NEW YORK – Asia Society
23 September 2015
KEVIN RUDD: Good afternoon everybody, it’s a full house here at the Asia Society today. Welcome one and all. I’m Kevin Rudd, President of the Asia Society Policy Institute. Josette Sheeran is here too, President of the Asia Society – thank you to Josette. We have many others here from our Asia Society family, including patrons and members. Next to me is seated Lulu Wang, whose birthday it is tomorrow – see we research these things very carefully Lulu. Also I see we have our trustees, Denise and Andrew Saul, lovely to have you with us. Also, I notice we have with us honorary life trustees, Cynthia Polsky, as well as Trustee Emerita, Gina Lin Chu. For all of the others who are here representing our great institution, who have been part of the building blocks of the Asia Society over the decades, welcome one and all. For those of who support our work here in the United States, across the United States and across the various countries of Asia. I’ll also acknowledge the presence of our good friend, the Consul-General of France, Bertrand, good to have you here as well as other members of the diplomatic community. I’d also like to welcome Kiran Mazumdar-Shaw, Managing Director of Biocon from Bangalore in India – good to have you with us today. I’m pleased to say we also, as the Asia Society Policy Institute, been doing a lot of work in India of late. Particularly, a policy taskforce we have launched with the Indian Chamber of Commerce on how do we get India into APEC.
But that’s not the subject today, the subject today is something completely different and something very near and dear to the hearts of many folk in this room. On a day like this you wouldn’t want to be in any other country but America. Here we have Pope Francis the leader of 1.3 billion Catholics, Xi Jinping the leader of 1.3 billion and a bit Chinese all visiting a country that remains the world’s only superpower. These three leaders all are pursuing different but I would say intersecting missions for humanity. It is a truly remarkable thing that they are all in town this week. In fact, to hear both Pope Francis and President Xi Jinping within twelve hours of each other quoting Martin Luther King I found a remarkable cultural experience. So, with the great Dr King he inspires us all. Today we are talking about, of course, the upcoming summit between President Xi Jinping and President Obama within the broad framework of US-China relations. This is a subject near and dear to my heart, I spent most of last year here in the United States with my colleagues at the Harvard Kennedy School, working on a paper we released here and elsewhere in America a few months ago called ‘Alternative Futures for US-China Relations’.
This is a subject not only relevant to Americans, not only relevant to the citizens of China but relevant to citizens of the world because the shape of our future regional order, the shape of our future global order in politics and security and business and the economy, but in all other domains including climate change as well, the future of the order will be shaped very much by the future of this relationship. Therefore, as citizens of the world we have a deep interest in how it is prosecuted. That is why this visit is important and this third summit, since the Sunnylands Summit of two years ago, is particularly important. As someone who has observed this relationship in one form or another, in one capacity or another over the last 35 years since I first began studying China and Chinese. These three working summits – Sunnylands in 2013, the Yintai Summit in Beijing last year and now the summit that will occur on the back of the bilateral in Washington in a few days time – occur a critical time when China’s rise both as an economic power and increasingly as political power and prospectively in terms of its military capabilities, makes the dynamics of this relationship different than they have been for decades previously at any point in their history.
It is wrong to say that the two countries approach parity in one category or another but I would say that the capacity for both these great powers to exercise great influence in the region and in the world and on the order and the rules which make up the global system is indeed profound. And if that relationship is prosecuted peacefully and with stability and with mutual then I think so much of the future of our planet can rest secure. If, however, it is derailed by one level of conflicting interests or one set of conflicting values or through the accidents of history – in other words, incidents and events which result escalation rather than intelligent and mature management – then the reverse narrative is always available to us in history. It is a sober reminder that how we shape our future lies in these hands, it is not determined by the gods above, there is no neutral determinist force out there shaping the future of US-China relations – it is very much in the hands of these two leaders and those of us in other parts of the world in shaping the future of this and broader relationships in the international community.
We have today a great panel who are here to assist us in this task. My job is to extract their insights rather than provide you with a homily of my own. We have with Evan Medeiros – I’ll ask Evan to the stage soon – Evan has a recently been named Managing Director and acts as Head of the Eurasia Group here in New York. Evan has served as a member of the White House’s National Security Council for the last six years or more. His last role in the Council was as Senior Director for Asian Affairs – in other words, President Obama’s top adviser on Asia policy including China. I’ve know Evan very well over a long period of time, he is a Sinophile and that is, he understands Chinese, he understands the culture and has, therefore, worked closely on the nuts and bolts as well as the long term future direction of the US-China relationship for his last several years. I couldn’t think of a better person to have with us today, welcome Evan.
Joining him is Dan Rosen. Dan Rosen, Founding Partner of the Rhodium Group and leader of that firm’s work on China. Dan is an astute analyst of the Chinese economy, experienced policy practitioner as well and while Adviser of Economic Policy at the Whitehouse National Economic Council and National Security Council. Dan also worked with China’s accession to the WTO. Last year he authored a landmark report for the Asia Society Policy Institute on China’s economic reform program and has served here as a Jack Wadsworth Fellow. As I invite these tow gentlemen to the stage could I ask you all to turn off your various listening devices, telephones and alternative technologies as we enter into a session where we will have a conversation among us for the next half hour or so and then after that I will throw the floor open to all of you.
One remark as we begin is, having just read the text of President Xi Jinping’s speech delivered in Seattle, it’s quite a remarkable speech. At a personal level we have a Chinese President who I think for the first time in history admitted to being a fan of Cuban mohitos. He said that when he went to Cuba he dropped by to see Hemingway’s bar and his favourite rum and mint on the rocks mohito. So I think this is a new insight into the drinking habits of Chinese leaders. He also, remarkably, lists his readings in terms of the Western literary and historical tradition. Confessing his admiration for Hamilton’s federalist papers, Thomas Paine’s common sense, biographies of Lincoln, Franklin, Roosevelt as well the literary works of Thoreau, Whitman, Twain and Jack London. As well as Hemingway’s ‘Old Man and the Sea’ where he thought long and hard about sharks. We in Australia think about that everyday. But I think in the tonality of the President’s speech as I’ve read it for the first time, is that it actually reflects a conciliatory embrace of the American people and its tradition.
These remarks are not simply made idly – addresses by Chinese Presidents are well crafted over a long period of time. Beyond the tonality of the speech, if you then go to its structure, the first half of it essentially goes through America’s list of concerns with the Chinese economy one after the after and seeks to give a response to each of these concerns. He then does the same in terms of the national security agenda between the United States and China as well and goes through those one after another and gives his response. Not all of those responses will either satisfy the national security policy establishment in the United States or the business community. But what I find remarkable about this speech is – rather than what we’ve often seen from Chinese political leaders in the past who often preferred to speak in lofty generalities about the world as it might be in a utopian future full of peace, development and enlightenment – this is very much a nuts and bolts speech about things that are irritating the relationship and he’s demonstrating to the people of America that he understands that, he’s demonstrating to the people of America that he believes it is necessary to respond to those concerns. That’s why I chose deliberately the word before, it strikes me than in tonality and in content as remarkably embracing and conciliatory address. Does it solve all policy problems on the agenda between the two countries? Of course not. Does it represent putting out a hand of embrace towards the American people on day one of the visit? I think so. But we’ll hear more of that soon from a gentleman who’s been working long term on this visit, one Evan Medeiros.
