian systems (eg those of Japan and China) seem to be seeking similar goals by the use of 'soft power' rather than 'hard power' methods. And, as suggested below, those methods are apparently being extended to the international arena with limited recognition from Western observers because of their lack of familiarity with the way power is exerted in East Asia.

The reforms introduced by China's president Xi Jinping in 2013 arguably constituted (not the economic and political liberalization that Western observers had anticipated) but rather a renewal of ancient Chinese systems of governance by autocratic elites (see The Resurgence of Ancient Authoritarianism in China and comments on President Xi's 2015 endorsement of Confucian virtues)

Obstacles

While non-capitalistic neo-Confucian bureaucratic methods can be very effective in creating production capabilities (and in fact arguably constitutes a novel form of protectionism as well as mobilizing finance in a way that is similar governments paying for wars by selling 'war bonds'), savings tend to be used wastefully, enterprises have limited capacity to absorb losses without technical insolvency (because of the lack of any significant equity buffer) and financial institutions tend to have poor balance sheets. The latter can only be protected from financial failure by:

  • regulatory regimes and state-owned banking that tolerate poor balance sheets in financial institutions;
  • avoiding the need to borrow in capitalistic (ie profit seeking) international financial markets by suppressing domestic demand to such an extent that savings exceed investment and current account surpluses are achieved (op cit);
  • reliance on trading partners' ability to tolerate current account deficits and increasing debt levels indefinitely; and
  • rigging domestic markets through cartels to apparent 'profits' for state-connected enterprises and financial institutions at the expense of the rest of the economy;

Following decades of 'miracles' by accelerating development of its production systems, Japan ran into severe difficulties in the 1980s because of its structural focus on production capabilities and lack of concern for financial outcomes. Huge quantities of credit had been created on the basis of inflated land values, and invested in excess industrial capacity and acquiring assets world-wide with little regard to price. Moreover Japan lacked the capacity to effectively manage the acquired assets because of the lack of a 'communitarian' tradition amongst employees in the related organisations.

In the early 1990s, a senior official in Japan’s Ministry of Finance (Eisuke Sakakibara) published a book (Beyond Capitalism) which described Japan’s economy as a ‘non-capitalistic market economy’. However no Western observers apparently bothered to ask what was meant by ‘non-capitalistic’, or what would be the consequences of applying ‘non-capitalistic’ economic practices to a substantial segment of the world’s economy. In 2000 it was argued that the character of Japan's financial system made it impossible for it to be deregulated (ie to operate on Western principles) - see Why Japan cannot deregulate it's financial system. Again Western observers seemed to generally put the issues this raised in the 'too hard basket', and Japan maintained its ('Art of War') traditions by: (a) seeking to ensure that outsiders did not understand its true 'shape'; and (b) 'holding up a mirror' so that when opponents looked all they saw was a reflection of themselves.

Western Incomprehension

What has been going on has been anything but obvious to average Western observers who have not considered the cultural context, and thus mis-understood what was happening (see also Babes in the Asian Woods).

Seeking understanding in terms of Western-style models and concepts (such as communism or democratic-capitalism) was useless.

Western societies rely on rational decision making by individuals and have created artificially simplified social environments in which the limits to rationality in dealing with complex problems are significantly reduced (see Cultural Foundations of Western Strength).  Simplification results from: trusting individuals to generally make moral choices (based on their responsibility to God under Judeo-Christian traditions); a rule of law (which frees individuals from the need to second-guess the reactions of the powerful); democratic government based on policy debate; and (capitalistic) reliance on the profitable use of savings to coordinate economic activities. 

However East Asian societies operating on traditions derived from ancient China (who can best be conceived as whole-of-society bureaucracies) rely on bureaucratically-orchestrated  social consensus for decision making which is then implemented by those involved in developing the consensus and, if necessary, enforced autocratically. Individual rationality is not part of this process. [In China the role that the bureaucratic elite traditionally play (and actually play in Japan) seems to have been taken since the late 1970s by the so-called Communist Party (see China's Bigger Secret) presumably to disguise what was going on because under Mao the bureaucracy had been portrayed as oppressing the masses].

Those societies do not rely on (and in China's case have not even created) the arrangements that Western societies have in place to enable 'rational' individuals to make decisions that a fairly effective in allocating resources and managing change (see The Advantages and Limitations of Financial Criteria). However in East Asia, economic decisions do not tend to be based on calculations of financial outcomes (eg profitability) but rather on seeking to maximize 'real' production (eg market share). Thus neither financial outcomes nor Western-style economic statistics are central to decision making, though they are produced (at times impossibly-quickly and apparently arbitrarily) to comply with the expectations of Western and international institutions.

Thus East Asian economies can't be understood in terms of Western economics. Economic activities are primarily motivated and coordinated by people's obligations to one another (and ultimately by their obligations to the social elites who represent their ethnic community as a whole) rather than by calculations of income / profit by independent individuals.

The apparent incompatibility of East Asia's economic models and the global financial systems based on Western principles (and Western observers' ignorance of those differences) has led to increasing problems since the 1980s (see Asian Financial Crisis (1998); An Unrecognised Clash of Financial Systems; and G20 in Washington: Waiting for Hell to Freeze Over?).  

The second refers to:
  • China's conversion from Communism to a variation of the Japanese neo-Confucian system of socio-political-economy after 1979 - a very few years after Mao's policies were seen to fail and his cultural revolution had sought to purge Confucian influences from China;
  • attempts by the US to engineer a rebalancing of its trade deficit with Japan in 1985 (under the Plaza Accord) which failed because changes were sought by adjusting exchange rates and the way in which Japan's financial system directed funds to production and suppressed consumption was ignored;
  • the bursting of Japan's financial 'bubble' in about 1990, which was followed by: (a) no serious reforms of financial institutions - presumably because this would have required disrupting Japan's whole system of socio-political-economy; and (b) a decade of stagnation;
  • the 1997 Asian Financial Crisis - brought on by the withdrawal of a great deal of foreign capital, when the lack of serious attention to profitability was recognised in many countries (ie those practising 'crony capitalism' without the protection of current account surpluses);
  • the traditional unwillingness to discuss such weaknesses with outsiders;
  • the more widespread adoption of strategies to suppress demand and so accumulate large foreign exchange reserves (mainly $US) as the best method to reduce the risk of financial crises;
  • efforts by Japan to sponsor the establishment of an Asian Monetary Fund to operate in ways that would be compatible with its economic model - and the creation of large quantities of virtually zero-interest credit that was exported through 'carry-trades' to boost import demand for Japan's exports (mainly from US);
  • increasing concern (eg by Bank of International Settlements and World Bank) about the risks to the global financial system of East Asia's continued dependence on US demand and escalating US debts;
  • the hope that Western-style financial systems might be made redundant under a new global financial order, and a possible relationship between this and the West's clash with Islamist extremists after 2001 (who also would presumably be happy with an international order that was not based on democratic capitalism).

Following the Asia financial crisis of 1997, East Asian societies were urged (especially by the IMF) to reform their financial systems to make them more transparent.

What was not apparently recognised was why this was culturally impossible (see Understanding the Cultural Revolution, 1998). The latter referred (for example) to: fundamental differences in way information is used; the need to change economic goals from economic 'power' to financial returns; the inseparability of economic issues from questions of social / political power; and the lack of appropriate legal systems.

In practice, all that happened was that (with IMF encouragement) strategies were even more widely adopted to suppress demand and so accumulate large foreign exchange reserves (mainly $US) as the best method to reduce the risk of financial crises. After all Japan and China had done this with apparent success.

Some Western analysts have sought to understand China's rapid economic progress.

In late 2009, the 'mystery' of why Chinese companies maintained high savings rates was examined by the IMF [1]. Some observers: (a) noted that this made their growth dependent on debt-fuelled consumption elsewhere (mainly in the US) - which would no longer be sustainable) and (b) suggested that the explanation of their high savings rate was that those companies were state owned and had no no one to pay dividends to [1]. 

In late 2010, economists' attempted to explain China's economy by simply suggesting that its super-fast growth has been driven by investment (funded by transfers from China's consumers), and that this tactic is both limited and difficult to change [1].

However such explanations, if they do not take account of cultural factors and the similar situation in Japan, can only ever be part of the story (eg see China can't be properly understood in terms of Western economics, Complications in Assessing 'Asia' in Terms of Western Economics and Australia and the Asian Century: The Challenge Can't Be Understood in Terms of Economics).

And there has been almost no effort at all to understand the intellectual basis of East Asian systems of government.

An Aside on the Chinese State: The Chinese state has been said to be based on 'socialism with Chinese characteristics'. However, the reality is arguably more complex because:
  • the Chinese classics seem to be becoming the foundation for educating future generations. This would inculcate desired behaviours and a responsiveness to the information provided by community leaders, rather than any reliance on abstract understanding or independent initiative (see Competing Thought Cultures);
  • there are Confucian elements in the way the state operates (ie in the role that social elites (eg bureaucracies) play as teacher and guide to the community (rather than as enforcers of laws that were enacted to facilitate independent initiative by setting boundaries);
  • though Confucianism is now being promoted, the Communist Party was originally radically opposed to this - and Mao's Cultural revolution had sought to eliminate this influence from China (see Communism Versus Confucianism: The Continuing Contest in China) - and the role of Confucianism seems to be increasingly contentious (see Debating the Chinese State);
  • Japanese influences were arguably more significant in the development of China's 'socialism with Chinese characteristics' / neo-Confucianism - yet this also can't be mentioned because China's people remain resentful of Japan's actions in WWII (see CPDS Comments in Competing Thought Culture).
Impacting the Global Economy Impacting the Global Economy

The necessity to boost production and suppress consumption in East Asian societies that adopted variations on the Japanese bureaucratic / non-capitalistic economic model led to structural demand deficits (and so-called 'savings gluts') within those economies. This was compounded by one of Japan's solutions to the challenges it faced in the 1990s because of its economic model (ie creating credit at virtually zero interest rates which was exported through 'carry trades' to boost demand elsewhere, mainly in the US).

Large domestic demand deficits were macroeconomically unsustainable within affected economies. In the 1930s Keynes identified the risk that demand deficits (ie unspent savings) posed to economic growth, and advocated counter-cyclical public spending as the remedy. Moreover these large demand deficits made global economic growth unsustainable (see Structural Incompatibility Puts Global Growth at Risk, 2003), though the problem took many years to manifest itself.

In recent decades innovations in macroeconomic management and economic globalization provided a temporary means for compensating for demand deficits, by allowing them to be countered by excess demand elsewhere (mainly in the US). 

East Asia's demand deficits could be accommodated for a time because:
  • changes to the global financial system in the early 1970s (ie the move from a gold standard to the $US's role as a global reserve currency), permitted the US to sustain persistent trade deficits, as these could be financed by boosting money supply (rather than balanced with gold reserves);
  • Keynesian counter-cyclical public spending, which had been economic orthodoxy in the post-WWII years, tended to lose credibility in the 1970s as governments had difficulty getting the timing right (ie such tactics tended to amplify, rather than smooth, booms and busts). Monetary policy, based on setting the interest rates that reserve banks charge financial institutions to maintain an acceptable rate of CPI inflation, tended to take its place in stimulating or damping economic growth, Moreover easy monetary policy proved effective (originally in the US stock market crash of 1987) in preventing financial crises from affecting the 'real' economy;
  • an apparently 'virtuous circle' in trade and investment arose as: (a) easy money policies were needed to sustain US growth, given the drag of its current account deficit; (b) easy monetary policy encouraged the rapid growth in asset values, which in turn sustained high rates of consumer, business and government spending  [1, 2] and ensured a large trade deficit; (c) cheap imports from Asia inhibited the CPI inflation that would normally make very easy monetary policy seem unwise; and (d) the US current account deficit was balanced by capital inflows mainly from East Asia;
  • industrial structure in advanced economies changed as capital intensive manufacturing lost productivity and shifted to lower wage economies. Knowledge-intensive functions expanded in their place of which one of the most important was financial services - and the latter tended to attract savings from elsewhere;
  • high and perhaps unsustainable levels of public spending were needed to maintain demand in many other major economies (as well as the US).

It may be that US authorities (presumably as a by-product of Cold War strategies to promote world development on a democratic-capitalist basis and with Japan's encouragement as a US 'ally') sought to exploit those innovations to maintain global growth in the face of East Asia's demand deficits, in the expectation that market forces would eventually force real financial reforms in Asia (see An Unrecognised Clash of Financial Systems?).

However the US's ability to take on the role of 'consumer of last resort', which had made export-driven growth a feasible economic tactic, could not be a permanent solution as the resulting financial imbalances led to problems (eg a large and persistent US current account deficit and accumulated debts).

The financial instabilities that emerged in the US in 2007 (related initially to losses on very complex structured financial assets - ie sub-prime mortgages) and were transformed in 2008 into an unprecedented global financial crisis had many causes (eg see Financial Market Instability: A Many Sided Story (2007) and Global Financial Crisis: The Second Test of Globalization?).  However global financial imbalances (which, as noted above, also had many causes) were key components of the problem (and later problems) because counteracting the effect of structural demand deficits elsewhere required: (a) easy money policies in the US that generated asset bubbles; and (b) high levels of public spending in countries that favoured fiscal rather than monetary policy measures to stimulate growth (see Comment on the European Sovereign Debt Crisis).

Despite their importance most GFC analysts (because of the lack of information about the East Asian systems of socio-political-economy that necessitated such imbalances) have focused simply on arrangements within Western financial systems and economies. Moreover the G20 Summit in April 2009 essentially ignored the imbalance issue, and was thus unable to create any solid basis for sustainable economic growth (see Announcing 'Peace for our Time'?). 

Though there was another ineffectual G20 meeting in September 2009 analysts in the the US and Europe had started to recognise the necessity for systematic efforts to reduce imbalances (and this was mentioned in the context of a forthcoming G20 meeting) - a focus to which China objected [1]. By March 2010, there were signs that the US was unilaterally moving away from its post WWII commitment allow easy access to its markets in order to boost global economic development (see A US Response to the GFC : Backing Away from Bretton Woods?).

Moreover in June 2010 the G20 again failed to confront the problem of financial imbalances and created the risk of an even more severe round of global financial instabilities (see Too Hard for the G20?). And, though the imbalances issue was recognised by the G20 in November 2010, no solutions were found (see Unreal Optimism?), and another meeting in April 2011 showed that progress was not being made in resolving the issue (see 'Waiting for Hell to Freeze over' won't solve the problem).

In August the US government finally accepted the need to constrain the growth of its debt - and this seemed likely to have consequences for the global economy because financial systems in major East Asian economies, and in emerging economies elsewhere, had been protected from financial crises by limiting domestic demand and reliance on current account surpluses largely at the expense of the US, the world's 'consumer of last resort'. In November 2011, the US President announced an intention to shift the US's national security focus to the Pacific, in both an economic and a military sense - and expressed an expectation that China would 'play by the rules' (see Limiting the 'Consumer of Last Resort').

Unsustainable Economic Models? +

 

 

Unsustainable Economic Models?

East Asian systems of socio-political-economy (eg those of Japan and China in particular) seem likely to prove financially unsustainable.

They have been dependent on suppressing demand to generate current account surpluses - to protect state-linked financial institutions from the crisis that would result from having to borrow in international financial markets because profitability / economic value added has not been sought in making investments (see above).   The resulting international financial imbalances are unsustainable - because trading partners can't continue to sustain current account deficits and escalating debt levels indefinitely. New economic strategies that have been put in place have not overcome the critical need to avoid exposing (eg Japanese / Chinese) financial institutions to national current account deficits. Moreover the escalation of state borrowings (and contingent liabilities for the bad debts of state-linked institutions) to sustain economic growth seemed by 2013 to have placed both Japan and China on a path to serious financial crises. There are no obvious solutions to these problems within the framework of the neo-Confucian systems of socio-political-economy that have been the basis of the 'economic miracles' in East Asia, any more than there is an obvious way of balancing supply and demand domestically where there is no (capitalistic) emphasis on the use of profit to guide market-oriented resource allocation.

The Financial Imbalances Problem

Large international financial imbalances (especially those involving the US as the world's 'consumer of last resort' in seeking to promote the global spread of democratic capitalism) can not continue, because of:

  • their role in the GFC (as above);
  • the inability of the US's financial system in the post-GFC environment to compensate for large demand deficits in East Asia (or elsewhere).
The Need to Reduce International Financial Imbalances affecting the US

The ability of the US to provide the excess demand that allowed export-oriented industrialization to be a viable strategy for economic development (particularly in East Asia) depended on the strength of the US financial system and ongoing asset inflation (see Financial Imbalances). It was clear in 2008-2009  that there could be no unilateral solution the the obstacle that imbalances posed to global growth.

Even if modest growth resumes in the US and elsewhere in (say) 2010, it will necessarily be based on much lower levels of consumer in the short term and constrained government demand in the medium term (and much lower levels of financial imbalances) because of:

  • an ongoing requirement to reduce household debts;
  • the absence of rapid asset inflation to (a) generate tax revenues; and (b) borrow against to fund household spending;
  • the potential difficulties in funding US budget deficits.

Though this issue was ignored by the G20 Summit and it may thus be impossible to engineer global economic recovery, the need for such adjustments has been increasingly recognised (see Structural Indicators of Ongoing Recession / Depression, and 1, 2). The latter suggested that the solution could lie in both increased welfare services and higher quality investment opportunities in China, which would slowly reduce its high savings rate.

Professor Martin Wolf argued (realistically) that "Creditor countries [mainly China, Germany and Japan] are worrying about the safety of their money. .... (However this will be safe) ... only if the creditor countries facilitate adjustment in the global balance of payments. Debtor countries will either export their way out of this crisis or be driven towards some sort of default. Creditors have to choose which". [1]

  • the growing pressure for wage rises in China that emerged in 2010 - which would accelerate the growth of domestic consumption and thus speed the shift from current account surpluses to deficits. In June 2010 China's success seemed to have resulted in a loss of willingness by China's workers to receive limited rewards for their efforts, and the adoption of vigorous campaigns (based on the use of modern communication technologies) to pursue higher wages [1]

By 2013 the limits to the US's ability to act as the world's 'consumer of last resort' were even more apparent - as debt and income constraints on households were being compounded by growing recognition of the limits to increasing government debt (see Limiting the Consumer of Last Resort) .

However even in 2009 it had been clear that without radical change East Asia's growth would continue to depend on now-unreliable US demand [1].

In early 2014 it was reported that economic recovery in the US was unexpectedly not contributing to exports from economies that had been dependent on export-driven growth - because: Asia has become less dependent on US (given domestic demand and inter-regional trade); consumer spending in US remains weak; and Asia has been losing competitiveness because of higher labour / production costs [1]

New Economic Strategies Had to be Be Found

Thus there seemed to be recognition that a shift in the basis of East Asia's economic growth and development would be needed away from the export-oriented industrialization strategies that Japan (primarily) had spread through the region (with World-Bank and US endorsement) [1, 2].

Recognising the Challenge

People in East Asia are starting to realize that they face the end of the era of export-oriented industrialization (EOI) which has been applied for 40 years. Success by Taiwan and Korea convinced World Bank in 1970s that EOI should be supported, as the alternative to import substitution. The latter could have worked only with large redistribution of income and wealth - which regional elites opposed. While the World Bank encouraged export processing zones, little happened until the US sought to overcome its trade deficit with Japan by currency revaluation under the Plaza Accord. This made much manufacturing unaffordable in Japan - so kieretsu moved labour intensive components to China and SE Asia. Japanese capital inflows allowed NICs to avoid the credit squeeze of the early 1980s. Rapid growth in NICs resulted, driven by Japanese foreign investment. Japan sought an Asia Pacific platform for re-export to third countries. China later mastered this model. The process depended on the US market - and there was no shortage of credit as Asian countries loaned to US on a massive scale. China's demands created the illusion of decoupling - after its demands eased the effects of the Asian financial crisis. But this continued to depend on US demand. Now the whole edifice - which depended on debt-financed middle class consumption in US - has collapsed. While income inequality in Asia had actually increased, rising wealth took the edge off this - but with growth collapsing radical protest and social revolution are now possible across East Asia  [1]

As noted above the US and Europe raised the need for systematic efforts to reduce imbalances in the context of a September 2009 G20 meeting  [1].

In August 2011 economics professors from a Chinese university raised the prospect of another Asian financial crisis - linked to the widespread dependence of Asian economies on current account surpluses (see Asia's Next Financial Crisis and its Impact on Australia below)

To sustain growth within a Western-style market economy would require more macroeconomically-balanced economic systems (ie those without a large demand deficit and savings surplus). 

This requirement would bring the incompatibility between the prevailing Western-style global financial regime and East Asia's economic models into sharper focus, because it is likely that any shift towards sustainability within Western-style financial traditions would require a large (and probably culturally-unachievable) change in social, political and economic practices.

However China's response after the start of the GFC did not involve any shift towards the adoption of Western-style financial systems (any more than Japan had done in the 1990s).   Various initiatives were taken to seek to avoid conventional financial constraints - eg diversification of foreign exchange holdings; seeking to stimulate demand in emerging economies; encouraging the creation of new international IMF-controlled international currency; and seeking to promote the Yuan as a trade currency (see Doing China's Own Economic Thing). However at the same time:

  • there were serious challenges to the position of China's Communist Party (see Discord / Conflict and Political Instability); and
  • maintaining China's rapid economic growth required even faster creation of credit and growth of both; (a) state debt; and (b) contingent liabilities for the escalating bad debts of state-linked institutions. By late 2013 the prospect of a crisis was becoming very real (see Preparing for a Con?).

The only practical alternative may be seen to try to create a new international economic (and perhaps political) system based on practices and institutions that have little relationship with Western precedents to meet challenges arising in the post-GFC environment in 'Asian' ways (see below).

The Need to Avoid Exposing Financial Institutions

The most obvious difficulty under Western-style international arrangements (mentioned above) is that because economic production is coordinated through 'Confucian' social relationships (amongst elites and the obligations of subordinates to superiors) rather than by serious concern for return on capital, losses have tended to accumulate in financial institutions. In the past these could be ignored by suppressed consumption and thus generating large amounts of savings and current account surpluses so that sufficient cash flow was available to make it unnecessary for banks to borrow in international markets.

In future, without support from a strong external economy (to provide excess demand and productively invest surplus savings) or major changes to business and financial practices, financial crises like that in 1997 would be likely.

Though financial systems in Asia seemed reasonably secure against external financial shocks in early 2009 [1], they would need to be radically transformed were growth to be driven by domestic demand in the medium to long term. Growth would inevitably have to be funded by borrowing in international markets rather than from cash flows derived from trade surpluses.  While sound balance sheets might be fabricated if there is no outside scrutiny, this would not be feasible if external investment had to be sought.

There are precedents for radical transformations as part of East Asia's economic strategies (eg Japan's initial challenge to Western economies in the 1950s and 1960s came unexpectedly through moving into the highest productivity and most demanding segment of developed economies - which at the time involved capital intensive manufacturing). While similar tactics, ie moving into what had been the high ground of Western economies - financial services, might be seen as an option, in practice this seems unlikely. 

Developing financial systems under which economic outcomes were driven by a search for the profitable use of capital rather than social relationships would probably be impossible because of cultural aversion to abstracts (see An Unrecognised Clash of Financial Systems?).  Moreover in responding to the impact of the GFC, China (for example) made no obvious move towards Western-style changes to its financial system (see China: After the Bubble) any more than Japan did in the 1990s.

The possibility that alternative ways of making state-supported companies and banks 'profitable' (by rigging markets through communitarian networks) is suggested below.

Japan's Predicament

The following useful account of Japan's economic history and prospects suggested that in 2013 its position has deteriorated significantly since about 1990, and that it faced severe future problems.

