TIME russia

Russia’s Lackluster Economy Means Putin Simply Can’t Afford a New Cold War

Vladimir Putin
Russian President Vladimir Putin prepares to toast with ambassadors in the Alexander Hall after a ceremony of presentation of credentials by foreign ambassadors in the Grand Kremlin Palace in Moscow, Russia, Wednesday, Nov. 19, 2014. Alexander Zemlianichenko—AP

Moscow needs the West

One of the axioms of global geopolitics is that a country can project power only as far as its economic might allows. There is good reason why the United States, by far the world’s largest economy, has been the dominant force in all things political and military for the past 60 years. And we can see China now rising to superpower status on the back of its spectacular economic ascent.

Vladimir Putin should take note. As Russia’s president attempts to reassert his nation’s clout in Europe, he is doing so on an ever shakier economic foundation. The question for Putin going forward is whether his stumbling economy can support his geopolitical ambitions. The answer is anything but clear.

Russia’s economy was struggling even before Putin’s adventurous foray into Ukraine. The country had been one of the high-fliers of the developing world, so much so that Goldman Sachs included Russia in its BRICs — the emerging economies that would shape the economic future — along with Brazil, India and China. But a feeble investment climate, endemic corruption and excessive dependence on natural resource exports eventually laid Russia low. Growth last year sunk to only 1.3%, down from the 7% to 8% rates experienced a decade ago.

Since Putin’s intervention in Ukraine, Russia’s economic situation has worsened severely. GDP inched upwards only 0.7% in the third quarter from a year earlier, and the International Monetary Fund is forecasting mere 0.2% growth for all of 2014. Sanctions imposed by the U.S. and European Union in the wake of Putin’s intervention in Ukraine have blocked some major Russian banks and companies from accessing financing in the West, starving them of much-needed foreign capital. As a result, the value of the Russian currency, the ruble, has deteriorated by 30% against the dollar so far this year, routinely hitting new record lows along the way.

In a recently released study, the European Bank for Reconstruction and Development predicted that Western sanctions would help push Russia into a mild recession in 2015. Sanctions, the bank noted, “negatively affected business confidence, limited the ability of companies and banks to access international debt markets and contributed to an increase in private capital outflow.”

Meanwhile, Putin’s countermeasures have made matters worse. His decision to ban the import of some foodstuffs from the West has caused prices for fresh produce and other necessities to rise. Combined with the weakening ruble, that’s pushing up inflation, which bites into the pocketbook of the average Russian family. Moscow’s economy minister recently said that he expects inflation to exceed 9% by early 2015. The nasty mixture of a depreciating currency and escalating prices have forced the central bank to hike interest rates, which will act as a further drag on growth.

Headwinds from the global economy are making matters even worse. Tumbling oil prices spell bad news, both for overall growth and the financial position of the government, which is reliant on tax revenues from its energy industry to fund the budget. In 2013, oil and gas accounted for 68% of Russia’s total exports, while duties on those exports, combined with taxes on mining, accounted for 50% of the federal government’s revenue.

Putin so far hasn’t flinched. Instead, he has been scrambling to evade Western sanctions and find new sources of exports and investment in Asia. On the sidelines of the Asia-Pacific Economic Cooperation summit, held in Beijing this month, Russia agreed to a deal to supply even more natural gas to China, on top of a $400 billion pact inked earlier this year.

That “pivot” to Asia will take time to bear fruit, however. Right now, none of the negative factors damaging Russia’s economic prospects look likely to turn positive any time soon. “We expect the stagnation trend to continue and potentially accelerate next year, exacerbated by lower oil prices, tighter monetary policy and continued uncertainty on the geopolitical front,” noted Barclays economist Eldar Vakhitov in a recent report.

Still, Putin’s economic woes haven’t yet translated into political problems. The Russian public appears to be patriotically rallying around Putin’s aggressive foreign policy and setting aside concerns about the economic fallout. In the latest poll conducted by the Levada Center, a Moscow-based independent research organization, an amazing 60% of the respondents said they believed that Russia was heading in the right direction, up significantly from 40% a year earlier. Putin’s approval rating stands at an even more astronomical 88%.

What the future may hold is another issue. A good part of Putin’s political success has been based on his record of improving people’s welfare, but with no relief in sight for Russia’s economic troubles, it may only be a matter a time before the general populace begins to feel the pinch more sharply. Nor can Putin ignore his economy’s need for foreign investment and technology to upgrade industry and create jobs. He may eventually find himself facing a critical choice — maintaining his foreign policy goals or softening his stance towards the West out of economic necessity.