Let me just throw this to you as a question, and you take it as you see fit. Evan, you’ve had great experience on the relationship, the vist has now come. If you are looking at it now as an utterly impartial external observer as you are. What do you think from both sides – Beijing’s perspective and Washington’s perspective – might be the barometers of success of otherwise and, more broadly, give us your insights as to where you think strategically this relationship is going.
MEDEIROS: Let me begin by thanking the Asia Society, Kevin and Josette for inviting me here today. As a long time friend of the Asia Society I’ve always benefitted from publications and events and I’ve had the good fortune of speaking at the Asia Society’s facility in Hong Kong just last week, which is just exceptional both in terms of architecture as well as location so I encourage all of you to visit it in Hong Kong. It is a very special place.
So the US-China relationship. Kevin, those are great questions and ones that I’ve been thinking about for the last week. When I reflect on the summit and the US-China relationship, one question comes to mind and it’s a question I constantly got asked when I was in government and subsequent. That is, is the US-China relationship at a strategic cross-roads? My answer is always the same – yes, and it always will be. In other words, this is a big complicated relationship that defies easy explanations. It’s a relationship where there are areas of cooperation, areas of competition. Those areas of cooperation and competition cut across each other in all aspects of the US-China relationship – foreign policy issues, military and security issues, economic issues. The ability of both governments to manage that complex relationship is in part a function of domestic politics, which varies in both countries.
So when I think about the summit, I think first and foremost that it’s important not to try and put it in the box of success or failure. The US-China relationship is too important and too complex for it to be subject to a pass-fail test and that’s why I thought Kevin’s comments at the beginning were so important. About the need to, essentially, ensure that there is real leadership constantly at the top and creativity to avoid the trap of inevitable rivalry. Whenever I talk to friends in the media, in particular, who are predisposed to say, “Thumbs up or thumbs down? How did the visit go?” It’s going to be far more complicated than that. While I know that there’s been a lot of attention, especially in the media in recent weeks about all the big challenges in the US-China relationship – South China Sea, cybersecurity, the future of Chinese economic reform and the Renminbi exchange rate et cetera, the US-China military relationship – I think it’s going to be important to use a moment like this, to use a summit, to take a step back and reflect on exactly where we are as the US and China confront this difficult agenda.
A point that I think is very important to bring forward is that we’re in year seven of the Obama Administration, not year one of the Obama Administration. As a result I believe that there are some important unique structural strengths to the relationship that are too often forgotten but will come to the fore when Xi Jinping arrives in Washington and people see the breadth and the depth of the conversations and the work that gets done. What are those structural strengths? Number one, I think that there is a strong political foundation to China policy in the United States and American policy in China. In other words, because we’ve been dealing with each other for seven years Obama knows and understands the China challenge very clearly and he’s adopted a smart, strategic, consistent approach to China. I understand that that is a fully biased statement as someone who built the strategy beginning in 2009.
RUDD: In Australia we call that fair comment.
MEDEIROS: There is a strong policy foundation but also political foundation in the sense that the leaders at the very top are deeply invested in this relationship. There is no question to Obama that the US-China relationship require his time and attention and he has a sense of the tools and the toolkit available to do that. By contrast I wouldn’t say the US-Russia relationship would fall into that same basket. So there’s a strong policy foundation and political commitment at the top.
Number two, the channels of communication between the United States and China, as of 2015, are broader and deeper than they ever have been before. I mean China policy in the United States and the US-China relationship is sort of a V6 engine. That doesn’t mean there aren’t problems, that doesn’t mean there aren’t difficulties. But there are more and better channels to communicate and to address these then ever before. I’ll share with you my favourite factoid: Barack Obama has met the Chinese President more times than any other President in the history of the US-China relationship since 1979. That’s not an analytic judgement that is a mathematical fact. I’ll share with you another mathematical fact, that is after he meets with Xi on this state visit Obama will met with his Chinese counterpart (Hu Jintao and then Xi Jinping) more time in his period to date than any President combined preceding him. More times between 2009 and 2015 than 1979 to 2009. Just to give you a sense of the depth of the commitment on the part of the administration on the important attention that has been paid to managing the US-China relationship.
In part we built this strategy at the beginning based on an understanding that the US-China relationship works best top-down, especially on the Chinese side. But there are other important channels as well, the strategic and economic dialogue – I can remember early on in the Obama Administration, those phone calls and that channel between Tim Geithner and Wang Qishan were critical, absolutely critical, in 2009 and 2010 in managing through the Global Financial Crisis. We built other important channels between Kurt Campbell and his Chinese counterpart, Jim Steinberg and his Chinese counterpart. All based on the recognition that there was a big broad relationship and we had to make sure that the President’s top advisers – cabinet members, subcabinet members – were talking with the Chinese in the right way about the right issues at the right times. So channels of communication are important.
Then a third structural strength of the relationship is simply the fact that there is, because we are in year seven, we’ve built up a strong track record. We’ve done a lot of difficult things, we’ve worked through hard issues. That builds up a level of confidence that there is resilience in the US-China relationship. People forget the Obama Administration has sold arms to Taiwan a few times, the President has met the Dalai Lama, we’ve imposed sanctions on China before. These are all difficult issues. The fact that we were able to work through those issues, just like in a personal relationship, often time you end up stronger on the backside. In addition to working through the hard issues, we’ve also cooperated in important ways – whether it is on Iran’s nuclear program, North Korea’s nuclear program, responding to the Global Financial Crisis and the critical role that China played in the G20 process, or most recently the climate change deal we negotiated. There are subregional issues – Sudan and Afghanistan, where the Chinese really stepped up as they understood that their economic and their security interests were at stake.
This is a relationship in which, over the last seven years the track record demonstrates that we can do real things and when the United States has to take the actions necessary to protect American security and economic interests, we can work through those. That’s contributed to a high degree of clarity, consistency and predictability that have lead us to the point we are today in which Obama and Xi Jinping are not meeting for the first time, this is actually the fifth time they would have met (that counts the time they met when Xi Jinping came here visiting Washington as Vice-President). These are two leaders who know each other, they’ve spent tens of hours together. There is a very constructive rapport. Obama doesn’t pull punches and Xi Jinping doesn’t pull punches. There is a real meaningful exchange and I know because I’ve been there, I’ve been in the room for every one of these meetings. You’d be very proud of your President in the way he’s able to address both the issues of the day but also, as Kevin said, address some on the longer term issues. Questions of to what extent China is committed to the international order? Does China agree with the US’ liberal internationalist approach to international relations? The US investment in rules, norms and institutions as a way to structure international economic and international security affairs? We can have those conversations with China now and that is new, and it’s different and it’s important. That’s one of the most important reasons why these state visits are critical.
To get back to your question, Kevin, what should we look for in the state visit? Well first and foremost, the most important part of the visit but the part that is least seen – and I understand that it’s very unsatisfying to the public – is the extended conversations between the two leaders. Because you simply cannot replace the significance and the value of Obama and Xi spending hours together talking and working through these issues. I was at Yintai last Fall when Obama and Xi had nearly four hours of dinner conversation that was extraordinarily broad reaching – from the tactical to the strategic, Obama’s vision for America, Xi’s vision for China et cetera. That is essential to the effective management of such a complicated relationship.