In 1979 Japan was seen a potential economic #1. Though it has declined since then its stock market rose in 2012 - because of faith in new PM's reflation strategy (ie increased public spending, creating inflation to reduce debt / GDP and devaluation). These have been tried before and not worked. Japan had 9.5% pa growth from 1955 to 1970, then 3.8% pa from 1971 to 1990. After debt bubble burst in 1990 growth has been only 0.8% pa. Nominal GDP has been stagnant since 1992, while a 5-7% output gap has existed. Stock market is 70-80% below 1989. Real estate prices are at 1981 levels. Interest rates are negligible. Public finance has deteriorated significantly since 1990. Gross government debt is 240% of GDP (while net debt is 135%). Total (government, corporate and consumer) debt is 450% of GDP compared with 280% in US. Japan's 128m population is expected to fall to 47m by 2100. Japan's 65+ population will rise from 12% to 23% of the total, while workface will fall from 70% to 55%. By 2050 Japan's median age will be 52 - the oldest ever. Natural disasters have compounded Japan's problems. Japan's political system is fractious, characterised by frequent changes and no stable policies. Japan's post-WWII economic model was export-based (like Germany) and involved an undervalued yen to gain competitive advantage. The yen was revalued under Plaza Accord in 2085 - and exporters were affected - reducing growth from 4.4% pa in 1985 to 2.9% in 1986. Monetary policy was eased, driving real estate and stock prices higher. To prevent asset inflation interest rates were raised from 1989 to 1990 - triggering a collapse in boom. As economic problems worsened, large fiscal stimulus measures were announced and interest rates fell to zero. But deflation, not recovery, resulted. Public finance deteriorated from budget surplus and debts of 20% of GDP. As economy stagnated, weak tax revenues and large fiscal stimulus led to large deficits. This led to 2 lost decades. Japan's large savings, low interest rates and large current account surplus allowed the build-up of government debt. Japan's large savings reflect: frugality and thrift during rise to prosperity after WWII; young age structure; low pensions; bonus system; lack of consumer credit and savings incentives; and large corporate savings (8% of GDP). Most is invested domestically - in banks, bonds and postal system. High debt levels are sustainable because interest rates are very low (due to zero interest rate policy and quantitative easing since 2001). Low interest rates did not discourage bank deposits / purchase of government bonds, as there were no good domestic alternatives and foreign investment was discouraged by high yen. Also deflation turned low nominal yields into high real yields.  Japan has had current account surpluses for 50 years - and has net foreign assets of 50% of GDP. This allowed Japan to avoid borrowing offshore. Since GFC and European crisis, Japan has been seen as safe haven. This allowed Japan to increase its government debt level - but may not do so in future. After the bubble collapsed, Japan went from surplus to chronic deficit - but this did not restore growth and stagnation became chronic. Japan has been said to suffer a balance sheet recession - triggered by collapse of value of financial assets. Insolvent firms are reducing debts. Investment has fallen sharply, and corporations are net savers. Private consumption is weak - reflecting weak employment, lack of income growth and population aging. Strong exports and current account surpluses have partially offset this. In a balance sheet recession, monetary policy is ineffective as there is little demand for credit. GDP declines by amount of debt repayment and un-borrowed household savings. As new PM's strategies have been tried before, they reflect desperation. There will be a short term (but no sustainable) lift in economic activity. Continued economic weakness, falling savings and a reversal of current account surpluses make Japan's government debt burden unsustainable. Household savings have fallen from 15-25% of GDP in 1980s and 1990s to 3%. Unemployment is higher, but still not critical (because of government subsidies). Wages and worker's share of GDP have fallen. Moving from lifetime employment, 34% of workforce are now on contracts. 16% of Japanese are below poverty line.  Population aging also reduces savings. Money paid to retirees from savings now exceeds new savings. The rundown of savings is compounded by poor returns on savings. Japan's current account surplus allowed government to run large budget deficits which can be funded domestically. But trade account surplus fell from 2007 into deficit in 2012 (because of strong yen and weak global growth). Territorial disputes with China have exacerbated export decline. Shutting down nuclear power required large LNG imports. Rising costs forced Japanese manufacturers to relocate to cheaper sites.  Japan is likely to shift into current account deficit and have to borrow offshore to finance government deficits.  Government is unlikely to be able to continue to borrow - at least at current low rates. Japan's domestic savings are about 250-300% of GDP, and government debt is close to this level. Domestic deficit funding will be much harder. Insurance companies sell their government bonds to pay retirees.  Japan's large portfolio of foreign assets (being the largest net holder of foreign assets) will cushion it for a time. As drawdown of foreign assets to finance retirement accelerates, Japan will run down foreign assets - but eventually be required to borrow offshore. This could require much higher interest rates. At current very low interest rates, interests costs Japan's government 25-30% of tax revenues. At 2.5-3.5% rates (2-3 times higher than at present) government debt would be unsustainable. Higher interest rates would result in large write down in government bond holdings by banks. To avoid these problems Japan must address core problems. Budget deficits are hard to cut - as social security and interest now accounts for too much of budget. Health and aged care costs are rising. Population aging and shrinking workforce will slow growth and reduce tax revenues. Tax increases are unpopular. Reduced deficits will reduce growth - and compound the problem. Other options include: financial repression to force investment into low interest JGBs; BOJ could monetise debt to finance government; or inflation could be sought to inflate away debt. But ultimately debt default or debt restructuring may be vital.  Older Japanese with large JGB holdings would lose. Traders have often bet on a Japanese crisis (eg by short-selling JGBs) and failed each time. Given large domestic savings and ability to monetise debt, the status quo can continue for a while. But deteriorating ratings will make debt funding harder - especially outside Japan. About 60% of Japanese government debt must be refinanced in less than 5 years. A crisis may take time to emerge, but then unfold quickly [1]

This account of Japan's debt problems (and balance sheet recession) is a cautionary tale for others who have used variations of Japan's methods for accelerating economic development.

However the problem is likely to be even worse than suggested above for reasons suggested in  Why Japan can't deregulate its financial system, (Makuni ,2000) and Evidence. The former suggested that financial 'repression' was used initially to direct national savings to creating industrial capacity, and both suggest that there has been limited regard for profitability. Thus the balance sheets of Japan's households, businesses, banks and government are likely to be much worse than are indicated by official data - so the potential for a financial crisis is much greater

Presumably Japan recognised in about 1990 (and perhaps much earlier) the profound difficulties that the financial principles built into the prevailing international financial regime (ie the emphasis on return on capital and sound balance sheets) created for its economic model, and adjusted its strategy on that basis .

Japan chose not to, and perhaps was unable to, adjust its system of socio-political-economy to conform to the requirements of the Western-style international financial regime.

 'An Unrecognised Clash of Financial Systems' is the present writer's speculative view of international events in terms of a 'clash of civilizations / cultures' that may have been obvious to Japan though it was invisible to rational Western mindsets who had no way to understand the predicament of those (including ultimately China) who adopted variations of Japan's economic model.

In brief: The above-mentioned speculation referred to:
  • the collapse in Japan's asset bubble in 1990s with serious adverse effects on the banking system;
  • the subsequent failure to reform the banking system (perhaps because of the adverse effect this would have on Japan's social elites) - which lead to Japan's lost decades of ongoing recession and deflation;
  • Japan's role as the world's main source of credit, particularly that exported to the US through 'carry trades', which boosted demand for Japan's / Asia's exports;
  • international instabilities that apparently were related to Japan's financial dealings (eg the 1987 US stock-market crash, and the 1997 Asian financial crisis);
  • Japan's efforts to create an international financial regime based on 'Asian' traditions;
  • Japan's apparent influence on the US Federal Reserve in adopting easy monetary policies; and
  • a possible linkage between Japan's predicament and the 'clash of civilizations / cultures' that Western societies experienced with Islamist extremists

Japan's international relationships since 1990 need close attention - by both East Asian nations and especially by the US, as the latter may have been subjected to the greatest con game in history by Japan's 'good cop' routine. A case can also be made for extending that attention back several decades, eg because of deception about the character of Japan's system of socio-political-economy and the apparent involvement of the 'dark side' of Japan in orchestrating it (see Coalitions of Interest)

In October 2009 it was indicated that 'Japan wants its culture back' - in reference apparently to claims that it had become 'Americanised' and wanted business to operate in a traditional communitarian style rather than concerning themselves over-much with profitability (see Which Identity Does Japan want Back?)

In mid 2010, it was indicated that Japan's major companies would seek to develop export markets in emerging economies - because of the inability of developed economies to continue to support Japan's export industries [1]. Needless to say this would create problems for emerging economies because many are also often dependent on current account surpluses (achieved through export-based economic strategies) in order to protect under-developed financial systems (see Leadership by Emerging Economies?)

In early 2013, attention was drawn to the way in which rapid population aging was compounding Japan's financial problems.

Japan's rapidly aging population (because of decades of falling fertility) poses a risk to its financial arrangements.  Japan has large debts - but the ill-effects of this are not obvious. Japan has an external surplus and can print its own money. It has a savings surplus and can thus sell government debt at low interest rates. Low rates mean that there is no problem in debt service - and if there was the Bank of Japan could just buy more government bonds. However there is a mismatch between declining demography and appeasing an aging population with populist policies. Conventional economic theory can't help see what will happen - as this has never happened before. Investors now favour Japan because of new prime minister's 2% inflation target - which requires perpetually devaluing currency to produce a trade surplus despite 'war of words' about currency wars. Japan is THE aging society. Median age is 45 now (the oldest in the world), and this will rise to 50 in 20 years. This requires savings for the future - but it also indicates a structural demand deficiency / export dependency. Japan has now passed the stage where it could rely on domestic demand to grow - while at the same time external demand can't grow fast enough to to keep up with declining domestic demand. If Japan's problems are thus structural, they won't be solved by any economic 'kick start'. All that will happen is continued accumulation of debt that will be ever harder for declining working age population to service. Japan could cope with its problem by directing its excess savings offshore before the GFC - because it was the only country doing so. But now all OECD countries need to do the same thing. The imbalances in Europe can't be resolved (as some argued) by increased German fiscal deficits to stimulate consumption - but rather there is a need for peripheral economies to increase their savings. External demand and foreign asset income are crucial for growth by aging societies - but all developed countries can't grow by seeking exports. In Euro area, efforts by peripheral countries to boost economies with exports are leading to economic stagnation and the core countries (net savers) can't take up the demand slack. In Japan the problem is now very visible - as positive external balance (the only source of growth) is evaporating. Its trade balance is negative, and its current account balance is weak. Japan's public debts are continuing to grow - mainly due to the effect of population aging. Debt can be serviced at current low interest rates - but would not be serviceable if rates rise. If confidence is lost, Japan could wind up like Italy and Portugal. Investors are now buying on the short end of Japanese debt - just as happened initially in European periphery. Japan will not have sufficient savings to cover all government debts in 2016 - but the market could force changes sooner. Japan has a strong net external investment position - which differs from countries like Italy / Portugal. But the external assets and internal savings are distributed differently - and those with external savings may not be willing to pay the surcharges needed to compensate those who have lost their savings by trusting governments. And will young Japanese be happy to stay in a country with the highest tax rates on the planet  [1]

And Japan's aggressive quantitative easing in early 2013 may have been a desperate attempt to delay a financial crisis that would result from having to borrow in international (profit-focused) financial markets with a non-capitalistic financial system.

Another 'sting' driving Japan's urgency? - email sent 9/5/13

David Pilling
Financial Times

Re: The twin stings driving Japan’s urgency, Business Spectator, 9/5/13

Your article raised the question of Japan’s motive for ‘Abe-nomics’ – and suggested that this might relate to ‘stings’ from the 2011 tsunami or China’s assertiveness.

However I should like to suggest a third possible ‘sting’ – namely the risk of a financial crisis because of Japan’s high government debt levels and increasing exposure to current account deficits. The latter taken together could lead to a requirement to borrow in international (profit-focused) financial markets with a non-capitalistic financial system. The result would not be pretty, because while Japan’s economic position looks bad to analysts who take its financial statistics at face value, opening the books to potential profit-focused creditors would probably reveal a much worse picture (see Japan's Predicament).

My interpretation of your article: Why did Japan change its economic approach so suddenly (ie shift from acceptance of deflation to Shinzo Abe's program to reverse 15 years of falling prices. Everyone has been too busy making money to worry about the reasons. The currency has devalued and the stock market is up dramatically. This is starting to affect the real economy. Two contributing causes were 2011 tsunami (the response to which raised questions about whether industries would leave Japan) and China. Beijing has become increasingly assertive - and this may have given Japan a leader with a sense of purpose. Fears about security and economic weakness have a long history in Japan. Rich country, strong army was the rallying cry of Japan's modernisation after Meiji Restoration. Abe sees a weak economy and reducing Japan's ability to defend itself - and thus stresses both a strong economy and strong national defence. Patriotism has been rising. Abe and others shouted banzai (long live the emperor) at a ceremony to mark the end of US occupation in 1952. The US was told that for Japan and the US to jointly provide security for the region, Japan must be strong. Abe has also committed to participation in Trans-Pacific Trade Pact that would expose Japanese companies to tougher competition. This would mean tearing up the LDP's social contract with farmers. Other long discussed imperatives might also be considered: liberalizing energy / healthcare and getting more women into workforce

In relation to that hypothesis it is noted that major economies in East Asia (especially Japan and China) have financial systems that are incompatible with Western-style capitalistic economic practices – ie they are mercantilist in the sense of pursuing economic power by maximizing production, rather than capitalistic in the sense that this involves profit-focused investment by independent enterprises – see Evidence. Suggestions about the character of, and reasons for, those systems are in Understanding East Asia's Neo-Confucian Systems of Socio-political-economy (2009).

The attempt by Japan and China to build economic (and thus military) power on the basis of non-capitalistic financial systems has had significant effects on the global economy, and now seems to create increasing risks for those major East Asian economies (see Fasten Seat Belts: Rough Weather Ahead). The latter suggests that the consequences of the use of non-capitalistic financial systems include:

  • Contributing to the global financial crisis (because of the favourable international financial imbalances those non-capitalistic systems require);
  • An incompatibility between the financial systems that have been the basis of neo-Confucian economic ‘miracles’ and continued global economic growth (because a sustainable basis for global growth can’t be created in the face of structural international financial imbalances); and
  • The resulting likelihood of financial crises, political instability and resurgent-militarism in East Asia.

Shinzo Abe’s (ultra) nationalistic outburst parallels sentiment that being expressed by China’s leaders (see Do Others Share the 'China Dream'?) and may reflect the fact that Japan’s post-WWII dream that an ‘Asian’ system of socio-political-economy (that may have been shared with China in about 1979) could finally dominate the world is likely to turn into a nightmare. The profound significance in Japan of tearing up the LDP’s social contract with farmers (which was foundational to Japan’s Meiji era determination to gain power through economic success) is suggested in Reverting to the Soul of a Samurai?

In this context ‘Abe-nomics’ (ie an extremely aggressive program of quantitative easing) could be intended to have the same sort of impact as Japan’s earlier period of extremely easy money policies – namely reduce the risk that Japan would face current account deficits because it could be expected to devalue the Yen and boost external demand for Japan’s exports by recreating a strong Yen-carry trade (see Irresponsible Quantitative Easing).

I would be interested in your response to my speculations.

John Craig

However diverse other suggestions are offered about its situation (eg that Japan is functionally bankrupt; that the weakening yen could set off a financial crisis across Asia; that stimulus measures without structural reforms could be disastrous; that BOJ has undermined the market structure that prevented crash by Japanese government bonds).

Abenomics has driven up the Japanese Topix Index. The case for this is that stimulating Japanese economy will increase inflation, weaken the currency and aid exporters. But this must ultimately fail. Japan is know as exporter, but now imports more - a problem that has been increased by extra fuel needed as nuclear power plants were closed after 2011 tsunami. Japan has had a 27% fall in purchasing power, and costs are rising faster than wages. Mortgages rates are rising when stimulus should have led them to fall, Combined public / private / corporate debt is already 500% of GDP. Japan is functionally bankrupt. The population is falling, so savings are declining. The real problem is that international markets will demand higher rates because of higher risks. The true cost of capital could double.  [1]

The radical relation policies of Shinzo Abe have boosted consumer spending - but led to concern that the weakening yen could set off a broader Asian crisis. Japan's growth jumped in the first quarter - suggesting that Abe's kickstart worked. Retail sales soared. The Nikkei is up 70% - mainly because of weaker currency. Falling yen may be creating conditions across Asia like those before Asian financial crisis (ie when external funding dried up). Trade surpluses of many countries could evaporate and lead to new financial crisis. China could experience a sudden loss of competitiveness after years of soaring wage rises. The eurozone could be pushed towards deflation. The core of Abenomics is mobilizing Bank of Japan to use tactics that drew Japan out of Great Depression in 1930s. BOJ is injecting almost as much as US fed though its economy is only 1/3 the size. This stirred concerns about $US1tr leaking out into a new 'yen carry trade'. But this has not happened yet. Japan has rather repatriated currency home. Strategy is high risk as any suspicion about an attempt to inflate away Japan's debts could see interest rates rise significantly. Yields on government debt have doubled - but are still below 1%. If they reach 3% a banking crisis could emerge as banks hold JGBs worth 80% of GDP. The bond rout in Japan could indicate the start of a global trend [1]

Japan could be in trouble unless current measures (ie fiscal / monetary stimulus) are accompanied by structural reforms. [1]

BOJ could lose control of of its bond buying blitz. Authorities want to increse inflation and devalue yen. Thus rational investors are selling Japanese government bonds - and overwhelming BOJ's buying program - thus increasing bond yields [1]

Yields on Japanese bonds doubled in a month, triggering a stock market crash. This triggered similar problems, and investor fears worldwide. BOJ may not be able to hold down yields no matter how many bonds it buys. This could lead to loss of faith in government and 'beginning of the end' for Japan's economy. This happens as China is struggling with effects of 4 year ending boom - which pushed credit to 200% of GDP and spawned a shadow banking system. China's data is no longer reliable in assessing its economy. China is slowing hard - and debts may be greater than reported. Global equities have boomed on the basis of QE (in US, Europe , Japan) - but this is likely to be wound back soon, and could create major market reversals. The promise of Abenomics has lifted Japanese equities - but little has actually happened to justify this. The bond market rout is raising fears of a banking crisis (as banks hold huge amounts of government debt). The BOJ has undermined the market structure that has kept Japan's bond market stable for 20 years. Others however believe that this will generate recovery [1]

Abenomics generated a rapid response in terms of consumer spending and property investment - because of Japanese expectations that inflation and devaluation would make goods and property more expensive [1]

The 'third arrow' of Abenomics involved regulatory reforms to bring more women into workfoce, encourage cash-hoarding corporations to invest and promote industrial innovation [1]

In early 2014 it was reported that Japan is now experiencing increasingly significant current account deficits. Devaluation of the Yen did not sufficiently increase Japan's exports - and now its trade deficit exceeds to revenues from external investments [1]. In mid 2014 Pimco suggested that Japan's extreme monetary experiments could lead to a major crisis. Japan can't keep buying bonds without losing control of inflation of its currency. It also can't afford higher interest rates - so it is hard to see any scenario that leads to a smooth exit [1]

For a financial system that does not take profitability seriously, a current account deficit (and thus a need to fund growth by borrowing in international profit-seeking financial markets) is a precursor to a major crisis.

In September 2014 it was reported that the Bank of Japan was moving towards being the largest holder of stock on the Nikkei stock exchange - as it seeks to support Japan's fragile economy through the purchase of these riskier assets. This is in stark contrast to US Federal reserve which has been buying government bonds and mortgage-backed securities. The BOJ is under pressure to stabilize the country's financial system and prop up the economy [1]

In December 2014, it was suggested that:

  •  the Abe Government had sought an electoral mandate for the most radical reforms in Japan's modern history. HSBC warned that Japan is trying to drive down the Yen - and that this was dangerous and potentially uncontrollable perhaps leading to exchange rate crisis and worldwide currency storm. Abe may be backing away from fiscal retrenchment and may pressure BoJ to facilitate increased household spending. Yen would be hurt by any sign of outright monetization.  Japan's recovery faltered. Abe's Thatcherite 'Third Arrow' of reform never happened. Japan's economy depends on BoJ's purchase of assets of 1.4% of GDP monthly - the largest for any modern country. Wage inflation may result - and hit the exchange rate.  This could set off beggar-my-neighbour devaluations across Asia. China is trying to wean its economy off exports - but there are limits. And capital flight from Japan could set off explosive rise in $US - and harm emerging markets with $US denominated debts. This would do serious global damage. BoJ is currently soaking up all bond issuance by Japan's government. Real interest rates are deeply negative. Printing money may be being used to devalue Japan's debt.  There are some positive signs in Japan's economy and the oil price slump will help. However Japan is at a critical point. Many reforms (eg to finance / pensions / taxes / productivity / deflation) are needed simultaneously [1]
  • Japan's savings rate has turned negative for the first time on record (ie since 1955) - and this creates problems because Japan's high debt levels have been funded domestically and cheaply whereas foreign lenders would require a more appropriate risk premium [1]

In March 2016 it was argued that Japan could be headed for a solvency crisis - in (say) 5 years. Public debts are 250% of GDP and spiraling up. Retirees have been willing to hold government debt at zero rates - but these will soon be unable to provide enough capital. When / if it becomes necessary to rely on foreign capital, rates are likely to go much higher. Bank of Japan could be forced to fund government debts directly - in which case Japan would face a significant inflationary risk (rather than current deflationary risk). This may already be starting to happen.   [1]

China's Predicament

After apparently being persuaded to adopt of a variation of the Japanese economic model (and perhaps to revert to more traditional Art of War tactics in its contest with the West), China mobilized a huge amount of energy and creativity and achieved spectacular progress from the 1980s in the face of immense difficulties to be seen as a potential economic super-power.

There was ultimately an expectation that Asia's economic growth (led by China) would decouple from the growth of the US economy (see Decoupling: A New Urgency?). The need for decoupling has been amplified by the GFC and the consequent inadequacy of export-led industrialization strategies.

In June 2009 it was suggested that emerging economies might have been less adversely affected by the GFC and be able to maintain strong growth without dependence on demand from the US and Europe. However, without radical changes, this seemed likely to be only a temporary respite.

China: After the GFC speculates about China's position - basically suggesting that China's response has involved both: (a) high levels of government spending and provision of credit through banks for property, infrastructure and other forms of investment; and (b) some efforts to transform its society and economy which may long have been planned to overcome the constraints implicit in the economic model it copied from Japan (eg its dependence on the strength of the US financial system).

By mid 2010 it was common for observers to speculate on the basis of China's rapid growth in the post GFC environment about the 21st century being the 'China era' (eg see also Future of the World: Again?), though without any real understanding of what such an outcome really meant or that the hazards facing extremely rapid state-driven economic growth (like that in the USSR in the 1950s and Japan before 1990) might disrupt China's rise also.

Some Thoughts on the 'China Era' (email sent 21/8/10)

Professor Jean-Pierre Lehman
IMD

Re: 'Uncertain times as we enter the China era', The Australian, 20/8/10

On the basis of a couple of decades study of the different paths to modernisation of Western and East Asian societies, I should like (in response to your article) to offer some suggestions about the sorts of 'homework' that may need to be done to cope with the China's rising economic and geo-political influence.

My interpretation of your article: China has become the world's second largest economy, upsetting the status quo of the last century. In 1820 China still had 30% of world GDP - and Japan was minor appendix that owed much of its civilization to China. But when industrializing imperialist western powers came, Japan adjusted while China resisted. China declined in every way from 1840s - while Japan became an imperial power. Japan lost WWII, but won the peace. Chinese Communist victory and Cold War made Japan into US protégé - and Japan enjoyed an economic miracle. In the 1980s Japan was expected to become #1 economically, but it never achieved this. From 1949 to 1976 Chinese economy remained closed under Mao, and economically marginal. In 1979 China's new leadership reversed economic policy - and achieved 3 decades of amazing progress since then. While China prospered, Japan declined. This will have geo-political consequences (eg render US-Japan security treaty less viable). Asia contains many geo-political fault lines. Major changes in Asia are occurring while US suffers economic woes, policy confusion and is mired in Afghanistan. Japan was an economic rival, but was geo-politically obedient - but China may not be. China has frailties - but it is clear that while 19th century was Europe's, the 20th the American century, the world has now entered the Chinese era. Doing business will require dealing with the challenge of China's competitiveness - which needs lots of homework.

