Closer to the Edge: Will 2015 provoke crisis in China?

2014 was a fairly dramatic year for China. 2015 could be more of the same?

 

When your history includes the Cultural Revolution, the Great Leap Forward, three major wars within ten years (WWII, The Chinese Civil War, and the Korean War), occupation by a foreign power (Japan), and not one, but two, Opium Wars, it isn’t easy for any given year to be considered particularly dramatic. But, if we had to rank 2014 for drama for China, it would likely be near the top over the last few decades. Not that anything particularly new happened. Rather, old troubles became even more troublesome, sometimes to the point of almost boiling over into full-fledged crises.

 

Relative to a wide variety of issues—potential financial crisis and economic downturn, military conflict over disputed territories, terrorism in Western China, democracy demonstrations in Hong Kong, arresting senior leaders on corruption charges, etc.—2014 was a dramatic year for China. The key theme for 2015 will be measuring whether China can continue to prevent any of the ongoing challenges from becoming actual crises.

 

Below is a brief description of the challenges that stirred China in 2014.

 

ECONOMY: Growth or Crisis Ahead

Growth slowed while debt rose to 250% of GDP. The IMF reports that other countries that have increased debt as fast as China has over the last five years have eventually faced financial collapse and crisis. Does that fate await China? Will China try to limit debt? How much will growth suffer as a result?

 

ECONOMIC LIBERALIZATION: Is China “feeling the stones” fast enough

China made many small economic reforms in China which is consistent with the gradual, step-by-step approach it has taken to liberalization over the years. With other forces slowing the economy, does China need to speed up some of those reforms?

 

FOREIGN FIRMS IN THE BULL’S EYE: Is China Targeting Foreign Firms for Investigation and Sanction

Investigations, fines, and prison sentences created the sense among some that foreigners are under siege in China. While there are some areas of concern, overall it is premature to say that the government has turned against foreigners.

 

CORRUPTION: Taking down the tigers

China’s anti-corruption effort gained momentum. A retired politburo member was arrested as were dozens of other senior officials and many more lower-level officials. While there is no doubt a political element to the campaign, it is also likely good for reform in the long run. Will the arrests continue?

 

CYBER ESPIONAGE: Arrest warrants and Snowden revelations add to the tension

The Sino-US rift over cyber espionage intensified as the US issued arrest warrants for 5 Chinese military officers accused of spying on US companies. More allegations from the Edward Snowden affair added fuel to the fire. The impact on US IT firms, particularly in the network hardware business, could be significant.

 

SABRE RATTLING OVER TERRITORY: Tensions rise in the South China Sea

Early in the year China seemed to court confrontation with its neighbors relative to longstanding territorial disputes. By the end of the year China had softened its approach. But positions haven’t changed and the stage is set for more conflict.

 

TERRORISM IN WESTERN CHINA: Danger grows as attacks increase

Violent attacks in Western China were more frequent, more deadly, and more widely perpetrated in 2014 than in recent years. China has assigned considerable resources to address the problem but there is no guarantee 2015 won’t be even more violent.

 

PROTESTS IN HONG KONG: Will the cry for democracy grow stronger?

For more than two months Hong Kong Chinese protest Beijing’s decision to restrict candidates for office to those approved by Beijing. There was much support within HK for the protests, but not everyone thought disrupting commerce was a good idea and support decreased over time. Beijing is unlikely to change its position any time soon, so future protest and conflict are a real possibility.

 

China is taking a cautious approach so far

China has signaled that it will no longer trade massive increases in debt for growth. Whether or not they maintain that position will be central to China’s economic performance in 2015. For the time being China is no longer taking provocative action in the South China Seas. It will be worth watching whether China, or the other countries involved (Japan, Vietnam, the Philippines, etc.), continue to prefer calm over the advancement of their own interests. China has already steeled itself for more separatist violence. Whether tensions rise in that area are not totally in their control.

 

Crisis isn’t inevitable

There is no reason to think 2015 will definitely be a “crisis” year for China. Even if growth slows somewhat, it isn’t definitive that it will be a difficult year. As is always the case, there are variables that China can control and those it can’t control. Whether 2015 is a good year or not for China will likely be decided by the issues above. For those, like us, interested in tracking China’s progress, these are the issues that deserve our attention.