China’s Geopolitical Game Plan
 
In 2016, China faces problems that would decimate a conventional market.1

Consider just four key factors:

1. President Xi Jinping’s greatest concerns right now are growing labor strikes, protests, and layoffs. In 2015, strikes and protests doubled over the previous year to reach 2,700 incidents. So far in 2016, they’re on track to surpass 6,000. China’s biggest coal company in northeastern China staged one of the most politically daring protests over unpaid salaries. Meanwhile, Hebei province is set to close 60 percent of its steel mills, lose 180 billion yuan in revenue, and lay off over a million workers as it weans itself off heavily polluting industries in the next two years.

2. China is under acute financial stress, as debt is rising twice as fast as economic growth, according to China watcher and Beijing-based economist Michael Pettis. Chinese banks continue to practice “extend-and-pretend” loans. And sources estimate that China’s banking system could suffer write-offs four times larger than U.S. banks incurred during the subprime crisis. China’s shadow banking system has grown more than 600 percent over the last three years and has been using off-balance sheet trust products to hide losses. Some analysts estimate that China’s troubled credit could exceed $5 trillion, a staggering number that’s equivalent to half the size of the country’s annual economic output. China’s financial sector will have loans and other financial assets of $30 trillion at the end of this year, and as much as 22 percent of the Chinese financial system’s loans and assets will be “non-performing.”

3. The most reliable sources report that China’s true GDP growth for the coming fiscal year may be as low as 3 percent. By China’s standards, that’s a depression.

4. China’s rapidly aging workforce recently peaked, and its “dependency ratio” will grow from here, making internal growth tougher.
Yet, because China is playing “the long game,” it could be well-positioned to ride the global prosperity wave associated with the Deployment Phase of the Fifth Techno-Economic Revolution.

Throughout the centuries, one of the most successful strategies for expanding a nation’s power has been to conquer territories and turn them into the newest colonies of an empire. From the Roman Empire to the British Empire, the same formula has been used many times.

But a less-used, and less-understood, strategy can be just as effective. As the Dutch East India Company proved in the 1600s, turning the rest of the world into a supply chain can elevate a country into an economic power more rapidly than would an attempt to conquer the world.

It is precisely this below-the-radar approach to geopolitical greatness that China appears to be pursuing today.

Parag Khanna is the author of several books on geopolitics, including his newest, Connectography: Mapping the Future of Global Civilization.2 As he pointed out in a recent Global Affairs column in Stratfor.com, “In contrast to the legalistic and nation-based approaches that dominate Western thinking, China views the world almost entirely through the lens of supply chains.”3
 
It’s no coincidence, therefore, that China has been importing raw materials from every nation that it can persuade or coerce into a deal. While the U.S. is the leading trade partner of fifty-two countries, China commands the top trade position with more than double that amount: a staggering total of 124 countries.

While the U.S. tends to divide the world’s countries into allies and enemies, China views all of them as suppliers of the resources and assets it needs.

According to Khanna, from China’s perspective:

- Argentina is a source of soybeans.

- New Zealand is a source of meat.

- Australia is a source of iron ore and natural gas.

- Afghanistan is a source of copper and lithium.

- Zambia is a source of metals.

- Tanzania is a refueling port for its massive shipping fleet.

Other governments might own the resources beneath their soil or in their territorial waters; but as long as China can extract those resources through trade pacts, the end result is the same.

China controls many of the ports in Asia, Africa, and Latin America that allow its 5,000 merchant marine ships to refuel as they traverse the globe. A Hong Kong company now controls both ends of the Panama Canal.

China has created Special Economic Zones (SEZs) around the world. These include SEZs in:

- Mexico
- Venezuela
- Algeria
- Egypt
- Zambia
- Nigeria
- Ethiopia
- Mauritius
- Vietnam
- Thailand
- Cambodia
- Indonesia
- South Korea
- Pakistan
- Russia

Note that many of these zones are in areas where labor is even cheaper than it is in China. That gives China the opportunity to source manufactured goods at a lower cost than it can produce them itself if its own labor costs continue to rise.

Even when other countries aren’t willing to yield to China’s demands, it simply imposes its will.

Consider the South China Sea, which is rich in the energy resources China badly needs to fuel its struggling economy. Although parts of the South China Sea are claimed by several neighboring island nations, China is enticed by the estimates that 30 trillion cubic meters of natural gas and 10 billion barrels of oil are lurking beneath its surface. So Beijing has hauled a mobile oil and natural gas exploration rig into the region, boldly straying into Vietnam’s territorial waters several times over the past two years.

Also, as pointed out previously in Trends, China is building artificial islands, called the Spratlys, on top of seven reefs and atolls in the Spratly archipelago in the South China Sea.4 By installing runways on the islands where military planes could be based, China is ignoring other countries’ protests and aggressively asserting its interest in protecting its primary trade route to the west.

China is also keenly interested in establishing a trade route through the Arctic and Antarctic regions; as the glaciers melt, a faster trade route is opening, while the vast energy resources of the region are up for grabs.