Some speculations relevant to the issues raised in your article are:

  • an attempt to identify the intellectual basis of political and economic management in East Asia, which Western observers must find radically unfamiliar is in a segment on East Asia in Competing Civilizations (2001). Briefly this refers to using strategic information to directly accelerate development of 'real' (say) economic activities, without paying serious attention to 'abstracts' (such as law, contract or financial outcomes) which are the basis of rational decision making processes under Western traditions. These methods (which owe a great deal to Daoism, and nothing to the West's classical Greek heritage) were:
    • pioneered by Japan (whose Zen and Shino traditions have much in common with Daoism) and combined with the Confucian traditions that were more dominant in China; and
    • subsequently spread to other East Asian societies - eg Japan reportedly introduced these methods to China's leaders in 1979;
    • built on the traditional role of highly educated bureaucratic elites in maintaining social and political order by manipulating what members of the community think;
  • the result has been a 'clash of civilizations' (primarily evident in terms of financial systems) that has been largely invisible to Asia-illiterate Western observers (see An Unrecognised Clash of Financial Systems?) though this 'clash' ultimately played a significant role in generating: (a) the global financial crisis (see Understanding East Asia's Economic Models and Impacting the Global Economy, 2009); and (b) the international financial imbalances that currently make efforts by the G20 to create a sustainable path to ongoing global economic growth virtually impossible (see Too Hard for the G20?);
  • while China appears to be the major economic power emerging in Asia, Japan's role should not be neglected (see Focusing on Japan and the Global Financial Crisis, 2009 and Which Identity Does Japan want Back?, 2009). As your article noted, Japan lost WWII but has tried to win the peace. Japan's goal in WWII was to create an Asian Co-prosperity Sphere - and its major tactic in doing this was to try to mobilize China (Japan's 'big brother') to take the lead role in creating this. It also needs to be considered that: (a) economic growth may not be everyone's idea of 'success'; and (b) for reasons suggested above, global growth can't be sustainable given the international financial imbalances that arise mainly because East Asian economic models do not involve taking profitability seriously and thus require domestic demand deficits to provide high levels of savings for ongoing unprofitable investment;
  • possible characteristics of a global 'Chinese era' were suggested in China as the Future of the World?;
  • the probability that China's (and Japan's) objective is not to exert global influence (because this is incompatible with their management methods), but rather merely to ensure that Western-style democratic capitalist practices are not dominant in an Asian sphere, is suggested in Creating a New International 'Confucian' Political and Economic Order (2009);
  • the probability that East Asian methods of political and economic management suffer fundamental limitations is outlined in Balancing Supply and Demand and suggests that that China is headed for serious economic problems (see Heading for a Crash? / A 'Ponzi' economy);
  • steps that might be taken to strengthen the global influence of democratic capitalist systems of political economy (which would reinforce  Western values such as individualism, liberty, rationality, a rule of law and democracy) are outlined in China may not have the solution, but it seems to have a problem,

I would be interested in your response to the above speculations.

John Craig

There seems to be something of a 'Ponzi' quality in China's economy (ie its dependence on strong inflows of new cash to prevent exposure of deficiencies in the balance sheets of its institutions - see China's Ponzi-like Economy). In an environment in which global growth stagnates as a consequence of international financial imbalances (see Too hard for the G20), China's best prospect of avoiding crisis might be seen as creating an environment in which its institutions / economy would not be evaluated against prevailing international financial criteria.

In August 2011, the possibility of another Asian Financial Crisis linked to the widespread dependence of Asian economies on current account surpluses was raised by Chinese economists - though in doing so they did not actually identify the cause of this risk.

Asia's Next Financial Crisis and its Impact on Australia - email sent 24/8/11

Matt Wade

Re: 'All aboard for Asia's bumpy decade ahead', Brisbane Times, 23/8/11

Your article reported a warning by Chinese academics that another financial crisis is likely in Asia over the next few years. I should like to suggest a perspective on this situation and what it might mean for Australia.

My interpretation of your article: As investors consider a re-run of global financial crisis (GFC), warnings of a repeat of Asian Financial Crisis (AFC) emerged from a presentation at a RBA conference by Peking University economists. A new AFC is possible over the next 10 years, they said. The 1997-98 AFC devastated many economies as investors fled the region. This didn't end Asia's growth because China and India emerged - though they had not been seen as high performers in 1993. The AFC had a major impact on the region - mainly involving the emergence of large current account surpluses and export of capital from the region. Asian countries responded to the rapid exodus of foreign capital by promoting current account surpluses. Before then most Asian countries were capital importers - but they are now capital exporters. Now Asian savings are being used to finance budget deficits in the North Atlantic, though they are needed to promote domestic development. Another spin off was efforts to forge trade, financial and economic cooperation across the region – though this has made little progress. China used monetary and fiscal stimulus measures during GFC, which also generated inflation - and this can't be repeated. Now many Asian economies need structural reforms. Imbalances and distortions are increasing in China. India faces problems in providing jobs for millions of workers, SE Asia must upgrade their industrial structures to overcome middle income trap. There need for change could lead to a crisis - which leads to global recession. Australia survived the first AFC, but might find the next more difficult.

The AFC was triggered by the withdrawal of foreign capital when the wastage of capital by ‘cronyist’ (rather than ‘capitalist’) financial systems became obvious. However similar distortions in financial systems have apparently been a general characteristic of the systems of socio-political-economy that Japan pioneered after WWII as the basis of its ‘economic miracle’ and then encouraged others in East Asia to adopt (see Understanding East Asia's Neo-Confucian Systems of Socio-political Economy). National savings tend to be mobilized by state-connected banks, and made available to state-connected enterprises that seek to maximize market share, but pay limited regard to profitability. While this arrangement provides a novel form of industrial subsidy, it also makes it hazardous for such countries to borrow in ‘capitalistic’ (ie profit-oriented) financial markets.

The AFC emerged in 1997 following the withdrawal of foreign capital from countries whose suspect financial systems were not protected by current account surpluses and accumulated foreign reserves. This certainly encouraged others to copy the methods that Japan and China had previously used to gain such protection. And interestingly the withdrawal of foreign capital was seen to have been initiated by Japan (see Hartcher ‘Look East, Dr Mahathir, for the source of Asia’s decline’, Australian Financial Review, 25-26/10/97).

A new financial crisis has long seemed probable in Asia as the third stage of the GFC because many economies have continued to depend on the willingness and ability of trading partners (especially the US) to sustain current account deficits and ever increasing debt levels (see Unresolved Problems and Coming Crises, 2009). And it has been obvious that this practice would eventually prove unsustainable (see New Economic Strategies Must Be Found).

However the structural reforms that were referred to in the Chinese professors’ paper are unlikely to involve efforts to adapt to Western-style ‘capitalistic’ financial practices. A cultural revolution would be required for many East Asian economies to operate profitably under Western / US financial principles, because of (for example): fundamental differences in the way information is used; the need to change economic goals from economic 'power' to financial returns; the inseparability of economic issues from questions of social / political power; and the lack of appropriate legal systems.

Rather the crisis they referred to might be the by-product of experimenting with a ‘neo-Confucian’ international order which would operate in quite a different way to the democratic capitalist principles that Australians are accustomed to (see Signs of an Emerging East Asian International Order). Or alternatively the crisis might be collateral damage associated with efforts by Western societies to eliminate the constraints on their economic prosperity that arise from the international financial imbalances that have been needed to protect ‘cronyist’ financial systems in East Asia – eg as suggested in Preventing Economic Stagnation

In any event, the next AFC will be quite unlike that in 1997-98. Australia will not be able to rely on its exports to ‘Asia’ continuing. ‘Asia’ did not continue to demand Australia’s commodity exports at the time of the first AFC simply because China and India emerged as new players. Rather this demand continued because: (a) the region’s economy was geared to exports to major developed economies (particularly to the US), and US demand remained strong; and (b) ‘cronyist’ financial systems (in Japan and China) were protected by the willingness and ability of the US to continue increasing its debt levels indefinitely. These supports are unlikely to be available in the next Asian financial crisis.

John Craig

By late 2013 it seemed that China (like Japan) could be in a situation in which the accumulation of high levels of government debt (and contingent liabilities for the bad debts of other institutions - such as state owned enterprises, local governments and banks, which are effectively branches of the Communist Party) could be the basis of a serious financial crisis which China's system was poorly positioned to deal with (see Preparing for a 'Con'? and Or Maybe there IS a Real Problem)

In relation to China observers have suggested that risks seemed to be associated, for example, with:
  • huge increases in local government debt to fund special projects to maintain growth during GFC;
  • rapid increases in bank lending - which risked making banks too big to bail out;
  • the emergence of a shadow banking system which marketed risky, but higher interest, products;
  • banks' need for offshore capital because of growing levels of bad debts;
  • China's emphasis on growth (which required expanding credit) rather than on structural reform (to make expanding credit safe);
  • government liabilities which were not limited to direct government debt (54% of GDP - of which local government debt was 1/3 of GDP) because of the need to cover bad debts of banking system (which was an extension of the Communist Party) and the shadow banking system (as it had had implicit government guarantee);
  • China's domestic debt rising from 128% of GDP in 2008 to 216% of GDP;
  • lack of reliable information about local government debt;
  • a perceived looming credit crunch;
  • 20-50% of credit being provided by shadow banking system;
  • perception that China was on a $24tr debt 'tiger' that it can't control, and that all countries that have had credit booms like China's have had credit crises;
  • the decline over 5 years in the GDP gain from $1 of credit from $1 to $0.25;
  • expectation of defaults in China in 2014 - as many loans become due for renewal;
  • 50% fall in lending in February 2014 - as lending by shadow banking system virtually ceased;
  • exposure of China's banking system to copper and iron ore - whose prices declined rapidly in early 2014 - because these had been used as collateral for loans;
  • significant borrowing by China's banking system in $US and its consequent exposure to any decline in value of yuan - which in the past could have been devalued to boost China's competitiveness;
  • a possibly huge and economically-significant level of corruption by Chinese officials.

At the same time there seemed to be serious political tensions across north-south boundaries where past frictions have led to civil wars that have littered China's history and to 'commercial' factions from southern China being driven out to become the Chinese Diaspora especially across SE Asia.

Catch-up Growth in History

Harvard researchers have argued that the history of countries that experience rapid catch-up economic growth is that they return to the global average rate very suddenly - especially where authoritarian governments are involved.

Details: China's super-rapid growth has extended 33 years - three times longer than normal. However in 1961 the Soviet Union was predicted to overtake the US by 1980. Japan was also expected to overtake the US. However Japan's productivity which had doubled over 30 years to 1991 is now 6% below that in 1991. In 1980 Brazil had experienced 5% pa growth for 20 years, but has since had zero per-capital growth for two decades. It is invalid to use current high growth rates to predict the future. Current rates explain only 20-30% of future growth. Where growth exceeds 6% pa an abrupt deceleration to 2% is normal [1]
Creating a New International 'Confucian' / Bureaucratic Financial and Political Order?

Creating a New International 'Confucian' / Bureaucratic Financial and Political Order? 

There are indications of attempts to create international financial and political arrangements which would avoid the risk of failure that the neo-Confucian systems in East Asia face within a global system based on liberal (eg democratic capitalistic) institutions. 

For example attempts to avoid the constraints implicit in the 'capitalistic' global financial system's expectation that national savings should be invested (largely by enterprises that are not dependent on the state) to maximize the return on, and ensure the return of, capital rather than to achieve the consensual goals of ethnic elites to boost the power of an ethnic nation have been ongoing for decades and primarily led by Japan (see A Generally Unrecognised 'Financial War'?)

Beyond an Economic Contest

Various observers suggested at one time that China was challenging the US dollar - but China's primary goal was not likely to involve replacing the $US with the Yuan.

Promoting the Yuan as a Reserve Currency: Efforts have undoubtedly been made to promote the use of China's currency in international trade. For example, steps to promote the international role of the Yuan / renminbi were outlined as follows in late 2014.

Over several decades China's high economic growth and economic integration has increased its role in global output and trade. It now has second largest economy; is the world's largest importer / exporter; attracts huge FDI inflows; and is the world's largest holder of foreign exchange reserves. However the market share of its currency has been limited - and China has sought to change this by gradually internationalizing the renminbi. Qualified foreign investors have been able to access China's capital markets. The renminbi's trading range was widened to 2%. Using the renminbi for cross border trades has been encouraged. Renminbi deposit accounts and offshore renminbi markets have been encouraged. This has allowed RMB to emerge in international currency system.  It has overtaken the euro in global trade finance. Renminbi bond issuances in Hong Kong has increased rapidly. Most of this involves issuances from China' based companies - but non-China-based companies have increasingly become involved. The renminbi's use as a reserve currency is small but is increasing. These developments result from the PRC opening its capital account and deepening its financial markets. [1]

This clearly requires great care because China's financial system has not involved serious concern for return on, or even return of, capital (see Evidence). In purely financial terms the Yuan's value would always be suspect.

Thus, presumably in order to overcome this obstacle China has been rapidly accumulating substantial gold reserves as a back-up for a traded Yuan - a fact that has been disruptive of international paper-gold markets (see Interpreting the Canary in the Gold Mine).

Rather China (and perhaps Japan) may be primarily seeking (and presumably have been seeking for decades) to reduce the role which any currency and free markets play in influencing economic affairs (and democracy plays in influencing politics), and replace their role to a significant degree with something like neo-Confucian relationships amongst social elites and their subordinates in various parts of the global system. Even as far as the RMB / Yuan might play a role in international financial markets, this would involve an 'elite-manipulated' commodity whose actual financial backing would be neither transparent nor certain.

This elite-controlled international system appears to be being presented as an effort to create a 'multi-polar world' as an alternative to the  international order that the US has championed since WWII without highlighting the lack of any 'liberal' (ie democratic capitalist) emphasis in the proposed 'multi-polar-world'.

The world that China's so-called 'Communist' Party seemed to be seeking to create was one in which its autocratic state would be able to intervene directly in organizing economic activities in other countries.

Aspirations

In simplest possible terms the goal could be to reduce the constraints on the rule by traditional ethnic social elites that arise where financial considerations determine economic activities / state spending and where law and democracy are the basis of government - because it is presumed that:

A possible rationale for this was presented by Henry Liu in The Abduction of Modernity (2003). Order within the society as a whole (built on the order that exists with families / communities) is emphasised rather than the welfare and capabilities of individuals.  Western societies were described as 'barbarians' because weapons were invented and used from the late 15th century which enabled common folk to challenge their aristocratic superiors. Restoring rule by 'elites' may be seen as removing the aberrations that are perceived to result from liberty for the common man. Moreover there seems to be an expectation (eg as indicated in The Rise of the Ferro-dollar and China: Sustaining Growth by Neglecting Profitability) that synergies and externalities can produce better outcomes for an economy as a whole that more than compensate for limited or negative returns on capital investment

The goal might not be to 'rule the world', but merely to ensure (as Japan sought using military force in the 1930s - initially by unsuccessfully seeking China's support in establishing a 'Greater East Asian Co-prosperity Sphere') that a significant part of it is not governed in accordance with the universal values and individual freedoms that underpin Western democratic capitalist systems.

An aside: It may be noted in passing that such an outcome might also appeal to Islamists who believe that: (a) democratic and capitalistic constraints on rule by social elites (ie Islamic authorities) are inappropriate - in that case because of the moral failings that are seen to arise as a consequence of individual liberty; and (b) people should live in ritualistic conformity with their traditions (ie Shar'ia Law in a Muslim environment). The possibility that these similarities with the aspirations of East Asian ultranationalists might have led to collaboration was speculated: (a) in Attacking the Global Financial System (2001) in relation to the 911 attacks in America; and (b) in Is the Barbarity of ISIS Another Attempt to Ensnare the US in the Middle East? (2014). However it is emphasised that, while there are some indications, the present writer is not aware of any direct evidence of such collaboration.

Such an outcome would be quite inconsistent with the version of an 'Asian century' (in which China in particular would play a leading global role within a Western-style international framework) that was advocated by, for example, business and political leaders in Australia who seem unable to understand what a real 'Asian century' might involve (see Australia and the Claytons Century: The 'Asian' Century You have when you are not having an Asian century).

However the possibility that a non-global neo-Confucian international order (which would make econometricians and many political scientists redundant because they also would simply have no idea how it would work) might be considered and might be consistent with emerging events is considered below.

The Need

In brief there was a pressing need to create an international financial and political order in competition with liberal Western-style international arrangements because radically different, and incompatible, systems of socio-political-economy are involved in East Asia. In particular:

  • liberal Western style institutions are based on universalist values and emphasise the welfare and capabilities of rational / responsible individuals;
  • East Asian cultural traditions are based on ways of thinking that do not acknowledge universal values and which emphasis the welfare and capabilities of particular ethnic communities as a whole under the guidance of elite / autocratic bureaucrats (see East Asia in Competing Civilizations). From some viewpoints such systems can be viewed as a 'soft' form of fascism (whose primary feature seems to be an emphasis on an elitist state rather than on the people) - and Mao's cultural revolution in China had been directed towards promoting social equality by purging Confucianism from China as it was seen to have oppressed the people.

The constraint on the neo-Confucian / 'bureaucratic non-capitalist' models Japan pioneered and then promoted throughout East Asia (and ultimately in China in the late 1970s) lies on the demand side (ie on their dependence on favourable international financial imbalances - ie on strong export demand - especially from the US, and on the ability that the US has had to productively absorb surplus savings). No amount of additional supply capacity is going to solve that difficulty. In the absence of strong external demand, growth driven by domestic demand would merely run down foreign exchange reserves and, if Western / global economic / financial principles continue to be applied, the neo-Confucian economies the latter must eventually suffer crippling financial crises because of the lack of traditional capitalistic attention to profitability that characterises those models (see above).

Creating strong domestic demand in China would be a short term option for overcoming this constraint. From the time of the global financial crisis extremely high levels of investment spending were stimulated in China mainly through a rapid expansion of credit. When this seemed likely to be unsustainable proposals for more fundamental economic reforms were advanced at the Third Plenum of the Communist Party in 2013. However the liberalization that this envisaged was quite incompatible with the maintenance of an authoritarian state and the long term implications of such liberalization (and or the rise of a consumer-driven economy) would have to be challenges to autocratic government (see Other Structural Problems). The fact that changes to China's education system would encourage the emergence of a compliant population (rather than one capable of taking initiative in a liberal environment) strongly suggested that China's announced economic liberalization was unlikely to be sustained (see Competing Thought Cultures).

The apparently incompatibility of East Asian economic models and the prevailing international financial regime is paralleled by the incompatibility of domestic political arrangements (eg in China) with those required to take an international leadership role (see Eurocentric Aspirations in a World of Rising Asian Influence) .

Other observers have suggested motives for China seeking changes in the international political and economic order.

Examples: 

 China exhibits enormous complexity and ambiguity. While there might be debate about its future, its strategic and foreign policy elites have consistent views. US pre-eminence in the region has been seen as an aberration. There is discomfort not only with open trade, freedom of the seas and a rule of law, but with a regional order backed by a powerful democratic community. Much writing is about how to dilute US influence. The US seeks to promote China's role as responsible stakeholder - while China seeks to build comprehensive national power  - and to disrupt US regional leadership through subversion and 'winning without fighting'. The 'responsible stakeholder view assumes that China's interests and ambitions are flexible - though the evidence suggests that its goal is to reshape the region in accordance with its own preferences. It also places too much faith in liberal line of thinking - and China's economic rise has disproportionately increased wealth / resources of state. [1]

WWI saw the emergence of social democracy in Europe as an alternative to monarchism, while communism emerged to replace Western imperial colonialism. Communism provided both Russia and China with an effective vehicle for creating a new society to revive past glories. But Western imperialism continued after feudal monarchy was overthrown in China, by establishment of a US style republic until communists seized power in 1949. Communism failed in Russia in 1991, but communism with Chinese characteristics continued to prosper in China because "socialist concepts have always been operative throughout Chinese history and the import of Marxism from the West did not replace a Chinese socio-political culture of communal harmony derived from prescribed social rites and hierarchical relations". Chinese culture has always placed community at its core, in contrast to western post-Reformation culture centering on individualism. Confucian philosopher Mencius warned that a nation operating on profit motives will always endanger its own wellbeing - with renyi being a better alternative (loosely meaning observance of proper human relationships, support for justice, fidelity and humanity - as embodied in socialist idea). Marxism merely adds a contemporary dimension to indigenous Chinese socialist philosophy of renyi that enables China to interact with expansionist Western capitalism / repulse Western imperialism and resist neo-liberalism.  [and much more interpreting US history] [1]

Likely Characteristics

A long term solution would presumably required the creation of an updated version of the China-centered imperial tributary system that existed prior to the expansion of Western influences - which could also be viewed as giving effect to Japan's WWII goal of creating a 'Greater East Asian Co-prosperity Sphere'.

Characteristics of the former 'Confucian' International Order - a China-centred tribute trade system 

It was a world within worlds (rather than a universalist global system). In this China-centred 'world' within the world: (a) economic activities were subsets of political relationships between China and its tributaries: (b) major trade and financial flows were managed by the state - though there were minor amounts of private trade.  Historical Perspectives on States, Markets and Capitalism, East and West

[incomplete]

Features of such an international Confucian 'world-within -the-world' might be expected to involve:

US perceptions of Mao are based on current Chinese elite perceptions of him. The latter support Mao’s revolution only so far as it provided a basis for ejecting foreign influences and allowing China’s elite to make China strong – so its elite can have international influence while the majority of Chinese people eke out a marginal existence. Mao called such people the ‘capitalist roaders’ (in that they wanted China to take a capitalist road to national greatness) rather than a socialist road that would distribute wealth more evenly – thus frustrating the emergence of a stratified Chinese elite who could enjoy a concentration of resources sufficient to wield some power on the international stage (J. P. Franks in Customer reviews of Mabo Gao, ‘The Battle for China’s Past: Mao and the Cultural Revolution’, 2008)
  • those who 'control the world' without democratic accountability or a rule of law being able gain substantial political and economic benefits from their central position, eg by:
    • ensuring that their (ethnic) connections gain economic benefits as the middle-men and source of key inputs in the arrangements amongst 'tributaries' that are put in place;
    • requiring others to comply with whatever they want as a condition for maintaining order. Under East Asian traditions there is a rule of  man - not a rule of law. An agreement (for example) means whatever (the most powerful) man says that it means. Order is not ensured by the lawful framework within which individuals / enterprises take independent initiatives;
  • primary reliance on social-elite-coordinated (ie power rather than profit-seeking) economic transactions within and amongst China and its 'tributaries' - though with independent profit-seeking enterprise allowed on the margins;
  • rigging domestic markets through elite social networks similar to that used to orchestrate production, so that favoured (large state-owned or state-linked) enterprises appear 'profitable' - at the expense of the rest of the economy - by setting favourable upstream and downstream prices (see below);
  • seeking a net current account surplus with the outside world by suppressing consumption, while being able to handle some current account deficits by creating special financial institutions and institutions to which 'profit-focused' investments could be attracted by rigging associated industrial activities through cartels;
  • no attempt to create a 'global' system - because of the particularist traditions and a lack of commitment to general / universal principles and a lack of management / government methods that would work with those who don't accept a socially-subordinate position. This would be a 'world' within the world, not a new global order - though efforts would presumably be made to undermine the effectiveness of global institutions that have operated on Western-style democratic capitalist principles;
  • achieving changes by behind-the-scenes activity without public disclosure or discussion - as debate / abstract analysis is not a favoured method for problem solving.  The 'East' was not seen to be 'mysterious' for nothing.

