Tag Archives: China

September 19, 2025 · 4:43 pm

The Complex Politics of the Belt and Road Initiative

Since its launch, China’s Belt and Road Initiative (BRI) has struggled to cope with the political challenges of infrastructure development in low-income and often politically unstable developing countries. Dams, ports, highways and the like run-up debt, displace people, damage the natural environment, and invite corruption. The risk of corruption is further elevated by the endemic nature of such practices among Chinese actors. Zha Daojiong, a professor of international relations at Peking University remarks: “Good old-fashioned aid, with China doing everything by itself, meaning Chinese money, Chinese companies, Chinese construction materials and even Chinese workers – frankly speaking, that is an invitation to malpractice and outright corruption.”

A 2013 power plant project in Kyrgyzstan offers an illustration of the problems inherent to China’s early BRI practices. Securing bids from a Russian company and a Chinese company called TBEA to refurbish a power plant, the government choose TBEA even though the Russian company had far more experience. The choice was connected to the Chinese embassy’s message that Chinese financing would only be available if TBEA were given the contract. Ultimately, the power plant broke down after the refurbishment and the prime minister and other top officials were placed on trial for corruption after it was discovered that they profited by inflating the price of the contract by $111 million.

Due to the above problems, infrastructure projects often produce popular resistance despite potential economic payoffs down the road. Popular protest has hindered BRI projects in countries such as Indonesia, Myanmar, Bangladesh, Zambia and Krygyzstan. In recent years, two dozen Chinese nationals have been killed or kidnapped in Africa. This problem is connected to the fact that, as journalist Tom Miller notes, “Chinese firms … are happy working with local elites and unelected officials, but much less adept at dealing with civil society.”

In Pakistan, the $62 billion China-Pakistan Economic Corridor (CPEC) has been threatened by Baluchi separatists, who have blown up gas pipelines, assaulted Chinese engineers and attacked the Chinese consulate in Karachi. In 2016, Pakistan’s army deployed 15,000 troops to protect CPEC projects, with the top commander pledging that: “Pakistan’s army shall ensure security of CPEC at all costs.” In 2021, the terrorist group Tehreek e-Taliban Pakistan claimed credit for setting off a car bomb in a failed attack aimed at the Chinese ambassador to Pakistan. Following a surge in violence directed at Chinese nationals and projects in early 2024, a Chinese Foreign Ministry spokesperson declared: “We ask Pakistan to take effective measures to protect the safety and security of Chinese nationals, institutions and projects in Pakistan.”

Given this track record, it is perhaps not surprising that one survey of Chinese firms found that the foremost concern about investing abroad – cited by 71% of respondents – was political risk. Yin Yili, Vice President of China Communication Construction Company, has remarked that Chinese firms “lack the ability to discern where to invest or effectively manage overseas risks.” An American Enterprise Institute study of unsuccessful overseas Chinese investment projects found that one quarter failed due to political factors. AidData has documented 94 Chinese projects with a total value of $56 billion that were cancelled or suspended between 2000 and 2021.

International development consultant David Landry observes: “Because of their late entry into new markets, Chinese firms may also be more likely to invest in … projects deemed too unprofitable or risky by other investors” that are “far outside their field of competence.” The RWR Advisory Group reports that one third of BRI projects in Southeast Asia through 2018 were delayed or canceled due to lack of feasibility. Lee Jones and Yizheng Zou observe that: “Chinese SOEs enter risky markets like ‘rogue’ states or disputed maritime areas, not because top leaders instruct them to, for ‘geopolitical’ gain, but because these profit-hungry firms are relative latecomers to international markets, and Western firms already dominate more stable territories.” This conclusion is echoed in the anonymous remarks of a Chinese official with the National Development and Reform Commission: “China had no choice but to lend a lot to risky countries because they had the commodities we needed and because the western multinational organisations already dominated the rest of the world.”

The continued willingness of Chinese banks and SOEs to undertake risky overseas projects during the BRI’s early years stemmed from the role played by the state-owned China Export & Credit Insurance Corporation, commonly known as Sinosure. Sinosure insures Chinese banks and firms involved in BRI projects against losses due to government seizures, nationalization, political violence and other risks. Sinosure paid out $1.73 billion on claims related to BRI investments and exports between 2013 and 2017 as its overseas operations rapidly expanded. This backstop served to induce moral hazard among Chinese investors. Indeed, the chief economist at Sinosure referred to the due diligence procedures of China’s policy banks as “downright inadequate.” In recent years, Sinosure has pulled back on support for riskier projects and countries, leading to greater caution on the part of Chinese banks and SOEs.

As projects struggle, China has been compelled to intervene to safeguard its investments, its people, and its political influence. In 2018, the Ministry of Foreign Affairs issued security regulations for Chinese firms operating overseas. At the CCP’s 20th Party Congress in 2022, Xi Jinping declared: “We will strengthen our capacity to ensure overseas security and protect the lawful rights and interests of Chinese citizens and legal entities overseas.” The People’s Liberation Army has been instructed to develop options for protecting “overseas interests” while the People’s Liberation Army Navy is rapidly expanding its capacity to land expeditionary forces abroad.

In some cases, China may seek to shore up repressive regimes or bypass democratic institutions to avert lost investments and influence. Losing confidence in Pakistan’s civilian leadership, for instance, China successfully pushed for the Pakistani army to take charge of overseeing the China-Pakistan Economic Corridor. Chinese private security firms are also moving abroad to provide security for China’s overseas investments. China recently announced plans to train 3,000 foreign law enforcement personnel to protect Chinese interests overseas, including the security of Belt and Road projects. Securitization of China’s economic engagement in Africa is an important aspect of the Global Security Initiative, which featured prominently at the most recent Forum on China-Africa Cooperation. In general, China’s oft-touted foreign policy principle of non-interference in the political affairs of other countries has become increasingly untenable.