But a second thing to look for is what agreements are reached. I think it’s always important to demonstrate a few deliverables. In other words, a public demonstration that we are able to make progress on hard issues and where our interests overlap we can gradually grow cooperation over time. One of the areas that I think is under-appreciated is, under Xi Jinping, the US-China military to military relationship – which lagged far behind the other aspects of the relationship, a part of the relationship that if poorly managed and underdeveloped has the possibility to destabilise everything else – there’s been gradual important progress. In particular, confidence building measures related to how our ships and planes would interact. Preventing accidents in the military relationship is critical, it bounds the competitive aspects of the relationship. The ability for some important deliverables, including in the ‘mil-mil’ area will be significant.
A third issue to watch out for is, what are the two leaders saying publically? We heard from Xi Jinping in a speech yesterday and I thought Kevin did an excellent job highlighting how engaging Xi Jinping was and it was sort of beyond the lofty tactics of Marxist-Leninism speeches. Let’s see what the two leaders say because what they say at the press conference is signalling to audiences in China and audiences in the United States. Xi Jinping has already said some very interesting things in his speech today. In particular, that the President of China now acknowledges that there is a distinction, a hard and fast distinction, between cyber activities for national security and cyber activities for economic espionage and that the latter is unacceptable, China is not going to engage in it and China’s going to prosecute anybody who does. As somebody who has spent hours and hours and hours in meetings with Chinese leaders trying to work on this very issue, the fact that you have the President of China in a speech in the United States to the American business community not only acknowledging that there is a legitimate distinction and as a result an emerging norm against using cyber activities for commercial advantage and economic espionage, and that’s China’s going to use its laws to prosecute it – that’s significant. A threshold has been crossed and that’s the result of persistent diplomacy through these multiple channels that I’ve talked about. Why don’t I stop there and turn over to the General Secretary?
RUDD: Thank you very much. By the way, to be Prime Minister of Australia you don’t have to be General Secretary of the Labour Party. I just wish to clarify that! That was fascinating, and you’re right to actually correct my question from the outset which was success-fail, pass-fail. Because this relationship is now of such an order of magnitude and of such complexity that in fact it requires a whole different set of measures and metrics to evaluate its progress. In terms of the strategic significance of conversations between two leaders of the two largest economies in the world and the two largest militaries in the world, that is an important step forward. We didn’t have that level of, frankly, relatively regular strategic exchanges prior to the beginning of these working level summits two years ago. Then on the specifics, you’re right, the language when you read through this speech on cyber is qualitatively different. In fact, the language on a number of the specific issues on the visit as he anticipates, Xi Jinping that is, the questions he is going to be asked in America, are in part – not in whole – of a different quality.
But before we dig down deeper into the entrails of Xi Jinping’s speech last night and what we might expect specifically and strategically from the speech, let’s go to the economy. Because nothing occurs in politics in a vacuum, there is something called the economy and something called the Chinese economy. Very much the elephant in the room in many conversations occurring around the world today. We have all seen our television screens come alive with depressed looking investors sitting on the floor of the Shanghai Stock Exchange, we have seen also, I think, a high degree of hyperbole in response to China’s relatively modest devaluation of 3 per cent of the Renminbi in the middle of August, particularly against devaluations which have occurred elsewhere. Both those two factors, the underlying question of the overall strength of China’s economic performance and growth both now and into the medium term is probably what animates the concerns about these, shall I say, external manifestations in the stock exchange and the currency markets. Dan’s been looking at questions of the economy for a long time – he has done some great work with us at the Asia Society in the past. Over to you, my friend, on growth now, projections, the reform program – on track, off track? And tell us whether we should be concerned about stock markets and currency markets?
ROSEN: Thank you Kevin, I think you’ve got it exactly right. Probably the most portentous issue hanging over the summit at the moment are some very fundamental questions about China’s economic state of affairs today and that is certainly the ballast in the larger relationship and has been for many years in very important ways. Evan noted that in our times China’s disposition in regards to new norms, new questions in the international economic sphere, let alone the bilateral axis are super critical and we have to be hopeful when we see China ready to engage in a discussion about how to shape the international economy in the years going forward because that’s one of those things that did scare the socks off us. The thought that we might still be in an ideological struggle over something so basic as whether a market economy should be the prevailing norm that we and our children organize their careers around. The willingness of China, the behaviour of China in engaging with us – the incumbent economic leaders – on how to reshape, strengthen, adjust or what have you those international economic norms is going to be something of a contest of ideas. The Chinese way of viewing what is optimal is going to be different to ours for self-interested reasons and perhaps for a different way of seeing what’s best for markets to function. The American point of view is not the only one in the world, even among the OECD we have differences of opinion, not surprisingly China has a difference of opinion.
We will be negotiating with one another and there will be at the end of the day a balance sheet for who moved the needle a little bit more in their preferred direction. The way that sort of engagement works between an incumbent power and the rising power is going to be informed by both the fundamental strength of the two economies – how much dynamism and momentum America has as an economy, and how much dynamism and momentum China has with its economic juggernaut going through really important changes right now. The fundamentals matter but also the perceptions matter. Xi Jinping arrived yesterday in the United States and he indicated what his message would be in interviews last week with the Wall Street Journal with a lot of confidence about the state of China’s economic fundamentals. That’s his message today, “We’re in a position of strength, of course we have challenges to manage but really everyone must acknowledge that the odds are in favour of China outperforming an America muddling through going forward.”
That’s very important to handicapping and looking to what the conversation is going to look like and feel like when the leaders of these two countries get together and talk about modifying business as usual in the bilateral relationship and the global economy. I think what stand out thought at the moment is that there are questions of confidence arising about the Chinese side of that equation today. Questions that are natural just given the enormity of the economic transformation that China has already acknowledged needing to make. The Third Plenum which Kevin mentioned, exhausted an analysis here in avoiding the blind alley at ASPI, that was a given. That even if they get everything right, this is a high degree of difficulty transformation that Xi Jinping has to oversee. Then add to that the short term questions of confidence and competence that arise from this past Summer where in trying to make steps forward on a couple of the important planks of that transformation Beijing really did stumble quite badly in terms of its understanding of what it means to optimise capital markets. It turns out they don’t have a clue. They’re not alone there. Everybody in the world who tried to catch that falling knife has messed it up and embarrassed themselves.
But I think we gave President Xi and his colleagues a little bit more credit than, frankly, they deserve in terms of their readiness to manage that process. So we’ve got the capital markets problems, we have how the modest devaluation was managed. The policy itself was an excellent one and a terrific step, but the way it was delivered, implemented and communicated was surprisingly ham-fisted in my view. So we have these questions out there. Has President Xi addressed them adequately? In his remarks last night, I was in the room in Seattle – took the red-eye back at Kevin’s request to be part of this today so I’m a little sleepy. President Xi masterfully answered the top-level question. He said, “Our reform and opening will be continuous, it is on track and there is no turning back from it – once you launch an arrow it must take its course, you can’t recall it.” In the highest level he is doubling down on this movement forward towards reform away from the past and toward the future. In the specifics though, on the economic side, we get into a more complicated debated that is going to take us into some of the details in the speech last night, some of what he has and has not dealt with publically.
The President has not said a single thing about the equities market since June. He simply has not addressed the seriousness of China’s equity markets meltdown in a public forum. Privately last week I had a chance to hear him say the following which really impressed, “China’s equity market problems and its growth concerns really are quite serious, they are in part a result of efforts to maintain China’s growth through stimulus.” That was a way of him saying, “I know that that’s not the way forward and I can’t stimulate my way out of this.” That’s the kind of stuff I love to hear, I can make a lot out of that. I can make a pretty good silk purse out of that ear (or whatever it is) and say, “Okay, that’s distancing himself from the past practice of letting the leash off the property sector every time you run into some headwinds.”
