Two ground-shifting events have taken place over the last months that have the potential to fundamentally alter U.S. relations with the Sinic and Muslim worlds. In one case, Chinese president Xi Jingping, through a recent change in the Chinese constitution, is now “president for life;” in the second, Saudi Crown Prince Mohammed bin Salman is pushing to soften Islamic theology in the Kingdom and align the interpretation of Islam with practices at the time of The Prophet – meaning greater social toleration and expanded roles for women. It’s hard to exaggerate the significance of both events for the U.S. and our allies as we deal with the PRC and the Islamic world in the years ahead.
- With the Crown Prince, it’s safe to say his domestic reform efforts deserve U.S. support; moving Islamic thought away from an 18th century “Wahabist” interpretation and towards a more inclusive religious and social stance can help enormously in reducing the popularity of the jihadist narrative.
- It’s a different story with Xi Jingping. Anointing Xi for Life spells trouble - for U.S. commercial interests, and for our security interests in the western Pacific.
The reasons for the worry are many. They begin with the by-now constitutionally enshrined “XI Jingping Thought” – defined simply as “Socialism with Chinese Characteristics.” This brief definition, however, masks multiple concerns:
- First, it means a continued heavy dose of state intervention; state-owned enterprises (SOE’s) will be bolstered in key industries, not reduced in influence nor subjected to market-dominated pricing forces. While some heavily indebted SOE’s have already been shuttered, those associated with national security (e.g., telecom, electricity, transportation) remain; and despite PRC hoopla surrounding "SOE reorganizations," new high-tech sectors are fast becoming government favorites - meaning, yet more subsidization, below-market prices globally for those products exported, and restrictions on PRC market entry.
- Second, and related, Chinese “industrial policy” has been formally elevated to a matter of national security. With the publication of the “Made in China 2025” manifesto by the Chinese State Council, it's now clear that sectors vital to our own growth – information technology, robotics, aerospace, biotechnology – are objects of yet more Chinese state intervention. The PRC's stated objective in this document is nothing short of becoming the "global manufacturing leader." U.S. Trade Representative Robert Lighthizer characterized the execution of this vision as "Unbridled industrial policy." He's right.
- Third, this all means that economic reform is pushed out. Slower growth – where less than 8% is now the "new normal" for the PRC – is forcing trade-offs for Xi and his new economic team; structural reform will be the likely casualty. A purported "market-friendly" new head of China's central bank, Yi Gang, may liberalize China’s financial sector; but industries are likely to remain heavily influenced by state – and party – interventionists.
"Xi Thought" also includes a deepening strain of Chinese nationalism. It's manifested of late in border skirmishes with India and continued militarization of the South China Sea; but it's also reflected in China efforts to set new rules in institutions like the WTO and G20 as the U.S. steps back. As any recent visitor to the mainland can attest, China nationalism is enormously popular; and it's fueled by a sophisticated propaganda apparatus that's added new "technology bricks" to the Chinese Information Firewall.
Bottom Line: as Secretary of Defense Jim Mattis outlined in his recently published National Defense Strategy, China is employing an "all-of-nation long-term strategy" that seeks "Indo-Pacific regional hegemony in the near-term, and displacement of the U.S. to achieve global preeminence in the future." Economic and business policy – key parts of Xi's "China Dream" – are fundamental to the success of this strategy.
- In the process, U.S. business will be "used and abused," as one analyst recently wrote. Troubled economic waters lie ahead, even if the Mnuchin/Lighthizer-led back-channel discussions with China yield progress on market entry. These are dangerous months, for a critical bilateral relationship.