Acquiring 'Soft' Power

The development of a trade / tribute system would not initially result in an adverse reaction from those being drawn into a subordinate position because it would involve the use of 'soft power' methods. Those who seek to be at the centre of power would: (a) have to be well educated, informed and in a prominent position; (b) adopt a neutral position in relation to some issue; (c) get together influential stakeholders with complementary interests in that issue; (d) encourage them to develop a consensus; and then (e) use state power to enforce that consensus with the support of the stakeholders whose viewpoints it reflects (perhaps at the expense of the elite's subordinates and those who might compete with the insider stakeholders) . This keeps the influential stakeholders happy - as their wishes would be put into practice.

Example: Creation of (say) the BRICS Bank (see below) might have involved seeking a consensus of non-Chinese participants about development funding and putting the participants' consensus in to place while drawing upon resources generated within China because it is taken as given that Chinese people will work hard to achieve nationalistic goals while receiving limited benefits (eg because financial repression is practiced to direct resources to production rather than consumption). This also arguably requires a sense of nationalistic purpose - and in China in recent decades this seems to have involved  gaining revenge for what historically happened to China, and more recently involves sabre-rattling with Japan.

What the stakeholders whose views were being drawn upon would not see is that such a process steadily increases the ‘coordinator's’ knowledge, power and high status – and strong connections with the most powerful other players. Later they would find that nothing could be done without support gained by providing respect (and nominal gifts) to the increasingly powerful and unrepresentative facilitator network.

Developing consensus as a basis for policy involves fairly standard bureaucratic tactics - and seems to have been the method used by elite Confucian bureaucrats to govern 'Asian' nations (as virtual 'whole-of-society' bureacracies) on behalf of emperors prior to European influence. The core 'ideology' of China's 'Communist' regime involves non-intervention and the rejection of universalist values (ie the notion that anyone would have any idea what were good or bad for another society). This makes sense if one's intended method for building an 'tributary' international system involves being at the centre in developing consensus amongst the most socially, politically and economically powerful in the region that is being 'administered'. It does not matter to those who who bring the powerful groups together what consensus emerges. All that matters to the catalysts is that they have the status, and thus the power, to do so.

In the post WWII era, the US often intervened in other countries in an effort to promote the adoption of institutions built on individual freedom. Such intervention frequently failed because the cultural preconditions required for liberal institutions were not considered (eg see Establishing Japan's Post-WWII Economic and Political Systems and Fatal Flaws in relation to Iraq). However the international system that China aspires to create would not involve intervention with liberal aspirations. Local elites would be enabled to exert power in any way they see fit - providing they did not seek to influence the way that China's 'princelings' exerted power in China.

An aside: the fact that in 2014 Russia unexpectedly decided on a non-interventionist approach to east-west conflict in the Ukraine suggests that China's preferred approach might be gaining ground in the BRICS group.

Unfortunately these apparently 'virtuous' methods would eventually create something of a monster because it would place huge influence in the hands of mere mortals who would inevitably abuse it (eg as members of China's so-called 'Communist' Party did in using their role as economic catalysts to make themselves and their families wealthy, or as ethnic nationalists have done at times in espousing the superiority of their community over all others). In a democratic environment the 'soft power' that an effective bureaucracy can develop is constrained by accountability to the electorate's representative. But abuses of such power are likely in the absence of that accountability.

One observer suggested that China seems to be trying to leverage international influence on the basis of its possible future (rather than its present) economic strengths - and that those future expectations may not materialize if China becomes caught in a middle income trap

Reference was recently made to Australia's need to avoid getting involved in a conflict between Japan and China - apparently because it was believed that Australia was critically economically dependent on China. China has used its potential power for current leverage / gain. However this depends on its ability to escape the 'middle-income' trap. China achieved rapid growth by the world's largest fixed-investment surge in history - and is now starting the pay the price. AS its growth slows, it won't be able to use future economic strength for current leverage. China is the world's factory - but export-manufacturing is dominated to foreign firms / investors. 2/3 of china's trade is processing. It is not a strong source of demand - and thus can't offer demand to other countries. And China's FDI is dwarfed by that from elsewhere. As China's growth slows it ability to threaten others with future economic costs from upsetting China will decline. China can't enforce economic sanctions against advanced economies. There is an assumption that China was becoming more 'normal'. Its fourth generation of leaders described its model as unsustainable. China has claimed to be changing. But its 2015 position is showing signs of problems. Some analysts argue that China's dominance is assured. But this may not be so [1]

Another observer argued that China is seeking to create an unconventional form of international power that others need to understand [1]

Making Progress?

One observer suggested that China's autocratic Confucian order in 2011 closely resembled that which Communist revolutionaries overthrew in 1911. Even though Mao's Cultural Revolution had sought to purge Confucian influences from China because he believed that they had oppressed the people, his successors apparently reintroduced a form of Confucian governance by a bureaucratic elite (as 'socialism with Chinese characteristics') presumably because Japan had demonstrated after WWII that bureaucratically-coordinated non-capitalistic methods could generate 'miracles' in the 'real economy'.

Moreover there have been indications that alternative regional arrangements were being considered for decades to consolidate the long-established role that China's Diaspora have played as a China-focused economic 'empire' especially through SE Asia.

For example, An Emerging East Asian International Order? referred to:
  • claims by leading officials that Japan is a 'non-capitalist market economy' - which is reasonable as profit-seeking (the key feature of capitalist enterprises) has not appeared to be the main driver of businesses in Japan;
  • reference to the emergence of a 'Confucian union'  - based on the concept of a 'worker caste system' in which bureaucrats / technocrats would have power which would be different to the 'merchant caste' system in which capital is the source of power;
  • China's practice of 'sharing' the protection offered by a current account surplus with countries that provide inputs to its export industries, whose economic methods would otherwise result in financial crises;
  • proposals, led by Japan, for the establishment of a Asian Monetary Fund as an alternative to the IMF (and the considerable strengthening of that proposal under the Chiang Mai initiative) which would:
    • provide a framework for financial and monetary systems in which social elites enable resources to be directed towards boosting the economic power of their ethnic communities without serious concern for return on capital from meeting their people's demands as consumers;
    • involve shared access to foreign exchange reserves to prevent crises associated with withdrawal of capital in any particular country;
  • calls by the leader of Japan's newly elected government (of the Democratic Party Of Japan) for Japan to 'get its identity back' - an identity that did not traditionally involve Western-style democratic capitalism.

In 2005 the UN Human Rights Commission established a project to promote 'international solidarity' as a fundamental human right. However the proposal was extremely vague in relation to how 'solidarity' would be organised, and (though this was probably not what was intended) potentially provided a framework to justify the international use of authoritarian / illiberal coercion in the name of 'human rights'.

Potential Problem: 'Solidarity' can be interpreted as being either 'collective' (ie involving a free association individuals with shared interests - such as a trade union) or 'communitarian' (ie involving all members of a community with necessarily diverse interests many of whom might have to be coerced to comply with what some social elite believed to be the 'communal' interest). The latter (which corresponds with the sort of authoritarian communalism which has emerged in China and may be being promoted internationally) is probably not what was intended - but could be construed to be a 'human right' if the intended nature of 'solidarity' is not clarified.

China's 2009 responses to the GFC may be consistent with a desire to create a new China-centred trade / tribute empire as speculated above - though this is by no means certain. Steps taken have had the effect of:

  • boosting growth within such a potential China-centred 'world' (both in China itself, in potential 'tributaries' and in developing countries) presumably in order to strengthen demand for its products from other than the US (and other 'capitalist' countries);
  • retaining social-elite control of economic and financial transactions within such a 'world';
  • establishing special financial centre and financial institutions  - perhaps so that (hopefully) small amounts of profit-seeking investment to cope with any net current account deficits that arise can be officially controlled while giving the impression of financial profitability;
  • making it harder for anyone (especially the US which has favoured a different approach) to create an effective global financial system.
Specifically it is noted (eg see Doing China's Own Thing?) that:
  • China has made no attempt to reform its economic / financial system on Western principles. Emphasis has continued to be placed on state-owned enterprises and state banks neither of which are noted for taking Western-style approaches to profitability seriously - and the environment for private enterprise is very poor;
  • foreign banks have started operating profitably in China arguably because of the same sort of market-rigging by cartels that allows state-owned enterprises to appear profitable;
  • domestic consumption has been moderately boosted;
  • significant amounts of China's foreign exchange reserves have been diversified away from $US. In particular, reserves have been used to: (a) make loans to key trading partners; (b) acquire businesses; (c) stockpile commodities; (d) acquire future key energy / commodity inputs; and (e) gain support;
  • proposals have been presented for the development of Shanghai as a international financial centre with 'Chinese characteristics' - perhaps involving regulatory reforms and creating a market for $US denominated bonds;
  • proposals exist to upgrade established industrial regions on China's coast to succeed on the basis of independent innovation - while transferring traditional industries inland;
  • the use of the Yuan has been encouraged as an international trade currency amongst  key trading partners;
  • concern has been expressed about reliance on the $US as the global reserve currency with SDR's issued by IMF suggested as an alternative. Concern has also been expressed about the need to rely on US demand;
  • the Ministry for State Security was reportedly placed in charge of China's economic dealings - a move which could be expected to dramatically curtail foreign commercial involvement within China.

It was possible that social-elite-coordinated cartels (rather than reliance on conventional market transactions) may be being put into place to promote the perceived 'profitability' of state-favoured enterprises and banks (and thus the perceived risk of financial crises in neo-Confucian economies) as suggested by:

  • the massive boost in China's corporate profits / savings from 2003 that was described by The Myth of Chinese Savings;
  • the pre-GFC balance-sheet health of Asia's corporate and banking sectors [1], when this faces massive cultural obstacles under Western-style business techniques,
  • claims of such rigging by Eammon Fingleton, a close Japan-based observer of the region;
  • the increased concentration on larger enterprises, and the credit constraints facing SMEs which the IMF reported [1]

China's efforts in late 2009 to subvert United Nations talks intended to negotiate an international agreement on responding to climate change may have indicated an attempt to limit the effectiveness of global institutions which operate (as the UN has sought to do) on Western-style political principles and perhaps establish alternative 'Asian-style' elite-consensus machinery.

Explanation:  In December 2009 it was noted that China's tactics at the UN's Copenhagen climate change summit appeared to be aimed at preventing any outcomes being achieved [1]. This reportedly involved:
  • a complete refusal to engage in talks;
  • China-engineered procedural blocking tactics (in conjunction with developing nations) to prevent political debate on draft resolutions by claiming that they were a plot to 'kill' the Kyoto Protocol;
  • the refusal of China's Premier to participate in talks with the US President - with a third-rank official substituting;
  • avoiding engagement by top political leaders for two weeks by insisting that everything had to be done by consensus amongst 192 countries;
  • encouraging involvement of a hardline Sudanese negotiator who described developed nation's approaches to climate change as like Nazism; endless rhetoric about historic responsibilities of the West and rants about the evils of capitalism - which meant that there was no top-level discussions about practical action.

This is significant because the UN has been based on Western-style political processes. The latter rely upon debate amongst representatives as the means of reaching decisions. This is incompatible with East Asian traditions in which:

  • entirely different assumptions are made about the feasibility of reaching appropriate decisions through rational debate (see East Asia);
  • political power is associated with NOT making decisions, but rather with having social subordinates who make them on behalf of the powerful (see Pye, Asian Power and Politics). An insistence on 'consensus' (amongst social subordinates) is compatible with these traditions.

While some observers suggest that China's obstructionism merely reflects an inward focus on its own needs [1, 2], the possibility that China might seek to develop alternative means for developing practical responses to international issues such as climate change through consensus amongst those countries whose elites accept a subordinate status within a China-centered 'tribute' system should be recognized.

The UN, it may be noted, has been ineffectual in dealing with global issues in any event (and for much of the previous decade the US, which originally took the lead role in setting up the UN, had emphasised unilateral rather than multilateral action - because of the US's apparent preference for trying to defeat ignorance on the battlefield rather than in the academe). China's new efforts to subvert UN machinery are likely to simply be further justifications for seeking serious reforms.

In mid 2013 China appeared to some observers to be seeking to contribute to a potential China-centred trade-tribute system by promoting a G2 relationship with the US as a 'partnership of equals'.

What a China / US 'Partnership of Equals' Means - email sent 5/6/13

Jamil Anderlini,
Financial Times

Re: Global Insight: China’s ‘great power’ call to the US could stir friction, Financial Times, 4/6/13

I should like to try to add value to your useful observations about the aspirations of China’s current leaders to create a G2 group with the US – as a ‘partnership of equals’.

My interpretation of your article: Beijing wants a partnership of equals with the US. Xi Jinping will bring a new Chinese world view to a coming meeting with US president Obama. Five years ago, China rejected the Group of Two relationship between Washington and Beijing. But the G2 has now been adopted and re-branded by China. China's administration under President Hu was seen to be passive, reactive, isolationist and clumsy in responding to outside world. Deng Xiaoping had advise that 'China hide its brilliance and bide its time'. Even as Chinese companies and investment spread worldwide and China's military power spread, China was portrayed as a poor developing nation. China's new leadership portray a different picture. A more coherent and assertive foreign policy may be part of a 'great rejuvenation of the Chinese nation'. US diplomats have had better access to officials than under last administration - and the latter seem obsessed with getting the US to acknowledge a new type of great power relationship between equals. There is hope that China's rise will not be accompanied by friction / war as in the past when rising powers encounter incumbent superpowers. Focusing on this single relationship will create friction elsewhere - because by seeking to promote a relationship of equals with US, Beijing has downgraded its relationship with others. Cynical Beijing-based diplomats see the 'great rejuvenation' theme as seeking to re-establish the ancient tributary system that put China at the centre of the world. Many feel they have been treated to a charm offensive. China's new G2 initiative implies that China sees all other nations as not great powers, and thus able to be ignored - and this has significant implications for Europe

Firstly, I submit that a ‘partnership of equals’ would not simply imply a relationship as equals between the US and China as nations.

Rather it implies that the autocratic neo-Confucian systems of socio-political-economy that have been the basis of rapid economic modernisation and growing power in East Asia (including China) should be accepted as an equal alternative to the liberal democratic capitalist international order that the US has championed globally since WWII. Some suggestions about the profound implications of this are outlined in China as the Future of the World; What does an 'Asian Century' Imply? and The Infantile US vs China Debate. The latter refers, for example, to fundamental differences in: ways of thinking; whether most importance is attached to individuals or to their communities as a whole; the relationship with Japan’s ‘Asian Co-prosperity Sphere’ aspirations in the 1930s and 1940s; and the critical importance of genuinely understanding such issues.

Secondly, the parallel with Japan’s failed efforts to gain acceptance as a cultural ‘equal’ in the lead up to WWII should be recognised – as should: (a) the contest with advocates of Communism associated with the Cold War: (b) the long term ‘financial war’ that has apparently been under way – which may, or may not, have had a relationship with the ‘war against terror’ (see A Generally Unrecognised 'Financial War'?), and (c) the implications of recent threats of ‘hot war’ emanating from North Korea which is another of the East Asia’s authoritarian neo-Confucian ‘family states’ (see 'Art of War' Speculations about North Korea's Threats).

Finally, some suggestions about the character of a new China-centred ‘tributary system’ are speculated in Creating a New International 'Confucian' Political and Economic Order (2009+). The latter also refers to the likelihood that countries with neo-Confucian systems of socio-political-economy (eg Japan and China) will experience ‘meltdowns’ if they are unable to escape from the liberal international financial and political order.

John Craig

At about the same time efforts were made to popularize a view of China's autocratic political system as a desirable and effective alternative to Western democratic models - which, though unique to China and inapplicable elsewhere, demonstrated that Western 'universalist' claims were invalid.

Parting the Bamboo Curtain ... A Bit

In July 2013 a video presentation by Eric Li was made available which compared what was called China's 'modified Mandarin' political system with Western democracies.

Outline of Li E., A Tale of Two Political Systems, 3/7/13: China was presented at one time with a linear view of history leading through various stages to collectivist Marxism. It was also presented with a linear view that saw individualism leading to electoral democracy and free markets. The latter has been promoted to the developing world. But China did not buy it – and made very rapid progress despite having a one-party state. The assumption is that this will be associated with operational rigidity, political closure and moral illegitimacy. But the reality has been adaptability, meritocracy and legitimacy. This system is supposed to be incapable of self correction. However China has had radical change. The Party self-corrected (eg in shifting from lifetime rule under Mao to leadership changes). Political reform has been seen to lag behind economic reform, but political reforms have been rapid. In fact the Party is the world’s leading expert on political reform. It is a meritocratic institution. Only 5 of 30 people in the Politbureau come from privileged backgrounds. Most have had to work hard to get to that position. This is possible because of the role of the little-known Party Organisation Department.- which is its human resources engine. Recruits rotate through three components namely: (a) civil service; (b) state owned enterprises; and (c) social organisations such as universities. These involve separate but integrated career paths. Graduates start at the bottom, and progress through various levels and across different functions. Those who perform best are promoted. The top performers move up to higher officialdom, and perhaps into the central committee. This progression would take 3-4 decades. This is a modified form of China’s Mandarin system. Western leaders get to the top without having this sort of experience. Winston Churchill once suggested that while democracy had problems it was better than the alternatives – but he had never heard of the Party Organisation Department. The West assumes that a multi-party system with free elections is best – and that if a party is not voted in through elections it has no legitimacy. But what about competency as a source of legitimacy? China was in a bad situation in 1949 when the Party took power. Now people’s perceptions that the future will be better than the past are very high – in marked contrast to the situation in many developed countries. This is a real basis for legitimacy. Electoral democracies (eg US / Europe) are suffering from dismal performance. And developing countries with electoral systems are still suffering from poverty and civil strife. Democracy, not China’s one party system, is in most danger of losing legitimacy. China continues to face massive problems because of the changes it is undergoing (pollution, population, food safety, corruption). Critics see corruption as a consequence of the one-party system. In transparency China ranks 70-80 out of 170 – and is improving. But India, the world’s largest democracy, is 94 and dropping. 50% of the countries below china are electoral democracies. Thus election is not the cure for corruption. Over the next 10 years China will surpass US as the world’s largest economy – and have per capita income near the top of all developing countries. Corruption will be curbed. Economic and political reform will continue under the one-party system. Meta-narratives that make universal claims failed in the 20th century and are continuing to fail. Meta-narrative is the cancer that is killing democracy from the inside. Democracy contributed to rise of West and the creation of the modern world. The universal claims that Western elites make about their political system is the core of the West’s current ills. The West should spend less time trying to force their system onto others, and more time on domestic political reform, then democracy would have a better chance. China’s political system won’t supplant electoral democracy, because (unlike the latter) it does not claim to be universal (and thus can’t be exported). China’s example does not provide an example for others, but demonstrates that alternatives exist. Communism and democracy are laudable ideas, but the era of dogmatic universalism is over. There is not just one way for government. Universality needs to make way for plurality.

Observations concerning 'A Tale of Two political Systems'

Eric Li's video presentation acknowledges that China’s system is neo-Confucian – though interestingly it was described as ‘modified Mandarin’ system (presumably because Mao-era negative attitudes to Confucianism seem to remain strong at grass roots level in China). It constituted a semi-official Chinese endorsement of the ‘Asian Co-Prosperity Sphere’ idea that Japan had promulgated in the 1930s and 1940 – ie a region in which ‘Asian values’ would prevail (ie universal values / a rule of law / individual liberty would be rejected in favour of guidance of society as a whole (ie what can be thought of as 'family states') by intellectual bureaucratic elites). The present writer's version of this was East Asia: The Realm of the Autocratic and Intuitive Ethnic Hierarchy (in contrast with Western societies that can be thought of as the Realm of the Rational / Responsible Individual);

The video also illustrates the traditional way of using information in East Asia (ie to encourage a desired response by an audience rather than by seeking to enable others to understand – because there is no belief in universals such as truth). For example the video suggested that China’s Communist Party had been able to manage political and economic progress since 1949 (including massive political transformations) on the basis of competencies gained from a ‘modified Mandarin’ system – even though Mao’s Cultural Revolution had been specifically aimed at eliminating those traditions from China on the basis of their perceived past oppression of China’s people.

The video also illustrates the role that deception plays in traditional Art of War tactics. The system that Eric Li describes has presumably been in place since the late 1970 – and yet has been kept hidden from the external world. In Western societies organisational strategy will be kept in confidence by (say) companies – but under traditional East Asian Art of War tactics the strategy and activities of the whole of a society are non-transparent – in the expectation that doing this will create domestic advantages and disadvantage other societies. The need to respond to this by seeking deeper understanding is obvious;

Many complexities are not revealed by the video (ie it only draws the Bamboo Curtain aside a bit). For example:

  • The presentation is unlikely to be an independent individual view, but rather to be being presented on behalf of China’s so-called ‘Communist’ Party (for reasons suggested in In East Asia Deals Always Involve Politics ). Eric Li described himself as a ‘venture capitalist’ – which implies that his role involves arranging finance for, and providing the commercial nous needed for, start-up enterprises involved with innovative products. Under China’s system such a persons would presumably be either employed by, or socially associated, with a state-owned financial institution - and thus is presumably making a state-sponsored presentation;
  • It seems that the neo-Confucian methods that have been the basis of rapid economic development may have been transmitted to China in the late 1970s by Japan – though China’s people are still encouraged to view Japan as an historical enemy perhaps in order to: (a) promote national unity; and (b) confuse Western observers about what is going on in East Asia. The way in which the Party Organisation Department is described as organising a bureaucratic system for staff development and advancement within China’s so-call ‘Communist’ Party seems very similar to descriptions of what happens in Japan’s bureaucracy – which is the centre of neo-Confucian control of Japanese society. During its period of rapid catch-up growth, Japan also had a one-party state - dominated by the so-called Liberal Democratic Party (which was anything but);
  • thus, if any country has the right to claim that it does not seek to provide an example for others except in the sense of showing that (say ‘modified Mandarin’ / neo-Confucian) alternatives to democracy exist, that country is Japan, not China - though it can be noted that North Korea's  official Juche (church'e) ideology also involves: (a) a commitment to the uniqueness of each society; (b) a rejection of Western 'universalist' notions; and (c) a desire to create a 'family state';
  • The neo-Confucian methods for achieving economic ‘miracles’ that Japan pioneered: (a) involved co-opting the community’s savings and using this to subsidise production so as to gain market share (because an ethnic community is viewed as a ‘family’ so it is reasonable for the ‘parents’ the use its resources as they see fit); (b) thus required that domestic demand be suppressed to avoid having to borrow in international financial markets; and thus (c) also depended on the willingness and ability of trading partners to support that macroeconomically unbalanced process of development by tolerating large current account deficits and escalating debts. Prior to the GFC the US long did this in the expectation that countries such as Japan (and even China) would eventually come to 'play by the global rules';
  • Family wealth has not been the basis on which people gained positions within the meritocratic bureaucratic hierarchy that China’s ‘Communist’ Party became in the post-Mao era. However the positions that they gained have often been exploited to accumulate family wealth (at least up to the present time) – thus creating the world’s most inequitable distribution of wealth;
  • Democracy and universal values are not the only Western values that China’s ‘Communist’ Party has required that its people give up (see The Infantile US vs China Debate). Individualism, understanding / rationality, a rule of law and social equality also had to be sacrificed;
  • Potential political instability in China is illustrated by the Bo Xilia case. The latter involved giving expression to the aspirations for equality amongst China’s people that had characterised the Mao era, but were eliminated by the subsequent non-transparent introduction (from Japan?) of the ‘modified Mandarin’ / neo-Confucian system;
  • Western societies have experienced difficulties in recent decades not only because of undoubted limitations of traditional democratic institutions, but in part because of the disruptive effects of the distorted financial systems and macro economically unbalanced (ie domestic demand deficient) economies that have characterised East Asian Confucian systems (eg see Structural Incompatibility Puts Global Growth at Risk). This problem was poorly understood because it arose behind a pretence of quite different systems of political economy – ie democratic capitalism in Japan’s case and Communism in China. The global financial crisis that resulted in part from international financial imbalances has had adverse economic effects particularly in the US and Europe – but has not yet had such effects in China because high levels of fairly wasteful state spending and lending by state-linked banks were put in place to sustain growth and political stability in the first phase of the GFC. However a delayed effect is likely to hit China quite hard in the not too distant future because the world's credit-bubble must be just about the burst (see Debt Denial: Stage 3 of the GFC? );
  • China currently seems to face difficulties as a consequence of the ‘modified Mandarin’ / neo-Confucian methods that have been used to accelerate early-state economic development but are now likely to generate even worse troubles than they created for Japan after 1990 (see China: Heading for a Crash or a Meltdown). One illustration of the pending economic debacle is China risks deflation trap as true GDP crumbles. While there is no guarantee, there are many increasingly informed observers who would cast doubt on Eric Li’s forecasts for the future;
  • The plurality (of political systems) that Eric Li concluded by endorsing globally is not something that neo-Confucian systems appreciate domestically – as the consensus reached by state-linked social elites will tend to be enforced by the bureaucratic state, and independent / different initiatives will be neither welcomed nor supported (and will be ruthlessly suppressed at times).