According to a report in Supply Chain Management Review, “China-bound commodities are already flowing through the passage - including gas condensate, liquefied natural gas, iron ore, and coal - and Beijing wants to start sending consumer goods back the other way.”5

So China is simultaneously working on a diplomatic front to become a member of the Arctic Council, which creates policy for the Arctic region, while also tempting Greenland’s tiny population with the promise of billions of dollars in investments from China’s mining companies in exchange for the right to import its uranium. Denmark, which controls Greenland under the old paradigm as a colony, has so far rejected China’s advances. However, by voting for independence, Greenland’s population could break away from Denmark’s colonial rule and, by taking China’s money, could willingly become what Khanna calls a “supply chain colony.”

It’s already happening in Iceland. A Chinese state-owned enterprise called CNOOC is now looking for oil in Iceland’s waters.

At the same time, China is ignoring the 1961 Antarctic Treaty that prohibits countries from looking for oil in the Antarctic. It is also launching expeditions of ice-breaking ships to clear a route for geologic surveying to explore whether oil exists under the ice.

Why is China behaving this way?

It simply has no other options. As reported in Wall Street Daily, “China’s economic model, built on a foundation of exports and investment in manufacturing and infrastructure, is no longer working.   Hong Kong home sales tumbled 70 percent year over year in February, representing a twenty-five-year low. China’s exports fell 25.4 percent in February…. In 2015, strikes and protests doubled over the previous year to reach 2,700 incidents. So far in [early April] 2016, they’re on track to surpass 6,000.”6

At the same time that China’s economy is in shambles, its leaders are realizing that the competition between superpowers is no longer between armies; it is a conflict between economies that are battling to win the connections with other countries that provide vital supplies and raw materials.

Or, as Khanna articulates this new reality in a Foreign Affairs article, “In the twenty-first century, arms races are not over weaponry but over connectivity…. With the world now crossed by a latticework of connections, the age of territorial conquest is largely over. International conflict has fallen; instead, nations compete to gain leverage in the connected world.”7

To improve those connections, China spearheaded the creation of the Asian Infrastructure and Investment Bank (AIIB) to fund infrastructure improvements in the states once controlled by the Soviet Union. By building better highways, railroads, and pipelines, China gains more efficient access to those states’ resources.8

In the U.S., attempts at using a connectivity strategy are consistently overshadowed by expensive attempts to conquer enemies in the Middle East. And even if Congress approves the Trans-Pacific Partnership (TPP) trade agreement this year, which would give American businesses greater opportunities to export to Asian countries, the fact is that China is forging a more powerful partnership between itself and other Asian nations. Called the Regional Comprehensive Economic Partnership, it not only includes such TPP members as Australia and Japan, but it also includes other countries like India.

India ranks only behind China as the second-largest shareholder in the AIIB. Another 60 countries have joined the bank, including most of America’s allies, even though the U.S. remained against it.

Based on this trend, we foresee the following developments:

First, the contest for supremacy between superpowers will shift from the battlefield to the supply chain.

Instead of fighting wars with armies, countries will compete for access to the economic resources they will need in order to prosper.

Second, China’s lack of transparency will create opportunities for the United States to win converts to its own supply chains.

As noted in Statfor, Iran pulled out of an agreement to ship oil to China because of bureaucratic delays in Beijing. Similarly, Mexico pulled the plug on a deal with a Chinese railroad builder because the bidding seemed suspicious, while Zambia backed out of a Chinese contract for closed-circuit TV cameras because of corruption.9

Third, investors and executives need to be wary about the stability of China’s economy.

According to Wall Street Daily, “Our sources report that China’s true GDP growth for the coming fiscal year may be as low as 3 percent. From July 2015 to February 2017, its reserves fell $600 billion and dropped by almost $200 billion in the first six weeks of 2016.” It’s a good idea for anyone with heavy investments in China to hedge against an economic meltdown in that country.10

Fourth, as an exporter of energy products, the U.S. will gain a strategic advantage over China in the economic battle for control of the global supply chain.

In December 2015, Congress removed the restrictions on energy exports. Countries in Asia and Europe will now be able to import oil and natural gas from the U.S. rather than the Middle East. Look for the U.S. to forge trade pacts that make oil shipments contingent on American companies’ access to the receiving countries’ own resources.

References
1. Wall Street Daily, April 1, 2016, “Is the Chinese Economic Miracle Over?” by Carl Delveld. ⓒ 2016 Wall Street Daily LLC. All rights reserved.

http://www.wallstreetdaily.com/2016/04/01/china-economic-miracle/

2. Connectography: Mapping the Future of Global Civilization by Parag Khanna is published by Random House, an imprint and division of Penguin Random House LLC. ⓒ 2016 Parag Khanna. All rights reserved.

3. com, April 9, 2016, “Use It or Lose It: China’s Grand Strategy,” by Parag Khanna ⓒ 2016 Designtechnica Corporation. All rights reserved.

https://www.stratfor.com/weekly/use-it-or-lose-it-chinas-grand-strategy