China's new era under Xi

By Peter S. Kim

Last month, the 20th National Congress of the Chinese Communist Party (CCP) put beyond doubt the fact that President Xi Jinping will rule the world's second-largest economy with an iron fist for years, if not decades. By extending the constitutionally mandated maximum term of 10 years, Xi is now the first leader since Mao Zedong to sit for an unlimited rule. The news was met with global investors selling Chinese stocks at their lowest level since the global financial crisis in 2008. China's reversal from its commitment to market reform will have lasting repercussions for Asia, if not the world.

All evidence points to China continuing its defiance of Western influence and turning to a new chapter of isolation and self-sufficiency reminiscent of the ideology touted by its neighbor, North Korea. The political theater of Xi's predecessor Hu Jintao, forcibly ushered out from the closing stages of the meeting, is chilling proof of the current regime's disdain regarding the old guard who was instrumental in opening mainland China to the world.

From the lineup of the latest 25-man politburo, it would seem Xi has only time for ardent servants of the CCP while being ready and willing to purge dissenters. The era of rules-based international law and trade is quickly being reduced to a war of attrition where globalization is on hold or even reversing.

The immediate damage is seen from rising global inflation, caused by China's role as the "factory to the world" withdrawing from the global supply chain. It was hoped that China's draconian zero-COVID policy would end once President Xi's extended rule was confirmed. However, his speech during the event indicates motivation far greater.

The latest appointments of China's all-powerful politburo comprising hardliners comes after posturing as a nation embracing democracy and free trade since the 1990s. For the past 10 years, Xi has built his power base to heights not seen since Mao, with occasional hints of China reneging its long-term promise of embracing democracy. First was the visible prioritizing of political gains and nationalism over economic growth.

The hubris evident from China's rise in economic and political status ultimately led to a seismic backlash from the U.S., which former President Donald Trump capitalized on to great benefit. Second, South Korea's decision to allow the Terminal High Altitude Area Defense (THAAD) on its soil saw China weaponizing trade and disregarding the rules in the World Trade Organization (WTO) agreement. In hindsight, Korea's experience with THAAD and China was a "canary in the coal mine" for other countries, as China continued to use trade and finance for political leverage.

From the 1970s, China's rise from poverty was aided by the West, led by the U.S. and its belief that it could convince China to embrace capitalism and, more importantly, democracy. From China's side of the ledger, it enjoyed a safe geopolitical environment backed by a friendly and enthusiastic U.S. The historic deal in 1971 between Presidents Deng Xiaoping and Richard Nixon opened China to the world and reversed its poverty and political turmoil in one shot. Having U.S. endorsement fast-tracked its integration with the world both economically and politically.

Deng's reform promises and apparent embracing of Western philosophy convinced the world that China was ready to join the growing club of globalized capitalists. China's consistent message for desiring democracy was rarely questioned by Washington, which was confident of the proven formula of authoritarian nations falling under the lure of capitalism for its elites and the democratic desires of its citizens. However, since joining the WTO in 2001, it has become gradually clear that rather than the U.S. enticing the Chinese of capitalism, China was seducing the world into accepting its unique economic model laced with caveats from the CCP.

China's ambivalent attitude toward the Russia-Ukraine war adds to concerns over its disengaging stance, which seems to be angling for economic and political leverage over the increasingly hostile West. By abstaining from supporting the West's efforts to curb incursions, China is voicing its protest over what it considers an unfair indictment of China over its internal affairs.

With China showing signs of disengaging from international law and order, the Asia-Pacific region will have to get used to generating economic growth without China. The first country to take this step is Australia, whose three export sectors in commodities, tourism and education, are dominated by China.

Likewise, South Korea has China as its largest export destination, driven by China's investment boom from the 1990s. China's pivot away from global trade coincides with South Korea's need to transform from an export-dependent to a consumer-driven economy.

Since the THAAD issue emerged in 2017, Korean companies have understood the difficulty of China as a manufacturing and customer base. The recent announcement from the U.S. government to exclude components or materials from China for EV batteries receiving subsidies is just the beginning of a global dilemma where countries and companies are pressured to choose between the two superpowers. Just like Korean companies for the past few years, other nations and their companies will face an impossible decision in the coming years.

Peter S. Kim (peter.kim@kbfg.com) is a managing director at KB Financial Group.