Decoding "A New Style of Great Power Relations" in U.S.-China Ties: Implications for economics and security in East Asia

Christopher K. JOHNSON

We at the Center for Strategic and International Studies (CSIS) want to enable policymakers to create an analytic construct through which to view China's new leadership. What is President Xi Jinping's vision? He has principles and ideas, but I believe there is no fully formed agenda at this point. There are serious challenges, and he has to manage crises. One unique characteristic of Xi Jinping and the collective leadership is that they have both a domestic and an external strategy. Whether it is a good strategy is debatable, but it must be met by strategies in other countries.

It's important to understand the Chinese domestic situation. As we see the country grow in power, we should revisit the idea that the Politburo is fearful of domestic pressures, etc. Internal affairs continue to be the primary preoccupation of the government. How do we view Xi Jinping's rise?

There was a stable succession in 2012 despite the presence of intense domestic problems. This represents China's first transition without the revolutionary elders, so there was no unassailable voice. Several parties were jousting for control—former President Jiang Zemin, Hu Jintao to a lesser degree, and other retired officials. Age restrictions mean that there are more retired people who want to retain influence, which is becoming a problem. They had to push back the party congress by several months, but it was stable and smooth in the end.

The new team seems to be working together effectively, especially Xi Jinping and Premier Li Keqiang. This suggests the regime learned from Tiananmen that it is very important to at least project unity publicly, as signs that the leadership is divided lead to problems. There are very distinctive factional interests within the system, but they are working smoothly to move forward. There are also very competent officials with strong reform and strong practical credentials running keys parts. For example, in the Ministry of Finance there is Lou Jiwei, a reformer for his whole career and very close to former Premier Zhu Rongji, who presided over the last great wave of reforms in the late 1990s. Zhou Xiaochuan, the People's Bank governor, has been retained beyond the mandatory retirement age despite not being a Central Committee member—suggestive of how Xi Jinping and others are working to arrange things. Career diplomats Yang Jiechi and Wang Yi, the foreign minister, are running the foreign policy portfolio. Both have very strong experience and credentials in managing foreign relations. There is a solid base on which the leadership can move their policy agenda forward.

What has this resulted in? Xi Jinping is probably the strongest Chinese leader in some time—much stronger than Hu Jintao, who never really managed to consolidate power in the traditional way. Xi Jinping has managed to do this in less than two years. We have identified three keys to his rapid consolidation of power. The first is his "princeling" background—being a child of one of the founders of the regime provides him with a built-in interpersonal network of other "princelings" across systems, most importantly in the military and the security services and the other elements of the party bureaucracy, and gives him a unique understanding of the system.

The second key is that Xi Jinping understands the need to control the key levers of power to wield authority effectively. On issues such as anti-corruption, he's been going after the military, the security services, the party bureaucracy, and the large state-owned enterprises (SOEs) because he knows he must have a firm grip. Hu Jintao knew the concept but was effectively blocked from pursuing it. Xi Jinping has also created new institutions to accrete further power including the National Security Commission.

Third, he has created a very pervasive, coercive toolkit to keep his opposition off-balance. His anti-corruption campaign unprecedentedly is targeting very senior level people and their families, both active and retired. Retired Politburo standing committee members cannot feel secure, and Xi Jinping wants it that way.

Pervasive ideological retrenchment can also be seen across the system. There is heavy pressure not to deviate from the positions of the top leadership and an intense campaign reinforcing continuity between the first 30 years of the People's Republic of China (PRC) and the reform period. The result is that criticizing the Mao period effectively means criticizing the current party line. This has been reflected primarily in crackdowns on the internet and in media freedom. Even very influential fellow "princelings" are getting the message that they shouldn't push the envelope.

The "mass line education campaign" is another very important tool. Officially designed to improve the party's relationship with the public, etc., it is really a classic rectification campaign to dig up dirt on officials and give Xi Jinping leverage.

Shifting to economics, we need to focus on the key development at the Plenum: assigning the market a decisive role in the economy. Three key areas must be watched very carefully. SOE reform is a major one. Implementation will be difficult. The keys with SOEs are management of their massive corporate debts and whether so-called strategic industries—previously the purview of SOEs only—will be opened truly and to whom (to Chinese domestic private capital or some foreign participation?). SOE reform does not mean privatization but instead strengthening the state sector by streamlining state firms and creating competition through the private sector to develop national and ultimately global champions. The state will change fundamentally but will not disappear.