On the other hand, final thought for another ten seconds, in the week that’s passed Ambassador Xway and a number of other Chinese officials have talked up expectations about things like a bilateral investment treaty. Last night in his speech President Xi afforded it five words, “We should conclude a bilateral investment treaty as soon as possible.” That’s it. Some people will have been greatly disappointed that he didn’t give it a little bit more jawbone in terms of expectations for what could be achieved this Friday. Let me stop there and we’ll see where it goes.
RUDD: Let me just drill a little into the economy on those three top line point: growth now; secondly, the stock market; and thirdly the depreciation. Growth now, if I read Xi Jinping’s speech carefully, he is confident that 7 per cent is going to be sustained. You go to China and you speak to people privately around the country, there is a much wider debate about where the rate is and whether in fact further measures are necessary at the policy level to keep it at what’s defined internally as the social stability minimum of 6 per cent. So a quick one to you is, on the current growth challenge – that is, in calendar year ’15 and ’16 – what are the policy measures beyond the monetary policy easing that they’ve undertaken that you think they could do?
ROSEN: I think given where we were coming into June at performance year to date about 6.8 per cent, a little under 7 per cent. Looking at how much of this year’s GDP was coming off the back of the securities brokering sector and the fact that all of that growth in the financial services industry has gone to zero as a result of the markets essentially being shut down, I mathematically don’t see how it’s really possible to declare 7 per cent for this year. At the same time as I’m concerned about, I’m impressed that they haven’t thrown the kitchen sink in terms of stimulus in trying to make that number. The one thing the President and his colleagues have been talking about is there remains gaps in infrastructure in China. They still talk about high speed rail, they talk about highways and both the Premier and now the President have really underscored drainage systems and sewers in all of China’s urban places. That doesn’t sound very presidential but the reality is the country could use another trillion bucks in sewers.
RUDD: I’m the Chairman of on the UN’s foundations for sanitation and sewerage and water management. This is important stuff.
ROSEN: This is important stuff. So that’s 2015 – it’s a couple of stop gap measures and whether they can credibly say 7 per cent, is possible. 2016 and beyond we start to get into a conversation about One Belt One Road and soaking up China’s overcapacity by seeding demand with hundreds and hundreds of billions of dollars of Chinese credit for economic exports and we can get into that maybe in a separate line.
RUDD: Do you don’t see a further fiscal measure to plug a growth gap in the last 12 to 18 months?
ROSEN: Of course there are lots of little tweaks to fiscal that are being employed at every turn, especially since June-July. But I think it’s important to note, the most strategic message in terms of the strategy going forward from the President as well it’s that that’s not going to get us out of our dead end. That in fact is what is causing the current problems in growth – that we’ve got such a volatile investment cycle because we’ve turned to that solution too often in the past.
RUDD: On the stockmarket what we says is, and I quote him from last night, it is the first time Xi Jinping has addressed what the rest of us have been looking at on our screens for the last couple of months. Quote, “Recent ups and downs in China’s stockmarket have caused wide concern. Stock prices fluctuating in accord with inherent laws is the duty of the government.” Sorry this is a rough translation. “It is the government’s duty to ensure a fair and just market and to prevent massive panic from happening.” In other words, what he identified was the beginnings of mass panic. “This time the Chinese government took steps to stabilize the market and contain the panic in the stockmarket and thus avoided systemic risk. Mature markets in various countries have tried similar approaches. Now China’s stockmarket has reached the phase of self-recovery and self-adjustment.” I’m interested in the last sentence, what do you think that means?
ROSEN: Very succinctly on this, the President is justifying the steps that China took to deal with the correction once it had begun. But to my initial point, that the President is not truly being confident in that he’s not acknowledging the errors that happened on the way up. What a truly confident President would have said was, “The government of the People’s Republic of China caused this bubble, brought it to its peak and then is asking for credit for the steps its taken to manage the correction on the way down.” But what is needed is an acknowledgement that we were part of the problem. We misunderstood the nature of capital markets and we’re the ones who bubbled them up so much by suggesting to people that the government was going to protect this bull market.
RUDD: The nature of the Chinese political system, the day to day management of the economy including regulation of markets doesn’t lie in the President’s office. It lies in the State Council, under Premier Li Keqiang. It raises an interesting question about the extent to which the President was involved directly on the stockmarket question, both on the way up and the intervening intervention on the way down. But leave that for a moment. On the exchange rate, what I found quite interesting – Evan pointed before to a new statement from the Chinese President on cybersecurity – on the exchange rate I think this is also an interesting statement from the President. He says, “Given the economic and financial situation at home and abroad there is no basis for continuous depreciation of the RMB. We will stick to the purpose of our reform to have the exchange rate decided by market supply and demand and to allow the RMB to float both ways. We are against competitive depreciation or a currency war. We will not lower the RMB exchange rate to boost exports.” These are remarkably definitive statements from a President on the question of a the future of the currency. Your thoughts on that one?
ROSEN: In general what we’ve heard over the past several months is an atmosphere of great uncertainty and doubt about where China intended to go with its currency policy. Beijing has espoused a strong Renminbi policy. The same way the US Treasury had a strong dollar policy for decades upon decades. The general posture of Beijing is going to be not to be transistor salesmen and try to export their way out of their growth problems, but to maintain a strong currency that is concordant with China’s geo-economic ambitions globally. That means, therefore, that creating the reason not to move out of Renminbi into dollars in the years ahead, China really has to double down and impress us with its domestic, internal economic reform. They have to create the market case to be long Renminbi. If they’re not going to set the Renminbi value by fiat in the way they have in the past – and, by the way, the way they’re still doing today. They are not yet really letting the market really determine where that rate is.
RUDD: Finally, this goes to both, a quick comment on you and back to Evan because its at the heart of the bilateral visit and the economic elephant in the room, is because of these recent challenges – most specifically in equities markets but prior to that a twelve month debate in the international financial community about the actual level of Chinese growth – an emerging doubt about whether the Chinese long term economic reform program was going to continue, or whether in fact it was just getting too hard politically and economically. And here is what Xi Jinping has to say on this in his speech, “In 2013 we decided on an overarching plan for deepening reform which featured over 330 measures. In 2014 eighteen major reform items were by-and-large completed. In the first half of this year we rolled out 70 key reform programs, with their effects gradually becoming evident.” This is interesting, “When it comes to the toughest reforms,” and I wonder there if he is referring to the future of state owned enterprises, “only those with courage will carry the day. We have the results and the guts to press ahead and take reform forward.” Interesting language from a President. “We will stick to the direction of market economy reform, continue to introduce bold and results-oriented measures concerning the market, taxation, finance, investment, pricing, opening up and peoples’ livelihood.” That strikes me as pretty bullish from the perspective of someone who is not about to take a step backwards on long term market based reform. A thought from you and then back to how you think this plays, Evan, in the upcoming summit about American and global concerns about China’s future role in the global economy.