In late 2013 China sought to promote a so-called 'Maritime Silk Road' concept to develop a 'partnership of equals' relationship with ASEAN countries that could potentially be like the China-centred trade-tribute regime that existed in Asia prior to Western expansion.

Xi’s Maritime Silk Road - email sent 8/10/13

Nile Bowie

RE: ‘Shutdown’: China’s Xi upstages Obama’s Asia pivot, RT, 6/10/13

Your article refereed, amongst other things, to China’s ambition to create a Maritime Silk Road as the basis for a common destiny for China and ASEAN.

“In a recent speech during the UN General Assembly, Foreign Minister Wang Yi enunciated the crux of Chinese diplomacy as being focused on multilateral participation between developing countries based on equal footing, and forging new international systems around the principle of non-interference and win-win partnerships. In other words, countries like Malaysia and Indonesia have more incentive doing business with Beijing – which invests billions in infrastructure deals to promote transportation, health services and education –rather than being locked into to the over-financialized, sovereignty-eviscerating terms and conditions of the Washington consensus and the TPP. As the geopolitical landscape develops in Southeast Asia, it will soon be clear whether countries will play along with Obama’s China-containment doctrine or reject it. Much of that equation depends on how Beijing can maneuver its hairy territorial disputes in the South China Sea.

Obama’s Asia Pivot vs. Xi’s Maritime Silk Road

Chinese President Xi Jinping became the first foreign leader to address the Indonesian Parliament on his trip to Jakarta, where he proposed a common destiny for the China-ASEAN community by constructing a new Maritime Silk Road of the 21st century. In his address, Xi made it clear that territorial disputes in the oil-and-gas rich South China Sea should be handled through dialogue and trust-building, invoking the Indonesian proverb, “Money can be easily earned but not friendship.” The thrust of Xi’s message is that mutually beneficial exchange trumps military disputes, and that comprise is possible. Xi also pledged to boost trade with ASEAN to a mammoth US$1 trillion by 2020 and partake in mega-projects such as the construction of the ambitious 90,000-hectare dam in West Java; he also cut US$30 billion deals in mining and port construction with the Indonesian president, Susilo Yudhoyono, and secured contracts for Chinese companies to build the long-overdue Jakarta monorail project.”

Some speculations about the way in which ASEAN countries (and perhaps others) might be linked into a China-centred ‘empire’ were outlined in Creating a New International 'Confucian' Economic and Political Order? (2009). This referred to the recreation of tributary relationships similar to those that existed in Asia prior to Western expansion – which presumably parallels Japan’s ‘Asian Co-prosperity Sphere’ ambitions of the 1930s.

While China’s Foreign Minister referred to international relationships being on an ‘equal footing’, it is worth noting that equality is not a feature of China’s domestic political system. That intrinsic social inequality is the core of political disputes surrounding Bo Xilia and the Chinese regime’s fear of political instability / revolution because ordinary people apparently favour a return to the social equality of the Mao era. The ‘deal’ that China’s president is offering ASEAN countries seems similar to that that the ‘so called’ Communist Party offers China’s people – accept our leadership / dominance and we will make things happen behind the scenes through our social networks and connections (which in the case of ASEAN nations would presumably include the Chinese Diaspora that often have economically dominant roles), but don’t expect to understand / know what is going on.

I would be interested in your response to my speculations. 

John Craig

In late 2013 domestic reforms in China seemed to create a platform from which China's ruling elites could administer such a traditional trade / tribute regime (see above and The Resurgence of Ancient Authoritarianism in China).

In mid 2014 there were suggestions that:

  •  the BRICS countries (Brazil, Russia, India, China and South Africa) were seeking the creation of of an international order in which the United States would not be dominant [1].
    • [CPDS Comment: In the latter it was suggested that: "The principle of non-intervention has clearly welded the otherwise heterogeneous countries together." 'Non-intervention' is a primary feature of current Chinese (and even more of North Korean) ideology as a reflection of the East Asian view that the West's traditional perception that there are universal values and principles is invalid. The fact that this is seen to be the unifying factor in the BRICS group strongly suggests that it is China that it is drawing this group together and using traditional Confucian / bureaucratic consensus forming methods to do so. This also implies that the BRICS group would be an association of social / political elites from within the countries involved - rather than one that serves the interests that their communities generally would endorse. Claims of 'non-intervention would be spurious - because while there would be no attempt to influence the nature of other's political and economic systems, there would be significant direct intervention (eg by the Chinese state) in other countries economies].
  • The Shanghai Cooperation Organisation was emerging as a potential huge trade bloc. It involves China (the world's largest trading nation) with Russia and four former Soviet state - while Afghanistan, India, Iran, Mongolia and Pakistan gained observer status (with a view to later membership) in 2010 [1]
  • China proposed the development of its own version of the World Bank to rival institutions that are under the sway of the US and the West (including the Asian Development Bank). The Asian Infrastructure Investment Bank would start with $100bn capital. Capital would be provided by China. Interested countries included oil-rich Middle Eastern countries, the US, India, Europe and Japan. [1].
  •  a new BRICS Development Bank was established (with $100bn capitalization) which will be modeled after Washington DC - based World Bank and the IMF which emerging economies have seen to be too Western in their approaches to economic assistance [1]. Some insight into where the power would reside in the BRICS Development Bank is indicated by the reported intent that the Bank's board of directors would consist of senior bureaucrats from each participating country [1]. China would have the right to veto decisions by the proposed AIIB [1] - ie China would have total control of anything that the AIIB did.

BRICS Bank: Another Step in Creating Authoritarian Alternatives to Liberal Global Institutions? - email sent 18/7/14

Jim O’Neill
Goldman Sachs

Re: Jim O’Neill: BRICS bank highlights US failings, CNBC, July 17, 2014

This article quoted you as suggesting that this World Bank / IMF alternative has been established because the latter institutions are too ‘Western’. Might I suggest that being too ‘Western’ includes imposing constraints on authoritarian social elites in various countries that the latter find inconvenient?

My interpretation of the above article in which you were quoted: A new BRICS Development Bank was established (with $100bn capitalization) which will be modelled after Washington DC - based World Bank and the IMF which emerging economies have seen to be too Western in their approaches to economic assistance.

The establishment of the BRICS Development Bank should not be viewed in isolation (for reasons suggested in Look at the ‘Forest’ Not Just at the ‘Trees’).

Rather I suggest that it should be seen as yet another component in a likely effort to create a new international China-centred trade-tribute regime like that under which Asia was administered prior to Western expansion (see Making Progress? in Creating a New International 'Confucian' Financial and Political Order, 2009). The latter suggests that attempts to create such an alternative international financial and political order would be motivated by the urgent need to avoid the imminent risk of failure that the non-capitalistic neo-Confucian systems in East Asia face under a global system based on liberal (ie democratic capitalistic) institutions.

The likely urgency of this is illustrated in An Approach Crisis? The latter also draws attention to the role that those non-capitalistic neo-Confucian systems have played in laying the foundations of a potential crisis (see also Structural Incompatibility Puts Global Growth at Risk, 2003 and Impacting the Global Economy, 2009)

I would be interested in your response to my speculations.

John Craig

  • it was suggested that the BRICS groups of emerging powers is fighting the (Neoliberal) World (Dis) Order via a new development bank and reserve fund to offset financial crises.

 The BRICS groups of emerging powers (Brazil, Russia, India, China and South Africa) is fighting the (Neoliberal) World (Dis) Order via a new development bank and reserve fund to offset financial crises. The process started in Yekaterinburg in 2009 and has now led to the BRIC’s counter-punch against the Bretton Woods consensus (ie the IMF and World Bank) and Japan dominated – but US responsive Asian Development Bank. The BRICS Development Bank has $US50bn in initial capital – and will invest in infrastructure / sustainable development not only in BRICS countries. Brazil’s BNDES is the model. With additional Beijing / Moscow funding this new institution could leave World Bank in the dust. It would provide access to real savings rather than US government’s printed green paper without collateral. And there is also a $100bn pool of reserve currencies to counter risk of capital flight. The development bank will be headquartered in Shanghai. This goes well beyond economy and finance – and is essentially about geopolitics – offering emerging economies an alternative to the Washington consensus. This is a key element of emerging China-Russia alliance. Russia is pushing for all dealings in South America to bypass the $US. Putin’s writing off Cuban debt had a significant impact. Xi Jinping is also on tour promoting south-south integration. The Russia-China commercial / diplomatic initiative fits the concerted push towards a multi-polar world. However it will be a lot of work for the BRICS to project a productive model independent of casino capitalism speculation model – which is still recovering from the 2007/08 crisis, and faces a financial bubble that has not burst for good. The BRICS’ strategy is a sort of running constructive criticism of capitalism; how to prevent the system perennially financing the US fiscal deficit and global militarization. Argentinian economist, Julio Gambina, emphasizes the need for independence. Claudio Gallo (La Stampa) highlights how neo-liberalism is producing a disastrous anthropological mutation which threatens global totalitarianism. Argentina is imprisoned by a chronic foreign debt crisis unleashed by the IMF 40 years ago – and now perpetuated by vulture funds. The BRICS Bank and reserve pool as an alternative to IMF and World Bank might allow many emerging nations to avoid a similar fate. The BRICS strategy is pointing the way. [1]

In late 2014:

  •  claims were made about China's successes in establishing itself as the center of a new international order in dealing with European issues, while indicating some nervousness about the implications.

China is becoming the world's largest economy. At the same time the US has revealed a major strategic weakness in managing the Iraqi crisis through methods that would require the world to remain under US tutelage. This indicates a tilt from a US world to a Chinese world. China's emergence as a player was initially under the radar in Ukrainian crisis. Political sanctions against Russia forced it to sign the Russian-Chinese gas agreement on disadvantageous terms. Currently China's PM is on an official visit to Europe and Russia offering contracts, investments, business opportunities and a real Marshall Plan for economies damaged by the Ukranian war. The City was saved from bankruptcy by becoming the major center outside China issuing Yuan bonds. The ECB is beginning to consider adding the Yuan to its international reserves. The coming ASEM summit in Milan will connect Europe and Asia while providing a path to solution of the Euro crisis, the Ukranian crisis, the Euro-Russian crisis and the global systemic crisis. The success of this meeting will demonstrates the difference between alliance with the US (which primarily leads to war) and with Asia (where concern is with economic recovery). This should be the death knell of the transatlantic treaty (TTIP). Europe and the world should welcome the emergence of a new boss on the international scene - while recognising the need to maintain independence. The emergence of a multipolar world is resuming - though it has been more painful and more Chinese than would have been anticipated [1]

  • it was argued that a new world order dominated by the BRICS was emerging, without pointing to the lack of any principles behind that push for power.

Some Thoughts on the 'New World Order' - email sent 18/10/14

Rakesh Krishnan Simha

Re: Welcome to the new world order, Russia and India Report, 17/10/14

Your article suggested that a ‘new world order’ is being created based on the BRICS. I would like to suggest the need for a close examination of how that ‘new world order’ is being created, and what this would imply in terms of how it would operate in future.

My Interpretation of your article: The IMF's annual report confirms that the future belongs to the BRICS with western economic power declining rapidly. The IMF suggests that China is now the world's largest economy in PPP terms. Change has been very rapid. In 1990 when the Soviet Union was collapsing the West stood triumphant. The G7's GDP was $12tr more than that of the seven largest emerging economies. Now the position has reversed. In 2005 it was predicted that China would not overtake US until 2005. And by 2050 it is expected that India's economy will be bigger than China's with the US a distant third. Russia has now exceeded Brazil and is not much behind Germany. Given this power shift from West to East, there is a need to change geo-political hierarchy that has existed since WWII. Reforms are needed to UN, IMF and World Bank. India's PM argues that it is ridiculous for Britain and France to by on UN Security Council while India, Japan and Brazil are outside. IMF shareholding is equally bizarre. IMF realizes that US refusal to allow reforms endangers the fund. Defeatism and angst has set in in the West. The rise of the national security state and corporate triumphalism combined with rising wealth and inequality has reduced government's power to function domestically and impose imperial power elsewhere. A Third World country is emerging unchecked within a first world one - a powerless America within a global superpower. The US's spluttering morale is having a domino effect on the rest of the West - and its Vassals. The growing economic power of emerging economies gives them the foundations to establish a new order independent of western international order. The West will continue to prosper but its ability to steamroller others are over. The gap in living standards is closing quickly. By 2050 the world's 10 largest economies will all be currently emerging economies - with the sole exception of the US

My suspicion is that what is being promoted at a global level is something like the ancient trade / tribute regime administered from China that governed Asia for centuries prior to Western expansion (see Creating a New International 'Confucian' Financial and Political Order).

Serious consideration needs to be given to how such as system would work. Mao’s Cultural revolution in China was apparently directed towards purging Confucian influences as they were perceived to have been the basis of centuries of oppression of China’s people. It has recently been claimed that China is now much like it was in 1911 – and the social inequalities this implies have been the basis of political friction in China. It is also worth considering what the people of Hong Kong face as they are pressured to become merely another part of China (see China: No Turning Back Now????).

I would be interested in your response to my speculations

Regards

John Craig

  • there was controversy about whether it would be in Australia's interest to join China's proposed Asian Infrastructure Investment Bank. Some saw this as economically and politically sensible, while others were concerned about the implications of thereby facilitating China's pursuit of its strategic interests.

Australia has baulked at signing up to a powerful new Chinese development bank because of concern by government that this could be used to expand China's strategic influence in the region. There have been 21 signatories as founding members. Australia was asked by US to stay out, but the issue was subject to earlier uncertainty. The Treasurer had emphasised the economic benefits, while the Foreign Minister emphasized strategic and governance issues. China has been unable to provide assurances that prevailing governance standards would be maintained - thus undermining transparency and governance standards in developing countries. Peter Drysdale (ANU) suggested that Australia would be crazy not to sign up - for strategic, economic and political reasons [1]

Australia's former ambassador to China expressed concern about Australia not signing into the new AIIB. Concerns about governance should be fixed by being involved. It is not unreasonable for China to want new international arrangements that go beyond those in place when the ADB was created. US raised concern about governance, environmental standards, debt sustainability and whether a new institution in parallel with ADB was needed. Nev Power (Fortascue Metals Group) argued that Australia is part of Asia and needs to tolerate different ways of doing things. Mr Raby argues that China's government has achieved 'finesse' in managing Hong Kong riots - which was a big improvement on the situation 25 years ago. Australia should not take sides on political issues in the region [1]

Cabinet's national security committee found against joining the new China-dominated Asia bank - despite Treasury support for doing so.  PM believes that Australia should join a new multilateral regional bank - but not one run / dominated by Beijing. China is unwilling to change its proposal to comply with that. Defense minister had argued that China could convert financial power into direct military advantage in vulnerable nations close to Australia. The key question is whether the proposed bank is an instrument of Chinese national interest or a new multilateral facility for the region. Defense minister opposed joining an institution in which Australia would have no say in how funds were invested  [1

There are significant questions about the AIDB (eg how it would be governed, whether it would be used to pursue narrow political objectives and what environmental / labour standards will apply). As China would have dominant voting and governance arrangements within AIDB this issue matters. In the past Beijing has offered loans as development assistance with political and strategic strings attached. The US's role is accepted in Asia because it is viewed as an impartial shaper of rules and a provider of opportunity. However by staying outside the AIDB the US (and others) have missed the opportunity to change the AIDB from within. China has long frustrated ASEAN efforts to establish a binding code of conduct over maritime disputes in the South China Sea - but it had to be in ASEAN to do so [1]

The Future of the Asia Pacific - email sent 30/10/14

Craig Isherwood
Citizens Electoral Council of Australia

Re: An independent Australia would join the Asian infrastructure bank, not the TPP free trade death pact, Citizens Electoral Council, 30/10/14

I should like to suggest for your consideration that the issues involved in evaluation of the Asian Infrastructure Investment Bank (AIIB) are somewhat more complex than the above article indicated.

My Interpretation of that article: If Australia’s government were acting in the national interest it would join the AIIB. The latter will direct $100bn pa into new infrastrure in the Asia Pacific. The US heavied Australia not to join. Instead Australia is pushing ahead with free trade death pact – the Trans Pacific partnership (TPP) – which excludes China, and elevates the demands of multinationals above national governments and laws. . Obama represents the City of London / Wall Street financial oligarchy. Faced with the prospect of a complete financial meltdown the Anglo-Americans are desperate to preserve their global hegemony. The AIIB should be compared with the TPP. China proposed the AIIB to copy the process that allowed China to become the world’s biggest economy – in a way that can’t be suppressed by Anglo-American institutions. The AIIB will facilitate infrastructure investment. 20 countries signed up. The AIIB will intermediate between investors and projects – thus making financing straight forward. Little is known about the TPP. Leaks suggest that it would enable corporations to sue national governments. 12 countries around the Pacific are involved in negotiations. China was not invited – indicating that the TPP is part of Obama’s containment strategy.

Your article highlighted the fact that the Asia Pacific faces a choice (which is illustrated by the AIIB) between the democratic capitalist methods that have been the basis for global political and economic affairs and a supposedly ‘Asian’ alternative which China is currently seen to be taking the lead role in promoting. While I have no real idea what the TPP envisages because reliable information is not available, I would like to suggest for your consideration that the option that the Asia Pacific is being offered by China is a little like that facing the citizens of Hong Kong in relation to whether or not their individual freedoms are valued and respected (see China: No Turning Back Now????).

Some suggestions about the type of ‘soft fascist’ international order that China is seeking to promote (through the AIIB and many other initiatives) are suggested in Creating a New International 'Confucian' Financial and Political Order. However the issues are not simply of relevance to the Asia Pacific – but in many ways involve the future of the world. Some overview suggestions about those issues are outlined in Towards a New Economic Understanding.

The latter suggests that the alternative to democratic capitalism that is on offer involves what can best be described as a ‘bureaucratic non-capitalist’ system of socio-political-economy. Amongst other things the latter involves investment of ordinary people’s savings by the cronies of bureaucratic social elites with little regard for return of, or return on, ordinary people’s savings. Rather the goal of investment is to increase the power of the ethnic community and its elites in particular. This has been the basis of economic ‘miracles’ in East Asia – but has left countries using that model at risk of financial, economic and political crises (eg see Heading for a Crash or a Meltdown?). China is now seeking to internationalize that system out of desperation (eg to create a system that, amongst many other things, would allow the elite’s nationalistic cronies to invest ordinary people’s savings through the AIIB with little regard to return on, or return of, their savings). This is presumably what US and Australian government expressions of concern about governance standards and transparency amount to.

The fact that China seems to have recently announced a 100% ‘bail-in’ by those whose savings have found their way into the poorly considered infrastructure investments by China’s local governments and shadow-banking system (investments that have kept China’s economy afloat since the GFC started) illustrates the risks that China’s ordinary citizens face in such an environment.

I would be interested in your response to my speculations

John Craig


Looking at the AIIB in Context - email sent 6/12/14

Tracy Coglan and Tom Luckock
AustCham Beijing

Re: AIIB is not just another multilateral, Business Spectator, 5/12/14

Your article on the Asia Infrastructure Investment Bank proposal was very useful. However I should like to submit for your consideration that the AIIB needs to be considered in a broad strategic context, rather than by just considering how it might work if everything goes well.

My Interpretation of your article: 21 countries joined the AIIB. Australia has moved from rejection to joining if World Bank style controls are introduced. Australia needs to be sensible about this AIIB is not a traditional multilateral bank. China wants to see it judged on the projects it delivers, rather than the causes it promotes. Australia needs to better understand the AIB and can do this by considering how China now funds infrastructure. The AIIB would invest both debt and equity into developing market infrastructure projects . It would be located in Beijing with most capital provided by China. The AIIB would be overwhelmingly a Chinese institution, and Australia needs to consider whether international membership is just window dressing. However it seems that China wants genuine member involvement – and to create an international platform that delivers projects efficiently and competes with existing multilaterals. It also wants to internationalize the RMB and help its companies invest overseas. China hopes to thereby increase its own soft-power in the region and that needs to AIIB to be a credible, representative and respected organisation. The AIIB might be a combination of the China Development Bank (CDB) and the Asian Development Bank. The CDB is China’s main policy bank – and (like the AIIB) would be funded by the Ministry of Finance. It involved in infrastructure in Asia and elsewhere. It is more efficient than the multilateral banks but less transparent and less restricted by political and environmental checks. ADB is the regions key development bank – which is transparent, has sound political / environmental checks – but is slow and frustrating in providing funding. A combination might be beneficial. Australia’s concern would be having enough ADB in the mix. Australia could pay a useful but limited role in framing the AIIB – and would have to accept that it was not a multilateral bank – for good and ill. Strong policy banks are essential to deliver projects in developing markets – as they are less likely than ordinary banks to be affected by defaults. The US, China, Europe and Korea all have policy banks – though Australia does not. China will probably seek to have AIIB member equipment used in AIIB funded projects. Funding cuts are reducing the role of the multilateral banks. Recessions and regulatory controls have seen commercial banks downsized in developing markets. Developers seeking funding with a political risk fix have limited choices. The AIIB may provide a good balance between adequate controls and efficient deployment of funds. If Australia is not involved, where will it be in the region’s infrastructure projects?

A suggestion about the context in which the AIIB needs to be viewed is in Creating a New International 'Confucian' Financial and Political Order (2009+). The latter suggests (amongst other things) that China is:

In considering the AIIB from that perspective it is necessary to recognize that: (a) China will not necessarily survive its incipient crises without severe setbacks; and (b) there are major problems associated with the ‘policy banks’ that have been features of East Asian economic ‘miracles’. ‘Policy’ has included industrial and economic development (not just infrastructure). The limited concern for profitability in providing national savings to state-linked enterprises (see evidence) has arguably: (a) provided a generally unrecognized subsidy to rapid growth; (b) had a damagingly destabilizing effect on the global financial system; and (c) laid the foundations of a likely Chinese financial crisis like that which Japan suffered after its debt-binge in the 1980s.

There is little doubt that China wants the AIIB to be an effective institutions and (along with other initiatives) to increase China’s ‘soft power’. Moreover it would undoubtedly be more interested in making projects happen than promoting (abstract) ‘causes’. Those features are part of traditional ways of doing things in societies with an ancient Chinese cultural heritage just as much as are: (a) control through authoritarian hierarchical social networks; and (b) disregard of abstract notions such as 'profitability' in the use of national savings.

