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Kevin Rudd on Xi and China

Octavian Report: What is your view of Xi Jinping? How do you see his vision for China playing out?

Kevin Rudd: Xi Jinping has a deep ideological and psychological commitment to the Chinese Communist Party. It’s partly because he’s second-generation Chinese royalty. His father was a member of the Politburo and a revolutionary commander during the civil war against the Nationalists. So it’s very much in his blood. He did not come up through that other stream of the Party, the technocratic stream. As a consequence, by reason of personal experience and his ideological worldview, for him the Party is not just a temporary device — it’s actually in his view long-term and central to China’s ability to become a great power in the world.

For him, cleaning up the Party through the anti-corruption campaign was fundamental. For him, further consolidating the power of the Party versus other voices within the country is consistent with his ideological vision (despite the natural resistance to that). He sees himself as being personally central to the Party’s future — hence his own personal power consolidation as well.

He’s not a guy to be trifled with, I say having met him several times. He’s a politician’s politician operating within a one-party state.

OR: Do you see a risk for China in this power consolidation going forward? What about his move away from the free market?

Rudd:  Three things are happening under Xi Jinping’s leadership. One’s this consolidation of political power around the person who is President and General Secretary and Chairman of the military commission. He is not just first among equals: he is the undisputed head honcho.

On the economy, what we’ve seen — particularly since China’s own domestic financial crisis of August 2015 — is a rapid slowdown, if you can use those terms together, in the pace of phase-two free market economic reform in China. There was a blueprint announced in 2013: they went some ways toward implementing it in 2014 and the first half of 2015. They then had a meltdown in equities markets and financial institutions in the summer of that year. The response from the political leadership was: You want us to further liberalize this economy? Given what we’ve just been through? Thank you very much; we’re not about to do that. So there were a number of anchors thrown overboard to slow the pace of market-based economic reform.

The third thing we’ve seen with Xi Jinping’s leadership is a much more decisive and proactive view of China’s role in the world. Rather than sticking to Deng Xiaoping’s maxim — hide your strength, bide your time, never take the lead — as of 2014, Xi announced a new general doctrinal strategy, an activist Chinese foreign security policy of actually moving the status quo. Hence the Belt and Road Initiative, hence land reclamations in the South China Sea. Hence a new foreign policy activism in Latin America and Africa and in the councils of the multilateral system.

OR: Do you think that the U.S. and China are going to clash? If so, where?

Rudd: Conflict between the United States and China is by no means inevitable. It’s up to the leadership of the two countries to decide what future they want together. And at present, we’re in a fluid position. The United States has formally abandoned its 40-year-long doctrine of strategic engagement with China, proclaiming that it’s failed, that China is not becoming more liberal economically or more liberal politically or more liberal internationally. It’s actually heading in the reverse direction. Hence Trump’s declaration, through Vice President Pence, of a new period of strategic competition.

The problem with all that is we are now in a period where we don’t know what the rules of the game are. We knew what the rules of engagement were previously because the two countries had gotten used to each other after 40 years. But in this new period, we’re starting to see friction everywhere, and in unplanned and unpredictable ways.

Take the blow-up in Port Moresby at the APEC Summit. APEC for the first time in its 30-year history did not agree on a communiqué because of the fundamental breakdown between the American and Chinese positions on the future of global trade.

Having said all that, it’s not in the interest of either country to go to war. From China’s perspective, they’d probably lose a conventional conflict. No one wins a nuclear conflict. The U.S. point of view is that the losses would be unacceptably high. Therefore, the danger here is not one of intentionality. The danger is conflict through miscalculation and escalation. And that’s where there’s now too many things gone wrong for people like me to feel comfortable.

OR: Do you see the focal point of conflict being North Korea? The South China Sea? Taiwan?

Rudd:  The probabilities are likely in that order. In the South China Sea, America is changing its posture to challenge China more through freedom-of-navigation operations. China is responding with aggressive tactics on the high seas and in the air. So there’s what I describe as a basic law of arithmetic probability which starts to kick in. If you’ve got too much metal kicking around a defined area of water and air space, sooner or later the bits of metal hit each other. That’s what worries me.