Recall that the Soviet Union collapsed, after all, because its economy could not sustain its international policies. Putin has to watch that history doesn’t repeat itself.

TIME Japan

Japan Sinks Into Recession (Again)

A man holding a shopping bag walks on a street at Tokyo's Ginza shopping district
A man holding a shopping bag walks on a street at Tokyo's Ginza shopping district on Nov. 16, 2014 Yuya Shino—Reuters

An unexpected contraction in quarterly GDP shows that Prime Minister Shinzo Abe’s radical economic program is badly broken

If anyone is still holding out hope that Abenomics — the unorthodox slate of economic policies named after their inspiration, Japanese Prime Minister Shinzo Abe — could rescue Japan from its two-decade slump, the news on Monday should dash it. The troubled economy surprised analysts by (once again) tumbling into recession. GDP in the quarter ended September shrank by an annualized 1.6% — far, far worse than the consensus forecasts. That followed a disastrous 7.3% contraction in the previous quarter. Speculation in Japan is that the bad results will push Abe to call a snap election only two years after taking office.

What’s going on in Japan is important for all of us. Since the economy is still the world’s third largest (after the U.S. and China), a healthy Japan could provide a much needed pillar to growth in a struggling global economy.

The current downturn is being blamed on a hike in the consumption tax, implemented in April to try to stabilize the government’s feeble finances, which slammed consumer spending. It is now expected that Abe will delay a further increase in that tax scheduled for next October. But the real causes lie much deeper — in the failings of Abe’s economic agenda.

The idea behind Abenomics was to boost the economy with massive stimulus from the Bank of Japan (BOJ) and the government combined with structural reform of the economy, or what has been called the third arrow. The problem is that we got the first two arrows, but not the third. While the BOJ kept its printing presses rolling, dramatically weakening the value of the yen, badly needed deregulation and market-opening has come extremely slowly. Some critical changes, like a loosening of labor laws, seem to be off the menu entirely. The result is that the actual potential of the economy has not been enhanced. Meanwhile, the welfare of the average Japanese family hasn’t improved either. Wages haven’t advanced much, while prices have increased.

If Japan’s situation proves anything, it is the limits of central bank policy to fix economies. Despite a torrent of cash infused into the economy through the BOJ’s “quantitative easing” or QE, Japan’s economy remains mired in slow growth and stagnant household welfare. That’s why it is hard to imagine that the BOJ’s October decision to increase its QE program will make a major difference. So that’s the takeaway for policymakers in the U.S. and especially a stumbling Europe: If you’re going to rely too much on central bankers to revive growth, you’re going to fail.

The question facing Abe is whether he can press ahead more quickly with important reforms, either in his current administration or after a fresh election, which his party will still mostly likely win. Based on his recent track record, we don’t have reason to be confident. But maybe one day Japan will give us a surprise — in a good way.

Read next: It May Be Too Late for Japan’s PM to Fix the World’s Third Largest Economy

TIME China

China Stock-Market Link Shows Promise and Frustration of Beijing’s Reforms

A banner introducing the Shanghai-Hong Kong Stock Connect is displayed in front of a panel showing the closing blue-chip Hang Seng Index at the Hong Kong Stock Exchange in Hong Kong
A banner introducing the Shanghai–Hong Kong Stock Connect is displayed in front of a panel showing the closing blue-chip Hang Seng Index at the Hong Kong Stock Exchange in Hong Kong on Nov. 10, 2014 Bobby Yip—Reuters

The new connection between the exchanges in Shanghai and Hong Kong is another small step toward prying open China’s financial system to the world

When Great Britain handed Hong Kong back to China in 1997, it did so under the formula of “one country, two systems.” Though officially controlled by Beijing, Hong Kong maintained a separate governing, legal and financial system from the mainland. Starting Monday, however, the relationship is changing to something more like “one country, two a-bit-more-connected systems.”

That’s because of Shanghai–Hong Kong Stock Connect, a pilot program that is linking the stock exchanges of the two metropolises together. For the first time, investors in Hong Kong and China will be able to directly trade shares on each other’s stock markets.