I would be interested in your response to my speculations

John Craig

  • it was noted that China had allowed foreign investment in certain types of fixed assets without pointing to the fact that any such investments would be subjected to strict supervision by social elites connected with China's authoritarian state.

China Opens it Doors to Private Capital - But Not to Independent Initiative by Citizens or Investors - email sent 3/11/14

Stirling Larkin
Larkin Group

Re: China Opens its Doors to Private Capital, The Australian, 1/11/14

Your article pointed to the fact that foreign investors are to be allowed to invest in certain types of fixed assets in China. However it did not point to the fact that any such investments would be subjected to strict supervision by elites connected with the Chinese state, and that the benefits associated with private initiative would thus not be available to either investors or to the Chinese economy.

My Interpretation of your article: The past three months have been impressive in China. Despite a short-term cyclical downturn (eg declining manufacturing / industrial output; problems in property investment; and weak export demand), there has been the greatest leap forward since Deng Xiaoping’s reforms in 1978. 130 sweeping reforms have been announced – including a commitment to stable growth and quicker reforms. Operation of foreign hospitals and private oil importers have been allowed, as has private capital participation across the economy (especially ‘fixed asset investment’ in key sectors). This provides opportunities for state-subsidized investment in health-care, education and urban infrastructure. SOEs are also allowed to sell assets / equity to foreign investors to finance restructuring (and thus deleverage economy). Renminbi qualified foreign institutional investors (RQFII) can take advantage of these opportunities. However the Shanghai-Hong Kong Connect program (which would have allowed global investors direct access to China’s A-Sharemarket) has been indefinitely delayed. China faces the same problem as the West – ie stimulating growth / innovation through enterprise / innovation without risking inflation / loose monetary policies / market manipulation. China’s ‘new normal’ seeks productivity growth, technological advancement and consumption-led growth driven by the services sector. China’s housing market is still critical to economy (at about 15% of GDP). It has slowed (which has adversely affected commodity prices) but is expected to recover. China’s provinces are now allowed to issue bonds – rather than rely on bank lending (and this provides other opportunities for global investors). Confidence in China’s high-yield bond market has been restored – and the British government issues 3bn yuan of British Government bonds denominated in renminbi. The RBA should do something similar.

There is no doubt that China has been under a huge amount of pressure for reform (especially of its financial system) – eg see China: Heading for a Crash or a Meltdown (2010+).

Your article outlined various ways in which foreign capital would be encouraged to enter China (hopefully without risking inflation, loose monetary policies or market manipulation). However in relation to this it needs to be noted that:

In response China has apparently sought to:

  • Stimulate the development of a new international order (in competition with liberal Western-style international institutions) that would be something like that which existed in Asia prior to European expansion and would be similar to China’s domestic ‘bureaucratic non-capitalist’ order (eg see Creating a New International 'Confucian' Financial and Political Order). For example an Asian Infrastructure Investment Bank (AIIB) has been established which will operate under Chinese government control without any assurance of financial transparency or that the AIIB would not be used to pursue nationalistic objectives (eg see The Future of the Asia Pacific);
  • encourage foreign investment in entities that would be strictly controlled from China such as those nominated in your article. The scope for independent initiative by investors (eg by establishing or gaining control of enterprises and directing them towards profitable opportunities) would remain very limited – just as it has been in Japan. Though (as Fingleton argued) selective regulation by the state and market rigging by cartels can allow favoured undertakings to be ‘profitable’ at the expense of the rest of an economy, where there are serious constraints on the pursuit of net economy-wide profit, it is unlikely that distortions associated with domestic financial repression and large structural international financial imbalances could be avoided. The case of Alibaba (which has recently been floated in the US and involves access to the Chinese e-commerce market through an entity whose governance arrangements are obscure and unable to be challenged by those who are merely investors [1,, 2, 3]) arguably needs to be considered in this respect.

I would be interested in your response to my speculations

John Craig

  • China seemed to be promoting various initiatives through an APEC leaders summit that appear to involve an extension into the international arena of the bureaucratic and financially-undisciplined methods that have been the basis of its rapid economic development, and of its consequent risk of financial, economic and political failure

If China is Almost Broke How Can Chinese Investment Save Australia? - email sent 6/11/14

Robert Gottliebsen
Business Spectator,

Re: Saving Australia from the commodity export rout, Business Spectator, 6/11/14

As I interpreted it, your article suggested both: (a) that China has massive financial problems because of undisciplined large-scale investment of borrowed money; and (b) that Chinese investment in Australia might help compensate for the adverse effects of the failure of an expected commodities’ boom. I can’t see how both of these can be true.

My Interpretation of your article: It has been a long time since Australia experienced what is now happening to its exports - an enormous rout. Demand is falling / stationary while supply is exploding. $A could go to US75c and bring on recession. One immediate result has been low wages growth. But there could be real problems in 2015 unless commodities’ demand rises. China is Australia's biggest market. While it will try to keep demand high, it is in trouble. Province after province are in deep financial trouble and the banking system is cracking. The GFC resulted from similar banking problems in the US. China can't repeat the enormous infrastructure-driven commodity demand growth of recent years - because it was funded with borrowed money and this can't continue. China's problems are at the heart of the commodity rout in iron ore and coal. This is compounded by problems in Europe and the fact that, while US is doing well, this can't drive the rest of the world. On the supply side, low cost producers are raising production to try to drive out high-cost producers. Possible options to reduce Australia's problems could be Chinese investment on the East coast and a further rise in tourism.

As far as I can see China has been heading for serious problems that are largely (but not only) financial (see China: Heading for a Crash or a Meltdown, 2010+). These problems seem to be a bye-product of the ‘bureaucratic non-capitalistic’ system of socio-political-economy that have been the foundation of economic ‘miracles’ in East Asia (and which led to a financial crisis in Japan in about 1990 after it also had an undisciplined bureaucratically-driven investment boom in the 1980s).

In desperation China now seems to be seeking to internationalize its (‘bureaucratic non-capitalist’) system (see Creating a New International 'Confucian' Financial and Political Order). For example it was recently noted that:

China will host an APEC leaders’ summit in November 2014 with an emphasis on economic reforms, connectivity and infrastructure. China's president will advocate an open economic pattern in Asia-Pacific and on building Asia-Pacific partnerships. An APEC information exchange will be advocated to increase transparency amongst US-Led TPP members and the China-led Regional Comprehensive Economic Partnership members. China has also launched massive growth-driver projects for the region: the rebuilding of the Silk Economic Belt and 21st century Maritime Silk Road and the Asian Infrastructure Investment Bank. China will also push for a massive free-trade treaty (Free Trade of the Asia-Pacific) (China to push for APEC Information exchange, BRICS Post, 5/11/14).

In relation to these proposals it needs to be noted that, if they are developed through the use of China’s ‘bureaucratic non-capitalist’ methods, the resulting international institutions would be neither liberal nor financially-disciplined (eg consider In East Asia Deals Always Involve Politics, 2012; The Future of the Asia Pacific, 2014; and China Opens it Doors to Private Capital - But Not to Independent Initiative by Citizens or Investors, 2014).

‘Chinese investment’, in Australia or elsewhere, is built on a bureaucratically-controlled financial system that lack financial disciplines and whose future is anything but certain (eg consider Overcoming Australia's Corruption Shortage, 2014 and An Even Scarier Story for Emerging Markets, 2014).

Thus, rather than relying on ‘Chinese investment’ or increasing tourism, I submit that Australia would do better by now getting serious about developing its economy (eg see A Case for Innovative Economic Leadership, 2009 and Lifting Productivity: Considering the Bigger Picture, 2010). Better late than never.

John Craig

  • it was increasingly being suggested that China was seeking to create an new international order.

Xi Jinping has faced serious domestic and foreign policy challenges - and has put a lot of effort into  a domestic anti-corruption campaign and enhancing China's international image as a major country and regional leader. He is promoting the 'China dream' (a great revitalization of the Chinese race). The CCP announced its endorsement of a noble-minded emphasis on peace, tolerance, international trust, justice and cooperation. Yet it has also emphasized building powerful armies in accordance with China's status to be able to defend its maritime resources and build a strong nation. A delicate balance exists between cooperation and hard-line foreign policy. As long as China's priority is to be a great power, defense will be prioritized. China became the world's second largest economy 10 years ago and has rapidly strengthened its military muscle. Some argued that China's approach of biding its time while strengthening itself is no longer needed. China's shift from passive diplomacy was first obvious in relation to Japan. A clearer vision of China's vision for the 21st century international order emerged from its proposal to US for the formation of a Group of Two (G2). There is a big difference between the way China has dealt with Japan and the US. However the more China emphasizes the 'China model' and the theory of 'China's uniqueness' the more it conflicts with universal, widely accepted concepts of international society. The world may not accept the 'China model'. China took a similar path to other developing nations in modernizing and industrialization. If it agrees to develop the current international order, rather than trying to forcefully create a new international order, it will be welcomed. A former Chinese president pointed to the disadvantages of the injudicious use of force - and this is in line with China's emphasis on cooperation since the end of the Cold War. He advocates an international strategy in which China should contribute from the universal perspective - rather than in terms of theory of 'China's uniqueness'. [1] [CPDS Comment: 'Soft power' methods (rather than military force) are the primary feature of traditional East Asia 'Art of War' strategy and seem to be preferred in creating an international order that is radically different from the post-WWII 'liberal' international order - see above]

China is engaging in diplomatic diversification to escape the old architecture of multilateralism. In the past China worked in that system, but now sees that it mainly benefits the US and its allies. Against the US-EU world of multilateralism, China has founded a parallel world (eg through Shanghai Cooperation organization, Forum on China-Africa Cooperation, the China-Arab Cooperation Forum, as well as the BRICS and other groupings). China has put huge resources into this effort and is quietly achieving results. The China Central and Eastern Europe 'group' has a secretariat in Chinese ministry of Foreign Affairs - but no similar entity amongst potential European partners. This is partly due to divided loyalties - as the 11 countries that deal bilaterally with China are unsure about a united entity. The EU sees this as a competing network - which seems to be aimed at causing divisions in the EU. However there seems to be quite different motivations involved. China is seeking friends through this grouping, while the European counties would simply view it as a means for accessing China's money [1]

Deng Xiaoping said that China should hide its strength and bide its time (ie not rock the boat until it was strong). His successors followed this advice. However in recent years China has acted differently. The US is seen to be in decline - after subprime mortgage crisis. Beijing has been flexing its muscles. It has drawn closer to Russia while avoiding global initiatives (such as climate change). This caused concern around the region. But in the past few days this has changed (eg with a climate change agreement with US). Other cooperative agreements have been reached with US. China and Japan even managed to de-escalate tensions. After years of brinkmanship China has showed statesmanship in dealing with global issues and its neighbours [1]

China's most important strategic choice was no embrace globalization. Now its it is pursuing Asian regionalization. Economic development is the only way of tackling all of China's challenges. The central objective of China's strategy for two decades has been to secure and shape a conducive security / political / economic environment so that China can concentrate on its economic / social / political development. Trade with West is less important than it used to be. The Shanghai Cooperation Organization (SCO aka the Asian NATO) chaired by Russia and driven by China has emphasized expansion and economic cooperation amongst its members. The SCO is an economic / security cooperation group of China and five central Asian states.  Afghanistan, India, Iran, Mongolia and Pakistan are observers. Belarus, Turkey and Sri Lanka are dialogue partners. India, Pakistan and Iran will be members in 2015. The bloc has 15% of global GDP. China (and Russia's) goal is to create an Asian security architecture independent of the US and its allies. Genghis Khan's old territories will become a new economic bloc - with a combined population eventually of 4bn. The infrastructure and economic corridors have been planned and in some cases actually built. China's 'New Silk Roads' policy involves improving regional connections. A Maritime Silk Road will connect China to ASEAN and coastal south Asia. A Northern Silk Road involves rail connections to inner provinces - reaching ultimately as far as Moscow. In conjunction with India (which is pursuing a look east policy) a BCIM Economic Corridor (a Southern Silk Road) is being developed. In May 2014 China's state-owned news agency suggested that these routes would eventually extend to Europe. This envisages an economic cooperation group from western Pacific to Baltic Sea. China's Asian Infrastructure Investment Bank (with 21 participants) is seen as a serious challenger to World Bank and Asian Development Bank. This will help China by allowing its ($US3.9tr) foreign exchange reserves to be invested on commercial terms; and help in internationalizing the yuan. China has sought to internationalize the yuan since 2000. Its global integration is no longer limited to trade, but spills over into finance. The Shanghai Free Trade Zone is expected to allow Shanghai to become an international finance centre by 2020. Plans for full yuan convertibility in Shanghai FTZ were announced - which will allow convertibility to be extended to national levels - and allow RMB to become eventually a global reserve currency. Offshore RMB centres have been established in many places. A RMB sovereign bond is to be issued by UK Treasury. China has been rapidly increasing its gold holdings - while india has been the largest gold importer. Western gold holdings have moved east. Singapore has plans for a physically deliverable gold contract. China's commercial, economic and financial focus is now centered on Asia. A regional currency is needed - and this seems likely to be founded on a gold standard [1

China's rise will challenge the US's longstanding presence in Asia. US opinion is becoming that US efforts to help China have created problems for US. Similar concerns arise in relation to Russia. But China and Russia have always been major power with un-Western worldviews. Some see individual leaders making a difference. China's leaders claim to have a strategy for peace in Asia - but this can only happen if China builds a new empire - which will require it to crush the existing liberal order as soon as possible. This is a structuralist view (rather than a view that individual leaders matter).  China has been striving for decades to create a new Sinosphere. This could be uncomfortable for China's neighbours - either subsumed into China project or excluded from it. Alternatively those countries might develop an alliance to resist that outcome - and the US could help catalyse this [1]

  • concern was expressed about the fact that China's solution to many economic problems seemed to involve building high speed railways of dubious benefit except in limited situations.

In China it is often said that the worse the economy becomes, the more railway building is emphasized. The flurry of new high-speed-rail (HSR) proposals suggests policymakers are worried. Railways stimulate the industrial sector. Since 2008 HSR projects have been China's stimulant of choice - and have also become a geopolitical tool. China's population densities suggest that mass rapid mobility is needed. However in Japan this has led to unbalanced regional development. Financial returns on HSR are uncertain - and only a few have been profitable. China has many major international HSR ambitions. These advertise its technological prowess and extend its influence.  The anxiety about the influence that China gets relative to weaker neighbors is what stokes concern about governance in China's new development banks. It is an old-fashioned for of development aid in which China does everything - and draws upon its prowess in HSR. HSR customers are governments. Domestically China now invests $US4.5 tr *24% of the global total) yet it saves $US5tr. It needs ways to invest the extra offshore, and HSR projects are an alternative to buying US Treasuries which create real assets that China can build and control. [1]

  • China and Australia committed to a free trade agreement which observers saw as being very beneficial to Australia economically - without any serious consideration of the broader implications of that deal. At the same time, China's president gave an account of China's benign intentions in an address to Australia's parliament. He proposed a 'comprehensive strategic partnership' between China and Australia. This involved: (a) an emphasis on China as the 'big guy'; and (b) reference to this partnership working through building relationships / seeking elite consensus (ie to working in the neo-Confucian / bureaucratic / 'Asian' way - rather than the liberal democratic Western way).
    • [CPDS Comment: This clearly involved an offer to Australia of benefits through collaboration in the establishment of an China-centered trade / tribute system - and posed a moral dilemma in relation to whether insider-benefits should be sought through involvement in an unrepresentative / authoritarian / elitist system at the expense of traditional Western emphasis on welfare and capabilities of individuals] - see also Strengthening Australia's Democracy
  • anti-US European observers suggested that China was succeeding in creating a new international order. They also speculated idealistically about the nature of that new order that seemed to be required without apparently recognizing its incompatibility with China's actual methods of operation.

The world has experienced a global systemic crisis since 2008. This has led to the emergence of very large international players who challenge the world order that the US established after the collapse of Soviet bloc. Multipolarisation requires reform of existing international authorities (or perhaps the invention of new forms of global governance). Europe has a major role to play in this because of its experience of integrating states of different sizes / kinds. The Internet is also having an effect through turning the whole of humanity into a single organic social body - as an alternative to the pyramid system which has been the basis of current international system. The world of the future will involve largely self-organised social networking system whose governance arrangements have yet to be invented. There will be small, flat political structures integrated by human networks matching their administrative expertise. The world is currently experiencing a contest between: 'empire' and mutually independent political entities; representative democracy versus direct organized citizen participation; pyramids versus networks; militarized colonization versus globalized regulated trade; oil versus renewable energy; a cumbersome economy versus a digital one; banks versus financial flows; employment versus online professional activity; UN activity versus BRICS club etc.  Significant in this has been China and the BRICS influence; the end of the Euro-Russian stalemate in relation to Ukraine; and ending problems in Europe. Now the world has become Chinese as demonstrated by changes affecting global governance. Examples involve: US decision to reduce carbon emissions - while China agreed to a much less restrictive policy; significant progress in many areas associated with China's leadership in APEC summit in Beijing; international agreements between China and others on contracts and yuan currency trades; the ultimatum to G20 conference in Brisbane) to reform international institutions -which may lead to BRICS group taking over in making needed changes (eg in IMF); India's ability to gain acceptance of its food security program through WTO - because the WTOs' survival depended on this; and efforts by Russia, China and Germany to allow Iran to take its place in the international scene [1]. 

  • it was suggested that China was seeking to create a new international order because it had not been allowed to take an appropriate place within established international institutions as the result of a US belief that China was 'immature'. Elements of the international order were perceived to involve: (a) making Renminbi an international currency because of concern that a strengthening $US will damage other economies; (b) creation of AIIB; (c) development of trade relationships; and (d) efforts to contain official corruption. Geo-political considerations were seen to impede the development of benefits from the free trade agreement that China and Australia were proposing (see outline of ASEAN, APEC and CHAFTA below and resulting Interchange with Daryl Guppy)

Relationships in APEC are changing significantly - as indicated by the speeches by China's and the US's presidents - and their dealings (together with Australia) at G20. China has sought a seat at the IMF table (and other post-war economic institutions) commensurate with its status. This was not offered and President Obama said that this was because China was not mature enough. So China has created its own table and issued invitations in ASEAN and APEC regions. Australia was invited but has declined so far. The 'table' has several legs (eg the AIIB). President Xi Jinping identified 4 pieces of the jigsaw at APEC meeting. The first involves strengthening $US (and high $US helped precipitate the Asian currency crisis). Some are now concerned that strong $US will create problems in ASEAN. However the region's position is better in that banking systems have improved, and there are alternatives to $US for funding. China wants Renminbi to become investment currency as well as a trading currency. China has second largest economy and healthier foreign reserves than US. To make a change possible China has: (a) established Yuan trading centres; (b) use these for investment support; (c) creation of AIIB - which is a natural reaction to China's exclusion from global financial institutions; (d) combining the Hong Kong and Shanghai Cross trading platform and continued development of the Shanghai Free Trade Zone. This will significantly free up China's capital account. Some see this leading to capital flight - but it can also be viewed as sensible investment diversification. The 'Hunt the Fox' campaign is intended to track down overseas movement of ill-gotten gains of corrupt officials. These steps are changing the financial landscape. There are now alternative funding sources in the face of rising $US -given rapid strides being taken to internationalize the Yuan. Australia FTA with China does not seem to have changed its position much - noting simultaneous collaboration with US president and Japan's prime minister. The federal government's hesitancy will constrain state-based initiatives. China clearly wants to include Australia, and states may need be more obvious in engaging with China (eg to assist businesses to expand into China and to attract Chinese investment). The FTA has been treated too casually by the media. Many saw it as already accomplished. Few highlighted the significant economic benefits. China's expectations in relation to FTA are not simply easier investment - but also include: reduced tariffs on imports to Australia; opening the provision of services; most favored nation status in relation to investment. FTA also covers travel visas; e-commerce; government procurement; services and trade rules. Strategically the agreement is seen to reduce status of US's TPP - which excludes China. China argues that FTA shows that China wants collaboration and is not a treat as Japan and US claim. China has broad agenda built around New Maritime Silk Road and FTA shows that China can build relationship with industrialized countries. Australia's focus is on money and quick results. China plays a much longer game. A theme of the APEC and ASEAN summits was the way behind-border controls can frustrate the intent of free trade arrangements. The latter are still strong (eg complexity of 457 visa). The FTA will not actually be signed until 2015. The announcement in November 2014 was merely a heads of agreement (Personal communication on 1/12/14 from Guppy D. 'ASEAN, APEC and CHAFTA', Working with China.com, Nov 2014)


Resulting Interchange with Daryl Guppy

CPDS' comment (1/12/14) on the above article

The point is not that China is not ‘mature’ enough to get a seat at the TPP table – but that it is now being recognised that China’s aim is to create, through economic action, something like the ‘Asian Co-Prosperity Sphere’ that Japan sought through military action in the 1930s and 1940s (ie an ‘East-Asian-style’ international order that is incompatible with liberal Western institutions).


Response (1/12/14) from Daryl Guppy
"The point is not that China is not ‘mature’ enough to get a seat at the TPP table". These are Obamas words at APEC in Beijing.  I was a delegate at both the NanNing ASEAN and Beijing APEC conferences.  

Response (2/12/14) from Daryl Guppy

This article bought together several of my weekly columns published in Singapore and globally via CNBC. You can put this article on your website for reference if you wish as this compiled version is not hosted anywhere on the net. You can pick up some of my background at www.guppytraders.com  Some of these notes are reprinted in the NT ACBC fortnightly newsletter. .......