An authoritarian, single-party state has certain advantages in managing the political pressures associated with large-scale infrastructure projects. Lee Chih-horng, a research fellow at the Longus Institute in Singapore, observes that Chinese officials “can easily stifle public debate and concerns about infrastructure projects.” Legal challenges are limited by the Communist Party’s ultimate control over the court system. The state owns major media outlets and both traditional and new media are subject to various forms of censorship and management. Non-governmental organizations are limited in size and scope, heavily regulated, and incapable of directly challenging state priorities. Grassroots protests mounted by those negatively impacted by infrastructure development are managed through a combination of repression and cooptation.

Political conditions are very different in BRI host countries. Few developing country governments possess such extensive capacities to control the political risks of infrastructure development, even though, according to Ding Yifan of China’s Development Research Centre of the State Council, Chinese companies “think other countries are just like China.” As a result, many BRI projects have become embroiled in controversy, resistance and delay.

Though BRI loans go to both democratic and authoritarian regimes, an AidData study found: “When a country transitions from being fully democratic to fully autocratic … it can expect to secure an almost tenfold increase in Chinese debt.” The same study found that aid from China, other things being equal, “erodes democratic governance and reduces the probability of democratic transition.” Large-scale infrastructure development is especially important for authoritarian leaders. Lacking the procedural legitimacy that comes from an electoral mandate, authoritarian leaders must lean more heavily upon performance legitimacy, which may be bolstered through infrastructure development (Kuik, 2024).

China has attempted to export aspects of its governance model to help its development partners manage the social and political risks of state-led growth. The Chinese-funded Baise Executive Leadership Academy in Guangxi China offers 10-day workshops to help officials from ASEAN countries “understand China’s governance and economic model,” according to Deputy Dean Lui Xuanqi. From 2012 to 2017, the Chinese Academy of Governance provided training opportunities for over 10,000 foreign civil servants from 159 countries. In 2016, the Institute of South-South Cooperation and Development was established at Peking University for the purpose of training professionals from developing countries in skills relevant to building state capacity in governance and development. Through 2021, the program enrolled 220 graduate students from 50 countries.

Paul Nantulya reports that “Through the Forum on China Africa Local Government Cooperation, an arm of the [Chinese Communist Party], over 10,000 local government leaders train each year at China’s political schools.” China’s State Council states that 7,000 training sessions and seminars for foreign officials and technical personnel were organized under BRI auspices between 2013 and 2018. At the 2024 FOCAC summit, China promised to establish 25 China-Africa research centers and train 1000 African officials and political party members through an African Leadership Academy.

China’s pervasive surveillance systems have also been widely adopted abroad. Chinese companies have provided twenty-two African countries with public security systems that include cameras, biometrics, internet controls, other types of surveillance tools. Among the most sophisticated is Huawei’s Safe Cities program, which has been deployed in Kampala, Uganda and Nairobi, Kenya. Nevertheless, the impact of these technologies in Africa have been mediated by local political realities and limited state capacity, with the result that they offer authorities with less extensive social control than is the case in China.

Minxin Pei chronicles the massive and multi-layered surveillance system within China itself, which depends not simply upon technology, but also upon the organization and human capacities of a Leninist state. Pei notes: “Placing modern technologies in the hands of a poorly organized surveillance state is sure to produce inferior outcomes.” An AidData study finds that the deployment of Huawei technology in Africa facilitates repression by authoritarian states but has no such effect in democratic societies.

The most successful BRI partnerships have arisen where the pre-existing structure of the recipient state shared similar characteristics with China’s own party-state. Zhengli Huang and Tom Goodfellow offer Ethiopia as a case in point. Between 2000 and 2018, Ethiopia was the second largest recipient of Chinese lending in Africa, at $13.7 billion across 52 projects. Huang and Goodfellow argue: “Ethiopia’s long history of state centralization and hierarchical control made it a particularly suitable partner for Chinese financial institutions, with a relatively strong capacity to implement infrastructure projects on a massive scale.” On the one hand, a capable bureaucracy enabled the Ethiopian state to prevail in many disputes with Chinese SOEs. On the other hand, Chinese firms relied upon bureaucratic partners such as the Ethiopian Railway Corporation (ERC) to manage conflicts with local governments and civil society organizations. Huang and Goodfellow quote one Chinese SOE representative to the effect that: “the political struggles in this country are too complicated for us to understand. We are not able to intervene with any of these issues. That’s why we have to go through ERC when it comes to governmental issues.”

The impact of BRI projects on the host country depends in part upon state strength and capacity. Trade expert Isaac Shinyekwa of Makerere University in Uganda has observed of Chinese investors: “If they find you with strict regulations and systems, they will abide by that; and if they find you are weak and your systems are corrupt, they will work with the corrupt system.”

Overall, the impact of China’s efforts to shape the political institutional landscape within which the BRI has unfolded has been shallow. China’s limited success in managing the political risks of the BRI has resulted in reputational costs and played a role in China’s curtailed flow of BRI lending in recent years.

Reprinted from The Diplomat. Excerpted from David Skidmore, China, the West, and the Global Development Finance Regime: Competitive Convergence.