This may sound like an arcane event in the heady world of global finance, of interest only to a few local traders. But it’s not. Even though China is the world’s second largest economy, its financial system and capital markets remain fairly closed off. Controls limit flows of money in and out of the country, while foreign investors can buy Chinese shares only on a highly restricted basis. The Connect program is a step in a much bigger process with much bigger implications for the global economy — opening China up to international finance and upgrading its financial markets. The Stock Connect scheme “should increase the scale and relevance of these markets and also improve market efficiency and the robustness of China’s financial system in general,” HSBC equity strategists noted in a recent report. “We also believe the co-operation between Hong Kong and Shanghai shows the way forward for other markets in China — i.e. a coordinated and controlled approach to opening markets.”

If Beijing continues to reform its financial system — as its top leaders have pledged — the consequences could be huge. Already a titan in manufacturing, a China with a more open, professional and market-oriented financial sector could also become a major player in international banking and other services. Just as newly wealthy Chinese shoppers are reshaping global consumer markets, Chinese investors, once able to more freely take their money out of the country, would become much more important on the world stage too. HSBC, in its report, pointed out that if the Hong Kong exchange was integrated with China’s bourses (in Shanghai and Shenzhen), it would be the second largest stock market in the world, based on the combined value of their listed companies.

That is, of course, in theory only. China never employs the big-bang strategy when it comes to reform, and the Connect program is no different. At the start, the amount of money flowing through the scheme in either direction has been capped, to about $49 billion into China and $41 billion into Hong Kong. That may sound like a lot, but in fact, each figure is the equivalent of only 1% of the total capitalization of the markets in China and Hong Kong. Many investors may dither on the sidelines for the moment since there is some remaining uncertainty over how the scheme will actually operate.

Most analysts also doubt the scheme will be expanded quickly. “The Connect scheme has the potential over the medium term to become an important conduit for flows into and out of China,” commented Mark Williams, chief Asia economist at research firm Capital Economics. However, “most likely, the Connect scheme will be scaled up only slowly. And it has been devised so that flows will be monitored and could be curtailed if they threatened market or economic instability.”

So like much of China’s recent reform efforts, the promise of what could be and the reality of what actually is differ greatly. On a certain level, that makes sense. If China threw its unsophisticated and ill-prepared financial system to the trials of global money flows, disaster could result. At the same time, Beijing’s policymakers introduce change in such tiny steps it’s hard to tell when they might actually get somewhere.

TIME Japan

It May Be Too Late for Japan’s PM to Fix the World’s Third Largest Economy

Shinzo Abe
Japan's Prime Minister Shinzo Abe visits the Santa Lucia Hill Japanese Gardens in Santiago, Chile, on July 31, 2014 Luis Hidalgo—AP

Shinzo Abe is desperate to rescue his failing economic program, but he still hasn't done what's necessary

Tokyo is abuzz with speculation that Prime Minister Shinzo Abe is about to dissolve the Diet, as the country’s legislature is known, and call a snap election.

He by no means has to take such action. It has only been two years since his Liberal Democratic Party, or LDP, swept to power in a massive landslide, and the opposition is in such disarray that there is little doubt Abe would be returned to office in a new election. Nevertheless, Abe apparently feels the need for another vote of confidence from the public, likely in part to bolster support for his radical program to revive Japan’s economy, nicknamed Abenomics.

The problem is that it could already be too late. Abenomics is a failure, and Abe isn’t likely to fix it, no matter how many seats his party holds in parliament.

When Abe first introduced Abenomics, many economists — most notably, Nobel laureate Paul Krugman — believed the unconventional program would finally end the economy’s two-decade slump. The plan: the Bank of Japan (BOJ), the country’s central bank, would churn out yen on a biblical scale to smash through the economy’s endemic and destructive cycle of deflation, while Abe’s government would pump up fiscal spending and implement long-overdue reforms to the structure of the economy. Advocates argued that Abenomics was just the sort of bold action to jump-start growth and fix a broken Japan, and we all had reason to hope that it would work. Japan is still the world’s third largest economy, and a revival there would add another much-needed pillar to hold up sagging global economic growth.

However, I had my concerns from the very beginning. In my view, Japan’s economy doesn’t grow because there is a lack of demand. Pumping more cash into the economy, therefore, will not restart growth. Only deep reform to raise the potential of the economy can do that — by improving productivity and unleashing new economic energies. Unless Abe changed the way Japan’s economy works — and I doubted he would — all of the largesse from the BOJ would at best come to nothing. In a worst-case scenario, Abe’s program could turn Japan into an even bigger economic mess than it already is.