CPDS comments on 1/12/14  +

  • Response from Daryl Guppy on 2/12/14 +
    • CPDS reply on 2/12/14

Some comments on 'ASEAN, APEC and CHAFTA' follow:

  •  Attempts to create ‘another table’ have apparently been ongoing for decades – and led primarily by Japan – see A Generally Unrecognised 'Financial War'? The latter refers to one Japan-watcher’s conclusion that China became involved in the process in the late 1970s. Japan had sought to create the ‘other table’ (ie an ‘Asian Co-prosperity Sphere’ in the 1930s and 1940s – and Japan’s primary goal in invading China was to co-opt China (which nationalists regarded as Japan’s big brother) in that endeavour. The possibility (which is anything but a certainty) of collaboration between Japan and China’s nationalists in recent decades is mentioned in Broader resistance to Western influence?
    •  [DG] This underestimates the level of deep seated anti-Japanese feeling in China as a result of wartime occupation and atrocities. As worlds number 2 economy it does not need partners, but it does hark back to stable border relations established and maintained by trade. The Western historical interpretation of <tribute> from apparently vassal states reflects a Western understanding of history rather than a Chinese understanding. The right to trade with China was an objective of the surrounding states and many willingly imitated Chinese traditions. We see the same parallels in the 20th century with the adoption of US cultural icons and behaviours as we clamour for the right to trade with the US. The breach of the HaiShan gate by the Manchu was to a significant extent the result of trade sanctions imposed by the Chinese who had stopped trade with the Manchu.
      • [CPDS] There is no doubt about the deep-seated animosity amongst ordinary Chinese towards Japan. Forgiveness is not part of East Asia’s traditions. This makes any public display of collaboration impossible – but does not prevent behind-the-scenes collaboration perhaps mediated by offshore Chinese groups whom: (a) Japan helped to adapt the neo-Confucian methods that it had used for its own economic ‘miracle’; and (b) presumably played an influential role in China’s late-1970s reform . It is possible (though unlikely) that China’s leaders believe they do not need partners now – but: (a) Japan does need partners and had recognized that it needed China as a partner in the 1930s when capturing China’s emperor was seen as a way to get China on-side in establishing an ‘Asian Co-Prosperity Sphere’; (b) China needed partners in the 1970s – and seems to be doing its best to mobilize partners now (eg via BRICS etc); and (c) Japan’s PM has strongly expressed ultranationalist sentiment and alluded to Japan’s war criminals as having laid the basis for Japan’s future (see The Dark Side of Japan).
      •  [CPDS] While the right to trade with China might have been valued by outsiders, this came at a very high price to Chinese people. The latter were oppressed so that China’s elites would have the means to make trade with China beneficial to outsiders and thus make China’s elites internationally influential (see Likely Characteristics). That oppression was the reason that Mao’s Cultural revolution was directed towards purging Confucian influences from China, and that the adoption in the late 1970s of neo-Confucian methods like those that had been the basis for Japan’s economic ‘miracle’ had to be kept very quiet. What Mao did (ie try to get rid of the social hierarchies associated with the ancient regime) is still highly regarded in China where social equality is valued. And this remains a significant factor in potential political instability in China today (see Communism Versus Confucianism: The Continuing Contest in China ;
  •  as far as I can see the components of the ‘other table’ that China is now seeking to create are somewhat broader than your article illustrated (see Creating a New International 'Confucian' Financial and Political Order). For example it includes: the BRICS; influence in the UN; propaganda favouring China’s autocratic system as an alternative to liberal alternatives; clear confirmation of the quasi-Confucian (ie authoritarian bureaucratic) character of China’s government; diverse observer’s recognition that China is seeking to build an alternative international order. While the implications of this are quite complex, an attempt to outline this (The China-Australia FTA: Option 5 ) gained endorsement from one of Australia’s leading strategic analysts (see also China as a dominant power and Pax Americana to give way to a new world order). The latter drew attention to the relationship between China’s ‘new table’ and Russian militarism and Islamist extremism in terms of creating major authoritarian challenges to the liberal international order that the US and its allies have championed since WWII. The possibility of collaboration between East Asian nationalists and Islamist extremists in creating a Middle Eastern diversion for the US administration from the challenges to the liberal international order that were emerging in Asia was speculated in Attacking the Global Financial System? (2001);
    •  [DG] There is no need for an ill-defined coalition to attack the global financial system. The US shadow banking sector did this quite successfully without the need for any outside assistance or prompts. It draws a long bow to link the quasi-Confucian ethic with the aggressive, expansionists and proselyting ethics of Islamist extremists and US liberal capitalism writ large. Confucian, Daoist and Buddhist ethics lack the proselyting imperative that effects Western religions and ideology. The immigrant to China can never become Chinese, unlike the immigrant to the US who can become American. This is a fundamental difference in world views. The idea that the US supports a liberal democratic model conveniently ignores the consistent record of US support, and ongoing support, for some of the most corrupt and authorities regimes seen in the last 100 years on the basis that they were at a minimum anti-communist and if possible, pro-American.
      • [CPDS] The problems in the global financial system that erupted with the US sub-prime crisis has many causes (see GFC Causes). However the need for dangerously easy money policies in the US to prevent the global economy from stagnating (because of the financial repression needed to protect the non-capitalist financial systems that were in use in major East Asian economies and the international financial imbalances that resulted from that repression) were arguably the most significant (see Structural Incompatibility Puts Global Growth at Risk, 2003+ and Impacting the Global Economy, 2009);
      • [CPDS] While the ideologies and goals of East Asian neo-Confucian elites and Islamist extremists are different, there are reasons to believe that collaboration might have been possible and might actually have occurred (see Geopolitical Context to a More-Than-Passive Attack);
      • [CPDS] The differences between Western and East Asian attitudes to universal values / truth are as you suggest – and need to be much better understood as they explain a great deal of the world’s current problems (see Competing Civilizations);
      • [CPDS] The US has (as you suggest) had difficulties in championing its favoured liberal democratic model. The ‘blowback’ from supporting authoritarian regimes who were at least anti-Communist (a ‘realist’ foreign policy stance) has been widely recognised – and was the basis of the ‘idealist’ agenda of the US Neo-Cons who convinced the US administration to try to use its power to re-construct (rather than collaborate with) Saddam Hussein’s authoritarian regime in Iraq. However the ‘idealists’ were no more successful than the ‘realists’ because liberal democratic models have to be built on cultural and institutional foundations that are unlikely to exist naturally in a non-Western context (see Fatal Flaws). The liberal democratic model has a lot to commend it – but getting this into place successfully is anything but trivial;
  • China needs the Renminbi to be accepted as an international currency on the basis of China’s economic ‘strength’ (ie production capacity / foreign exchange reserves) because its financial institutions have shot-to-bits balance sheets and it would experience a massive financial crisis if those institutions had to borrow from the global financial system where profitability is the criteria for investment. China’s financial system (like Japan’s) is not geared to seeking return on / return of capital (see evidence) but merely with building ‘real’ production capacity and accumulating foreign exchange reserves. It is not for nothing that a flight-to-safety now seems likely to boost the value of the $US and create massive problems for countries with cronyist financial economic systems (like China). In the 18th century there was a contest between mercantilist economies (in Europe where the goal was to accumulate a stock of treasure / gold as a basis for state power) and capitalist economies (ie those where a balance between demand and supply was promoted by seeking profit through investment). The triumph of the latter in the 18th century was the subject of Adam Smith’s ‘Wealth of Nations’.
    • [DG] The rise in the US dollar has little to do with safety. If this was the case, then geo-political events would be more closely linked to dollar index moves and moves in gold. The Dollar Index reacts to the end of QE and the certainty of interest rate rises. The carry trade – borrow in US dollars and invest in high yield currencies and investments – is killed by the end of QE. The dollar rise creates problems for any economy that is defacto based on a US exchange rate. Australia is no exception with commodity contacts priced in USD. Not sure we want to say Australia has a cronyist financial economic system.
      • [CPDS] The $US rise seems to me to have everything to do with safety. QE by the US Fed made carry trades possible to areas where higher yields were achievable (just as Japan’s ultra-easy money policies had made carry trades possible and contributes to the asset bubble in the US that exploded as the GFC). Those carry trades were largely to emerging economies with poorly developed financial systems – where the risk following end of US Fed’s QE is very significant. Getting back to safer territory made a great deal of sense;
      • [CPDS] Australia’s risks are associated with: (a) a large current account deficit that needs to be offset by constant capital inflow; and (b) the practice of directing most of that capital inflow into property – which creates the risk of a real estate bubble (see Defending Australia from the Financial Crisis? , 2008). Crony capitalism (ie making capital available to a state’s associates who invest in nationalistic projects without serious attention to return on capital) has not been the issue
    • [DG] When assessing the structure of the Chinese economy it may be more useful not to apply the Keynesian lenses that grow out of the failures of the capitalist economy as revealed by the 1930"s depression. This style of economic analysis and its ilk, are suited to stable and well established economies. These analysis tools are less suited to an rapidly expanding economy that is driven by massive population shifts. The paradigm is different and requires different analysis which is perhaps why the oft touted coming collapse of Chinas has been delayed for so long.
      • [CPDS] There is no doubt that the financial risks that China’s economy faces can’t be properly analysed in terms of Western models and concepts. However China’s risks are none-the-less huge.
  • The official version of the ‘Hunt the Fox’ campaign has been challenged – see Why China is Torpedoing the G20 Corruption Initiative
  • China was said to be establishing a new continental autocratic empire which was uncertain because it was not based on China's traditions

China has revealed an ambition to establish a series of strategic maritime distribution centers west to Africa and beyond. This would extend the terrestrial Silk Road through central Asia. A 'string of pearls' through Indian Ocean has long been denied - in deference to india. But recent naval deployments show China is now less obliging. China's Maritime Silk Roads needs a presence and defense.  This parallels British coaling stations of olden times. This all raises questions about how nations recycle excess savings and conduct corporate state security complexes overseas. Jacob Zuma suggests that China can help Africa cast off colonial shackles. In Congo they are everywhere - but behind high walls. These new conquistadores are highly cohesive. The UK acquired an empire by accident. In the Philippines elements of a US empire were definitely sought. China's commitment to Marxism makes imperialism an anathema - though Marx's Bolshevik followers were keen to acquire territory. Europe waged a Five Hundred Years war on the rest of the world - yet only half way through this agreed (through Treaty of Westphalia) not to attack one another at home. China now is a strong proponent of non-interference. Phillips predicts that the world will continue to be multi-polar subject to a dual hegemony of two preponderant powers (with US as maritime liberal and China as continental autocratic anchors). Chinese historians argue that China won't dominate the world the way Westerners did. The tributaries of traditional Chinese civilization were comfortable in the Sinosphere. But Tibetans, Uighurs and Mongols might not now agree. The problem is that China now is not traditional. It resembles the Western nation-states that emerged after 1648 that professed sovereignty and non-interference at home but pursued colonialism abroad [1]

  • China's development of its international linkages are proceeding rapidly - and that this could create Eurasian integration as a new global model as an alternative to the spreading 'empire of chaos' that the US presides over.

History was created when a train recently left Yiwu in China for Madrid - 13000km. This illustrates Eurasian integration and is the start of China's 'New Silk Road'. This could eventually become a high speed rail link - and shift most container traffic from ships to land. Transport costs will be reduced, while China's construction companies expand. The US is pivoting to Asia while China pivots to Europe. China's president announced the 'New Silk Road' in September 2013 and a Maritime Silk Road one month later. The aim is to draw on historical aura of Silk Road to bridge civilizations. A $40bn infrastructure fund has been authorised to build facilities initially in China - and then expand. After decades of importing capital, China is now planning to use its own capital in neighbouring states. 22 Asian countries supported the creation of an Asian Infrastructure Investment Bank which like BRICS Development Bank will finance transport / energy and telecommunications. This is an alternative to Asian  Development Bank which works within framework of Washington Consensus. This signals a new order in Asia. China is already largest trading partner for many in Asia - so what is envisaged in drawing together China, SE Asia and Indian subcontinent. Whatever most think about what China calls its peaceful rise, they seem to shy away from Washington / NATO dominated trade and commercial world and the trade and investment pacts (TTIP and TPP) that would go with it. China is also offering Russia some access to credit. Russia and China are now also conducting joint large-scale joint military activities. Across Eurasia, Russian not Western pipelines are likely to prevail. This all suggests a major geopolitical shift. The US CFR is lamenting the loss of superpower exceptionalism. The US's China Economic and Security Review Commission blames China's leaders for being disloyal, adverse to reform and opposed to liberalization of their economy.  China is seen to be upsetting the international order and dooming peace and prosperity in Asia. China does face massive external and internal challenges. Its president is seeking to suppress corruption graft and waste. A great deal of investment currently produces only overcapacity. There needs to be a high transfer of resources for China to jump from middle income to high-income status. However China won't fall apart, and its leaders are looking to boost relationships with Europe.  At the same time the US is opting for an 'empire of chaos' - a dysfunctional global system that breeds mayhem and blowback across Middle East, into Africa and to European periphery. A 'new cold war' paranoia is likely in US. US agenda of isolating / crippling Russia is dangerous and likely to fail. Russia is currently the only power capable of negotiating global strategic balance with US - and limiting its empire of chaos. Russia like China is betting on Eurasian integration - though this is complicated by Ukraine situation. Germany may one day lead parts of Europe into strategic alliance with Russia and China [1].

  • Multilateral development banks have have a valuable role in financing development countries. Criteria for their success include: transparency and good governance; ensuring that debt is sustainable; environmental and social responsibility; ad high standards in project management. The AIIB and BRIC's Bank could join this group of multilateral development banks - and the US would welcome their participation [1]

In early 2015 there was a strong push by China to have the renminbi / yuan accepted as a global reserve currency under the IMF's Special Drawing Rights system. One observer suggested that doing so would help draw China into the international financial / economic system. However there was also the possibility that doing so might assist China to create an authoritarian / elitist alternative to the international system.

China does not have a normal 'currency' - email sent 27/3/15

William Pesek
Bloomberg

Re: Do everyone a favour, give China a reserve currency, Brisbane Times, 25/3/15

Your article suggested various reasons for including China’s renminbi as one of the world’s reserve currencies, eg that: (a) this would force internal reform in China, and stabilize its rickety financial system; (b) the PBoC’s reason for seeking to have its currency added to IMF’s SDR system is probably to promote domestic reform – noting that the objection to doing this was that renminbi is not freely convertible; (c) the yuan is becoming increasingly accepted as a store of value; (d) freeing yuan would loosen China’s leader’s grip on China’s economy, revolutionise how companies do business and have many other effects; and (e) force China to become more transparent.

I would like to suggest an alternative way of viewing the issue – namely that:

  • There is a profound cultural incompatibility between the foundations of East Asian political and economic systems and the current international order that is based on liberal Western practices (see Background Note);
  • China seems to be seeking to create an international order that is based on East Asian cultural traditions, rather than seeking to adapt to the Western-style international order (see Creating a New International 'Confucian' Financial and Political Order). Pushing for the creation of new international institutions would allow China’s social elites to expand the influence of their domestic ‘bureaucratic non-capitalistic’ systems into other countries;
  • The ‘value’ attributed to the renminbi is more a product of the mercantilist economic tactics that have been the basis of East Asian economic ’miracles’ (ie accumulate a stock of ‘treasure’ rather than the building of a balanced economy). ‘Value’ in a currency in the sense of gaining a return on capital has not been part of that process (see Evidence). The structural / deflationary demand deficit that was needed to avoid financial crisis had major adverse impacts on the global economy (because global growth would have stagnated without VERY easy monetary policy elsewhere) - and remains a significant factor in the deflationary risks that currently put global growth at risk. Changing this would be a massive cultural challenge;
  • Making a currency internationally tradable does not necessarily lead to domestic economic and financial reforms that are compatible with the liberal international system (eg see Why Japan can't deregulate its financial system);
  • China is arguably facing a massive financial crisis if it is not able to convince the world that its currency should be internationally accepted on the basis of its past mercantilist economic practices (see Ongoing Uncertainty).

It is possible that the benefits that your article outlined might be achieved. However the alternative scenario (ie that what is happening involves an attempt to create an authoritarian / elitist ‘Asian Sphere’ that exists in parallel with, and thus undermines, the liberal Western style international system) also needs to be considered.

John Craig

Many Western countries joined China's Asian Infrastructure Investment Bank in the face of vocal US objections - on the grounds that its goals (ie infrastructure investment) were valid and its operations would be transparent. There seemed to be no recognition of the significance of the legitimacy that the use of 'quasi-bureaucratic' consensus building by an unrepresentative elitist regime to develop such a 'transparent' institution(see Acquiring Soft Power above) gave to the international role of unrepresentative elitist regimes.

US analysts highlighted the dual geopolitical and economic implications of China's proposed AIIB.

About the Context to: China & the Asian Infrastructure Investment Bank - email sent 18/4/15

Wells Fargo Economics Group

As your article (China and the East Asian Infrastructure Investment Bank, 16/4/15) pointed out there are both geopolitical and economic factors in play in China’s leading role in establishing an Asian Infrastructure Investment Bank. The following is an attempt to suggest the broad context in which that initiative needs to be considered.

At one level the AIIB will allow China’s regime to engage in economic activities in other countries in the same way that it does within China (ie without the financial and democratic constraints associated with the liberal (ie democratic capitalist) international order that the US has championed since WWII). The likely implications (through the creation of the AIIB and in many other ways) of expanding the ‘bureaucratic non-capitalist’ systems of socio-political economy that have been the basis of East Asian economic ‘miracles into the international arena are suggested in Creating a New International 'Confucian' Financial and Political Order.

However it probably inappropriate to view what has happening as primarily a Chinese initiative – as Japan was the leader in the undeclared ‘war’ against liberal Western-style economic and financial institutions for decades before China’s economy became significant (eg see A Generally Unrecognised 'Financial War'?). And, as for the methods used elsewhere by the Asian ‘tigers’, China’s rapid economic advancement has been argued to be wholly or partly a product of guidance from Japan (as still seems to be happening in relation to China’s risk of a financial crisis). It is anything but unreasonable to view post WWII developments in East Asia as an Imperially-mandated continuance of Japan’s 1930’s ambition of creating an ‘Asian Co-prosperity Sphere’ using traditional Art of War tactics – following the failure of the military tactics that Japan used unsuccessfully in its 1930s’ attempt to mobilize China’s support for the creation of an international order that was compatible with East Asia’s traditionally elitist and authoritarian cultures (see The US's Most Significant Intelligence Failure?).

John Craig

A former US Treasury secretary argued that China's establishment of the AIIB represented the end of the US's role as the underwriter of the global economic system. The AIIB challenges the World Bank / IMF - traditional funding sources in which the US has a strong voice. Though US has had dominant global economic influence, countries are now falling over themselves to align with China [1]

It was also argued that China would be the only winner from the proposed AIIB.

East Asia's path to industrial success has been well trodden - first by Japan, then the four tigers and now China. It combines Soviet-style financial repression, urban industrialization,a mercantilist focus on exports, and protection for home champions. Can South, Central and SE Asia repeat this process? John Lee (Hudson Institute) has pointed to obstacles: (a) robotics is tilting advantage to capital intensive rather than labour intensive manufacturing; and (b) rather than a small number (150m) of people seeking to export to a large number of wealthy consumers (400m), there are now about 2bn striving to grow on the basis of exports to 1bn wealthier consumers. China may succeed in becoming both a consumer market and a competitive exporters - but its size means that others will be unable to follow that path. China's overseas development assistance is commercially focused. China firms expect to gain over 90% of the value of projects financed by AIIB. Others will only get sub-contracts. Indonesia sees the AIIB (which will build things) as complementing the World Bank's emphasis on little things (eg literacy, sanitation, opportunities for women). Unless the little things are right, the big things can't produce ongoing benefits. China is not alone in favouring turnkey infrastructure projects as both Japan (via ADB) and Russia have done so. What they provide are commercial deals, not charity.  Comparisons with the Marshall Plan are misplaced [1]

China was suggested to be sharing the benefits of its urbanisation emphasis with other countries (through AIIB and its 'One Belt, One Road' strategy- as China's urbanisation emphasis was seen as a key element of its economic strategy. Infrastructure will be built to speed up urbanization and thus drive growth [1]  [CPDS Comment: China's emphasis on infrastructure and property development in the post GFC environment seems to be the major reason that it currently faces the risk of a debt crisis]

China was seen to be relying on massive infrastructure and cross-border trade to cushion its economy as it transitions to more sustainable growth. But this could do more harm than good.  The One belt, One Road (OBOR) project aims to connect China to central and south Asia, the Middle East and Europe. However China's long term problem can't be solved without boosting domestic consumption. OBOR seeks to export China's savings and import foreign demand. This is just a continuance of China's old growth model [1]

The 'new normal' that China saw as the basis for its future growth was portrayed as the key determinant of the economic future of its whole region (see Australia's economy and the 'new normal'). The latter did not seem to take account of the various factors that could cause the 'wheels to fall off China's economic wagon').

It was suggested that China seemed to be seeking to arrange a massive external program of infrastructure investment and thereby stimulate economic growth [1]. At the same time China seems to be encouraging large scale off-shore property investment (eg see "Mum and Dad" Chinese Investors - You Must Be Joking, 2015).

CPDS Comment: In relation to this it is noted that:

  • large-scale domestic infrastructure and property investment was China's solution to the challenge posed by the GFC - and also the source of its domestic debt crisis because it was funded by an unprecedented explosion of credit (see Heading for a Crash or a Meltdown?). Thus, unless a considerably more disciplined approach is taken through initiatives such as the AIIB and the 'One Belt, One Road' strategy), all that will be achieved through stimulating regional growth via large scale infrastructure and property investment is a dramatically expanded debt crisis. The lack of apparent disciple involved in China's investment into speculative property developments in Australia (see 'Mum and Dad' Chinese Investors, op cit) is reminiscent of Japan's external investment splurge in the mid 1980s (which, in effect, 'bought the world at the top of the market' and contributed to Japan's later crippling financial crisis).
  • Perhaps by encouraging other countries to become partners in the AIIB (and perhaps other large scale investment vehicles) it might be expected that any debt crisis that results from China's leaders' directing major investments so as to boost their regional / global influence would not be solely China's responsibility;
  • external capital flows (in the past mainly into US Treasury bonds) have been needed to counterbalance the current account surpluses that resulted from domestic financial repression in East Asia's major non-capitalist economies (ie Japan and China). This suggests that China might now be seeking to find alternative destinations for the external capital flows that are needed to head-off or postpone the domestic debt crisis that would result if its current account surpluses were phased out through boosting domestic demand and it's  financial institutions with highly-suspect balance sheets then had to borrow in international financial markets. Maintaining current account surpluses (and thus capital outflows to a new set of trading partners) might again head-of or postpone China's debt crisis, but it also continues to contribute to the global demand deficits that make sustainable growth impossible (eg see Putting the Economic Risk of Deflation in Context, 2015)

China's Premier announced billions of $s of financing and trade deals with Brazil - as part of a program to deepen ties despite economic slowdown. Investments involved infrastructure. Announcements of Chinese investments have become common recently as Latin American countries dependent on China have experienced difficulties. However only about 1/3 of such announcements ever materialize [1]

A FTA agreement that China entered into with Australia in mid 2015 was seen to be highly beneficial to Australia and to have involved few Australian concession to China. This was quite different to the negotiations with the US in relation to a proposed Trans Pacific Partnership [1]

[CPDS Comment: Australia's government (whose DFAT advisers have previously demonstrated a dangerous lack of Asia-literacy) here traded economic benefits for economic and political dependence on China's 'princelings' - without any suspicion that this was the core of the imperial  trade-tribute regime by which Asia was administered from China prior to Western expansion - see above - and which China now is clearly seeking to re-establish as an alternative to liberal Western practices. Getting the economic benefits that the FTA promises depends on the continued cooperation of China's 'princelings' and, given a compliant population without democratic accountability or a rule of law, the latter can potentially gain large political and economic benefits from this dependency].

China's efforts to create a new international order have been seen to have historical precedents and to create opportunities for both China and Russia in a  renewed focus on Eurasia.

China is the most historically-minded nation. Mao based his conquest of power on Sun Tzu who lived around 500 BC, and Confucianism (which emerged at about the same time) remains at the heart of China's social thinking despite Mao's attempts to suppress it. President Xi's 'New Silk Road' initiative in 2013 paralleled a silk road initiative 2000 years ago that opened routes of trade and cultural exchange across Asia, Africa and Europe. China promotes 'multi-polarity' - the notion that the world should have multiple poles of attraction (rather than the uni-polarity of a US / Western dominated world. It rejects the idea that there is a single civilizational ideal or any one right way of doing things. Eurasia is an old idea whose time is seen to have come again. It has been suggested that eight trade circuits existed in 13-14th centuries between Europe and China under Pax Mongolica - which Western imperialism is seen to have superimposed itself on without obliterating them. Islam continued to spread, while Indian and Chinese migration continued. The old system has a chance to re-emerge because the West was humbled by the 2008-09 financial crisis - and the interests of China and Russia (two potential builders of Eurasia) have converged. China's motive for promoting Pax Mongolica is clear - its growth model based on exports of cheap manufactures to developed countries has run out of steam (eg because of stagnation in the West and rising protectionism). Rebalancing the economy towards domestic consumption poses problems for China's communist party - so reorienting investment and exports towards Eurasia seems a better option. As China's labour costs rise, production is being shifted to western provinces - which suits the New Silk Road concept. Russia also has a motive for developing Eurasia - because it is mainly an oil exporter. Russia, Armenia, Belarus, Kazakhastan and Kyrgyzstan have established a Eurasian Economic Union - similar to EU - a scheme that takes the sting out of West's Cold War victory. Russia favour joining the EEU with the New Silk Road concept into 'Greater Eurasia. On 8/5/15 Putin and Xi signed agreement for coordinated political institutions, investment funds, development banks, currency regimes and financial systems to serve a vast free-trade area linking China with Europe, the Middle East and Africa. Russia and China both feel encircled by the US and its allies. China's anti-hegemonic aim is to secure tolerance amongst civilizations. Putin has increased anti-American rhetoric. Two old rivals now seek to exclude Western influence from Eurasia - perhaps because the US blocked China's role in the IMF and Russia's desire to join NATO. Whether China and Russia's union will be enduring (or be a threat to world peace) remains to be seen. However, for the time being, this arrangement seems better to them than being lectured by the West [1]

China's economic transition is having disruptive international effects but also creating opportunities that need responses. [CPDS Comment: Evaluating what is on offer requires some depth of understanding of East Asian history and cultural traditions - see China Won't Get Far Along Its New Silk Road If It Suffers a  Political 'Flat Tire'].