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July 24, 2025 · 2:08 pm

U.S. Foreign Aid with Chinese Characteristics

As President Donald Trump takes a chainsaw to U.S. foreign aid programs, it would be easy to attribute such extreme measures to MAGA isolationism or DOGE zealotry. While anti-globalist and anti-government ideologies certainly played a role, the shift away from traditional foreign aid is not limited to the U.S. and does not represent a full-scale abandonment of development finance. Indeed, Trump’s moves represent the culmination of a decade-long realignment of Western approaches to development, inspired by China’s Belt and Road Initiative (BRI).

The retreat from traditional foreign assistance cuts across the Western world. By 2026, estimates hold that foreign aid budgets will have fallen by over one-quarter in Canada and Germany and by close to 40 percent in Britain, compared with 2023 levels. Overall, G-7 countries, which account for 75 percent of foreign assistance, spent 28 percent less in 2025 than in 2024.

Yet even as Trump’s Big Beautiful Bill cut foreign aid, it also provided new funding — a $3 billion revolving fund — for the International Development Finance Corporation (IDFC), which was created by the 2017 BUILD Act. The IDFC is up for renewal this year, and the House Foreign Affairs Committee has already voted in support of authorizing its operations for another seven years with a lending cap of $120 billion, double the initial level.

The IDFC was intended as an answer to China’s BRI, which represented an alternative to traditional Western approaches to aid.

The Development Assistance Committee (DAC) — a club of Western donor countries — defines Official Development Assistance (ODA) as concessional finance directed toward developmental projects in low- and middle-income countries. The DAC encourages transparency and discourages the tying of aid to purchases of goods and services from the donor country. Most DAC countries emphasize “soft” aid, focused on health, education, and humanitarian assistance. ODA typically draws upon budgeted funds that must be renewed annually.

Very little of Chinese development finance meets these criteria. Instead, China’s development finance is commercial in orientation. Most loans are initiated by policy banks — the China Development Bank and the China Export-Import Bank — that raise funds by issuing bonds to investors. Loans carry near-market interest rates and must be repaid in full. Much of Chinese development finance has been channeled through the BRI, which focuses on infrastructure construction. Loans through these policy banks and others have amounted to well over a trillion dollars over the past decade.

Western countries have followed China’s lead both in commercializing development finance and in driving more resources toward infrastructure development. The latter move has transpired under the guise of various initiatives: the BUILD Act (U.S.), Build Back Better World (U.S.), the Global Gateway initiative (European Union), the Blue Dot Network (U.S., Australia, Japan), the Quality Infrastructure Investment Initiative (Japan), and the Partnership for Global Infrastructure and Investment (G-7).

The competitive ambitions of the West have been limited by a paucity of available public funds, which makes it difficult to match the scale of China’s BRI. This problem gave rise to efforts to leverage public money to mobilize private capital for development purposes through blended finance initiatives.

At the multilateral level, a group of multilateral development banks issued a planning document titled “From Billions to Trillions: Transforming Development Finance” in 2015. This paper outlined a vision for mobilizing private financial resources toward Global South infrastructure and other developmental needs. This was followed by the World Bank’s “Maximizing Finance for Development” initiative and the United Nation’s “Global Investors for Sustainable Development Alliance.”

These projects and those discussed below constituted what Daniela Gabor characterized as a “Wall Street Consensus.” Many types of infrastructure take the form of public (or semi-public) goods. Public goods, by their nature, are underproduced relative to their social utility because producers cannot exclude consumers from benefiting once the goods are produced. The Wall Street Consensus aims to make infrastructure projects “bankable” or attractive to private investors by shifting the risk of unprofitability to the state. If successful, private money is pooled with public funding through blended financing models such as syndicated bond issues. In this “development as derisking” model, private capital is “escorted” into the process of financing infrastructure through the creation of new asset classes freed of investor risk. In 2018, the G-20 declared support for a Roadmap to Infrastructure as an Asset Class.

Two types of risks must be minimized for private investors: regulatory risk and financial risk. Reducing regulatory risk includes lower environmental and safety standards, guaranteed grid access, legal protections against nationalization, and liability limits. Financial risk is managed through guaranteed toll revenues, preferential credit, loan guarantees, tax relief, or subsidies. Multilateral Development Banks (MDBs) or DAC donors help build state capacity in project identification and development, provide expertise in securitizing infrastructure assets for the market, and offer partial financing or loan guarantees.

The necessity for subsidies and other forms of state support arises from the fact that more than half of infrastructure projects in emerging economies do not promise sufficient cash flow to attract private investors. Even projects with dedicated revenue streams often carry demand risks, meaning they turn unprofitable if demand for the service declines. Governments may be compelled to include contract provisions that promise to cover revenue shortfalls with public funds when demand falls below certain thresholds.

Seth Schindler, Ilias Alami, and Nicholas Jepson noted that what Gabor referred to as the “derisking state” becomes both more dependent upon global finance and increasingly interventionist in shaping market outcomes. This contrasts with the Washington Consensus, which counseled state neutrality vis-à-vis the market, but also differs from the East Asian development model, where state intervention sought to shape the behavior of national capital rather than global capital.

By relieving private investors of risk, states aim to amplify the capital that can be mobilized toward critical development needs beyond national savings or the resources of MDBs and bilateral donors. The trade-off is the acceptance of risk by the developing state, a danger highlighted when the COVID-19 pandemic and rising interest rates threatened the solvency of many highly indebted countries.

The U.S. International Development Finance Corporation fits this model. The BUILD Act described its purpose as to “provide countries a robust alternative to state-directed investments by authoritarian governments and United States strategic competitors.” With a financing authority of $60 billion, the IDFC seeks to “crowd-in” private capital with a flexible toolkit that includes nonconcessional loans, loan guarantees, export credits, political risk insurance, equity investments, and technical assistance.

