China: juggling political repression and market liberalisation

Dr Geoff Raby is the former Australian Ambassador to China and we’re talking about a speech he made last month to University of Technology in Sydney, the China Economic Conference, and the speech was entitled not all successful economies are free. It was about China and how he got into it and what he thinks about it now including the trade war. The most important part of it obviously is about the trade war but lots of interesting stuff from Geoff. 

Here is Geoff Raby, the former Australian Ambassador to China. 

Geoff, I love the story about how you got into China in the first place, you were going to work for ONA, the Office of National Assessments, and you were going to do Indonesia and they said no, sorry, you can’t do that we want you to do China.

Yeah, exactly, with like two weeks’ notice.  As I said in the speech I didn’t understand in those days that in government you don’t actually need to know very much about any subject, you just need to have some analytical tools that you can apply to all sorts of different subjects.

Indeed, and as you pointed out in the speech thus began a lifelong devotion to studying China.

Yes, life changing.

That’s right.  I think the nub of the speech perhaps is the sentence “Will its model of political repression and market liberalisation be sustainable?”  But I’m not sure you actually answered it, Geoff.  Do you have an answer to it?

Alan, that’s a good question.  What I’m really saying is that it’s worked for 40 years and for 40 years Western analysts have written China off and a point I make in the speech largely I think has been because of ideological perceptions, and so far so good.  I guess my answer is that the jury is out but you have to give China the benefit of the doubt.

I suppose living in Beijing, as you do, it probably feels pretty sustainable I guess.

Absolutely, not even just living in Beijing, I’ve just been down to Shandong for a Yancoal board meeting last week, everywhere the development is staggering and the scale of it.  There’s a high degree of, I think, public and political acceptance.  What we will never know about China until it happens, and we’ll only be looking at it after the event, is what’s going on in elite politics because that really still is completely opaque.  You’ve got a big swag of the opposition in prison Bo Xilai, Zhou Yongkang and so on, and you think these guys are going to be happy to sit in prison until they die?  I think not.  They’ll be looking for any opportunity they can to get rid of Xi.  Xi obviously has at his disposal all the power of the state to hold onto his position.  Ultimately that’s the problem with China, its inherently a fragile political system.

Why do you think Xi went for and the party accepted that big increase in his powers and becoming president for life at the most recent National Congress?

Yeah, well I think there was no alternative.  He had the power to do so, he had the influence and I think basically everyone around him just rolled over on that which again goes to the point that he has got the power and he’s able to exercise it. 

You mention in the speech a few of the challenges but you kind of skated over them a bit I think, one of them was the indebtedness, domestic indebtedness, which obviously is greater now.  You talk about the 40 years that it’s been sustainable and it’s worked and so on, and it has, but never before in those 40 years has China had this much debt to deal with.  Is that something that you worry about at all?

I think you have to keep an eye on it and think about it, and factor it into your analysis, but it needs to be put in context.  I don’t think the debt problem is ultimately destabilising of the economy.  The context is this, that it’s 265% or whatever of GDP, that’s not very different to Japan, the US and other developed countries.  They have pretty much a tightly controlled capital account and so another risk of debt is that you might have a balance of payments crisis, well that won’t happen for them and they’re running big trade surpluses still with a huge amount of foreign exchange reserves.  Most of the debt is in renminbi so you’re not going to have a currency crisis which is another risk for emerging markets like we see in Argentina or Turkey at present.  The banks, the state-owned banks, are incredibly well capitalised and they run a fiscal surplus. 

To me I think they’ve got the controls and the fire power to manage the debt and deleverage down.  The question is how quickly do they deleverage and if they were to do it quickly, say in the next two or three years, then economic growth would be a lot lower but they don’t have to because they’re not faced with these external pressures to deleverage quickly and they are trying to deleverage, they can do it over five or six years and it would hardly affect the rate of economic growth.

Where the risk is, is in the trusts and off-balance sheet lending and the so-called shadow banking system.  I think they’ve got a set of policies that they’re trying to deal with those risks with and local government debt, and there could well be some big spectacular bankruptcies and failures but I don’t think it’s going to destabilise the macroeconomy.

The other risk and challenge that you mention, of course, is the current one with the trade war with the United States.  From Beijing how does that look to you, does it seem dangerous or is it just sort of a storm in a teacup?

It’s very interesting.  From my own point of view, one, I never thought it would get this far having been a WTO ambassador for four years back in the 90s and being Australia’s lead trade negotiator for many, many years I just never thought things would get this bad.  I got it badly wrong on that.  We are where we are, there’s no sense of crisis or panic here from Beijing but what is very interesting, and like everything with elite politics in China it’s hard to get a smoking gun to prove your case.  But there’s a lot of talk amongst elites that the trade war is a negative for Xi Jinping, the first major negative he’s had in six years in power and that’s because there’s a view that he’s mishandled the US China relationship. 

