Bracing for simmering China risks

Chung Jae-hong
The author is an international, diplomatic, and security news editor of the JoongAng Ilbo.

The Chinese economy has become wobbly. Trust companies linked to secretive financial giant Zhongzhi Enterprise Group with an estimated 1 trillion yuan ($136.6 billion) in assets under management have missed payments on high-yield investment products. State-backed Zhongrong International Trust, in which the group has a 30 percent stake, is deferring payments on 350 billion yuan worth of wealth-related management products due to its liquidity crunch.

The news came on the heels of a default crisis for China’s fifth largest real estate developer Country Garden, which is expected to report a loss of as much as $7.6 billion for the first quarter. Bigger property names suh as Hengda (Evergrande Group) and Wanda are equally troubled.

The future of the world’s second largest economy looks uncertain as it grapples with the collapse in the property market, which accounts for nearly a quarter of China’s GDP. Beijing has eased up on its tight grip on loan regulations, but consumers are hardly going take a risk on the real estate market.

Foreign media also raised the alarm about a deflationary spiral for China. The country’s consumer price index fell 0.3 percent on year in July. The producer price index (PPI) also sank 4.4 percent last month against a year-ago period. Companies are cutting back on hiring, causing China’s youth unemployment rate to hit a historic high of 21.3 percent in June.

External conditions also bode badly for China. Washington kept up “constructive engagement” towards Beijing over expectations that China would choose democracy over totalitarianism as its economy expanded and globalized. But this engagement policy was officially scrapped and replaced with a containment policy from January 2017 under former President Donald Trump. Even the ever-bickering Democratic and Republican parties agree on the United States’ hard-line foreign and security policy towards China. Incumbent President Joe Biden has built on Trump’s offensive towards Beijing by rounding up the United States’ allies and partners to isolate China via the Chip 4 alliance, the Quadrilateral Security Dialogue (QUAD) with Japan, India and Australia, and the Aukus, a separate security pact with Australia and the UK.

Beijing has toughened its Communist ideology to fight the U.S.-led front. President Xi Jinping, who began his third term in October 2022, has dumped the pragmatist legacy of Deng Xiaoping to reinforce the party-centric and ideology-guided governance. Xi is envisioning the grand revival of Sinocentrism through a new socialism with Chinese characteristics that prize ideology over pragmatic causes.

But there is a limit to a one-party dictatorship in governing today’s society. Xi clamped down on big-tech capital including Alibaba as well as the private education and entertainment industries that could threaten the top-down Communist power. Beijing has lifted the regulations and offered to support platform industries amid the economic downturn, but enterprises remain skeptical. Socialism was defeated in the contest by capitalism, as evinced by the fall of the Soviet Union and the Eastern Bloc. Xi’s ideology-led pivot could also fail.

“Danger Zone: Coming Conflict with China” — co-authored by Michael Beckley, a professor of political science at Tufts University, and Hal Brands, a professor of global affairs at John Hopkins University — warned that China, which is peaking out, could brave a military conflict with the U.S. to assert its hegemonic supremacy and achieve national objectives before its power further wanes. China’s fortunes from the geopolitical advantages, open and reform policy, population effect and rich resources that fueled China’s success are running out amid the heightened U.S.-led containment.

The authors warn “Once-rising powers often become most aggressive when their fortunes fade, their enemies multiply, and they realize that they must reach for glory now or miss their opportunity forever.” Some of the bloodiest wars in history were started not by rising powers but by countries that had peaked out and started to decline — including Germany in 1914 and Japan in the 1930s. If Xi resorts to force to bring Taiwan under China’s control, the U.S. will not just sit on its hands — a consequence that can cause a shockwave to the global order.

The China risk poses a grave challenge for South Korea. The woes of the world’s biggest consumer have unsettled the trade-reliant Korean economy. The reopening from the zero-Covid policy has brought about weaker-than-expected ripples to both the Chinese and global economy. The fears over deflation and property crisis spell more bad news for Korean exports. Korean companies must diversify export markets and items by factoring in China’s downturn. Core technologies like chips must be further advanced.

The democratic front must persuade China that military aggression against Taiwan will bring about lethal harm than any gain. Seoul must uphold its partnership with Beijing without sacrificing its values and principles of democracy.

The summit talks among Korean, U.S. and Japanese leaders at Camp David later in the week are expected to address deepened — and regularized — trilateral military drills and meetings. Seoul must strengthen ties with Washington and Tokyo, as well as develop partnership with the like-minded European Union, Asean countries, India, and Australia to fight the mounting challenges.