ROSEN: I would say, as terrifyingly difficult as all that market reorientation sounds, the only thing scarier than it is not doing it. Because those who have deeply studied on the Chinese side, China’s growth outlook and potential, I believe have come to that conclusion – that without this marketization, without this adjustment of the model, the maximum potential GDP growth the country is capable of circa 2020 is about 1 or 2 or 3 per cent GDP growth. Which is so far below the value that you mentioned before Kevin, that raises so many more problems in terms of converting a good chunk of the state owned sector et cetera. My problem with the way the President is demonstrating his progress toward those reforms is he’s talking about the number of steps that have been taken but he didn’t read the conclusion to our study which said ultimately what matters is changes in the market place and outcomes. Charles Peirce, the great American philosopher that the President should put on his reading list now that he’s gotten through Twain and Thoreau and the rest, said, “Things are real if they have real effects.” And that will be the acid test for President Xi and his colleagues. Whether there is a transformation in the market place of what kind of firms produce, create jobs, pay taxes et cetera. Not how many measures the Commerce Department is able to check the box on.
RUDD: Mind you, all of us who have written reports feel like underappreciated authors because no one has quite got to the end of our reports. On the question of the strength of the Chinese economy, medium term, how big a concern is this from the Administration’s perspective? If the Administration is looking at global growth and we look at the challenges to growth around the world – still a lot of slowness in Europe, now a slower growth rate in Asia, an American economy recovering – from an American lens how is the growth equation as we’ve just discussed it, seen through the Administration’s eyes?
MEDEIROS: Great question, it prompts two thoughts. First, the discussion about the economy to me highlights one of the central risks at the heart of the US-China relationship, which is the growing strategic uncertainty in the United States and the policymaking community and among American strategists about China’s future trajectory. Because if you are a policymaker it’s difficult to carry out your policy if you don’t actually know in what direction China is headed. There are two aspects of uncertainty. Number one is the economy – Dan talked about that. But let me highlight one point that Dan made that is very important – the debates about the future direction of the Chinese economy are no longer do we know where they’re headed? Because you read the Third Plenum Report, you read Dan’s studies and you read Xi’s speech – they know where they have to go. The new question and an area I think of profound uncertainty is are they able to do it? And the potholes and speed-bumps they hit this Summer with the stockmarket and the exchange rate are raising a question that really hasn’t been debated very much which is, do they capability, do they have the political space to pull of reforms that are increasingly difficult and costly?
Which leads me to the second aspect of uncertainty, which is the domestic policy environment in China. Where is China headed politically? What we see is a Xi Jinping that highly centralized – arguably over-centralized – authority, we see a government that is carrying out a voracious anti-corruption campaign that basically has constipated the government. Nobody at the provincial or lower levels really want to make decisions because it’s so politically risky for them to do so – they don’t want to get caught up in some anti-corruption campaign or something. I think the anti-corruption campaign, while obviously it is the right thing to do, has frustrated policymaking in the system. Thirdly to carry out the first two what we see is the increasing use of, for lack of a better term, Leninist political tactics – using the propaganda apparatus to inflate the Shanghai Stockmarket along the lines of what Dan said, using the internal security services to go after securities firms in China who may be complicit in some of these activities. That raises real questions and real flags about the political environment in China and the extent to which it is actually going to constrain or enable these economic reforms.
The second big answer to your question Kevin is, on Chinese growth, one of the issues that I know is at the top of the minds of many strategists and policymakers in the US is because so many countries in the Asia-Pacific region have been relying on strong Chinese growth, high commodity prices, China as a driver of global trade. The collapse of all of that in the last two years has had a dramatic effect on emerging markets in East Asia and I think it is not fully understood how slowing growth in Malaysia, Indonesia, the Philippines et cetera is arguably beginning to change the geopolitics of subregions in the Asia Pacific which has huge potential policy implications both on the upside and the downside for the United States.
RUDD: You have to have some sympathy for our friends in Beijing though on the question of macroeconomic management. Not just in terms of the enormous challenge of the adjustment of the economic model of the last 30 years to the one they need for the future, but also the global headwinds that they run into in terms of soft global demand and net exports not providing the sort of buffer for growth that they would have anticipated several years ago while they go through a painful internal adjustment process. In other words, a difficult adjustment at home but now real weaknesses in the global economy which are no longer a given. But forgive them also for being a little puzzled over this question. There’s the international community – half of them frightened to death because their economy is so successful and the economic influence and financial influence we spread across the world, three months later they are all frightened to death that we might fail economically and therefore that affects them all directly in terms of their national economies. Certainly in my discussions in Beijing that gives rise to the occasional wry smile about international reactions to China’s performance.
On the question of anti-corruption which you just mentioned, again I find Xi’s speech quite remarkable. Together with so many of these other things, unlike in the tradition of a lot of previous Chinese leaders, he takes it head on and actually addresses it explicitly in his speech. I won’t read the whole quote but the first part says we’re doing it because we need to clean up the Party, it is the country’s soul and unless we’ve got a clean Party, frankly, we are not going to achieve any of our national objectives. We’ve taken on people who are very important and those who are not so important – ‘tigers and flies’ to use the Chinese expression – but then he goes on to say, “This has nothing to do with a power struggle, in this case there is no ‘House of Cards’.” This is a form of language which, again, I don’t expect from Hu Jintao. You always know it is a Xi Jinping speech when there’s language that just pops out at you which you don’t expect like taking a mohito down in Hemingway’s bar in Cuba. So on this one he doesn’t directly take your point that the anti-corruption campaign might be slowing the economy because decision making is slowing as people are fearful about how local decisions will be taken and interpreted. But he is answering the other part of the Western critique which gets filtered back into China through the overseas Chinese media that this is nothing more than a power struggle. Your thoughts on that Evan?
MEDEIROS: I think that, politically, Xi Jinping has three tasks and it is very difficult to disaggregate them. Number one is anti-corruption, trying to root our corruption in the Party. That’s a very legitimate and serious task. Number two is consolidating political power and getting rid of opponents and I think that’s a normal natural thing for any watcher of Chinese politics. And then third is bringing about these very difficult, costly economic reforms that requires breaking the rice bowls of stakeholders who themselves may be corrupt and who themselves may be political opponents. Essentially, it is a Venn Diagram of three overlapping circles and there are I’m sure a variety of people who fall into that inner section of the three circles which makes it very difficult to disaggregate what Xi’s motives are. Nonetheless, I think it is interesting that he makes this point. I interpret it as him trying to highlight that he’s genuinely interested in anti-corruption. But as a student of Chinese politics I also appreciate that it is often easy to make a virtue out of a necessity.
ROSEN: Just 30 seconds specifically on that. I thought that comment was fascinating about the factionalism. One of the big ongoing parts of the American conversation about China is a debate among our sinologists as to whether to interpret Xi’s actions as just factionalism amongst different camps of Princelings versus the Party School people. Or whether there is an earnest reform impulse here in Xi that is not just fighting factional battles but that uncertainty on our part, which he’s hoping to address by that comment in the speech. The observation you made about pity the poor folks in Beijing – one month they’re the great hope of the world economy, a couple of months later they’re seen as the greatest shock and risk to the world economy. This is their own fault for not being more transparent in terms of how their politics work, on the first point, and how their economy is managed and will be managed in the future in the second part. That does have to be solved. The world has a right to know where China is going to go and the solution to that can’t just come from foreign researchers like me and others doing their utmost to make sense of that. That burden is on their shoulders to give us a better understanding of the fundamentals.
RUDD: There you have it, a view on the politics, a view on the economics and a range of views on the visit itself. We’ve got about 20 minutes of questions before I give each of our panellists a few minutes to sum up at the end. Let’s keep the questions short and self-identify please.
