China: Perspective in 2015 – What (Not) to Look Forward to in 2015
According to the Chinese horoscope 2015 will be under the sign of Sheep (Goat) a symbol of Peace, Harmonious co-existence and Tranquility, but given the last year’s tensions on the international scene, 2015 is shaped to be a year of conflict.
Considering the actual distribution of economic, political and military power in the global system, China’s positioning in the world politics is undoubtedly a hegemonic one. From the economical point of view, this year may be a critical point in China’s transition from being the “workshop of the world” into an economy based more on domestic demand. China is the second largest economy in the world and the United States’ second-largest export destination, so both its challenges and opportunities are related to its potential and vulnerabilities as well.
The opportunities are the classical ones, provided by the fact that the policymakers can take comfort from an improving external environment, which will benefit exports, easy global financial conditions, and lower commodity prices.
On the other hand, a lot of challenges can be foreseen for 2015. China is a major importer of raw materials, so a slowdown in 2015 would continue to harm resource-rich nations in Asia, Latin America, and Africa. Chinese authorities are likely to try to help specific sectors like agriculture and small and midsize enterprises, but “their levers are becoming less effective,” according to Andrew Polk, resident economist at the Conference Board China Center for Economics and Business in Beijing. “The downward pressure on the economy is too powerful to be offset by slight policy adjustments.” Chinese banking being non-transparent, overly subject to blundering central control, and deeply corrupt, may not bode well for those measures. However, China has many cushions to fall back on short-term in the form of foreign money reserves and stockpiles of raw materials. But sooner or later they have to reckon with their dependence on continued oil imports. That is clearly the basis of China’s current relations with Russia — but with Russia arguably past its own oil production peak, that’s not a long-term strategy.
A disorderly slowdown will disrupt the financial system, perhaps causing damage to domestic banks, property prices to crash and manufacturing to slow. In turn, this will impact China’s domestic employment and wages, and global trade and financial linkages. China’s political leaders should understand the stringent need for further structural reforms, otherwise China will continue its “soft fall”, if government stimuli will not be effective and monetary policy will become tighter.
Another burning issue to be followed in 2015 is China’s approach to South China Sea. If the economical tendencies for 2015 can be predicted according to the evolutions from the previous years, given the unexpected evolutions we have witnessed in the South China Sea in the past few years, it is almost impossible to make accurate predictions about what we can expect this year. Moreover, there have been many discussions over the past few months among the chattering classes about whether we are likely to see a change in China’s approach to the South China Sea in 2015, and the implications that would have for Southeast Asia and beyond.
A first assumption may refer to a change of Beijing tactics that can try to cool things down. At the recently concluded Central Work Conference on Foreign Relations in December 2014, Chinese leaders confirmed their decision “to focus more on solidifying ties with countries in the neighborhood than with other major powers”. This may come as a result of the fact that Beijing has recognized that its provocative behavior in the South China Sea led to a deterioration of relations with neighboring countries. In response, China may re-design its foreign policy to improve its relationships. This could potentially include reducing tensions in the South China Sea in 2015. It may be an important step to improve the relations with some ASEAN countries as well as leave some time for its “win-win” economic initiatives, like the Asian Infrastructure Investment Bank and the 21st Century Maritime Silk Road.
A new important step has been done by China when it has declared 2015 “the year of ASEAN-China maritime cooperation.” The Premier Li Keqiang said in November 2014 that China would use 2015 to implement projects under the China-ASEAN Maritime Cooperation Fund, which Beijing initially set up in 2012. In this respect, China developed a comprehensive plan for utilizing the ASEAN-China Maritime Cooperation Fund to provide financial support for their “cooperation in the areas of maritime connectivity, marine science and technology, as well as maritime scientific research, search and rescue, disaster management and navigation safety.”
These projects are tied to the declaration of the code of conduct (DoC) on the South China Sea with ASEAN, and this declaration may have a strong influence on the further developments. The ASEAN reaffirmed its commitment to the full and effective implementation of the Declaration on the Conduct of Parties in the South China Sea in its entirety as well as to work towards the early conclusion of a Code of Conduct (COC) in the South China Sea. Advancing them would enable Beijing to affirm that it is, in fact, sincere about implementing the DoC, even if it continues to delay the negotiations on a more binding code of conduct (CoC). While ASEAN countries would prefer the CoC to be concluded as soon as possible, some, like Malaysia, have also welcomed China’s efforts to implement the DoC through specific projects although such a progress is hard to be made.
Even if we take into consideration the possibility that China is actually serious about initially trying to cool things down in the South China Sea in 2015, developments on the water during the year could also push Beijing toward a more assertive approach, either a reactive or a proactive one. For example, it will be interesting to see how Beijing and other claimants respond to the arbitration tribunal’s decision on the Philippines’ case against China, which may probably be sorted out by the end of 2015.
Although China might choose to focus more on its neighborhood rather than on major powers, it cannot underestimate America’s role in the South China Sea and its potential impact on Beijing’s approaches. The Obama administration is still committed to working with China where possible, as the climate and military deals late last year illustrated.
The agreements and partnerships signed in 2014 suggests that Washington is wading more deeply into the South China Sea issue, by signing the Enhanced Defense Cooperation Agreement with the Philippines, easing an arms embargo on Vietnam, signing a comprehensive partnership with Malaysia which involves cooperation on maritime security, and publishing a study on the nine-dash line through the State Department.
As the United States becomes more involved in the South China Sea issue, and considering that the presidential elections in 2016 are closer, there is an enhanced chance of Beijing reacting adversely to U.S. actions or proactively testing the Obama administration’s type of reaction.
Considering the aspects mentioned above, 2015 will be a key year for regional economic integration and irrespective of whether China adjusts its approach, we are likely in for yet another effervescent year on the South China Sea issue.