So far, Abenomics has disappointed. GDP shrank a hope-dashing annualized 7.1% in the quarter ending June. Inflation, meanwhile, is nowhere near the BOJ target of 2%, and is slowing. Nor has Abenomics brought significant benefits to the general populace. Job creation and wage increases are sluggish and, with prices increases, the welfare of the average salaried worker has suffered. Meanwhile, an increase in consumption tax earlier this year — made necessary by the need to shore up the government’s shaky finances — further burdened Japanese households and led to a drastic decline in consumer spending.

The response of policymakers has been to double down on Abenomics. On Oct. 31, the BOJ surprised markets by greatly expanding its unorthodox stimulus program, known as quantitative easing, or QE. As part of that, the BOJ will increase its annual purchases of Japanese government bonds by 60% to a staggering $700 billion. More of the same, however, will just have the same result: a short-term boost to sentiment with little lasting effect. In fact, the program is only perpetuating Japan’s bad habits. The extra BOJ cash is weakening the yen — the Japanese currency has tumbled by nearly 7% against the dollar just since the bank’s announcement — which hands Japan Inc. companies more competitiveness without forcing them to undertake any actual improvements.

The problem with Abenomics, therefore, remains the same. More yen printed by the BOJ can’t fix Japan on its own, and can’t replace the fundamental changes necessary to raise the economy’s potential growth. If anything, the BOJ’s latest action only buys Abe a bit more time to implement his pledged reform program, known at the “third arrow” of Abenomics.

So far, though, the third arrow has remained in his quiver. In June, Abe unveiled the latest elements of the plan, which included everything from lowering the corporate-tax rate to spur investment, to enlisting more women into the male-dominated workforce, and bringing further change to an unproductive and outdated agricultural sector. It would be unfair to say that Abe has made no progress on his promises. The number of working women, for instance, has been on the rise under his administration. But many important reforms remain stalled. Abe had announced the formation of “special economic zones,” which would be crucibles of experimentation with the deep deregulation necessary to spark entrepreneurship and investment, but their implementation has crept along at a glacial pace. Serious reform of the country’s distorted labor market seems to have slipped off the table. Abe is also foot-dragging on opening the economy to more competition by holding up the completion of the U.S.-sponsored Trans-Pacific Partnership free-trade pact over an unwillingness to expose Japan’s overly protected farmers to imports.

The big question is whether another election will somehow lead to faster reform. In theory, a fresh mandate could give Abe the added political clout he needs to press ahead more boldly. However, Abe already controls both houses of the Diet, so if he wanted to move more quickly on reform, he could. That has left some analysts wondering what difference an election may make. “A snap election could have the virtue of giving the government a stronger mandate as it struggles to push ahead with structural reform,” commented Mark Williams and Marcel Thieliant of research outfit Capital Economics. But since Abe’s party has already been in a strong position, “an election would not make much practical difference to his ability to get things done.”

Abe continues to insist he is a reformer and will follow through on his grand pronouncements. “Make no mistake, Japan will emerge from economic contraction and advance into new fields and engage in fresh challenges,” Abe recently wrote in the Wall Street Journal. “There is no reason for alarm.”

Alarm bells should be ringing in Tokyo, however. Even if Abe gets the “third arrow” in the air, it could still miss its target. Many of the reforms Japan needs will take years to implement. Meanwhile, the other two arrows of Abenomics may already be running their course. There was opposition within the BOJ to its latest decision to boost QE — an indication that the bank can’t be counted upon to keep the printing presses rolling forever. Nor can Abe dodge the need to stabilize the government’s debt and deficits indefinitely. The government’s debt is 240% of the country’s GDP — the largest among major advanced economies. He’s right now weighing whether or not to hike the consumption tax yet again. Imposing it could deal another blow to growth; postponing it would undermine what little credibility Abe had as a fixer of the nation’s finances.

In the end, repairing Japan requires more political will than Abe has shown. Maybe a new election will help him find it. But don’t hold your breath.