Largely due to IDFC activity, nonconcessional development finance flows jumped from 4 percent of overall U.S. aid spending in 2020 to 36 percent in 2021. Among the major projects funded by the IDFC are investments related to the Lobito Corridor in Southern Africa, which aims to create transportation links allowing Western firms to access critical minerals that are presently monopolized by China.

Ironically, this growing Western emphasis on nonconcessional, commercialized development finance with an emphasis on infrastructure development comes at a time when China has scaled back the BRI (largely due to growing evidence that many recipient countries have exceeded their borrowing capacities) and begun allocating more resources to “soft” aid through the Global Development Initiative.

An obvious drawback of the blended finance model is that it diverts attention and resources from traditional concessional aid and the investment in health, education, and disaster assistance that remain essential.

But even on its own terms, the effectiveness of the Wall Street Consensus remains in doubt. A 2020 report by the Center for Global Development concluded that the overall flow of blended finance had been disappointing and that the great bulk of MDB-mobilized private financing was directed to middle-income rather than low-income countries. A 2019 study by ODI Global reached similar conclusions. In low-income countries, on average, each $1 in public development financing mobilized only $0.37 in private finance.

Blended finance was constrained by the low risk tolerance of both public and private actors in the face of environments hampered by poor governance and few profitable investment opportunities. Since most blended finance flowed to middle-income countries and to “hard” sectors, such as transport and energy, as opposed to social sectors, the report suggested that the increased priority given such investments came at the expense of programs that more directly targeted poverty in low-income countries.

Indeed, the proposed doubling in the funding cap for the IDFC cannot substitute for the human costs that follow from the cuts to U.S. Official Development Assistance, which one study suggests will lead to 14 million deaths over the next five years. Traditional aid may have drawbacks, whether evaluated as a tool of U.S. foreign policy or in terms of development effectiveness, but abandoning it in favor of the privatization of development finance is neither wise nor humane.

This piece originally appeared in The Diplomat.

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June 11, 2025 · 11:07 am

America’s Strength Has Always Been Its Civil Society. Is It Still?

I spent the 2010-11 academic year in Hong Kong on a Fulbright Scholarship. While there, the U.S. Consulate in Guangzhou, China invited me to participate in a panel discussion to celebrate the anniversary of the United Nations Convention on Human Rights. Of course, a public event dealing with human rights could not be labeled such in mainland China, so the Consulate publicized the topic of the panel as “Fighting Discrimination.”

The panel included one other American Fulbright Scholar and two Chinese nationals. A woman discussed women’s rights in China while the other Chinese panelist described his work on labor rights. His talk was especially interesting. He left a lucrative legal position to start up a non-profit focused on defending the rights of migrant workers, a major issue in China. At one point, he was jailed after the authorities took offense at his work.

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When my turn came around, I began thusly: “The topic of today’s panel brings to mind the case of a towering defender of democracy and Nobel Prize winner who faced persecution and jail over his tireless work on behalf of freedom and justice.” At this point, the audience of around 30 Chinese individuals began nervously looking at one another, no doubt thinking “Is he really going to go there?” For a Chinese listener, my intro would be understood to refer to Liu Xiaobo, an imprisoned pro-democracy dissident who had recently been awarded the Nobel Peace Prize. I later learned that the audience included four signers of Liu Xiaobo’s manifesto, Charter ‘08.

But puzzled expressions turned to smiles as I went on: “I refer, of course, to Martin Luther King Jr.” The audience appreciated my tacit acknowledgement that my own country, which so often preaches to others, has a dark history of its own. I touched on slavery and the treatment of native Americans as examples. But, I argued, the United States had been capable of overcoming unjust institutions and practices again and again by virtue of the strength of its civil society, combined with a Constitution that enshrined basic rights. I mentioned the abolitionist movement, the suffragettes, the labor movement, and the civil rights movement. In each case, the powerful resisted change but were forced to cede to the pressures exerted from below by ordinary people willing to take risks and make sacrifices in the pursuit of justice.

Many of those in attendance that day looked up to the United States, even as they understood its many faults. No doubt sentiment in China has shifted over the intervening years as relations between the U.S. and China have turned increasingly confrontational. But those in China who continue to admire the ideals they once associated with the United States – and there are many – have also become disillusioned by the authoritarian turn in our politics. Dark days are back again.

But we have been here before. Can we today summon the courage to defend the gains that prior generations fought to obtain? Will the civic traditions that underpin democracy once again triumph over the dark currents of American society? The answer matter not only to us and our children, but also to those abroad – in China and elsewhere – who have at times taken inspiration from what is best in America.

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April 19, 2025 · 7:02 pm

Trump’s Trade War is Threatening American Financial Power

Donald Trump’s trade war is ostensibly meant to resurrect the United States as a manufacturing powerhouse. There is little chance of that. Half of U.S. imports are intermediate goods. As those prices rise, U.S. manufacturers will face higher input prices while firms in export industries will be hit by retaliatory tariffs abroad. U.S.-produced goods will cost more and be less competitive in global markets.

What Trump’s tariffs are instead accomplishing is to destabilize the one sector where the U.S. remains dominant: finance. Traditionally, the U.S. banking system has stood at the center of the world economy. American stock markets have provided the world’s deepest and most liquid capital pool. Investors sought out U.S. Treasuries as a safe and reliable investment asset. And the dollar has served as the closest thing to a global currency. As a result, the U.S. attracted cheap capital from the rest of the world, which in turn financed U.S. government deficits and high rates of consumer spending.