AUDIENCE MEMBER: Hi my name is Contessa Bourbon from the New York Times. I’d like to ask the panel what reforms should be included in the bilateral investment proposal, what sectors should be liberalized in China to realize this bilateral investment?
MEDEIROS: My view is that the negative list should be as short as possible. If China is genuinely committed to a bilateral investment treaty that not only will have the stimulative effect that we hope it will but also will be able to get a two-thirds majority vote in the US Senate.
ROSEN: I think the question is not what should be included but what should not and why? On what justification should any sector be excluded from a normal sort of investment relationship such as the United States has with Canada? If China wants to be normal with regards to the American relationship then there should be a normal type of list for how our economies should interact. So it is what isn’t there not what is in there. Everything should be in there unless otherwise justified.
RUDD: Like our negotiations with the United States on a free trade agreement, we insisted on the exclusion of beef.
ROSEN: That’s one category. We might say, “We have a sacred cow, it’s called the sugar growers in Florida.” Nothing strategic about it but our politics are our politics and we’ll compensate you otherwise for taking that –
MEDEIROS: That was a trade agreement, not an investment agreement.
RUDD: Very nicely taken. It was not an investment agreement, it was a trade agreement but it did have an investment annexure.
AUDIENCE MEMBER: Thank you Kevin and that was a wonderful panel discussion. I was thinking when Xi Jinping was trying to transition the economy obviously from export to more internally driven consumption and also to attack corruption, a strategy to move capital and power from SOEs and divert more capital and support to the SMEs, see to be a very ideal situation to accomplish many of his objectives. Can you tell us how that’s coming along? We know that the SOEs are all kind of frozen in their tracks but is growth continuing, are these SMEs continuing to get the capital they need to foster growth?
ROSEN: This is the irony of the stockmarket meltdown. That there was a kind of naïve hopefulness that since the banks cannot do venture capital, banks cannot really work with small growth companies – it’s just not how you do it, you do it through capital markets and through specialized companies that know how to work with that stage of growth. There was a naïve kind of hopefulness, cognitive dissonance in retrospect, that letting the capital markets take off and bubble like this was somehow going to allow you to have it both ways. The big banks could remain focussed on SOEs, at the same time this new risk capital found its way to SMEs through the capital markets. The problems is it’s not that simple. You need regulation institutions to make sure that happens in a sustainable and a healthy way. A state owned enterprise – the big state owned behemoths and national oil companies, steel, shipping.
MEDEIROS: And there is something like 155 000 of them.
RUDD: So the problems you’re faced with SOEs are: one, availability of finance; two, also unfair access to, shall I say, competitively priced inputs; and then three, existing market shares strongly favouring state owned enterprises. This, in my analysis, is frankly the big one in terms of the future of China’s growth. Do they tackle to SOE behemoth and do they allow space for what is the enormous creativity of the Chinese economy and business sector to turn small companies into big companies and for there not to be just one Alibaba but to be a thousand Alibabas but to be across all sectors of the economy and not just IT.
AUDIENCE MEMBER: Thank you very much Kevin. Kevin Sharman, University at Albany. The question I have – and I feel the shades of John Maynard Keynes and John Kenneth Galbraith are in the room today – in transferring from an export economy to a consumer economy. Doesn’t a consumer economy depend very strongly on the purchasing power of the population in that economy? My question is, does the Chinese population presently have the sufficient purchasing power to support this transition from an export to a consumer economy.
ROSEN: It really requires a good 15 minutes at least to work that out with some clarity. The very short answer is this, absolutely it does. It is a myth that China’s consumer economy is anaemic and has not been performing well. The only reason the consumer sector of China shrinks as a share of GDP is that the investment piece of the story was crazy on steroids too big, squeezing down the relative weight of consumption. But consumption grows at 8, 9, 10 per cent a year every year for the past 20 years and it absolutely has the potential to keep going in that directions for decades more to come so I think there’s good reason to be very optimistic about the potential anyway for Chinese consumption. The only problem is if a middle class Chinese household loses its confidence that the system is moving in the right direction, people will find ways to emigrate, in a word, and get out of the country, get their wealth out and consume someplace else – in Sydney, in New York City, in London, wherever – rather than keeping themselves 100 per cent deployed in their home country.
AUDIENCE MEMBER: (INAUDIBLE) founding editor of Almanac of American Politics. Is there a contradiction between a centralized political authority and the Chinese and a market based economy? Is there some kind of contradiction there?
MEDEIROS: It’s a sort of theological question.
RUDD: It’s ontological.
MEDEIROS: You’re right it is ontological. In theory, yes. Your question highlights a core challenge that the Chinese government is facing in carrying out the market reforms that Dan implemented. Every time they let the market play a more decisive role, they are basically saying, “We’re going to accept vulnerability and risk where we didn’t have it before.” Then when they are actually subjected to that risk or instability, the instinct is to grab control again and that’s what we saw with the government’s response to the stockmarket. So I think this is going to be a two steps forwards, one step backwards process on a lot of these areas for a long time as the Chinese government tries to manage this tension between a penchant for control and abhorrence for instability either locally or systemic and a recognition that they have to carry out these reforms in order for the economy to grow and ultimately for the Party to stay in power.
RUDD: The Western experience, as you know Sir, is that ultimately these two propositions are irreconcilable. The question for China is, is there some particularity about the Chinese condition which will make that different? Certainly Xi Jinping’s answer to this question is, there is nothing inherently contradictory in China, given its tradition, between having an authoritarian state – be it imperial or communist – on one hand and having an economy which is driven by market disciplines on the other. As Evan has correctly pointed out, as the levels of control yield to less controllable phenomena, whether it is in equities markets or through yielding greater market share to private SMEs away from state SOEs, where you could still command the states’ levers, well that’s a bit of a scary journey. But in my discussions with Chinese leaders who deal with these questions at this aggregate level, this question of philosophical direction, theological direction and ontological assumptions, is that they believe that in their system there is a sufficient degree of uniqueness to hold these two tensions together. Ultimately, history will be the test.
AUDIENCE MEMBER: Thank you very much. My name is Pincus Jarvis and my interest is in sustainable development. My question is on the nexus between growth, between consumption and the environment. Based on the deal between the two Presidents, from my experience, actually started in 2009 because now we’re having COP21 in Paris at the end of this year but at COP15 at 2009 that was the first time that President Obama brought in the Chinese along with him so that was the beginning of the deal in order to do something that the UN is capable of doing. So in effect there is a displacement of the UN, there is a displacement of OECD countries into something that has to involve the Chinese market itself. How do you answer to this?
RUDD: Evan would have been part and parcel to the Xi and Obama negotiations last year on climate change. I might add a word or two on my own Copenhagen scar tissue.
MEDEIROS: This is really a question for Dan to answer, for an economist to answer but there’s naturally a tension between growth, the environment and consumerism. First and foremost the Chinese government is interested in generating growth, the tension that they face is sometimes the reform initiatives that they have to implement – the stuff that Dan talked about – may not get you the growth you need. So they’ll have to reconcile that tension. In terms of the environment there is a broad recognition under President Xi that the environmental situation in China is just awful. Anybody that visits Beijing notices immediately the air pollution problem and what that’s done is that that’s created a recognition that there are economic costs associated with pollution that the government is trying to address and its motivated them to become involved in international climate efforts in ways never seen before. I was at the NSC during the 2009 COP meeting when Wen Jiabao was in the room with Obama and other leaders, and the agreement that they reached which was interesting at the time but it didn’t really result in any material change in Chinese behaviour. The real threshold we crossed was in the Chinese commitment to bring down emissions by 2030 last year. The question is how are they going to implement that? That’s something that they’re working on right now and I’m hoping that they’ll have some announcements to make about specific steps or benchmarks that the Chinese would be willing to commit themselves to to get the 2030 type of target. On consumerism I’ll turn over the Dan.
