China’s Reforms Aren’t Keeping The Military Happy

February 4, 2014 Posted by China Briefing Reading Time: 4 minutes

Op-Ed Commentary: Chris Devonshire-Ellis

There has been an apparent conflict in China’s approach to its foreign relations – and especially so in Asia over the past 18 months. Much analysis was made of China’s sabre rattling prior to the new President Xi Jinping being placed in power, with many analysts suggesting it was merely a phase China was going through to warn countries not to mess with it during a leadership transition period. However, as conflicts continue to rumble on, there has been little sign of any rapprochement from China at all over its somewhat assertive foreign policy.

On one hand, China has been extending olive branches to its “good” neighbours – with Indonesia and Malaysia being granted significant loans and commitments from outbound Chinese investment at the back end of last year. The Philippines meanwhile has been excoriated by the Chinese for having the gall to press ahead with a UN tribunal to try and get some settlement over South China Sea disputes. The Philippines’ President was told not to attend an ASEAN conference being held in Nanning (at which the Philippines were the primary guests, at an event held by a body that China is not actually a member of) while the Chinese aid response to the devastating Typhoon Yolanda was a measly US$100,000. By contrast, the United Kingdom alone raised US$232 million. Such responses run the risk of making China look petty and vindictive in the international arena.

The on-going spats with its neighbors do not appear a decision made at the commercial trade level. The Philippines and Vietnam are two primary members of ASEAN, with which China is the third largest trade partner. The Chinese attitude towards two of its member states has alarmed ASEAN as a collective body, even amongst nations considered China-friendly. Chinese warships, for example, held exercises just last week in an area off the Malaysian coast and very close to disputed territories between the two nations. That doesn’t really make sense in terms of diplomatic overtures towards an ASEAN nation China is supposedly friendly with.

Japan is China’s fourth largest trade partner, yet its bellicose attitude towards the country is seeing the Japanese turn their attention elsewhere. India is China’s sixth largest trade partner and yet it too faces territorial disputes – China’s Navy held exercises in the Indian Ocean just three days ago. All this gathers more steam when one considers that for the first time in five years, global military spending increased. The primary reason for this has been a dramatic rise in Chinese spending, which is now more than the EU nations of Britain, France and Germany combined.

This doesn’t seem to fit with China’s announced commercial intent in terms of developing trade links and growth with its Asian neighbours. It also appears non-compatible with the diplomatic rhetoric being issued by Beijing, nor overtures towards China’s neighbouring countries by President Xi Jinping at the recent APEC gathering. The contrast between how China announces itself as a friendly nation willing to invest throughout Asia, and the behaviour of its military are two different animals.

To my mind, this somewhat contradictory approach can only be attributed to a lack of unity between the Chinese leadership and the military. This means, if correct, that Xi Jinping has not yet fully cemented his power base and that important elements within China’s military are potentially unhappy with some of the reforms being suggested. With a large leadership and numerous factions within it, this is understandable.

However, the Chinese Navy’s apparently assertive attitude towards its neighbours is not symptomatic of a country that particularly wishes to open up to further reforms. Whether the root of this is a return to hard line communist internal protectionism or a desire to be cut in on some of China’s more lucrative deals remains to be seen. Jiang Zemin, when President, famously cut the PLA out of all ‘commercial activities’ involving the State. Whether that phase of separating China’s military from its commercial trade ambitions is now coming to an end remains to be seen.

In terms of trends, the United Nations Conference on Trade & Development (UNCTAD) released their regular Global Trends Monitor a few days ago. While China performed well in terms of FDI during 2013, of particular note is the rise of emerging Asia, and especially the South-East Asian region and India – which happen to be where the majority of China’s military assertiveness is currently taking place. The UNCTAD report doesn’t make any specific conclusions about China and Asia, but the rise of emerging Asia and India will impact competitively upon China’s future performance as a destination for global FDI and investment. China is already losing business to ASEAN and India, mainly as a result of increasing costs in China and the building of better infrastructure and more competitive tax regimes elsewhere in Asia to compete with the Chinese.

The apparently differing positions of China’s leadership when it comes to investing in Asia and the military’s assertiveness in the region is incompatible with a smooth transition for the fair development of regional trade. What China may lose in competitiveness to other nations one faction within China seems prepared to take back by force unless they can be pacified internally. Xi Jinping, it seems, still has rather a lot to do.

Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam as well as liaison offices in Italy and the United States.

For further details or to contact the firm, please email asia@dezshira.com, visit www.dezshira.com, or download the company brochure.

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