That is why, during times of political and economic turmoil, investors typically buy dollars and Treasuries as safe havens. Not now. Since Trump mounted his trade war with the world, stock prices have fallen, the dollar has slumped, and investors have demanded higher yields in return for holding U.S. government securities.

These trends amount to a deepening vote of no confidence in the political and economic leadership of Washington, D.C. The Trump Administration appears determined to collapse the liberal international order and return the world economy to the kind of zero-sum mercantilism reminiscent of the 18th century.

This crisis of faith in American leadership arises against the backdrop of pre-existing challenges to U.S. financial pre-eminence. The U.S. has used its financial leverage against adversaries (essentially denying countries such as Russia, Iran, North Korea, and Venezuela access to the global banking system) in such an aggressive fashion as to make even friends wonder whether these weapons might someday be turned against them. Further stress on the dollar-based international financial order arises from China’s efforts to promote internationalization of the renminbi – especially in cross-border trade and lending – and its creation of the Cross-Board Interbank Payment System (CIPS) as a China-centered alternative to the SWIFT messaging system that connects the world’s banks.

A long-time pillar of U.S. financial dominance has been the key role of the Federal Reserve in balancing inflation and unemployment while serving as a lender of last resort during crises. Yet the confidence inspired by the Fed rests upon its relative independence from direct political interference. Only a Fed capable of resisting pressures to juice the economy for the political benefit of presidents will retain credibility among investors as an inflation-fighter. This too is being undermined by Donald Trump’ s criticisms of Fed Chair Jerome Powell and his implied threats to replace Powell before his term is up – a power previously considered beyond a president’s reach, but one that could be endorsed by the Supreme Court in a pending case (Trump vs. Wilcox).

In August 2023, Fitch downgraded the rating attached to American government securities based upon concerns about both growing U.S. debt levels, which have reached 137% of GDP, and the periodic standoffs in the Congress over raising the debt ceiling. Another such game of financial chicken may be in the offing in the coming months if enough Democrats, seeking leverage over budgetary policy, join with fiscally conservative Republicans to delay a raise in the debt ceiling past a point of no return.

Vulnerabilities also arise from the heavy dependence of the U.S. on foreign investors, including sovereign states, to finance government debt. China alone holds $750 billion in U.S. Treasuries. The Chinese have been gradually whittling down this total, but could accelerate the process as a means to pressure the U.S. to relent on trade restrictions aimed at Chinese goods. The same is true of other governments that hold large quantities of American debt.

Even if no one of these stressors would be alone capable of inciting financial instability, the combination has created conditions ripe for disruption. Enter Donald Trump’s trade war, which has deepened worries about the recklessness and volatility of U.S. policy. Friends and adversaries alike are considering ways to “derisk” by lessening their exposure to U.S. trade and finance. This could mean a flight from the dollar and an unwillingness of investors to continue financing the U.S. Federal deficits except at an interest premium.

The Economist underscores the shaky fundamentals that underlie American vulnerability: “In the past 12 months, America has disbursed 7% of GDP more than it raised in revenue, and spent more on interest payments than on national defence. Over the next year officials must roll over debt worth nearly $9trn (30% of GDP).”

Vice President J.D. Vance has argued in favor of a weaker dollar while one top Trump economic adviser – Stephen Miran – has suggested taxing foreign Treasury holdings, a move that would likely prompt a bond sell-off

Foreigners hold $32 trillion in U.S. stocks and bonds. A sell-off of bonds and a retreat from the dollar could spike inflation, as a weak dollar pushes up import prices on top of tariffs, and swell the interest payments that the U.S. must pay on its massive debt obligations. The stock market would likely plunge, leading to a vicious downward spiral as investors liquidate assets to meet margin calls, thus further undermining asset prices and so on.

While the dollar remains dominant for now, the proportion of dollars in foreign reserves has gradually fallen from 73% to 58%. A more precipitous decline is not out of the question.

In the long run, a weaker dollar might make U.S. manufacturing for both the domestic and export markets more competitive, but this would be blunted if an ongoing trade war meant higher trade barriers overseas against American goods.

Any advantages from a weaker dollar would also be offset by the blows that Trump’s policies are inflicting upon American service industries in which, unlike manufacturing, the U.S. holds a surplus with the rest of the world. A weakening of the U.S. banking sector would undermine revenue from U.S. financial services abroad. Tourist revenue from overseas visitors has already plummeted, due to the trade war, rising political tensions, slower visa processing, and harsh immigration policies. The revenue that American colleges and universities (and surrounding communities) gain from the enrollment of international students is endangered by high-profile deportations and the unfriendly climate facing visitors from around the world. The administration’s attack on the independence of institutions of higher education also threatens to tarnish the brand of the sector, resulting in diminished flows of international students and high-quality scholars.

The burdens of American leadership in the world have been outweighed by the benefits of global interdependence and financial stability. But leaders can lead only when other are willing to follow. That requires a minimum of trust in the wisdom and reliability of the leader. As the Trump Administration trashes the international and domestic norms and institutions that have underpinned the liberal international order, other states and private actors will seek to derisk their relationship to the U.S., leading to growing American isolation. The short-run gains that might be had from bullying U.S. trade partners into one-sided “deals” pale in comparison with the long-run costs of destroying the bonds of trust that are the true source of American and global prosperity.

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December 12, 2023 · 9:39 am

Henry Kissinger: China’s ‘Old Friend’

In the West, no shortage of commentators were quick to denounce Henry Kissinger as a war criminal upon his death. China’s media, by contrast, hailed Kissinger as an “old friend of the Chinese people” and a “distinguished American diplomat” known around the world for the “wisdom” of his diplomacy.