RUDD: One thought on the way through, just on Copenhagen plus experience of the United States and China on climate change and carbon reductions. As being one of those other global leaders in the room when all of that unfolded, essentially you had in Copenhagen China and India saying no. That was it. Why was there not a Copenhagen Agreement? Largely because China and India said no. What happened then was that in the period of the subsequent five years and certainly by about 2011, this is when the Chinese barometer went to in terms of a complete acceptance of the climate change science and therefore the impact on China of unmitigated greenhouse gas emissions into the future and, therefore, the necessity of both global and national action. And I think secondly, the inability to produce such an outcome in Copenhagen has created the positive dynamic which underpinned the discussions between the two at Yintai last year. It remains to be seen whether the third largest emitter in the world, India, actually now folds into the same disciplines. International agreements and good, the provide a normative framework, the substantive question will be this, will American, Chinese and Indian greenhouse gas reductions be sufficient to keep us within a temperature increase this century of two degrees, which means peaking at 450 parts per million of GHG emissions. At present we are on track for a 3.5 degree temperature increase based on commitments made to date in anticipation of Paris. So it’s worth bearing that in mind. I might just skip to the next question if that’s okay mate?
AUDIENCE MEMBER: I don’t see how China can be a true international economic power without a freely floatable currency along with Japan, Europe and the United States. I wondered what the prognosis in achieving that goal are for China?
ROSEN: Number one, there have been very significant Chinese strides towards a freely floating Renminbi currency over the past several years. Those have been led by the Governor of the Peoples’ Bank, Zhou Xiaochuan, who had a mix of different motives for wanting to do so. At least part of which was that he knew China would never truly have domestic financial sector banking reform if there weren’t an open valve between China and the world in the form of a freely floating currency. Without that freely floating Renminbi, the temptation to distort domestic monetary policy in China in ways that have create gargantuan liabilities on the balance sheets of institutions. For those of you understand finance will appreciate the relationship amongst those things. It’s just manifest.
I think the most extraordinary thing I’ve heard from Xi Jinping’s office over the last month is an acknowledgement that the past mix of monetary and financial policies are what is causing China to underperform its potential today. That as much as one would like to goose up short term growth by dipping into the cookie jar of fiscal and monetary policy, which requires you to have a fixed currency so that you don’t have to pay the piper of money fleeing the country as a result of your machinations, as much as you’d like to dip into that cookie jar its never a good idea in the long term. And that a great country has to handcuff itself to a set of policies that preclude its ability to do so. Maybe Xi Jinping has the discipline to resist using his power – incredible power he’s brought around himself today – but he will have a successor and what his successor will do, he will not be able to control anymore than Hu Jintao is able to control how Xi Jinping is able to run China. That’s something I think that is on the President’s mind and he’s thinking beyond just the factional issues of the moment to the types of policies that will be the marking of a great China of the future and a currency that doesn’t need training wheels, doesn’t need constant nannying from interventionist central policy makers is part and parcel of the type of China that he considers to be great down the road.
AUDIENCE MEMBER: I’m Helena Colinda, I’m with the Lewis Foundation here in New York. If one or all of you could come in on the Asian Infrastructure and Investment Bank and/or One Belt One Road in more detail?
MEDEIROS: I think that they are both very interesting initiatives. As Dan alluded to in his presentation, the principle though not the exclusive motivation to do so was to essentially use these mechanisms to export China’s excess capacity problem in a whole range of different industries. There is a real question about whether or not China is going to be able to do that. For those of you in global finance, infrastructure projects are complicated, they have very long timelines in terms of return on investment and the political risk associated with them is very substantial. So I’ll be curious to see how AIIB and One Belt One Road play out over the long term. The AIIB is a particularly interesting initiative, because on one hand it’s a Chinese effort to meet the constant requests by the United States and other countries to “be a responsible stakeholder”, in other words to make a contribution and to the Chinese credit they recognize that there was a big deficit in infrastructure in Asia so they created an institution to go ahead and fill that gap. I think that’s interesting and useful.
The question among policymakers in government, especially when I was there, was always was this institution going to be up to standards of other multilateral development banks or is to be going to be an institution that is effectively a tool of Chinese foreign policy that engages in policy lending for the purposes of advancing Chinese diplomatic interests? A lot of the jockeying over the last year was about trying to encourage China to develop the former institution, the high quality MDB and not the latter institution. So that now that the Articles of Agreement have been done, it’s not perfect, I think it’s important to pay attention to the track record of the AIIB and see what it is all about. Nonetheless it is China’s first foray into international institution building, I think that’s an impulse that we want to encourage as long as it is not an impulse that tries to tear down the Bretton Woods types of institutions and the institutional framework from which the US and many countries throughout the world have benefitted from.
RUDD: As we go to the last questions, I’ll give a few minutes notice to our two panellists as I’m going to ask them to do a two minute summary each. But to think about one question in particular which is, what narrative would you give to the American and Chinese publics to describe this great evolving beast called the US-China relationship for the future? Because how it is described publically affects how populations within those countries view it as well, it’s not just an elite policymakers concern. Two last questions then.
AUDIENCE MEMBER: Bill Crane, an interested spectator. This is a general question for Evan. When President Xi and President Obama meet in Washington and when President Xi turns to him and says, “President Obama, you’re in your last two years and we’re going to have to deal with your successor and I watched the last two debates of the Republican candidates, what in the world is going on here in the United States?” What should President Obama tell him and what do you think Xi is thinking, looking at this spectacle and making an evaluation?
MEDEIROS: So you’re asking me to speculate about what Barack Obama is going to say and how Xi is going to respond? That’s a little bit of a tall order. The US-China relationship, from my perspective, is fine out to the end of 2016 for all the structural strengths that I mentioned. Simply the reason I say that is we know them and they know us. Because of the American election, whether it is a Republican of a Democratic that gets elected, it injects a high degree of uncertainty into the relationship. The Republican debate reveals that looks increasingly like China may become an electoral issue. It’s unfortunate. It’s never good for the US-China relationship when that happens. As somebody that was involved in the ’08 Campaign and certainly worked through the 2012 campaign, I think one of the strengths of the Obama Administration was that there was a very deliberate choice made in both instances to not pull China into the campaign. Not to make it a campaign issue, it’s too big and complicated a relationship to do so. What I would hope that President Obama would say to President Xi is, “We’ve got 18 months left, let’s do as much as possible in the next 18 months to create such a high degree of momentum that no matter who is elected the foundation of the relationship will be rock solid and even if there is a difficult transition period it won’t fundamentally undermine the progress that’s been made.”
AUDIENCE MEMBER: Thank you, I’ll skip American politics. Alicia Leufebeuf from Colombia University. We heard from Evan that China, in a nutshell, has never been as powerful as it is today. And we heard on the other hand that Xi Jinping feels insecure and has shows a certain lack of confidence in Dan’s last remark about the fact the Communist Party doesn’t accept a certain degree of transparency. So what is the main obstacle for you, for them to assume this power that they have and feel more confident?
