If one considers China's recent actions especially its creation of man-made islands, the belligerency of its naval encounters recently, it's bombast, and it's weapons development overtly aimed at knocking out American aircraft carriers, one must conclude that China is determined to exercise influence of not sovereignty in the Pacific rim region and perhaps beyond and might well be prepared to become aggressive. This is not just speculation, it is necessary to identify the motives and aims of a potential adversary in order to deal with them, just as it is necessary to identify the global goals of militant Islam to deal with that threat.
This conclusion about latent Chinese aggressiveness is reinforced by China's current economic situation. China faces a chronic challenge of finding work for millions of people every year who come off the farm and go to the cities in a pattern reminiscent of the Industrial Revolution in Europe. The problem is not just chronic but acute with riots or insurgencies of some kind occurring almost daily somewhere in China with the result that the party operating, of course, through its secret police, has become increasingly repressive. The solution to this challenge until now has been to trade with United States and the Western world which has been done so successfully that China is now challenging America as a number one economy and leading the world in manufacturing and exports. The hope of the central planners is that China with its historic growth in double digits and presumed growth of 7% or 8% can simply grow its way out of this dilemma.
This idea that China is still maintaining growth in the 7-8% range is disputed by Western observers who believe that the books are cooked. The same problem that is at the root of the banking corruption problem, the central authorities must rely on data which is unreliable. If GDP growth is really substantially lower than reported, the debt ratio will not be "brought down sharply" as the authorities and analysts predict. It is certainly a dubious proposition that "wise old men" acting on questionable data can artfully navigate between the rocks of recession and the shoals of runaway inflation while steering a corrupt system that must be run at high speed to avoid Armageddon. The Chinese introduced massive amounts of liquidity into their economy through the banking system precisely because they cannot afford to have less than phenomenal growth. If growth in China is closer to 0% than to 7% or 8%, the problem is virtually insoluble. More, the cost of manufacturing in China is rendering its mercantilist advantages less attractive than the manufacturing opportunities in India and Indonesia and even in America. That may well be why the manufacturing sector is giving way to the consumer sector and this "transition" might rather be seen as a symptom of slowing GDP and weak manufacturing rather than a rising and needed increase in the consumer economy.
Recently China's problems have been compounded by a recession which might very well be the harbinger of a severe economic contraction and pricking of a huge bubble generated by the government in an attempt to come out of the Great Recession and aggravated by widespread corruption in the provinces operating behind an opaque lack of transparency. In other words, the geniuses in Beijing who manage China's top-down economy or at least China's finances have not been able to curb the greed of the bankers and businessmen in the provinces (many of whom are Army officers) who generate questionable loans for dubious businesses which are destined to fail but only after the principals have skimmed a tidy profit.
It is been clear for some time that the Chinese provincial banking system has been out of control. The problem is compounded because it is the banking system rather than the stock market which generates the capital needed for Chinese growth. The provincial banks are motivated to make imprudent loans in order to secure corrupt kickbacks which now threaten the whole financial system. Whether growth is funded in a fiat economy by a central banks gushing out money to other banks or to Wall Street banking houses, the counter forces introduced (possibility of inflation, distortion of the economy) remain whether it is done in China or in America. The central bank in America has proved time and again that it is terribly difficult to time and administer Keynesian doses of fiscal medicine even as those decisions are based on the best data collection system in the world. The central command economy of China is based on a data system which is through and through corrupt.
The central authority is presented with the dilemma made very acute by the Great Recession, in order to avoid collapse China massively introduced liquidity into its economy through the banking system (because the stock market system simply was not set up to handle it) but in doing so it could not hope to avoid corruption.If it seeks to rein in corruption now, it risks reintroducing recession. Ghost cities reflect the volume of liquidity that has poured out of Beijing in an effort to keep the music playing. The last thing Beijing wants is to trigger the popping of that bubble because the situation might become irretrievable and mutate from a financial problem to a political revolution evidenced by the brushfire insurgencies in the provinces.
This is not to say that the rise of China has not been phenomenal. It is not to say that the future for China is unquestionably that of economic growth. The question is whether that growth will be uneven and tragically stunted by Top-down authoritarianism. Eventually, if China is to really prosper it must control corruption but that is not just a legal problem it is a cultural problem, a problem endemic in China for millennia which has infected every dynasty, not excluding the communists and neo-communists. Superficially, one would think that Top-down control of society would make it easier to cleanse it of corruption but it is historically true that free markets and free societies are invariably less corrupt than command economies in statist governments.
In view of this economic condition which appears to be chronic and acute, why would the Chinese take belligerent steps endangering their trade relationship with America and threatening the golden goose which lays eggs amounting this year to half a trillion dollars of trade deficit running in favor of China? Why would China risk bringing down the whole house of cards?
I do not presume to know but why should that stop me speculating? We think of China as a vast land with a huge population but yet a single-minded authoritarian entity. But the history of communism in both Russia and China indicate that there is much jockeying and chafing for power and control of policy going on below the surface. It might well be possible that the old men who run the finance part of the economy in China, the successors to the Communist Party, are being challenged by the bosses of the Army who, after all, have a huge investment in much the Chinese industry. It might be the both of these entities are battled by the intelligence forces, the Chinese KGB as it were, who have their interests and particular fears. Very often one group must make concessions urged by a competing group in order to have its way in another sphere. So for example, the Beijing central planners might have to loosen the leash on the military in order to continue in control of the economy, hence, the belligerency in the South China Sea. It might be that the intelligence service is warning of revolution, intimidating the other two branches with exposure of their corruption.
It might well be that the destiny of the Spratly Islands and the South China Sea will depend not so much on American policy, or American military readiness, or the reliability of our so-called Pacific Rim allies, rather that history could be entirely dependent on an internal struggle below the surface in China.