TIME China

Why You Should Care About Obscure Asian Trade Pacts

U.S. President Barack Obama Visits China
U.S. President Barack Obama, left, shakes hands with Chinese President Xi Jinping after a joint press conference at the Great Hall of People in Beijing on Nov. 12, 2014 Feng Li—Getty Images

They will play an important role in determining America’s future in Asia

As the very name tells you, the Asia-Pacific Economic Cooperation (APEC) summit in Beijing this week was mostly about business. And for good reason. Cross-Pacific trade — especially between Asia and the U.S. — is what made countries like China, Japan and South Korea as rich as they are today. So all of the national leaders who attended — from U.S. President Barack Obama to Russian President Vladimir Putin to China’s President Xi Jinping — are incentivized to promote freer exchange between their economies, and as a result, much of the talk at the summit regarded pacts aimed at further reducing barriers to exports and imports.

But these days, trade has also become a tool of geopolitical strategy, and that, too, showed itself at APEC. Different Pacific powers are pushing for different trade deals. How that competition plays out in coming years will help shape the region’s political and economic future — and most of all, the role the U.S. may play in Asia for decades to come.

China’s Xi is promoting a regional pact called the Free Trade Area of the Asia Pacific (FTAAP), which would build on the many overlapping free-trade agreements in East Asia. On Tuesday, he said that APEC countries “should vigorously promote” the FTAAP and “turn the vision into reality as soon as possible.” China made a bit of progress on this agenda. In their official communiqué, the APEC leaders pledged “to kick off and advance the process in a comprehensive and systematic manner” and set up a committee to undertake a two-year study on forming the FTAAP.

Meanwhile, Washington is advocating a rival trade deal, the Trans-Pacific Partnership (TPP), a 12-nation agreement that includes countries as far-flung as Japan and Chile — but, most importantly, excludes China. The U.S. sees the TPP as a way of redirecting trade toward America, while pressuring China to eventually conform to more market-oriented trade and business practices. Obama on Monday said that he saw “momentum building” toward the completion of the TPP.

Which one of these trade deals comes to fruition will have major implications. That’s because trade flows translate into political muscle. For much of the modern history of Asia, the U.S. was at the center of a vast trading network in which factories around the region manufactured goods exported to American consumers. But the position of the U.S. has declined in recent years. Only 14.2% of Asia’s merchandise exports were shipped to the U.S. in 2013, down from 23.7% in 2000, according to the Asian Development Bank. Meanwhile, as China’s economy has grown into the world’s second largest, it has started to transplant the U.S. as the main trading partner for many Asian countries, and that shift has added to Beijing’s political clout in East Asia — at the expense of the U.S.

Beijing wants to keep that trend going, hence the push toward the FTAAP. The U.S. would rather have the TPP, as a way of maintaining its own influence in East Asia and countering rising Chinese power. Right now, the U.S. has the edge. The TPP talks may be dragging on (mainly due to Japanese resistance to opening its highly protected agriculture sector), but they are very advanced, while China’s pact is just inching off the ground. Though China won a minivictory getting its deal a green light at APEC at all, the nod is just the tip-off to what promises to be a long, arduous process — which may or may not go anywhere in the end.

Further complicating matters is the need for the U.S. and China to cooperate on trade with each other. The U.S. market is critical to Chinese economic growth — China exported more than $440 billion worth of stuff to America last year alone — while access to China’s expanding middle class is no less important for the future of many U.S. companies. That leaves Beijing and Washington in the odd position of both competing over and signing onto trade deals. On Monday, the two hammered out a long-awaited understanding to expand the number of products covered under another pact, the Information Technology Agreement, or ITA. This bilateral step could lead to a much bigger trade deal at the World Trade Organization that promises to reduce tariffs on a wider array of IT goods, potentially giving a big boost to U.S. tech outfits.

What that shows is how the U.S. and China, despite their geopolitical contest for dominance in East Asia, ultimately have no choice but to do business. Whatever trade deals eventually win the day — the TTP, the FTAAP and so on — the world’s two biggest economies may have to create a few more acronyms they can share.

TIME Economy

The Strength of the U.S. Dollar Reflects Global Economic Reality

A man stands next to a money changer in Colombo
A man stands next to a money changer in Colombo, Sri Lanka, on Feb. 29, 2012 Dinuka Liyanawatte—Reuters

All hail the almighty greenback!

Ever since the Wall Street financial crisis of 2008, predictions of the dollar’s demise have come fast and furious. As the U.S. economy sank into recession, so too did confidence that the greenback could maintain its long-held position as the world’s No.1 currency. In Beijing, Moscow and elsewhere, policymakers railed against the dollar-dominated global financial system as detrimental to world economic stability and vowed to find a replacement. Central bankers in the emerging world complained that the primacy of the dollar allowed American economic policy to send shock waves through the global economy that roil their own markets and currencies.