China’s embrace of Henry Kissinger began with his secret 1971 trip to Beijing to launch the process of normalization of relations between the United States and China. This past July, during Kissinger’s 100th trip to China, he was treated to a personal meeting with Chinese President Xi Jinping in the very meeting place where Kissinger sat down with Premier Zhou Enlai fifty-two years earlier. Xi went out of his way to flatter Kissinger: “The Chinese people never forget their old friends, and Sino-U.S. relations will always be linked with the name of Henry Kissinger.”

The term “old friend” has an oddly personal and sentimental ring that seems out of place in a diplomatic context, yet it is frequently applied not only to Kissinger but also to other foreigners who are viewed with favor by the Chinese leadership. The term was first used in a 1956 edition of the People’s Daily in reference to American missionary James Gareth Endicott who became an unwavering defender of the Chinese Communist Party after the 1949 revolution.

Another early “old friend” was Edgar Snow, an American journalist who joined the Communist forces at their Yunnan base in the 1930s and who wrote a widely influential and flattering portrait of the movement titled Red Star Over China. Between 1956 and 2011, over six hundred individuals from 123 countries were granted the title of “old friend.”

In his once-classified study of Chinese negotiating behavior written for the RAND Corporation in 1985, former U.S. State Department and National Security Council official Richard Solomon noted: “The frequently used term “friendship” implies to the Chinese a strong sense of obligation for the ‘old friend’ to provide support and assistance to China.”

In her 2000 dissertation for Australian National University, political scientist Anne-Marie Brady quotes from a 1995 official Chinese handbook on foreign affairs: “The more friends we have the better, yet we also have to be selective. We especially want to make friends with such foreigners who are friendly to us, have some social prestige, have economic power, or academic achievements, or have political influence; this will be most advantageous for the achievement of a peaceful international environment and to support our nation’s economic construction.”

In short, the term “old friend” is bestowed on individuals considered sympathetic to Chinese views and aims who are in a position to serve China’s interests. An “old friend” will be feted with “special access and privileges” to the extent that they continue to act in ways desired by the Chinese state.

Ryan Ho Kilpatrick points out that the two countries accounting for the most “old friends” are the United States and Japan – both having histories of conflict with China. This makes sense because the utility of an “old friend” lies in their willingness to defend China even when this conflicts with the policies of their own government.

Henry Kissinger was a sophisticated man who well understood the transactional nature of his status as an “old friend” of China and he lived up to his end of the bargain. With access to the highest levels of power in both the United States and China, Kissinger played the role of an intermediary, passing backchannel messages between the leaderships and shaping coverage of events through media interviews and commentaries.

Kissinger sometimes allowed himself to be used by Beijing in ways that were embarrassing to D.C. Xi’s meeting with Kissinger during the latter’s aforementioned trip to Beijing in July 2023, served as an implicit rebuke of the Biden Administration set against Xi’s refusal to hold a one-on-one with U.S. climate enjoy and former Secretary of State John Kerry, whose visit to Beijing overlapped with that of Kissinger.

Kissinger was of greatest service to China during times of crisis in the bilateral relationship. Shortly following the violent suppression of pro-democracy protests in Tiananmen Square Beijing on June 4, 1989, Kissinger responded to Congressional moves to sanction China with an op-ed declaring: “A crackdown was inevitable” and “China remains too important for America’s national security to risk the relationship on the emotions of the moment.” Kissinger privately counseled President George H.W. Bush to resist pressures to punish Beijing and lobbied Congress against sanctions. In November of that year, Kissinger travelled to Beijing where, in a meeting with senior leaders, he is reported to have said regarding international reactions to the massacre: “China’s propaganda work has been insufficient.”

Kissinger gained much as an “old friend” of China. His continued access and relevance in China heightened Kissinger’s value to the many corporate boards on which he served and created business opportunities for his firm Kissinger Associates. By reminding onlookers of his key role in the opening to China, Kissinger burnished a reputation that otherwise took a beating as critical treatments of overall record in office proliferated over time.

Friendship is a precious commodity. Long ago, China made an investment in Henry Kissinger by bestowing him with the title of “old friend” along with the privileges that came with it. That investment brought a half century of returns.

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October 27, 2017 · 11:00 am

Understanding Chinese President Xi Jinping’s Anti-Corruption Campaign

Chinese President Xi Jinping has made fighting official corruption a cornerstone of his reign.

Judging by the numbers alone, the campaign has achieved impressive results. Astonishingly, the Chinese Communist Party (CCP) has disciplined well over one million officials since Xi took power in 2012. The anti-corruption campaign has snared hundreds of high-level leaders – including, most recently, former Chongqing Communist Party General Secretary and Politburo member Sun Zhengcai.

Xi’s fight against corruption has made him enormously popular among the Chinese people. As a political scientist and close observer of Chinese politics, however, I would argue that Xi’s enthusiasm to root out corrupt officials isn’t based on his own rectitude. Indeed, Xi’s family has inexplicably managed to accumulate over $1 billion in wealth, according to reports by Bloomberg. Rather, it rests on Xi’s determination to strengthen his personal power and that of the party he leads.

We should pay attention. If Xi succeeds in centralizing his control over the world’s most populous country, the United States will be presented with an increasingly confident and formidable competitor.

Sun Zhengcai was one of the more prominent targets of Xi Jinping’s crackdown on corruption. AP Photo/Mark Schiefelbein

Managing corruption

Corruption is built into the structure of China’s governing institutions.Xi’s campaign is more about managing the scope and consequences of corrupt practices than rooting them out altogether.

As China scholar Minxin Pei has documented, corruption in China typically takes the form of organized schemes involving groups of bureaucrats and private business people to plunder state resources.