Financial sector reform is a second area that should be watched—opening up the capital account, making the renminbi an international currency, starting with very basic matters such as allowing more free-floating deposit rates and a deposit insurance scheme. Part of the problem is that they understand that all of these reforms are interrelated. They're being very cautious, but these reforms are necessary to ensure their future competitiveness.

The third area is fiscal reform—the tremendous imbalance between the center and the localities with regard to financing. We are now seeing serious problems from the tax reforms done in the 1990s. Since the Plenum, there has been more flexibility from the Ministry of Finance on the issue of rural land reform (taking revenue away from local officials and allowing peasants to receive more direct benefit of the sale of their land). This is fundamental to its ability to exit this investment-driven cycle and move towards a more consumption-based economy.

These developments are fraught with challenges and risks. Nearly one year after the Plenum, it is clear that Xi Jinping is far out in front of the broad party consensus on how to manage these reforms. He can either slow down and allow a new consensus or drag everyone along with him. The latter seems to be his preference, hence the coercion and its attendant risks. His aggressive approach risks a backlash which we are seeing already on anti-corruption, and this has real implications for the reforms. If the Chinese working-level officialdom understands that the senior leaders are fighting over these issues, then they are very unlikely to stick their necks out. The unwinding of these political tensions is causing the reform process to slow down substantially. The third piece is the balance between a clear desire to tighten up on investment and the fear of accidentally triggering a major crisis. This causes very mixed signals such as declaring a 7.5% growth target. Some projections are that they will continue to increase the pace of investment by roughly 3%-4% per year, which is not sustainable and in fact very risky. Surprisingly, Xi Jinping has been very forthright on foreign policy while managing these very difficult domestic challenges.

Regarding China's discussion of the idea of a great power strategy, it's important to look at some theoretical building blocks that underpin the new foreign policy strategy. The first is the concept of the "period of strategic opportunity," China's fundamental external security guideline, which is very authoritative within its system and has been validated by three separate party congresses. Implicit in this is China's belief that its external security environment is sufficiently benign to allow it to focus solely or primarily on internal development. This is a good thing in that it acts as a governor on China's ability to act disruptively externally.

The second concept is peaceful development. This is the continually validated domestic version of the above concept. This is the idea that China's neighbors needn't worry—China's rise will be peaceful and focused on win-win solutions to these difficult problems and challenges

New for the leadership and for Xi Jinping is this concept of the "Chinese dream" which is a very interesting and flexible tool. It reflects Xi Jinping's political stagecraft. This concept is developing and will continue to be very important.

What is the new style of great power relations with the United States? The English translation was changed to "major country relations," but the Chinese hasn't changed—an internal Chinese audience reads "great power relations." To interpret this new phraseology, the best case scenario is that the overall relationship must be prioritized over minor conflicts and tensions. The worst case scenario is China seeking U.S. acquiescence on these security interests. Troublingly, when Foreign Minister Wang Yi was asked at the National People's Congress to describe China's impression of the new style of great power relations, he listed only Chinese priorities and no American ones. The message to the United States is "We want good relations and understand the primacy of Sino-U.S. relations, but we will look elsewhere if you won't meet us halfway." There's a transition away from Deng Xiaoping's injunction to bide time and keep a low profile toward a more active approach.

The second piece is the response to the U.S. strategic rebalance to Asia. China's response is to punch back aggressively. The People's Liberation Army (PLA) is a much more capable force than it was in the past. It is very consistent with the idea of the strategic employment of China's economic leverage. In the region, it is very much suggesting to the neighbors, "We are the economic powerhouse, and we are always going to be here in the region. You can't be sure the United States will be."

How do you move toward this great power strategy? In the defense space, China is planning very sweeping structural reforms designed to change the PLA's command structure, an anachronistic region-based design for responding to a territorial invasion by the then Soviet Union, and also, of course, for managing internal suppression, into a joint command system similar to the more externally focused U.S. structure.

The establishment of the new National Security Commission is another development. The goal is to improve coordination across the system to avoid potential problems and to project events as coordinated positions rather than the result of bureaucratic infighting.

Lastly, there is Xi Jinping's seeming interest in trying to generate a sense of tension. How do you persuade a reluctant PLA to start their command system over from scratch? Suggesting that the likelihood of conflict is higher makes very challenging reforms imperative. There is also the announcement that China is a maritime power and the establishment of the Air Defense Identification Zone. What does it mean for the United States, Japan, and others in the region that Xi Jinping seems to have concluded that in order to be successful domestically, he must maintain a certain level of internal and external tension to drive these reforms? It's a real challenge and is something we will have to watch carefully.