On the North Korea question, it’s all quiet on the western front. Too quiet. And if we end up with a false dawn in terms of the Korean denuclearization objective — which I suspect we might — then what I have always been most anxious about from the get-go, going back to the Singapore Summit, is what happens once diplomacy is seen to have failed. We’re then into a much harder strategic terrain. Because in the meantime through Trump’s diplomacy in Singapore and with Kim Jong-un, we’ve seen a complete normalization of the China-North Korea relationship. This was previously in the icebox. That’s our second set of problematic contingencies.

The third continuing sleeper is Taiwan. China is determined to rein in Taiwan’s strategic space. But at the same time, China is not ready yet to risk conflict across the Taiwan Straits because of the unacceptably high risk of American involvement and/or loss of life as a result of Taiwanese countermeasures.

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.

The overriding effect is a level of strategic uncertainty around the world as to what a future America may do. How predictable will American strategic behavior be in the future? Our traditional view, as friends and allies of the United States, is that if you’re going to be the world’s remaining superpower, one of the things that goes along with it is being predictable in your behavior. Others then tend to organize themselves around that principle. If the superpower becomes unpredictable and vacuums emerge, others seek to either occupy those vacuums or hedge or both. This is why we are starting to see what I would describe as breakouts of instability in various places.

OR: Do you see China becoming, then, the dominant power in the Pacific?

Rudd: China is the largest trading partner of every country in East Asia, without exception, from Tokyo through to almost Delhi. That’s a big figure. America, the largest economy in the world, is often not among the top-five trading partners of those countries. Capital markets will always be different. America will remain dominant, for the simple reason that the yuan is not tradable and the Chinese capital account remains closed.

But the relativities are also changing in China’s favor over time. The economic geography of East Asia is changing. America is now not the central player. TPP was an effort to turn that around, and uniquely you had Japanese leadership follow — historically not the world’s leading free trading country, reflecting its own strategic paranoia in relation to the United States.

So the overall posture within East Asia is one of understanding the unfolding economic realities and at the same time being uncertain about where America lies strategically in the future. Trump said he’s reinvesting hugely in the American military and its capacity, but we don’t know — given the “Trump Doctrine” — the predictability with which that military will be deployed. So the emerging posture across most of East Asia is one of hedging about the future, strategically hedging. Part of that hedge is not knowing through Trump’s uncertainty as to where all that leads. If Trump is reelected, the hedging will become even more acute. Even if Trump is not reelected, then what is the lasting impact of this current “America First” movement?  Does it infect more broadly the American body politic?

These are open questions in most of the foreign ministries of Asia.

OR: On climate change, are we creating a problem we won’t ultimately be able to fix if we don’t address it now?

Rudd: On climate, I just follow the science. As prime minister of Australia I had a responsibility to respond to the findings of Australia’s chief scientists and the Commonwealth Science and Industrial Research Organization, which has been in existence nearly a hundred years. It’s a massive institution which analyzes these questions in a clinical and detached scientific fashion. And their advice to us, from when I first became prime minster in 2007, was: A) It’s real. B) It’s accelerating. C) The manifestation of it is not just temperatures rising, but more extreme weather events, more droughts, more fires, more extreme storms, more extreme winters.

And if you don’t believe any of that from the scientists, if you only believe in good old capitalist principles, then look at how every single major insurance firm is now costing climate-associated risk in the world. The biggest capitalist firms in America put huge premiums on extreme weather events associated with climate change. I haven’t met a single global insurer that doesn’t believe in climate change.

So not only do we have these massive geopolitical shifts between the United States and China, we have a second global challenge in the acceleration of climate change. And a third is massive technological disruption. We haven’t even spoken about AI and its impact on business, on work, on the competitiveness of nations. Yet we have this technology revolution and its disruptions massively disrupting politics as well. You have climate disruption, you have geopolitical disruption between China and the United States. So if everyone’s feeling a bit stressed at the moment, they’ve got reason to be.