Chinese leaders are engaging in a dual strategy of “strike the mountain to shock the tiger” and “kill the chicken to scare the monkey.” The first strategy is an internal approach designed to take down a few powerful leaders to scare the lesser ones. The second strategy is an external approach in which leaders go after lesser powers to diminish the role or prevent the involvement of a greater power.
The internal strategy aims to remove formidable leaders who previously headed powerful institutions in key segments of the Chinese system, namely the state security apparatus, the military establishment, and the oil sector. These leaders pursued their own agendas and jockeyed for power at the highest levels before, during, and after the current leadership’s transition period that occurred nearly two years prior. The external strategy concerns the United States, the greater power, as well as Japan, the Philippines, and to a lesser extent, Vietnam, collectively referred to as the lesser powers. These observations lead to some salient questions. What are the major internal and external drivers of these ongoing strategies? Why are Chinese leaders pursuing these two strategies? And what is their overall intent?
What Are the Main Drivers of the Strategies?Enjoying this article? Click here to subscribe for full access. Just $5 a month.
The prime drivers of the leadership’s strategies consist of two internal factors and one external factor. The internal factors are best explained by the “crisis theory.” This means the leadership is attempting to manage domestic crises that pose challenges to the current leadership’s new authority and threaten the stability of the state. Presently, crises are unfolding in the economic arena, and, to a lesser extent now, the political arena. The external driver comprises ongoing structural changes occurring in the regional architecture and the security domain in particular; this regional transformation is driven in large part by the U.S. leadership. Both the internal and external factors have push-pull effects; meaning, China’s internal situation shapes its external policies and actions and, at the same time, the external situations feedback into China’s domestic system and affect the internal situation.
In the economic arena, the leaders are dealing with slowing economic growth. According to Charlene Chu, Senior Director of Fitch Ratings China, and a recent report produced by Fitch Ratings on Chinese Banks, “a key macro financial concern since the global financial crisis of 2008 has been the inability of China’s economic growth to get any lasting traction without considerable credit extension.” What’s more, “credit/GDP will have risen an estimated 87 percentage points in the five years ending in 2013, nearly twice that observed in other countries prior to financial sector stress.” The concerns “relate less to the level of credit/GDP – figures in the region of 200 percent are not unheard of in Asia or developed markets – and more to the very rapid rise in such a short time.”
The leadership however might be competent in managing a vast economy on the verge of a gradual economic slowdown by introducing policies to continue extending substantial credit and to liberalize capital controls in order to boost domestic consumption, for example. But these policies hold obvious risks. Extending more credit accelerates the rapid rise of credit/GDP levels in a short time, while lifting capital controls might make China vulnerable to capital flight. More crucially, the leaders are facing a potential crisis unfolding in the banking and finance sector and, as Chu has pointed out elsewhere, in the shadow banking system in particular. In this case, the leadership might be less capable of managing a sudden collapse of a major banking institution or of shadow banking institutions and the residual effects from such unexpected failures, such as social instability.
For the Chinese leadership, an economic slowdown or a banking and finance crisis, or some combination thereof, is dangerous on many levels. Conventional wisdom suggests the leaders predicate the Party’s legitimacy on economic development and growth, so a major economic setback or sudden crisis might undermine the new Party leadership’s authority. More importantly, however, is the unconventional wisdom. Every leadership since the 14th Party Congress perceives that economic weakness might make the state vulnerable to foreign influence and manipulation. Chinese history is replete with negative examples of how a debilitated Chinese economy made China more susceptible to foreign forces and resulted in considerable adverse consequences for the state and society. And when the CPC established the PRC in 1949 it staked its reputation on strengthening China against foreign influences and control as well as maintaining national sovereignty. For these reasons China’s economic reforms – in the banking and finance sector in particular – have entered a complex phase for the party, the state, and society.
Current economic reforms are made more complex because of the ongoing but seemingly diminishing complications in the political arena resulting from what appears to be the final stages of China’s leadership transition. Contrary to popular opinion that the current leadership has consolidated power rapidly, the leaders are still untangling and addressing an intricate internal faction. This faction consisted of influential individuals who occupied, and in some cases still occupy, powerful positions in major institutions, namely the state security apparatus, the state oil sector, and the military establishment. The matter is convoluted because the institutions are tightly connected: the security apparatus is connected to the military establishment; and the military establishment and the state oil industries have been closely linked in large part due to the Sino-Soviet split in the 1960s that resulted in oil shortages and imperiled China’s military. Because of this reality, unraveling the faction in its entirety and removing each and every player are unachievable objectives.