But here we are, six years after the crisis, and the dollar is showing just how resilient it actually is. The dollar index, which measures the greenback’s value vs. a basket of other currencies, has reached a four-year high. Those policymakers who bitterly criticize the dollar show little actual interest in dumping it. The amount of U.S. Treasury securities held by China stands at a whopping $1.27 trillion.

The newfound strength of the dollar makes perfect sense. Sure, the world economic landscape is changing, with new rising powers like China and India, whose currencies may one day rival the U.S. dollar. But the buoyancy of the greenback is a reflection of today’s reality: the U.S. is the lone, significant bright spot among the world’s major economies. GDP in the third quarter grew an annualized 3.5% — far higher than other industrialized economies. That’s why the Federal Reserve has wrapped up its long-running and highly unorthodox economic-stimulus program known as quantitative easing, or QE, which, by spilling a torrent of dollars into global financial markets, was one factor behind the currency’s weakness in recent years.

Meanwhile, most of America’s key trading partners are heading in the opposite direction. The European Central Bank (ECB) is widely expected to start its own QE program to try to combat potential deflation and jolt sagging growth in the euro zone. That’s why the euro’s value against the dollar has been sinking to levels last seen two years ago. If the ECB does act, downward pressure on Europe’s common currency will likely intensify.

Meanwhile, in Japan, the central bank on Oct. 31 surprised markets by greatly broadening its own monetary-expansion program in an attempt to rescue Prime Minister Shinzo Abe’s stumbling initiatives to revive the long-slumbering Japanese economy, nicknamed Abenomics. The yen tumbled to a seven-year low against the dollar as a result. Research firm Capital Economics predicts that the Bank of Japan’s (BOJ) action will help push the Japanese currency all the way down to 120 yen to the dollar by the end of 2015, from about 112 today.

The dollar has been gaining against some emerging-market currencies as well. Faced with slowing growth and the strain of economic sanctions, Russia’s ruble has been hitting repeated all-time lows against the dollar. Not even an interest-rate hike by Russia’s central bank on Friday has been able to stem the slide. On top of that, though that pressure has eased, the currencies of India, Indonesia and many other emerging economies still have not recovered their strength from when they tanked last year, after the Fed first signaled it was scaling back its stimulus activities.

How long can the good times roll for the U.S. dollar? That depends on many factors, from the future growth of U.S. GDP to the health of the global economy and upcoming Fed decisions on interest rates. Yet with central-bank policy in the most advanced economies sharply diverging — the Fed tightening, the ECB and BOJ loosening — the dollar could see continued gains. Some economists believe the conditions are in place for an extended period of dollar strength, perhaps lasting several years. “The building blocks are still in place for a sustained dollar rally,” analysts at financial giant Barclays concluded in a recent report.

The fact remains, too, that no other currency has emerged to truly rival the dollar as the world’s No.1 choice. The uncertain stability of the euro was exposed by its multiyear sovereign-debt crisis and the chaotic response to it from Europe’s leaders. And even though Beijing has high hopes to transform the Chinese currency, the yuan, into an international powerhouse, policymakers there have been extremely slow to introduce the financial reforms that would make that a real possibility.

Of course, there are still long-term factors at play that could knock away the pillars of dollar dominance. Russia and China, for instance, recently pledged to settle more trade between the two nations in rubles and yuan. But for now, the dollar reigns supreme, as well it should.

TIME China

The Chinese President’s Love Affair With Confucius Could Backfire on Him

China's Vice President Xi Jinping points at the bust of Confucius in China pavilion of Frankfurt book fair
Xi Jinping, now Chinese President, points at a bust of Confucius in the China pavilion of Frankfurt Book Fair he attended while still serving as Vice President on Oct. 13, 2009 Boris Roessler—Reuters

Xi Jinping is turning to China’s ancient philosopher to reshape the country’s political future. But that strategy is riskier than he seems to believe

Ever since China’s President, Xi Jinping, first began to claim the reins of power in Beijing nearly two years ago, China watchers have speculated on where he would take the budding superpower. Initially, it was widely held that Xi was more of a folksy, “man of the people” than his aloof and expressionless predecessor, Hu Jintao, and that he would be a bolder, more liberal reformer.