Corruption fuels job promotions, the awarding of government contracts and the transfer of public assets into private hands at fire sale prices. Corruption in China is rooted in the blurred lines that come with a system combining weak rule of law, considerable autonomy on the part of local officials and an economic model featuring opaque relations between private enterprise and a large state-owned sector.

Xi has approached the problem of corruption much like his predecessors, though with unusual vigor, scale and persistence. Periodically, the CCP leadership has undertaken highly visible campaigns against corruption. During these campaigns, teams of officers from the CCP’s Discipline Inspection Commission sweep the offices of municipal or provincial governments and party units. These efforts have succeeded in preventing corruption from overwhelming the political system and undermining the economy. But the misuse and plunder of state resources nevertheless remains pervasive.

If Xi were serious about rooting out corruption more thoroughly, deep institutional reforms would be required. In countries where corruption has been successfully addressed, these have included strengthened rule of law, greater judicial independence, democratic accountability, institutional transparency and greater space for media and civil society watchdogs.

In China, scholar Pei emphasizes the need for clearer property rights that prevent officials from exploiting public assets for private gain. Such measures would both limit the opportunities for graft and more easily expose that which does take place.

Yet Xi has shown little interest in these kinds of reforms, which would threaten the leading role of the Communist Party. Indeed, his attacks on rights lawyers, independent media and non-governmental organizations– precisely the groups that in other societies hold public officials to account – have pushed in the opposite directions.

Too many pigs at the trough

So if Xi has ruled out the most effective anti-corruption tools, why is he going after corrupt officials at all?

In The Dictator’s Handbook, political scientists Bueno de Mesquita and Alastair Smith theorize that authoritarian leaders cannot rule without the support of other powerful players, such as military generals, business leaders and key intellectuals. Their demands must be met. Such leaders survive, therefore, by channeling rewards to those supporters most essential to the leader’s maintenance of power. Over time, however, the number of individuals attached to the ruling coalition tends to grow, as does the price that each member demands for support. We might call this the “too many pigs at the trough” problem.

This may be sustainable if the economy is rapidly growing, but becomes more problematic once growth slows, as indeed it has in China in recent years. Because the monetary gains extracted by corrupt officials serve as dead weight from an economic perspective, corruption itself can become a source of worsening economic performance. The costs of paying off a bloated coalition of greedy supporters are considerable: a reduced take for the dictator himself, lagging revenue growth and declining popular legitimacy, the latter necessitating increasingly costly repression.

All of this explains why newly installed leaders move quickly to cull the number of pigs at the trough, as Xi has done since taking power in 2012. By retargeting private rewards only to those whose support is truly essential and reducing the size of payoffs to the minimum necessary to avert defection, the leader thereby shores up his power position with a smaller and more manageable ruling coalition.

Of course, culling the herd means more than simply cutting rewards to non-essential coalition members. They must be jailed or otherwise rendered incapable of retaliating. Factions organized around political rivals must be disrupted.

Such is the case with Xi’s recent uses of the anti-corruption campaign to undermine the Communist Youth League associated with Xi’s predecessor, former Chinese President Hu Jintao. Ruthlessness toward those unlucky enough to be targeted also sends a warning to the remaining coalition members.

Xi’s anti-corruption campaign is reshaping the magnitude and composition of the ruling coalition and the size of the payoffs to remaining members, thereby strengthening his own hold on power. But as long as China’s political order remains dominated by a single party, a system for funneling private rewards to members of the ruling coalition will remain essential to its functioning. Xi’s image as China’s “Mr. Clean” is more mirage than reality.

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October 19, 2017 · 8:00 am

How China’s skewed sex ratio is making President Xi’s job a whole lot harder

As odd as it sounds, China’s economic policy is being held hostage by its heavily skewed sex ratio.

China’s excess of young, unmarriageable males poses an acute dilemma for President Xi Jinping and other leaders as they set the country’s path for the next five years during the 19th Chinese Communist Party Congress, which opened on Oct. 18.

After years of heavy spending and investment to boost growth and employment, China is at risk of economic stagnation if it doesn’t restructure the economy. Yet there is peril that doing so will lead to dangerous levels of unrest among the millions of unmarried men — known as “bare branches” — who will be laid off from shuttered unneeded steel, coal and auto factories.

So far Xi has tempered reform and kept the money taps open in order to avoid political instability. As the costs of domestic economic imbalances rise and international pressures to cut excess industrial capacity grow, Xi will have to decide what to do about the bare branches strewn in his way. And that won’t be an easy task.

China’s spending spree

This dilemma has been building for almost a decade, since Chinese leaders responded to the 2008 global financial crisis by channeling massive investments into infrastructure and heavy industry to sustain economic growth and prevent political unrest.

The proportion of China’s economy devoted to investment shot up from roughly a third to close to half — a level unprecedented among modern economies (that compares with only a 20 percent investment rate for the U.S. economy in 2015). Since 2008, for example, China’s crude steel production capacity has more than doubled, reaching close to half of the world total.

This investment has proven remarkably successful, at least in the short term, helping China avoid the economic downturn experienced by Western countries. China’s investment binge also created the world’s largest bullet train network and made it a global leader in solar panel production.

This same binge, however, has also left China with a morning-after hangover that threatens to become a “national financial and economic crisis” unless it implements reforms, according to a group of Oxford-based economists. The report suggests that China focus on fewer but higher-quality infrastructure projects while accelerating a shift in demand from investment to consumption.

Yet China continues to rely heavily upon infrastructure investment to drive growth. Besides steel, the economy also remains plagued by industrial overcapacity in autos, cement, glass, solar cells, aluminum and coal. Recent efforts to close old and inefficient factories have had little effect so far.

