China busy buying friends but losing new Cold War with US

China busy buying friends but losing new Cold War with US, by Minxin Pei.

When the Soviet Union imploded in 1991, the Communist Party of China became obsessed with understanding why. … The CPC has taken to heart the first lesson: strong economic performance is essential to political legitimacy. And the CPC’s single-minded focus on GDP growth over the last few decades has delivered an economic miracle, with nominal per capita income skyrocketing from $US333 in 1991 to $US7329 last year. This is the single most important reason why the CPC has retained power.

But overseeing a faltering economy was hardly the only mistake Soviet leaders made. They were also drawn into a costly and unwinnable arms race with the US, and fell victim to imperial overreach, throwing money and resources at regimes with little strategic value and long track records of chronic economic mismanagement. …

China’s economy is not equipped to generate sufficient resources to support the level of spending that victory on this front would require. If China had a sustainable growth model underpinning a highly efficient economy, it might be able to afford a moderate arms race with the US. But it has neither.

While the Chinese economy may be far more efficient than the Soviet economy was, it is nowhere near as efficient as that of the US. The main reason for this is the enduring clout of China’s state-owned enterprises, which consume half of the country’s bank credit but contribute only 20 per cent of jobs. The problem for the CPC is that state-owned enterprises play a vital role in sustaining one-party rule, as they are used to reward loyalists and to facilitate government intervention on behalf of official macroeconomic targets. Dismantling these bloated and inefficient firms would thus amount to political suicide. Yet protecting them may merely delay the inevitable, because the longer they are allowed to suck scarce resources out of the economy, the more unaffordable an arms race with the US will become — and the greater the challenge to the CPC’s authority will become.

The second lesson that China’s leaders have failed to appreciate adequately is the need to avoid imperial overreach. About a decade ago, with massive trade surpluses bringing in a surfeit of hard currency, the Chinese government began to take on costly overseas commitments and subsidise deadbeat “allies.” Exhibit A is the much-touted Belt and Road Initiative, a $US1 trillion program focused on the debt-financed construction of infrastructure in developing countries.

hat-tip Stephen Neil