Amongst elites clearly there’s no more important foreign policy challenge than managing the US and he’s seen to have overreached himself and pushed too hard.  His enemies seem to be circling to use this as a reason to attack him.  That’s not because of the economic costs or consequences, and I think frankly again on China’s growth rate, the domestic market is so huge that it’s not hard for them to maintain growth through domestic stimulus if they need to do that.  In any event net exports these days hardly contributing to GDP growth in any case.

It’s not a domestic economic issue for China I don’t think but it looks like in terms of elite politics it may be becoming something of a point of attack on Xi Jinping.  As I said there hasn’t been any criticism or opening to attack him for six years so I think that’s the interesting thing about the trade war thus far.  The other side of it of course, Alan, is that the US is trashing the multi-lateral trading system and that should be a massive concern to us in Australia.  I’m surprised the Australian government seems to say nothing about it.

Yes, indeed.  Just on Xi Jinping what are his enemies saying that he should have done and that he should now do?

Well the rumours are that there’s a feeling amongst some of the elite that he has mishandled the US relationship, he’s pushed too hard.  Since he has come into power he’s adopted a very assertive muscular foreign policy and I guess they believe he should have found some accommodation with the US sooner.  Their feeling is that the trade dispute with the US, or war if you want to use that term, is a manifestation of his failure to manage the US China relationship better.

The feeling is that he should have been more appeasing of America, of Trump.

They would never use the word appeasing but he should have been smarter, he should have found other ways of managing Trump.

Obviously, the American focus is on trying to prevent or at least sort of contain China’s growth in technology and manufacturing technology, artificial intelligence and so on.  That’s what they seem to be more focussed on than actual trade.  Do you think that that’s something that will succeed in some way?

I agree that that is an element in the US position, it certainly wasn’t really the Trump position during the campaign when every second phrase he uttered was about China.  That seems to have crystallised in some thinking in the US and maybe even in Trump’s mind in the last six months.  You can’t stop countries developing technology.  Iran or North Korea under massive sanctions and isolation have developed their own nuclear technologies.  China is perfectly capable of developing all these technologies with artificial intelligence or whatever.  They’re already they’re the world’s biggest drone manufacturer.  They already have had forever US sanctions against them with respect to transfer of high technology, there’s US sanctions that also apply to the Europeans with transfer of military technology, but China has demonstrated it’s got great capacity to develop these things themselves.  It may slow the rate of development if they can’t just draw down on the global stock of knowledge but you can’t prevent countries developing these technologies if that’s their intention.

Where do you think this trade dispute is heading between US and China, will China just back down?

Good question.  I think China will come up with some sort of political face saving accommodation for Trump but they may wait to see how the midterm elections go.  Their retaliatory measures against the US are very smart and very well targeted at Trump’s base, many of the red states, a lot of agriculture.  Of course, there are lots of alternative suppliers globally that can step in and fill America’s shoes.  I think what’s caught everybody out, certainly me as a casual observer but everyone else, is that Trump’s support has held up quite strongly through this, the farmers haven’t turned around and said well you’re causing us great damage.  China has got no choice but to try and to wait it but ultimately I think China will come up with some accommodation.  Already there’s quite a number of measures that they’re taking in the financial services area for example allowing foreign firms to trade A shares and things within China that are directed at the US and are favourable to the US.  I think you’ll see more of that as well but it could go on for quite a while.

Just more broadly I read your speech in The Sydney Morning Herald and which kindly reproduced it there.  There were a couple of very telling, I thought, pictures that were put there.  You obviously didn’t choose them but they kind of really highlighted something.  One of the pictures was a photograph of a guy on a phone and it talked about how the socialism with Chinese characteristics for the new era, and the recent addition is the new era, tries to address the rising aspirations of China’s expanding middle classes which obviously is one of your themes.  Then there’s another picture showing a crowd of people with facial recognition technology being applied to their faces and little boxes around their heads which suggests – it doesn’t kind of openly say it, but it suggests that there’s greater oppression coming, that the Chinese government is using facial recognition to kind of spy on or at least know what everyone is doing.  That’s also another part of your theme which is the Chinese government is becoming, if anything, more repressive not less.

Yes.

How are those two things going to unfold, the rise of the middle classes and their desire for freedom presumably, and the ability to spend what they like and do what they like and travel where they like, and at the same time the growth of repression?

Yeah, it’s a very good point and I don’t really know.  I should say the Sydney Morning Herald published that without ever asking me to publish, my permission.

Really?

I did not, I just gave the speech at UTS, I did not know it was being published until someone actually sent me the link.

Goodness me.

I had absolutely no idea and apparently it was seen in the Canberra Times but no one ever asked me.  I haven’t taken it up with them, I sort of think I should but I can’t be bothered frankly.  Paul Keating once said to me… 

I suppose it was public but anyway, what did Paul Keating say?

A long time ago I got myself in some trouble with this foreign minister when I was ambassador and he rang me and said mate, how did you go, I said “Not bad Paul” and he said “Did you hear any noise from Canberra”.  I said “Yeah a bit of noise mate”, he said “Look, you just do what I always do, just tell them the dogs are barking, the caravan has moved on, get fucked”.  That’s been my philosophy ever since.  I never read anything anyone says about anything I write, I say my piece and move on. 