This has international consequences as well because all that excess steel, glass and aluminum must go somewhere and often ends up in other countries, hurting domestic markets. Steel exports to the U.S., for example, surged 22 percent from August 2016 to July 2017, prompting retaliatory threats from President Donald Trump.

So why did Chinese policymakers extend the investment spree do long? Why have they been reluctant to close down factories producing excess steel, solar cells or glass or stop funding the development of uninhabited “ghost cities”?

While there are many factors at play, one deserves more attention than it has received: China’s leaders fear the consequences of high unemployment among “bare branches,” a term used in China for young, low-status men who, because they are typically unmarriageable, represent endpoints on the family tree.

Growth of the ‘bare branches’

Bare branches are a result of one of the most skewed sex ratios in the world.

China has 106.3 males for every 100 females, compared with a global ratio of 101.8 to 100. In coming years, the workforce imbalance will only worsen because there are 117 boys under age 15 for every 100 girls. This is a result of extreme gender discrimination favoring males, a tendency exacerbated by China’s one-child policy, which was in force from 1979 to 2015. Typically, unwanted female fetuses, identified through ultrasound, are aborted.

This has resulted in a surplus of young bare-branch males. Bare branches are typically low status, since better-educated and higher-income males have better odds of attracting marriage partners. Lacking either skills or the strong community ties brought on by family life, these young, unmarried men make up a large proportion of the internal migrant population that relocates from rural areas to cities in search of work.

Researchers Valerie Hudson and Andrea den Boer have established that societies with large and growing numbers of bare branches are at risk of rising crime and civil unrest. This is especially true if inadequate employment opportunities are available for unmarried young men. The skewed sex ratio is accompanied by other worrisome trends, including high income inequality and the rising number of elderly that must be supported by each working-age person. The combination may portend trouble ahead for China.

A growing risk of unrest

It’s this fear of rising unemployment and unrest that has caused China’s hesitation to carry out economic reform.

Some economists believe that China’s official unemployment rate of 4 percent understates the reality, which may be more than double that. The rate of unemployment is politically sensitive since unemployed workers are more likely to engage in civil unrest and other anti-regime activities.

And males are overrepresented in the industries that would be hardest hit by reform like construction and heavy industry. On the other hand, females make up a disproportionate share of workers in the service sector, which must expand in order to sustain economic growth as spending on infrastructure and industry slows.

China’s growth model has actually exacerbated the unemployment problem because infrastructure, construction and heavy industry are relatively capital-intensive, meaning that a given level of investment produces fewer jobs than would be the case were the same investment devoted to service sectors (which are relatively labor-intensive). In other words, a greater emphasis on services would soak up more labor overall and reduce dangerous levels of unemployment.

If China shifts to sector-led growth, the risk of unrest will grow as women find more jobs at the expense of men, especially those bare branches. So even if China manages a “soft landing” that increases employment overall, civil and political unrest could rise as well if the proportion of bare branch males among those who remain unemployed also climbs.

This helps explain why Chinese authorities have directed massive amounts of investment into those male-dominated sectors following the global financial crisis. And why, in recent years, they have been slow to implement economic reforms that they themselves acknowledge are needed for the overall health of the Chinese economy.

From the perspective of Beijing, better some inefficient investments than the political risks of tossing millions of unemployed young males into the streets of urban China.

No good options

In his opening address to the 19th Party Congress, Xi made the usual promises about deepening market reforms, reducing industrial overcapacity and shifting the economy from investment-led to consumption-led growth. Given that these promises are not new, there is room for skepticism about implementation.

But even if reform is successful, it will mean large numbers of unemployed bare branches. That is why economic restructuring must be accompanied by generous unemployment benefits, job retraining programs and support for workers who need to relocate in order to find jobs. The gender composition of the service sector must also change in order to absorb unemployed males.

In short, Xi could forestall reform, thus keeping the bare branches busily employed at the risk of an economic crisis and punitive tarriffs from trading partners like the U.S. Or he could cut investment and close thousands of factories, creating a significant risk of domestic unrest and potentially necessitating some combination of a strengthened social safety net and political repression to contain it.

Whichever path Xi picks, bare branches will be part of the journey.

Originally published at theconversation.com on October 19, 2017.

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June 9, 2012 · 1:35 pm

Top Ten Challenges Facing Xi Jinping

Vice President Xi Jinping is expected to be named China’s next President and Communist Party General Secretary at this fall’s party congress. Here are the top ten challenges he will face:

1. Coping with financial risks related to bad debts of local government and potential fallout from the European debt crisis.

2. Striking the right balance between asserting China’s interests in region while still reassuring neighboring countries that China’s rise is no threat.

3. Managing growing economic tensions with the United States related to exchange rates, trade imbalances, intellectual property rights and Chinese export subsidies.

4. Dealing with political unrest, especially in rural areas where disputes over land rights, pollution and corruption have generated proliferating protests.

5. Rebalancing China’s economy away from high savings, infrastructure investment and export manufacturing toward domestic consumption, a stronger service sector and a broader social safety net.

6. Calibrating China’s response to America’s “pivot” back to strengthening U.S. alliances and military presence in East Asia as wars in the Middle East and Central Asia wind down.

7. Managing growing expectations among China’s youth for greater openness, free expression and democracy.

8. Fighting widespread corruption among Communist Party and government officials and restoring popular trust.

9. Addressing China’s huge and growing environmental challenges.

10. Bridging the gap between conflicting factions within the Communist Party, especially between market liberals and populists.

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