Chinese Chess

An Interview with Kevin Rudd

At the moment, Xi Jinping looks like the most powerful strategic thinker in global politics. Australia’s former Prime Minister Kevin Rudd, a statesman with deep experience in Asian affairs, lays out the depths of Xi’s vision and identifies the challenges it poses to the U.S., the Pacific region, and the world.

OR: At what point does China become a significant enough military power that they might make the calculation that they could win a war?

Rudd: It's impossible to determine. China has an intelligent strategy toward the deployment of its global power and its regional power. It starts with cultural engagement, then moves on to economic engagement. Over time this becomes somewhat overwhelming; political and foreign policy influence follow. China's national security interests are enhanced as a result. China's ultimate goal is to secure its national security objectives without ever firing a shot.

So when the crossover point with Chinese and American military and naval capabilities occurs, we just don't know. There's two big variables at play. One is the sustainability of Trump's re-equipment of the American military. And the second variable is the linear nature (or otherwise) of China's own defense forces. One of the biggest impediments to China's long-term military capability may well be what happens with the impact on the Chinese budget of health, social security, and retirement incomes in an aging population. These guys have to run budgets too. It's not as if they just get to print money.

OR: How do you see Xi’s economic vision playing out long-term?

Rudd:  On the general economy, well prior to the trade war kicking in, from about February of 2018 there's been some evidence of the softening of the Chinese economy. And that's from a number of factors. One is the slowdown in pace of market-based economic reform. As a consequence, we see a reborn confidence on the part of Chinese state-owned enterprises, with these in turn constricting the space of private firms. SOEs are actually acquiring private firms to take them out of the marketplace, often at sub-commercial rates. There is also a deleveraging campaign within the Chinese economy that has been disproportionately focused on private firms rather than SOEs.

Through the anti-corruption campaign, there is a general level of angst on the part of Chinese entrepreneurs (and for that matter government decision-makers) about allowing a whole bunch of private projects to be easily developed in case you get accused of having given your great-aunt Nellie a free trip to Hong Kong last New Year.

Put all that together, and you have something of a slowdown in Chinese business investor confidence. Chinese consumers are still consuming, as evidenced through the data from Singles' Day on November 11th. But business investor confidence from the private economy has been grinding to a halt. And the problem for China is that 90 percent of employment growth comes out of private firms. Most of the innovation comes out of private firms. And a large slice of China's overall economic growth comes out of private firms.

For reasons of political economy and his long-term view of the role of the Party within the country, Xi has decided to constrict the future growth potential of private firms. Ultimately, it's reflected in the growth data.

The fascinating thing for me is that these numbers began to become apparent to the central leadership by September or October. Because certainly by October, you start to see a series of speeches by Xi Jinping and Liu He, the vice premier responsible for the economy, radically and rapidly embracing publicly the importance of the Chinese private sector in a way that I haven't seen in the last five years. The open question is this: do Chinese entrepreneurs believe it? I'm not sure.

OR: How do you assess China’s move away from an export- and infrastructure-driven economy to one driven by domestic consumption?

Rudd: The “China Made by 2025” strategy is clear, and that's what it says across frankly all product categories, including the technologies. The old model was labor-intensive manufacturing for export reinforced by high levels of public investment in infrastructure sustained by high levels of personal savings. The new model? Focus on domestic consumption, de-focus on public investment (as much of the necessary build has already occurred) and focus instead on private fixed capital investment and on an expanding sustainable energy sector, all accompanied by high private consumption and a low savings rate.

The “low savings rate, high private consumption” bit is working. The private-sector bit has run into problems, as I just described. And in order to offset that problem, what the Chinese are now doing is again sending out signals about using state fiscal policy means to plug the growth gap.

That's the strategy. That's the blueprint. It's at best only been partially implemented. Unless you further marketize the private sector and create sustainable long-term incentives, then you're going to run into a structural problem.

OR: How alarmed should people be about the growth of the technological surveillance state in China?

Rudd: America shouldn't be surprised by it: China's a one-party state. What's new is that the Chinese now have available to them more comprehensive tools of authoritarian control. The Chinese have never pretended to be anything other than a one-party state. It's been largely a figment of the Western imagination that China was about to transform politically. I haven't seen evidence of that for a long, long, long, long time. Xi Jinping’s determination is to disprove once again that there is a destination point in history — a happy ending with liberal democracies the world over. The new tools of social and political control provide him with the capacity to do that.

For those of us who believe in liberal democracy, as I do, then it becomes even more important that we grow yet more determined to preserve liberal democratic norms within our own countries, that we have to be determined to do so — given that alternative political models have been constructed.

OR: Do you think the U.S. under Trump has permanently damaged its soft-power capabilities?

Rudd:  I travel around a bit in my position. And yes, there is damage to the brand of American soft power globally. You see it on questions of global environmental responsibility, the posture of the Administration toward climate change in general and the Paris undertakings in particular. You see it on the global principles of free trade and the Administration's frequent assaults on the WTO and the notion of free trade itself. You see it in Trump's general assault on allies around the world. Either rhetorically, politically, or through various trade measures systemically.