So far, though, those assumptions have proved off the mark. He has cracked down severely on social media and dissent, with the apparent aim of strengthening the Communist Party’s grip on society. On the economic front, he announced a sweeping program of liberalization, but hasn’t yet implemented it, and the hand of the state rests as heavily on business as before. That has left China analysts grasping at oracle bones to decipher Xi’s vision for China’s political future.

However, a picture of Xi’s agenda is beginning to emerge through the usual haze of secrecy surrounding communist leaders, and it features a man who lived 2,500 years ago: Confucius, the most influential of history’s Chinese philosophers. Simply, Xi is turning to China’s glorious past to provide an ideological foundation to his 21st century rule.

Though Xi has also invoked other figures from Chinese history — from philosophers of competing schools to more modern personalities like Mao Zedong — the President seems to take special interest in Confucianism. “Do not impose on others what you yourself do not desire,” he said in a September speech, quoting one of Confucius’s most-famous sayings. Earlier in the year, he extolled the wonders of benevolent rule in an address to party cadres with another, well-known passage from the Analects, the most authoritative text on Confucius’s teachings: “The rule of virtue can be compared to the polestar which commands the homage of the multitude of stars without leaving its place.” Last year, Xi, like so many Emperors of old, visited Qufu, Confucius’ hometown. During his tour, he pledged to read Confucian texts and praised the continuing value of Chinese traditional culture.

There is, of course, great irony here. For the first 30 years of communist rule in China, the party of Mao Zedong had tried to uproot Confucian influence from society, seeing the enduring legacy of Confucius as an impediment to socialism and modernization. During the tumultuous Cultural Revolution, launched by Mao in the mid-1960s, Red Guards rampaged through Qufu, smashing relics and defacing the old Confucian temple. In communist propaganda, Confucius was vilified as a feudal leftover responsible for the oppression of the common man.

Since the early days of reform in the 1980s, however, the party’s leaders have been (slowly) resurrecting Confucius and his ideas. Beijing’s successful program to introduce capitalism — or what it prefers to call “socialism with Chinese characteristics” — made the government’s Marxist rhetoric sound especially hollow, leaving the communists to return to Confucius instead.

The sage’s ideas about harmony and deference to authority, they believe, offer an authentic Chinese doctrine that can support the political status quo (and deflect Western ideals of liberal democracy). Much like the imperial emperors did for centuries on end, China’s new communist leaders are attempting to cloak themselves in Confucian principles to lend credibility to their tightfisted tendencies.

Xi seems to be taking this effort to a whole new level. He appears to be employing Confucius as part of a broader program to remake the Communist Party and realign the power structure within it.

For instance, Xi apparently believes a dose of Confucian morality will aid stamping out official graft. Over the past year, Xi has launched an aggressive campaign against government corruption, likely engineered to both eliminate political enemies and clean up an out-of-control bureaucracy that had lost the trust of the populace. A high-level Communist Party conference in October pledged to strengthen the independence of the judicial system to improve rule of law.

Confucius is part of Xi’s reform team. For 2,000 years, Confucius’s doctrine laid down the code of ethics for proper behavior in China — the way of the gentleman — and now Xi seems to be trying to recreate those Confucian standards through persistent exhortation.

Xi also apparently believes that Confucius can bolster his own standing in the country. Confucius’ ideal government was topped by a “sage-king” — a person who was so learned, benevolent and upright that his virtuous rule would bring peace and order to society and uplift the Chinese masses both spiritually and materially. Confucius made little progress in achieving this vision during his own lifetime. But Xi seems to be resurrecting the idea. Since becoming President, he has been whittling away at the government by committee that had prevailed for two decades, in the process centralizing more power in his hands than any communist leader since Mao. By combining one-man rule with the morality of Chinese antiquity, he appears to be painting himself up as some newfangled communist/Confucian sage-king — an all-commanding figure who will usher in a new epoch of prestige and prosperity.

But resurrecting Confucius remains a big risk. Confucius held his sage-king to the strictest principles of virtue and righteousness. The true sage-king was so benevolent that laws and jails would become unnecessary — the people would willingly follow his lead. By quoting and honoring Confucius, Xi is also potentially holding himself to the sage’s unobtainable moral precepts. Simply, the higher the Confucian pedestal on which Xi places himself, the farther he has to fall.