Outline of Callick R., 'China's Bumpy Ride Along the New Silk Road', The Australian, 29/8/15): A new Chinese revolution is starting to have external effects (eg stockmarket collapse, devaluation, slump in manufacturing, government responses) and challenging others benign view of China's economy. These are indicators of changes China has been seeking for years. World expects China to drive 40% of global growth. Many have seen China's military / political arrangements as bad, and its economy as good. Yet China is more complex - and has economic impacts that Soviet Union never did. European and US analysts can't understand cultural factors any more than they could with Japan. China's decision makers operate quite differently - ie they are not subject to political / public pressures. China has done all it can to sustain global demand - by infrastructure spending - yet its future policy direction is unclear.  China's changes are causing problems for Australia (as China bought 1/3 of its exports last year and commodity prices are falling).  Australia's unions are seeking disengagement from China despite its rise and search for external partners and opportunities. For the first 18 centuries after Christ, Asia accounted for over 75% of global GDP. But it was left behind by the industrial revolution - until Asia started to industrialize when the pendulum swung back. China's real wages have been growing at 11.4% pa this century. Now instead of just enjoying cheap Chinese products the world finds that China has global economic significance. The world benefited when China spent heavily but unproductively to maintain its economy after GFC. The 'Australia in the Asian Century' white paper was intended to educate Australians about this. But now Australia is less willing to change to accommodate this. Paths to higher productivity are being blocked. Change is also being resisted in China. China's elites share a notion of China restoring its status of power and dignity - and this is a huge political asset for its president. China's biggest problems are political - ie how to arrange the distribution of power. To date all that has been shown is brute power. They need to be able to outline a political vision to accompany the economic one. The economy is not its president's main priority - as China will now grow almost by gravity. But his job is harder because China's economy now matters globally. It does not matter whether China has financial strength, all that matters is that people believe that it has. The Communist Party thinks it is best placed to price risk (ie it should intervene if markets get it wrong). China is promoting new 'Silk Road' infrastructure initiatives, not to gain colonies, but so that all roads will lead to Beijing. This will soften the blow of China's slowdown. Australia is also expected to play a major role in the new 'Silk Road' - and this like the FTA is an opportunity that China is making available. China matters to Australia because: (a) Australia is a proxy for China in financial markets; (b) this relationship interferes with Australia-US relationships [1]


China Won't Get Far Along Its New Silk Road If It Suffers a 'Flat Tire' - email sent 1/9/15

Rowan Callick,
The Australian

Re: China’s Bumpy Ride Along the New Silk Road, The Australian, 29/8/15

Your article (outline above) pointed out that European and North American analysts have generally not understood the cultural factors that affect major East Asian countries such as Japan and China. However, your article also implied that Australia should now take advantage of the economic opportunities that China is offering without any more serious effort to understand East Asian cultures than others have made (eg by entering a Free Trade Agreement with China and encouraging China’s new ‘Silk Road’ projects).

I should like to submit that the first deficiency (ie a lack of understanding of the implications of East Asian cultures) needs to be remedied before appropriately informed decisions can be made about the implications of participating in arrangements that would (as your article suggested) result in ‘all roads leading to Beijing’.

My reasons for suggesting this are outlined in my Comments on ‘China’s Bumpy Ride along the new Silk Road’. Its seems likely that those arrangements would involve taking a subordinate status within a politically and economically illiberal international system controlled (as Asia was before Western expansion) by unaccountable and authoritarian ethnic Chinese social elites. It also seems possible that China will suffer a political, and thus economic, ‘flat tire’ the largely eliminates the opportunities that seem to be available. And once again the latter risk is arguably much easier to understand if one actually tries to understand what is different about East Asian cultures.

John Craig


Detailed Comments on ‘China’s Bumpy Ride Along the New Silk Road

It is undoubtedly correct to point out (as the article outlined above does) that European and US analysts have not really understood what they have been dealing with in major East Asian economies such as Japan and China.

However, while the 'Australia in the Asian Century' white paper pointed out that the region was now politically and economically significant, it made no attempt to overcome that lack of cultural understanding (see Australia in the Claytons Century: The 'Asian' Century you have when you are not having an Asian Century, 2012). The white paper simply assumed that Asia would rise economically within something like a Western style social, political and economic framework.

That assumption is anything but realistic and understanding of radically different ways of thinking and doing things is vital to coming to grips with what has been happening. Reasons for this are suggested in:

  • East Asia: The Realm of the Autocratic and Intuitive Ethnic Hierarchy (2001+) - which described a way of thinking / epistemology that seems foundational to regional cultures that have an ancient Chinese heritage that is quite different to the emphasis on 'rationality' (ie the manipulation of abstract concepts) that Western societies inherited from their classical Greek roots;
  • Babes in the Asian Woods (2009+) - which dealt with the implications of those cultural differences in general terms;
  • Creating a New International 'Confucian' Financial and Political Order (2009+) - which referred to the authoritarian international order that China seemed to be seeking to put into place as an alternative to liberal Western institutions (ie to those built on the independent initiative of rational individuals);
  • Comments on Australia's Strategic Edge in 2030 (2011) - which addressed security dimensions, and also suggested that it might have been possible to help China avoid its current precarious economic and political predicament if only the cultural issues involved had been studied and taken seriously;
  • Context to China's Sharemarket Boom and Bust (2015) - which referred to the possible impact of China's history and culture on current China-sourced disruptions of international financial markets.

Several of the points raised in the above article arguably need re-consideration in the light of a serious attempt to understand the history and culture of East Asia. For example:

  • it was suggested that China had aided the global economy by providing strong demand in the post GFC era - even though much spending been poorly directed. However the global economy had a serious demand deficiency because (for cultural reasons) East Asian systems do not take profitability (an abstract concept that can be used for rational decisions by independent enterprises) seriously but rather control resource allocation to maximize 'real' production primarily through consensus and obligation within hierarchical social networks (see evidence); - and thus:
    • it has been necessary in such economies to suppress domestic demand (and create global demand deficits / savings 'gluts') in order to protect banks and enterprises with bad balance sheets (see Structural Incompatibility Puts Global Growth at Risk, 2003);
    • huge international financial imbalances have resulted that amongst other things required easy money policies to create excess demand elsewhere to compensate and ultra-low interest rates (over decades) were a major factor in giving rise to the GFC and the subsequent constraints on global economic recovery (see Impacting the Global Economy, 2009);
  • while there is no doubt that China's main problems are political, a serious consideration of China's history and cultural traditions is needed to really understand what is involved - ie that a powerful neo-Confucian social hierarchy centered on the so-called 'Communist' Party (and China's President) is both: (a) needed to orchestrate China's change to its hoped-for new economy; and (b) strongly resented by grassroots Chinese people (see Context to China's Sharemarket Boom and Bust, 2015);
  • it was suggested that it does not matter whether China really has financial strength - only that people think that it has. In reality China's financial strength is a sham - given traditions that do not take return on, or return of, capital seriously and creative accounting practices (see China's 'Super-Ponzi' Financial System).  And under prevailing international financial practices (ie where industrial investment is driven by profit-focused independent enterprise rather than by the consensus of social elites and their subordinates sense of nationalistic obligation) China has been headed towards the same sort of financial crisis that Japan suffered (see Heading for a Crash or a Meltdown?). Whether China has the financial strength that markets have presumed, can only be irrelevant if there is a change in the international order like that mentioned in Creating a New International 'Confucian' Financial and Political Order (2009+). However creating a situation in which the power of ethnic social elites would not be subjected to either democratic or financial constraints would be incompatible with liberal Western-style institutions. It it is not only China's ordinary citizens who should think seriously about the new China-centered international order that has been being promoted.

In late 2015 expert Sinologists reportedly characterised China under Xi Jinping as: promoting a concept of 'shared destiny' domestically and internationally; combining Marxist / Leninist / Maoist thinking with a revival of Confucian statecraft; building power exclusively under China's 'princelings'; and possibly causing concern to China's neighbours about the nature of the 'shared destiny' that China intended to lead them towards

China's President Xi Jinping is adopting Maoist approach to foreign policy - according to Geremie Barme. This is seen as 'foreign policy acupuncture'. China is promoted as part of a 'community of shared destiny. While neighbours worry about China's activism, Xi has rejigged concepts of imperial dynasties to enable Communist Party to assert uniquely 'Chinese' ideas in world affairs. Barme (with Linda Jaivin and Jeremy Goldkorn) has exited third China Story Yearbook for China in the World Centre at ANU. Barme says XI is adopting a (disruptive) Maoist stance.  'Shared destiny' is the catch-all concept. It provides a framework for revived concept of 'all under heaven' - which assumes that China can be moral, political and economic great power.  Deng Xiaoping worked hard to demolish personality cult of Mao - and to prevent mini-Maos re-emerging. Xi however is going in the opposite direction. Xi has more titles than the Qianlong emperor in 18th century.  He is China's chairman of everything.  His status as member of red 'princelings' encourages the view that his mission is to restore communist party as China's salvation - believing that history is created by 'Great men'. He has a  Marxist-Leninist-Maoist worldview - tempered by revived Confucian statecraft - known as 'imperial thinking'. All 48 'tigers' (high level officials charged with corruption under Xi after Bo Xilia's downfall) are from 'commoner' families. None are Xi's peers - 'the second red Generation' (children of Communist Party founders. The 'shared destiny' concept is new but party has always claimed to express a community of shared aspirations / values - with an emphasis on collective / party probity / traditional over Western values / quelling Internet / repressing dissent. While many in the Asia / Pacific agree that they have a shared destiny with China, many may not share the increasingly-confining vision of Communist Party[1

The IMF announced that China's currency would be given 'reserve currency' status in its Special Drawing Rights system. Most observers viewed this as a positive move (eg to encourage China to liberalize its financial systems and join into the international financial system). However as noted in China Does Not Have a Normal 'Currency' above, the issue is quite complex.

IMF added Chinese yuan to its elite basket of reserve currencies - a move designed to spure greater liberalization of the world No2 economy. It confers international status on the yuan as China starts to ease restrictions on exchange rate and financial system. It also raises risks (eg in terms of volatility in China's trade and potential capital flight). What has been done acknowledges China increasing economic importance (ie 15% of global GDP - up from 5% a decade ago). It is also part of China's efforts to boost its economic leverage (eg with lending to foreign governments, encouraging use of yuan for trade and launch of AIIB. However reserve currency status is largely symbolic - as the IMF uses reserve basket to denominate emergency loans - not to create an internationally traded asset. Having yuan truely accepted as reserve currency will depend on China's success in deepening its financial system and adding far greater transparency [1]

 Chinese yuan is to join IMF's basket of currencies. This could lead to investment flows that disturb global financial system. This market the end of $US dominance that did not keep pace with global economic changes and weakens Western control over global market machinery. IMF deemed yuan to be 'freely usable' despite China's tight capital controls and bungling in Shanghai stock market. IMF believes that China's reform drive will create more robust international monetary / financial system. China's central bank may be using IMF push to defeat opponents of free-market policies. The change looks merely symbolic - but actually has profound implications. The global currency system has been dangerously unbalanced - because of dependence on $US - eg as revealed by $9tr of cross-border lending in dollars outside US juresdiction . $US centric world led to 'global savings glut' before GFC - and then swamped emerging markets with excess liquidity created by US Fed - a process that is now reversing. global $US standard is incompatible with multi-polar trading system as many emerging markets are more dependent on China. Thus finance and trade have been out of alignment. China could face problems from opening its system (ie floods of money in or out). $17.3 tr may be in Chinese deposit accounts (mostly held by rich Chinese) would could be able to switch half their assets in to foreign assets. There is concern about capital flight after devaluation scare in August. This could trigger a yuan devaluation that set off a deflationary shock to world economy. Some believe that $2.2tr is waiting to leave - but this could escalate. Authorities are trying to keep tight exchange-rate control because of this. Yet China can't have independent monetary policy, an exchange target and open capita account. Central bank believes that open capital account is the solution - but does not know how to do this safely. However there may also be a torrent of foreign funds wanting to get into China's bond market. China's hopes for this may however have gone backwards because of heavy-handed stock market intervention. China's hope for a superpower currency depends on establishing rule of law, competent supervision, consistency and global trust [1

IMF has given Chinese yuan reserve currency status - but gaining real acceptance for yuan by reserve banks as a currency to hold foreign exchange reserves in will require much more reform by China [1]

IMF has included Chinese yuan in its SDR currency baet. However this is largely symbolic and is unlikely to have significant effects in the short term [1]

In December 2015 China was accused of again trying to 'scuttle' international climate change agreements as it had done in 2009. China raised high expectations of its contribution prior to conference - but these have not been met in negotiations and the Like Minded Developing Country group (of which China is a member) seemed to be trying the block progress and slow negotiations [1] [CPDS Comment: In fact China with US took leading role in getting agreement to ambitious goals for dealing with climate change which ignored uncertainties about mainstream scientific assumptions about the issue - see Significant Climate Science Issues Remain Unresolved)

China's One Belt One Road initiative was seen to be very, perhaps unrealistically, ambitious.

It involves many infrastructure connection between China, Russia, Central Asia and the Indian Ocean - and is complemented by ports etc across Indian Ocean in 'Maritime Silk Route'.  The AIIB and Silk Road Fund have been established to help finance this. This reflects China's ambition to remake the world around it and dominate the Eurasian continent. But there is skepticism about how much will be built. Elements in Indian Ocean seem just about long term aspirations. Progress requires cooperation from unstable / corrupt / conflict-ridden regimes - especially in Indian Ocean. The Maritime Silk Road is poorly defined and possible elements that have been developed are not integrated - and nations embroiled in maritime territorial disputes with China look warily at port proposals. India is particularly wary. Whatever happens in the Indian Ocean will be much slower than is normal for China's activities. [1

China showed increasing signs that it was not interested in adapting to a liberal Western-style international order (eg see China's Strategic Approach to its Economic and Political Problems: A Speculation , 2016). Moreover:

  • China warned those involved in financial markets who did not invest in accordance with China's official economic strategy that it would act to ensure that they did not profit (eg from trading in financial markets which (say) put China's currency, the yuan, under pressure) [1];
  • Japan indicated that it was interested in coordinating economic policies with China - eg to defend the yuan.

In early 2016 it was reported that China is seeking to attract the children of foreign elites to study at China's universities [1] [CPBS Comment: The significance of this is perhaps that the international order which China seems to be seeking to create would involve coordination by China's social elites of networks of social, political and business elites worldwide]

In April 2016 it was argued that, by opening its huge bond markets to foreign investors, China's was: (a) trying to spread the risk associated with the huge debt levels that have been incurred to drive growth; and (b) putting the international financial system at risk - as China does not have financial markets as others know them as these are just a political tool.

Is Success Likely? [Out of date]

Though massive and difficult adjustments would be required in East Asia to adapt to the dominant global order (ie involving a rule of law and resource allocation based on independent profit-oriented initiative), there are reasons to suspect that the alternative outcome (despite its perceived benefits) would involve short-term risk, would be not in the interests of ordinary Chinese people and would ultimately be ineffective.

In the short term the hypothesised  plan would involve a race against time. It would be vital to create alternative 'tame' markets within a China-centred trade / tribute regime before foreign exchange reserves became depleted - in an environment in which recovery by major past export markets was not assured, and the latter's ability / willingness to sustain large current account deficits would be limited.

From the point of view of China's ordinary people such an arrangement may have been best assessed by a former premier of China who was critical of the path that China's leaders took at the time of the Tiananmen Square massacres because of: (a) the lack of political stability where only a few rule; (b) the commercial focus of those with political power; (c) rampant corruption; (d) social inequality; (e) pervasive inefficiencies; (f) the lack of benefit to ordinary people of their hard work

Zhao Ziyang (former Chinese premier) argued that parliamentary democracy would be the best option for China. After believing that socialist nations' 'peoples congresses' were better than parliamentary democracies, it was recognised that the former resulted in rule by only a few. Without a broadly based parliamentary democracy societies can't be politically stable or have a modern market economy, and developing countries will run into problems that have plagued China such as commercialization of power, rampant corruption and polarisation between the rich and poor. For China the transition requires allowing the existence of other parties and more democratic processes in the Communist party.  [1]

Zhao Ziyang was one of architects of China's economic boom but condemned its political leadership following the Tiananmen Square massacre. His urge for reform was based on recognition of deficiencies of China's economic system. Removing those deficiencies and the creation of an effective market economy were seen to require the creation of property rights. His initial concern was with increasing efficiency - which required transparency and freedom to trade. Ensuring that Chinese people gained returns for their labour was more important than pursuit of production growth. However under new leadership that path has been reversed. The dominance of SOEs in industry and banking is a major problem - and regulators are unable to control them because of the influence of government policy and the party. There is no separation of China's political and legal systems. Though growth allowed the emergence of a middle class, the GFC has strengthened the position of party whose default position is control. There are many examples of economic inefficiency in China. Economic and political reform is inextricably linked. Without parliamentary democracy China can't have a modern market economy.  [1]

It can be noted also that China:

  • tries to control the flow of information to its own citizens who may thus be unaware of the fact that under such an arrangement their hard work would remain largely unrewarded so that China's elites could control a new trade / tribute empire;
  • China's domestic political stability is anything but assured given the resistance to social inequality that neo-Confucian systems require (eg see Communism vs Confucianism: The Continuing Contest in China).

From the point of view of the rest of the world, a China-centred trade / tribute empire that was more-or-less self contained in terms of net supply and demand would be less macroeconomically risky than has been the case for that dependent on favourable international financial imbalance in the past. However:

  • its radically different modus operandi would prevent the emergence of any effective and uniform 'global' systems (ie global financial regulation) - and this would be mildly irritating;
  • the renewed inflationary risk from using monetary policy as a tool for macroeconomic management (which would arise when cheap imports became less of a constraint on producers' pricing power) would be a greater problem;
  • external investors would probably find that their projects remained forever marginally profitable unless they received official state patronage - as legal and financial systems would never be created to allow independent success in those terms. Concerns expressed in January 2009, that Chinese policies that promote domestic firms and create barriers for foreign ones might cause US firms to lose interest in China, may be noted [1];
  • states that were not full participants in the system would find that the local influence of 'Diaspora' was reflected in attempts to gain economic benefits through insider political influence;
  • conspiracy theorists would find entirely new factions to gossip about.

However in the medium to long term, quite severe problems could well arise internally within such a trade / tribute 'empire'.

China's future aspirations are limited by diverse environmental, demographic and political challenges which constrain its ability to create the sort of 'world' speculated above.

Constraints (in China's Development: Assessing the Implications) referred, for example to:

  • economic issues including: unbalanced state driven development; 'blunt' economic management tools; a weak private sector; a tendency to cronyism; problems with economy driven by market-share (rather than profitability from meeting customer demands); poor competitiveness rankings; imbalance between production and consumption;
  • potential future financial bubble if dependence remained on massive investment with limited concern for return on capital; 'blunt' tools for reforming financial systems
  • environmental concerns, which external observers have suggested must limit its growth and development;
  • demographic challenges related to the world's most rapidly aging population;
  • an autocratic political system subject to constant internal stresses - which in 2012 were clearly becoming very serious (see Change and Potential Instability Driven by China's Rising Generation? ).

Though the creation of an alternative political and economic 'world' might reduce some of the economic and financial constraints, the others would remain.

While there may be ways in which an economic system could be organised primarily on the basis of neo-Confucian social relationships and with limited reliance on money as a means of exchange, store of value and indicator of the need for economic change, such a system would probably eventually prove unworkably complex and inefficient. 

Another Structural Problem: Balancing Supply and Demand? 

A major challenge to the creation of 'Confucian economic world' (no matter how effective it could be in organising production and rigging markets to provide some with an appearance of 'profitability') could be the lack of satisfactory means to balance supply and demand - which are critical to sustainable economic growth.

Mercantilist economic models prevailed in Europe in the 18th century where the goal was to use state power to boost economic production - so as to accumulate a stock of treasure (eg gold). Adam Smith's Wealth of Nations critiqued those mercantilist economic models. He suggested that wealth would best be achieved by a free market. A key characteristic of the latter is the ability it provides to balance supply and demand - through an effective price mechanism and sensitivity by producers to profits.

These have not been features of East Asian economic models so that no matter how effective the latter are in strengthening the production side of an economy and arranging markets so that favoured enterprises are 'profitable', unless a satisfactory way can be found for (say) 'Confucian' obligation to balance supply and demand internally, they are not likely to prove any more sustainable than: (a) the European mercantilist systems that Adam Smith criticised; (b) the Soviet Union, whose command economy was seen to achieve sensational growth in the 1950s by producing goods that no one wanted; and (c) Japan in the 1980s.

In recent decades balancing supply and demand internally has not been an issue that East Asian economies have had to worry about - because demand has tended to be expanded elsewhere (mainly in the US) by easing monetary policy to prevent global growth stalling in the face of demand deficits in East Asia.

In addressing export markets, the strategies of 'East Asian' producers can (over-simplistically) be said to have involved maximizing market share (and cash flow) in export markets (through low cost quality goods) rather than maximizing profits.  Though some claim that seeking market share laid the foundation for long term profits (and there is no doubt that there can be synergistic gains from the relationships that can be established between diverse activities even if none are individually profitable) low cost quality goods were achieved (amongst other things) through modest wages and a high savings rate to provide capital for investment which did not have to be used particularly profitably.

While an economic system that targets market share and cash flows has a sensitivity to demand, this is not likely to be macroeconomically balanced.

Example: Development of a solar panel industry in China was supported by soft loans and subsidies from government. The result was the creation of global overcapacity (by a factor of two) and an 80% fall in product prices which has rendered those companies insolvent (though government subsidies remain) (Grigg A, 'Suntech shows China's folly', Financial review, 4-5/8/12)

For domestically driven growth within a non-capitalistic 'Confucian economic world', household incomes (from wages and investments) would have to increase - or else domestic demand would be unable to closely balance supply. Thus there could be no high savings to provide ready access to capital for investment. Moreover capital would need to be used efficiently - in ways that minimize costs (rather than merely relying on modest wages, and fabricated 'profits'). This requires that firms be genuinely profit sensitive, which seems incompatible with organising production and markets primarily on the basis of social relationships.

In April 2010 it was noted that emerging economies are challenging developed economies in their presumed residual area of competitive advantage (ie innovation) and are doing so on the basis of what has been called 'frugal innovation' to make new products at very low costs [1]. If valid this involves an improvement on the supply side of such economies, and does not reduce their dependence on strong external demand.

However the political and economic obstacles to China's system appeared to be becoming very severe and such proposals may be born of desperation to gain diplomatic victory before the severity of those problems becomes obvious (see Heading for a Crash or a Meltdown?). The latter referred to structural problems such as: dependence under the current global financial system on favourable international financial imbalances which can't continue much longer;  an incompatibility between the social equality aspirations of China's nominal Communism and the social inequalities needed by the methods for rapid economic modernisation that Japan originated; the inability of China's leadership to play a sustainable role in a Western style international diplomatic system; etc.

It can be noted in passing that an intense geo-political context between mercantilism (state-driven efforts to strengthen national economies so as hopefully thereby to increase political power) and capitalism (ie independent profit-oriented investment) was won by the latter in Europe in the 18th century (as recorded by Adam Smith in The Wealth of Nations), and such an outcome may be repeated in the 21st century especially given the likely difficulties of balancing supply and demand within non-capitalistic economic systems themselves.