Why you should care

Because as China goes … so goes the world. Or at least Asia.

Chinese President Xi Jinping enters 2015 with more hanging in the balance than any other Chinese leader in recent memory. He is attempting the hardest thing a national leader can do: He must not only get his house in order, but also vigorously push China’s political and economic influence around the globe.

Over the course of the next few months, Xi will have to juggle, on the one hand, domestic issues like corruption and growth; and on the other, the country’s expansive regional ambitions and its drive to outpace the United States. Today, Asia’s pre-eminent power seems far from what the Chinese call their “century of humiliation.” But to maintain his country’s enviable position and momentum, Xi will have to play double duty, with one foot firmly at home and the other in more global territory.

Every Chinese leader since World War II has helped transform the country. Walking past a giant poster of Mao Zedong in Beijing before Xi came to power, I once heard a typical Chinese take on this from a former official: “Mao created our country, Deng Xiaoping then modernized our economy, Jiang Zemin next led us out into the world, and Hu Jintao [the then-president] is lifting us up!”

A timeline of the above-mentioned Chinese leadership:

Mao Zedong (1945–1976)

Deng Xiaoping (1978–1987)

Jiang Zemin (1989–2002)

Hu Jintao (2002–2012)

What would my contact say about President Xi today, two years into his first term? My guess: that Xi is performing some necessary repairs.

One crucial observation Xi seems to have made is about the preservation of China’s political system. The Chinese Communists’ one-party rule remains the only government for China’s more than 1.3 billion people. Xi seems to realize that in order to keep legitimacy, the party must continue delivering economic growth and rising prosperity, as it has for decades. But that is easier said than done.

Basically, a Catch-22 is kicking in. China’s growth provided the jobs and prosperity that justified decades of one-party rule. That growth has come, in part, from dependably easy credit and cheap exports, which gave the country a competitive trade advantage. But the increased prosperity that resulted from this growth has pushed up wages and raised manufacturing costs — making exports less competitive.

This partially explains the country’s falling GDP growth — which has plunged to a five-year low, sliding from double digits to around 7 percent. Xi’s flexibility to halt the rapid descent is hampered because 35 percent of Chinese business activity remains in the hands of inefficient, overstaffed, state-owned companies that are hangovers from before China began opening up to private business. Although Xi will catch a break from falling oil prices, it’s still going to be difficult to shift China’s growth model to a sustainable one that is less reliant on exports and more on domestic consumption.

Such a shift to a healthier domestic economy requires rational economic decision-making — which is threatened by China’s rampant corruption. Too many decisions are made on the basis of bribery and favoritism, with many such favors going to high party officials. One sign of it all: Chinese officials, seduced by easy credit and kickbacks, launched an irrational building spree that has left many Chinese cities dotted with large, unoccupied structures.

Xi’s response: an unprecedented anti-corruption campaign. His prosecutors have punished 13 percent more party members in his first year than during the preceding one, and the numbers are rising steadily. Some China experts argue that this is yet another Communist Party purge more concerned with ensuring loyalty than spurring the economy. The year ahead should tell us which one it is.

Reporters surround President Barack Obama and Chinese Vice President Xi Jinping during their meet in the Oval Office of the White House in Washington, Feb. 14, 2012.

Reporters surround President Barack Obama and Chinese Vice President Xi Jinping during their meeting in the Oval Office of the White House on Feb. 14, 2012.

Source Doug Mills/Redux

On top of tackling these internal problems, Xi is projecting a grandiose foreign policy vision designed to extend China’s influence while also convincing neighbors that they are gaining from cooperation with Beijing. As part of this, China has softened much of the rhetoric about aggressive territorial claims in the South and East China Seas that had kept tensions high with at least six of its neighbors, starting with Japan, in 2014.

Complementing all this is Xi’s sweeping proposal for a “New Silk Road” — a revival of the trading route that, a millennium ago, connected China with the West. Beijing describes the plan as a system of roads, air terminals, ports and railways linking China to Western Europe, the Middle East and Africa. It will require a series of trade agreements and logistics that would stretch from central China and through India, Iran and Central Asia — all the way to the English Channel.

Xi is backing the plan with a $16 billion investment fund and a new institution called the Asian Infrastructure Investment Bank. The bank’s initial funding — $50 billion — comes largely from China, and is intended to spark infrastructure improvements in poorer Asian countries; 20 other nations — including Indonesia, Thailand, the Philippines, Pakistan and Kuwait — have signed up.

Chinese president Xi Jinping (right) meets with the European Council.

Chinese President Xi Jinping (right) meets with the European Council.

Source President of the European Council

The New Silk Road proposal is clearly designed to offset the United States’ so-called “rebalance to Asia” — a policy shift that saw America turn more attention to the region last year, mostly in the form of defense arrangements; it’s also set up to rival the U.S. Trans-Pacific Partnership (TPP), a free trade agreement that the United States and 11 other countries have been negotiating for nearly a decade. These are two tangible examples of how the world’s two major superpowers are jockeying for influence in the region. Xi’s plan may gather steam more quickly due to its simplicity and focus on building things and ramping up trade, as opposed to the TPP’s complex tangle of rules and regulations.

So it’s off to the races for the United States and China in 2015 — but don’t count on seeing the finish line anytime soon. The months ahead look far more like a marathon than a sprint.

This OZY encore was originally published Jan. 21, 2015.

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