Nor does Xi seem willing to implement other aspects of Confucian government. Kings were not supposed to be autocrats in his teachings. Ministers and other officials were bound by duty to protest policies they considered misguided to keep the Emperor on the proper path. Government was not to tread heavily into the lives of ordinary people. Kings may have had ultimate authority, but not unlimited power. Xi, however, doesn’t appear interested in easing the repressive machinery of the state, nor accepting any challenges to or limitations on his authority.

It appears, then, that Xi really wants to create not sagely Confucian rule but “authoritarianism with Chinese characteristics.” Confucius, if he were alive today, would not approve.

— With reporting by Gu Yongqiang / Beijing

TIME China

Anyone Expecting a Rebound in Chinese Growth Won’t Like the New GDP Figures

Construction sites and vacant streets in Xiangluo Bay.
Construction sites and vacant streets in Tianjin, China. The new central business district, under construction in Tianjin, was touted as another Manhattan, but is now a ghost city. The nation's slowing economy is putting the project into jeopardy Zhang Peng—LightRocket/Getty Images

Say hello to China’s new normal

Those who remain hopeful about the future of the Chinese economy got some extra evidence to bolster their case today. On Tuesday, the government announced that GDP in the third quarter rose by a slightly better-than-expected 7.3%.

But don’t get too excited. That 7.3% is the slowest quarterly pace in five years — since the depths of the recession after the 2008 Wall Street financial crisis. And it was pushed higher likely by exports. In other words, external demand, not investment or consumption in the domestic economy.

There is really nothing surprising about these figures. This is China’s new normal. The double-digit pace the global business community has come to expect is very likely a thing of the past. More and more economists are predicting that China’s growth rates will continue to slow over time. The International Monetary Fund, for instance, sees growth dropping from 7.4% this year to 6.8% in 2016 and 6.3% in 2019.

There are too many factors at work slowing down the Chinese growth machine. First of all, no economy can grow 10% a year forever, not even China’s. The country is no longer the impoverished backwater it was in the early 1980s, when Beijing’s market reforms first sparked its growth miracle. It is now the second largest economy in the world, and the bigger China gets, the harder it becomes to post such large annual GDP increases. There are also structural forces at work. China’s population of more than 1.3 billion is aging rapidly, thanks in part to Beijing’s restrictive one-child policy, and that will act as a long-term drag on growth. The workforce is already shrinking.

The only question is: How slow will China go? The answer depends on how optimistic you are that China’s current leaders can fix the very serious problems plaguing the economy.

Aspects of the growth model that have driven China’s exceptional performance — state-directed investment, easy credit — have now come to spawn all sorts of new risks. Debt levels at Chinese companies have risen precipitously, money has been wasted on excess capacity and unnecessary construction, and bad loans at Chinese banks have been rising as a result. The economy is paying the price.

A big reason behind the country’s slowdown today is the deteriorating property market, brought low by irrational exuberance and excessive building. Official data shows that the amount of unsold real estate has doubled over the past two years, and that has caused prices to fall and investment in new developments to dry up. The central bank recently loosened restrictions on mortgage lending to boost sluggish demand, but most economists don’t expect such moves will stimulate a rebound anytime soon. There are even concerns that China is following a pattern similar to Japan’s when the latter Asian giant had its financial crisis in the early 1990s.

The long-term solution to these problems requires nothing less than overhauling the way in which the economy works. The country’s leaders realize this, too, and have pledged to undertake a thorough reshaping of the economy to give the private sector more influence. Policymakers intend to make the economy more market-oriented by liberalizing finance and capital flows and withdrawing the control of the state. Such steps would probably lead to enhanced productivity, better allocation of finance and stronger innovation — all things China needs badly as its costs rise with its wealth.

So far, though, there has been little progress. A free-trade zone in Shanghai, launched a year ago to experiment with freer capital flows in and out of the country, has never got off the ground. A series of investigations into the business practices of multinationals operating in China has raised questions about Beijing’s willingness to open up the economy further to foreign competition.

Of course, the liberalization Beijing has promised will take a long time to implement. But if the effort doesn’t progress, growth will likely suffer. The Conference Board in a recent report predicted that growth would slow to 4% a year after 2020, in part because its economists believe China’s leaders won’t go far enough in reforming the economy.

What this all means for businessmen and investors around the world is that China may not play the same role in upholding global growth in coming years as it has in the past. The new normal may not lift the gloomy spirits dominating global markets these days, either. But we’ll all have to get used to it.

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