Q1. I'm interested in the worsening current intellectual property (IP) theft situation. What do you feel is the effect of this provocative issue?

Christopher K. JOHNSON
There has been some substantial change. On the good side, the Plenum document makes specific reference to establishing an IP court and viewing these issues differently. In terms of broader IP protection, there are some worrisome trends, especially the use of tools such as an anti-monopoly law and pricing investigations to accomplish the very clear goal of coercing target firms to share intellectual property. This occurs across various industries and is something that needs to be looked at as a comprehensive policy. It's important for Japanese, European, and U.S. companies and governments to try to work together on this issue to push back against these practices. Xi Jinping has put tremendous emphasis on innovation. The pressure to steal it or otherwise acquire it is very strong. This will bear close watching going forward.

Q2. What is the basic fundamental strategy on the part of the United States to face China and ensure that it does not lose?

Christopher K. JOHNSON
While Xi Jinping's goal is to maintain the robust state element, that doesn't mean it will be a crushing, impossible space for companies to operate in. A bilateral investment treaty either exogenously or through China becoming involved in the Trans-Pacific Partnership (TPP) would offer the best opportunity to shape the trajectory of the reforms.

The Chinese believe that the administration's policy on China has zigzagged considerably during the administration. My assessment is that consistency is very important with China. If you behave consistently, when you need to, you can be quite tough with them and they'll accept it. The administration has struggled somewhat in the second administration to define its policy approach, but the core is to try to engage in a traditional balance between managing or hedging China's rise while simultaneously welcoming it.

However, is China willing to play that game anymore, or has its strategy fundamentally changed? Our traditional means of signaling China are not working properly; China is not responding in the way we would like. The U.S. government needs to think more asymmetrically about how to manage the relationship with China. Xi Jinping is very different from his predecessor. He has strong views on these subjects and tends to view things in binary terms. U.S. actions either signal respect or disrespect. Will we make some accommodation for that new style or resist it, or will there be some combination of the two? There have been two key approaches historically in managing the relations between the United States and China: "outside-in"—working with allies and partners to shape and manage China's behavior, and "inside out"—emphasizing the bilateral relationship with China and bringing others along. The administration's approach reflects elements of both, but it's not working in a coordinated fashion. That requires nuance. It's also a changing landscape and a challenging environment. Our government should think about how to deal with this clearly different approach from China.

Q3. Could you tell us your observation of the health of the Chinese banking system and, if possible, talk about energy strategy? Our big environmentally-related concern is that China is overly dependent on coal.

Christopher K. JOHNSON
The problem is that the state banks are accustomed to operating in an environment where they have all of the advantages. They know that if it is opened up to foreign competitors—Japanese banks, American banks—that they are just not ready to take on that kind of a challenge. The leadership has attempted to deal with this by using tools such as the Shanghai Free Trade Zone to try to create some areas for experimentation. Most people in the financial industry with whom I speak would say that they are not certain of the benefits of the Shanghai Free Trade Zone, so this is a challenge.

If the appropriate reforms are done, the Chinese banking system hopes it will stem the tide of bad investment, overcapacity, and other problems fueled by the cheap credit system. Xi Jinping is very determined, as are people near him who have strong credentials in that area and are very reform-oriented, but the vested interests are powerful so it will be a fight. If we start to see the type of anti-corruption investigations in the banking sector that we have been seeing in, for example, China National Petroleum Corporation (CNPC), that would suggest it is becoming more serious.

On energy, China faces a terrible dilemma. It has abundant coal, but it's a dirty variety of coal. The air pollution issue is becoming a major social stability issue, particularly among the upwardly mobile urban middle class which is exactly the constituency the leadership needs to keep in line in order to keep the party in power. China understands the need to move towards liquefied natural gas (LNG). It is very worried about the strategic consequences of importing foreign oil, especially from the Middle East. Its shale oil and gas reserves may be much larger than even those in the United States, but it's all located in China's far west with very difficult access. Another problem is that CNPC owns around 85% of the choice tracts of exploitable land, and is waiting to get a concession from the government on price.