On your question about repression it was in my second last paragraph I think I talked about facial recognition and an economist did a piece on this a few weeks ago, maybe a couple of months ago.  No one else has really written about it or talked about it otherwise, and that we are in a period in China where you have an authoritarian state that has historically unprecedented resources and technology for political control.  We have never seen anything like it and there’s only going to be more of it.  How do the middle class deal with it?  I don’t think the middle class here care very much at all about it one way or the other. 

China is introducing this thing, a social credit card, which is completely Orwellian in its intent and that is that you’ll be ranked and given points on your behaviour across a whole range of things including patriotism and that will actually have an impact on your capacity to get a bank loan through the state banks and so on.  It is completely Orwellian and almost beyond imagination.  The state has this incredible capacity to control but equally as long as incomes keep rising and people can do what they want and travel, whatever, by and large the middle class will live with it all.  As long as there is stability they will accept it.

Is this changing your view of the world at all, Geoff?  This combination of economic success and political repression, Orwellian political repression.

Not really.  It’s just like a deeper expression of the social compact that the communist party struck with the people of China after the Tiananmen Square bloodletting and that is we will get out of your life, go and do what you like as long as you don’t challenge the role of the Communist Party in running the country.  At that level nothing has really changed, it’s a bigger manifestation of that compact but nothing else has really changed.  For me personally I find China a much less attractive place to be and it’s not about the Chinese people, the Chinese culture, and you always have to distinguish between Chinese people and culture and the Communist Party, but for me it’s just at a very personal level it’s a much less pleasant place to live.

I must say the social credit card, which I’d never heard of before until reading your piece and listening to you now, that social credit card doesn’t sound like business as usual.  It seems like taking it to a whole new level.  Surely, you’d imagine there would be some protests and pushback against that.

It’s a good point.  It does take it to a whole new level, that’s for sure.  But it’s just an extension of how the Communist Party influences society, and Xi is reinforcing all of that.  He is reintroducing Communist Party cells in the private enterprises, even overseas enterprises, and people live with it.  People live with that degree of state intervention but it’s nothing like what it was pre-80s when everyone had to belong to what they called a danwei, or work unit, and the danwei basically even determined who you got married to and when you got married and when you had a child.  The extent of intervention in people’s lives is nothing like what it used to be, but yes it is quite intrusive.

That’s actually one of the points you make in the speech, is that the early labour reforms were kind of easy because labour markets were so repressed in those early days that the reforms they were able to make we would regard them not as reforms at all but they actually led to huge increases in productivity.

Exactly, marginal adjustments because things were so distorted.  That’s the sort of main messages I want people to take away from the speech, is that if you look at China through Western eyes you’re going to miss a great deal of what’s really going on because things that seem inconsequential to us, or we assume are happening in any case, are not necessarily inconsequential here.  That’s why so many analysts have got China wrong and people like  Michael Pettis has been predicting China’s demise for the past decade and at some point these analysts have to be held to account where you can’t just keep calling the country out if it keeps going from strength to strength.

How much notice do you think we should take of the One Belt One Road initiative, is that as big a deal as it kind of seems from a distance?

It’s a big deal in China and in terms of Chinese policy priorities.  That influences priorities and allocating funds for investment offshore and so on, and approving projects.  I’ve always said that it will, like a lot of these things, promise far more than it can deliver.  Canberra’s pathological paranoia about China that somehow this is attempt to impose on a global order, a sinocentric order, just doesn’t get it because as you see already so many countries are pushing back against One Belt One Road loans and debts and so on.  It has a certain role, it will have a certain impact, it will have more impact in central Asia where it was basically designed for and much less impact the further you get away from China and to the extent China has used it, say like the port in Sri Lanka with the debt equity and control over the port, it’s going to lead to a critical reaction.  Firstly, the...is capable of One Belt One Road projects in Malaysia have taken on. 

The other point is China doesn’t actually force anyone to take these projects on.  A lot of countries that have high levels of debt, some of which is attributed to One Belt One Road, had high levels of debt before One Belt One Road was ever heard of and will have high levels of debt long after everyone has forgotten about One Belt One Road.  I sum it up, by saying they’re promises China will never deliver.

Just finally, Geoff, has a Communist Party person been listening to our conversation, do you think?

I work on the basis that I live in a fishbowl, the only way you can live in China is to assume everything you do is transparent and observed by [0:24:29.6], I don’t think I’m paranoid, and never do anything that’s illegal because you never know when it’s going to be used against you.

Just because you’re paranoid doesn’t mean they’re not out to get you.

Exactly, I’m not being followed but exactly.  We’re all good upstanding people so we never do anything wrong in any case, so there’s nothing to worry about.  But even when I was ambassador I just worked on the basis that you were completely transparent and if there’s something you didn’t want to be known then there were ways to keep things very secret but other than that you just accept that’s how it is.

That was Geoff Raby, the former Australian Ambassador to China who now lives in Beijing.