January 26, 2012

1. China’s rise is marginalizing American influence in Asia.

Just the opposite. Certainly, China’s power in Asia is growing; its economy is now the biggest in the region, and China is the largest trading partner for every Asian nation. And its military modernization has made the People’s Liberation Army a more lethal fighting force.

But instead of marginalizing or supplanting U.S. influence, China’s expanding power is pushing most Asian countries closer to Washington — and elevating America’s status. Uncle Sam’s presence is still welcome because it prevents a regional power from dominating its neighbors and promotes strategic balance. Today, the more power China gains, the more critical the U.S. commitment to the region becomes, and the greater influence Washington exercises.

No surprise, then, that when the Obama administration recently announced a strategic pivot toward Asia, China bristled, while most countries in the region felt reassured and applauded quietly. Today, U.S. security ties with key Asian nations — India, Australia, Japan, Korea and even Vietnam — are better than ever.

2. China’s massive foreign exchange reserves give it huge clout.

China owns roughly $2 trillion in U.S. Treasury and mortgage-backed debt and $800 billion in European bonds. These massive holdings may cause anxiety in the West and give Beijing a lot of prestige and bragging rights — but they haven’t afforded China a lot of diplomatic sway.

The much-feared scenario of China dumping U.S. sovereign debt on world markets to bend Washington to its will has not materialized — and probably won’t. China’s sovereign wealth fund, which invests part of those reserves, has favored low-risk assets (such as a recent minority stake in a British water utility) and has sought to avoid geopolitical controversy. And in the European debt crisis, China has been conspicuously absent.

China’s hard currency hoard adds little punch to its geopolitical power because its stockpile results from a growth strategy that relies on an undervalued currency to keep exports competitive. If China threatens to reduce its investment in U.S. debt, it will either have to find alternative investments (not an easy task these days) or export less to the United States (not a good idea for Chinese manufacturers). Moreover, with so much invested in Western debt, China would suffer disastrous capital losses if it spooked financial markets.

3. The Communist Party controls China’s Internet.

In spite of its huge investments in technology and manpower, the Communist Party is having a hard time taming China’s vibrant cyberspace. While China’s Internet-filtering technology is more sophisticated and its regulations more onerous than those of other authoritarian regimes, the growth of the nation’s online population (now surpassing 500 million) and technological advances (such as Twitter-style microblogs) have made censorship largely ineffective. The government constantly plays catch-up; its latest effort is to force microbloggers to register with real names. Such regulations often prove too costly to enforce, even for a one-party regime.

At most, the party can selectively censor what it deems “sensitive” after the fact. Whenever there is breaking news — a corruption scandal, a serious public safety incident or a big anti-government demonstration — the Internet is quickly filled with coverage and searing criticisms of the government. By the time the censors restore some control, the political damage is done.

4. China’s regime has bought off the middle class.

Hardly. Three decades of double-digit economic growthhttp://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG has elevated about 250 to 300 million Chinese — mainly urban residents — to middle-class status. Since the regime crushed the Tiananmen democracy movement in 1989, the middle class has been busy pursuing wealth, not demanding political freedoms. But this does not mean this group has thrown its support behind the ruling party. There is a world of difference between political apathy and enduring loyalty.

At most, the Chinese middle class tolerates the status quo because it is a vast improvement over the totalitarian rule of the past — and because there is no practical or immediate alternative. But as the Arab Spring shows, a single event or a misstep by authoritarian rulers can transform apathetic middle-class citizens into radical revolutionaries.

That can happen even without a precipitating economic crisis. Today, China’s middle class is becoming more dissatisfied with inequality, corruption, unaffordable housing, pollution and poor services. In Shanghai a few years ago, thousands of middle-class citizens staged a “collective walk” and stopped a planned train extension, a project that threatened their home values. A similar demonstration last year in Dalian resulted in the shutdown of a polluting petrochemical plant.

The party knows it cannot bank on middle-class support. Such insecurity lies behind its continuing harshness toward political dissent.

5. China’s rapid economic growth shows no signs of slowing.

The pace of growth is already cooling somewhat — from above 10.3 percent in 2010 to 9.2 percent last year — and the downward shift will accelerate in future years.

Like South Korea and Taiwan, which achieved stellar growth for three decades but have slowed gradually since the 1990s, the Chinese economy will encounter strong headwinds. The population is aging; citizens 60 and older accounted for 12.5 percent of the population in 2010 and are projected to reach 17 percent in 2020. This will reduce savings and the supply of workers, and raise the costs of pensions and health care. If China wants to keep its high growth rate, it must graduate to making Chinese-designed high-tech and high-value-added products. It will need more innovation, which demands less government control and more intellectual freedom.

Most critically, the investment-driven and state-led economic model responsible for China’s rapid growth must give way to a more efficient, consumption-driven, market-oriented model. Such a shift will not be possible without downsizing the state and making the party accountable to the Chinese people.

mpei@cmc.edu

Minxin Pei, director of the Keck Center for International and Strategic Studies at Claremont McKenna College, is the author of “China’s Trapped Transition: The Limits of Developmental Autocracy.” He will host an online chat with readers Tuesday at 12 p.m. Easten time.

Read more from Outlook:

The new Red Scare

Five myths about China’s economy

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As China gains on the world’s most advanced economies, the country excites fascination as well as fear — particularly in the United States, where many worry that China will supplant America as the 21st century’s superpower. Many ask how China has grown so much so fast, whether the Communist Party can stay in power and what Beijing’s expanding global influence means for the rest of us. But to understand China’s new role on the world stage, it helps to rethink several misconceptions that dominate Western thinking.