You can see how these reforms are all nested together. But I think the leadership is very determined. The optimistic view in the Chinese government is that because the United States has had this shale oil and gas revolution, it will become disinterested and stop playing its role in the Middle East. China free rides off of the U.S. security presence, so it worries that this could be a problem. The more pessimistic view argues that should United States and China have a problem, the former would seek to turn off those supplies or strike pipelines.

Q4. China experts in the United States and Japan say it's very difficult to talk to really influential Chinese—they don't get access to those who really matter. Is this the case?

Q5. What do you think about the rebalance continuing and how China perceives the changes in the U.S. position on how to approach Asia? With China, economic relations in Asia are generally good, while there is a lot of tension in the political realm. You mentioned that China is using tension to promote economic reform. What are the implications of that on the issue of the firewall between economics and politics?

Q6. I agree with your analysis that Xi Jinping is already a very powerful leader, that the third Plenum session reform was a bold one, and that the leadership was very serious about the reform. But half a year has already passed, and there's still a feeling that the reform has not yet been ignited. Some say that this is partly because government officials are faced with a very fierce anti-corruption move which makes them nervous and inactive in propelling the reform. I wonder if there is any other reason, or, in other words, who is opposing such a reform? What do you think about the situation?

Christopher K. JOHNSON
Accessing influential Chinese is definitely a problem. My approach is to talk to as many people as possible who I think have insight and then compare their assessments. Hu Jintao had to rely very heavily on the formal bureaucracy, so it was easier to see what the organizational chart looked like. With Xi Jinping, it is harder. Just trying to figure out who are the advisors, a much more informal group of people, is a sufficient challenge, and then trying to get to them as individuals is virtually impossible. Beyond that, he has a very Mao-like political strategy. Even Central Committee members don't know what is going on inside the system. I believe many of them were surprised at many of the Plenum document contents.

On the rebalancing, there is a traditional pattern where in a first administration you articulate a policy and in a second administration you implement it. Our administration has done a great job of getting the message out that they are serious about the rebalance. We also need to show that it is comprehensive, not just for the military. The Chinese use this criticism to suggest that "they're about disruption and we're about growth and prosperity." The administration has defined the TPP as the economic fulcrum of the rebalance so what does this say about the rebalance if you can't move it forward? However, we should not underestimate their eagerness.

It's very useful that, from Japan's interests' point of view, Prime Minister Abe has been so forthright in his pursuit of good relations with Southeast Asia in particular because China's approach is to isolate Japan. The implicit message in Abe's activities is, "I see what you're doing, and it won't work." I believe he's doing exactly the right thing under the circumstances. I'd like to see the United States and Japan work more closely together to co-implement the rebalance or for the United States to accept suggestions from Japan, Korea, other allies, partners, and friends.

On the firewall between politics and economics, the tension is an issue. One lesson the Chinese are learning is that the economics gives them the ability to do what they want to do in the political situation. In this region, economics is security for the most part.

As for the questions about the pace of reforms and who the opponents are, this is a very difficult thing that they are trying to do. It's not only a fundamental reordering of their system, but also they have to shift their mindset entirely about how they think of the system and the economy work, etc. They've given themselves until 2020 to pull this off and need to show regular progress to keep from damaging confidence. This is where it's important to understand Xi Jinping's thinking about his two five-year tenures. The first one is very much about power consolidation. What does he intend to do with the ensuing years? He is trying to reshape fundamentally the party state in significant ways. Part of this will entail more of his people being put in charge of the key levers of power. That takes time; those people don't have sufficient credentials at the moment—you can't just use raw power to push such things through. The goal in the second five years would be to work very hard to push them through. I'm not surprised at the pacing. If they don't solve the leverage problem, it may cause a major crisis. They need to slow growth, but they are instead declaring a 7.5% growth target. They see the leverage as a symptom of the underlying structural problems in the economy, so they are trying to tackle the hard issues of fiscal reform and financial sector reform. The question is: can they move on a timeline that is aggressive enough to address those underlying structural problems over the objections of these vested interests before the ticking time bomb of the leverage explodes?

In terms of who's opposing, it's the people who have something to lose. When Deng Xiaoping launched the reform program in the 1980s, there were very few people who objected to the reform program—the country was in shambles coming out of the Cultural Revolution, and almost no one had anything to lose. Now, there are people inside that system who will lose real money if these reforms go through. I believe the resistance is stronger than Xi Jinping thought, as well as pervasive across sectors. I would not doubt his strength or the commitment to try to do this. The question is has the system changed in some fundamental way that makes it impossible?