RUDD: What we’ve got to be realistic about is the simple nature of the Chinese political system. It is a one-party state. As an authoritarian state it is not transparent. It has never said that it is going to transform into a democracy. What we are running up against however on the other arm of its activities, which is an increasingly market based economy at home and its engagement abroad, is that basic transparency requirements therefore present themselves in the face. The dilemma therefore is how to do recognize, as a follow on to the question asked before from the gentleman at the back, are these two approaches to political economy ultimately compatible. For the Chinese this is a daily act of learning on the job as far that duality is concerned.
One final point I’d make about that before throwing it to a conclusion is that I think one of the things our Chinese friends are wrestling with is when the world’s eyes are now turned on China, given the sheer scale and size and internationalization of its economy and its financial institutions, then how do they communicate big macroeconomic changes or macroeconomic decisions in a manner which maximizes their normality in the eyes of markets? Because as Dan Rosen said before, at present we have a situation where things happen and then there is often a pause as market analysts take over to try to explain the logic of the statement or the logic of the decision or the logic of what has unfolded. This is, frankly, an expression of the nature of the political system as it is.
Two minutes each for my two colleagues, if you can stray a little more broadly than the question suggests but, given the publics of our two countries in America and in China are important in this equation, in terms of a public narrative describing the future of the US-China relationship what do you think it could or should be?
MEDEIROS: I’d emphasize two ideas and I put them forward for your consideration today: number one, determination; number two, resilience. I’m constantly asked, “Are you optimistic or pessimistic about the US-China relationship?” And I’ve decided I’m neither. I’m simply determined. This is a point that Henry Kissinger has made many times before. It’s a big complicated relationship, if you look too closely it just looks like a big sin curve – ups and downs. I think we need to move away from the optimistic-pessimistic and rather just simply be determined to ensure that the public conversation about China is about the China as we see it, not the China that we wish it were or the China that it may become and have a serious public discussion about the best ways to ensure that the US-China relationship continues to expand its areas of cooperation, because we need to work with China on big regional and global issues, and carefully manage differences. The US-China relationship right now faces a historic task. How do you avoid inevitable rivalry between a rising power and an established power? History doesn’t really have a lot of good lessons for us on that, there are a couple but not many. So be determined.
Number two, resilience. When I was in the Whitehouse and we were trying to figure out how to structure our China policy and how manage the inevitable disagreements. There were dark days. I remember when I got the phone call in the Whitehouse from our Ambassador about Wang Lijun entering our consulate in Chengdu – this is Bo Xilai’s security chief – and we had to figure out what we do with this guy. Or when Chen Guangcheng ended up in our Embassy in Beijing and I had memories of what happened with Fang Lizhi in 1989. Inevitably there are going to be difficulties in the US-China relationship and I think the most important thing to do is to ensure that policymakers focus on building a resilient US-China relationship. In other words, not a relationship that will never have difficulties or disagreements, not a relationship that will never be unstable, but a relationship that once it faces these difficulties, frictions, instabilities that it can eventually right itself over time. That it is resilient, it can withstand the inevitable difficulties, it can make itself stronger because of them. Because I think ultimately it is that kind of determination on the part of both the American and Chinese publics and policymakers on both sides that will get you to that point of building a resilient relationship that avoids these challenges that history suggests may occur.
RUDD: A common public economic narrative, Dan, possible?
ROSEN: I think times of great moment and historical significance require choices to be made, actions to be taken. Not just marginal, management of a long-standing approach to things. But there come moments when there needs to be a fundamental calibration of what the national interest is and what posture we should take vis a vis in this case the People’s Republic of China. In order to do that in a way that serves our interests we need a consensus among ourselves in how we understand and interpret what is happening in China and where it is going in the near future and in the long-term. There are legitimate reasons why there is so much discordance over what’s the right answer to that. There are issues of transparency for understanding what is happening inside Beijing today. As we started the discussion, there are issues of, not so much clarity in terms of where they know they need to go, but whether they will become competent enough to get there, whether they’ll be willing to sacrifice some of their political and security optionality over their own country in order to but economic growth for themselves. Because you cannot have both perfect security locking everything down and an efficient economic outcome in a market. You just have to accept some greater amount of vulnerability in a system if you want to maximise your growth.
What mix of choices China will make is not a foregone conclusion today, that is for their leadership to make. To the extent we have any ability to shape it, it’s in how we ourselves behave. I’m a constructivist, which means I believe how others act will reflect how we’ve acted. I think the United States needs to play its strong suit which is to double down on our democracy, on our dynamism, on our openness to adjustment and acknowledging our mistakes and our adversity and all those kinds of things. Demonstrate it through our actions and how we engage with China. China is going to be going through increasingly wrenching challenges in the years just ahead. China’s senior leadership believes that next there will be massive state owned enterprise lay-offs and if you were a Mearsheimer Cold-Warrior this would be a great time to try to undermine the Communist Party, if you thought that was the solution to the American interest. That would destroy American credibility in the Chinese mind in history for a century to come. We need to understand who we are and what is our strong suit to play and what our interests are in the long run and act accordingly and confidently.
RUDD: Thank you. Two saying always struck me in Chinese. One from anonymous and the other from Deng Xiaoping. The anonymous one I once saw at a railway station in Taipei eight years ago which was advertising some insurance company. It simply said this in Chinese (CHINESE) – “Look at the big picture and as a result achieve big things.” So that didn’t come from Confucius, it didn’t come from Mencius, it didn’t come from Sun Tzu but I’ve always thought about it and the subway in Taipei eight years ago. The other does come from Deng Xiaoping which is a little earthier, it’s a little more basic. It says (CHINESE) – “If you want to cross the river, just do it step by step feeling your way stone by stone with your feet.” That’s very much Deng. In fact, I think both those things were Deng – big picture and achieve big things but, frankly, you do it one step at a time.
So applying that to China-US. I think these two leaders have a capacity for reimagining the relationship in a visionary way which has practical steps associated with it. Knowing both systems relatively well I don’t think there is the faintest interest in either capital to risk the possibility of military conflict or war. I just don’t think so. Uncontrollable events, as we’ve indicated before, are another thing. But I do not think there are any intentionalities from either side of the Pacific on this question. If that is your underlying assumption then how do you reimagine the relationship that is not utopian but realisable? I think perhaps it has one element to it, which is to conclude that the challenges commonly faced by both countries in the world are in fact bigger, harder and uglier than the complications they have between them. When I look, for example, at the economy – we’ve spend a lot of time today talking about the state of the Chinese economy. Two years ago we’d have been having a parallel seminar, a depressing one, on the state of the American economy. The bottom line is we live in a growth challenged world and if I was looking to the dialogue between President Xi and President Obama it would be how do we drive the new growth drivers into the global economy to lift all boats? That’s our challenge.
Similarly, on the security front – the external challenges to strategic stability, whether it is terrorism or a North Korean nuclear weapons program – which actually Xi Jinping explicitly refers to in his speech as a cooperative endeavour with the United States – these represent massive external challenges to the strategic order. So my reimagining would be a bit along the lines of, “We as great powers, China and the United States, have a common interest in actually reforming and enhancing the global rules based order for our own benefit but, frankly, for everyone’s benefit as well.” The enemies of order, be they economic, be they pandemics or be they terrorism or the North Koreans, are actually far bigger than the things that seem to divide us.
Ladies and gentlemen, let’s thank our two panellists.