Will the US throw Singapore to the wolves?

May 25, 2017

Q: You have theorized there is a distinct possibility that Trump may decide to work with Xi, thereby further maginalizing Singapore from opportunities for economic growth – how plausible is that scenario and why?

A: I believe it’s much more than what you have described – a theoretical possibility. As what continues to surprise me no end is how so very few scholars and analyst have noted – how much both Trump and Xi resembled each other in terms of their goals and aspirations for their respective countries.

To me it’s a one to one match.

Both leaders see fit to deploy the rhetoric of greatness harking back to a bygone golden age to describe their overarching goals. In the case of Trump this is expressed in terms, ‘make America great again.’

In the case of Xi it is the ‘China dream.’

But if we press the pause button and ask what are these two leaders really trying to communicate with their respective visions along with what their mission may look like.

It really boils down to two things. The first is increasing their geo political sphere of influence in the world. The second is primarily economic primacy. In the case of America – when Trump says make America great again – what this entails is bringing back outsourced jobs, manufacturing and recreating the prosperous country America used to be.

The “China Dream” when you strip off the romance of Marco Polo is also very much primarily focused on both the geopolitical and economic as well. As the main thrust is not premised on fairytales but rather it relates specifically to China’s need to meet very specific economic waypoints, namely the “Two Centennial Goals” of doubling China’s 2010 per capita GDP by 2021 along with creating a “prosperous” nation that “reaches the level of moderately developed countries” by 2049.

Q: Do you see the military component of both leaders aspirations coming into conflict to such an extent where it retards economic cooperation?

A: Both grand ideas would naturally have to be complemented with much more muscular military elements to what currently exist in their inventory of skill of arms.

China needs a carrier doctrine. America needs more staging bases in the Pacific and possibly the Indian Ocean. So on paper it definitely looks like both superpowers are dedicating themselves to a classical Richardson arms race that suggest the real possibility of conflict.

Having said all that. You need to understand the chronology of how these calculations are made – that’s to say their economic goals namely to create a stable, harmonious and predictable theatre is designed to facilitate trade and commerce. So I see this arms race as complimentary to their economic aspirations.

When Trump’s says he wants a stronger U.S. military what he is actually saying is I want America to be economically great as well. Xi’s China Dream in my opinion is similar and much more direct and specific – as it encapsulates clear military designs on both land and sea. The latter which is seldom ever discussed is the maritime Silk Road that obliquely requires the Chinese to project into both the SCS and the Indian Ocean.

But you must understand these military designs are not stand alones – they are designed to compliment their geoeconomic assets. In the case of China she is pouring billions into deep water ports in the Indian Ocean from Djibouti to Gawar and the Sandonia and possibly next Lanka. But these are really designs to augment the vulnerabilities of the choke points on those trade routes.

So my point is just because you have two countries engaged in an arms race does not necessarily mean they are going to war. To my understanding that is not how the calculations are made. As it can very well be a reaffirmation that both countries are very serious about trade as well.

Q: Do you think Chinese designs will necessarily bring her in direct conflict with the US?

A: That’s a very good question. But I think whatever answer emerges has to be framed against the background of many of the similarities in goals that the US currently shares with China.

The problem with waging war is it’s quite a lousy way to make America great again.

Q: How credible is this idea that since both countries share a common set of goals this may actually be a bedrock to build deeper U.S.-China relationship?

A: Both Trump and Xi can leverage on each other’s strengths and global agenda to get roughly what they want – to make America great again, jobs and opportunities are needed. For China to realise her dream, the idea of the pivot needs to be junked along with how American policymakers have traditionally deployed realpolitik to manage conflict.

What many fail to recognise is there is already massive US industrial capacity invested within China – and many of these multinationals need the Chinese market to create exactly the conditions to make America great again.

This is important as we are not talking about two countries that don’t already have an active and healthy balance of trade between each other. So I see the incentive to build on these relationship rather than starting on a new slate.

My point is contrary to what is so often depicted by the media – there is already a lot of cooperation at the level of trade and commerce between China and America and during the last Trump and Xi meeting both parties have agreed to a one-hundred-day review of bilateral-trade policy to find areas where they can work further together. I think OBOR opens up many apertures of opportunities for American firms especially in engineering consultancy and specialised engineering services that China still desperately lacks and this would all go the distance to bridge the perennial trade deficit between the US and China.

Q: What does China stand to get from all this cooperation?

A: Firstly it would blunt the motivation that accounts for the TPP. Secondly on a monetary side – it would allow China to create a sustainable mechanism to reduce their trade deficit with the US. This would allow China to curb inflation and positively influence the Chinese money supply which is something that their central banks have been having a lot of trouble doing. Thirdly, since both China and the US are aligned economically, this would go a long way to end hostilities between them since the motivation to cooperate is higher than fighting. Fourthly, and this I might add is the most important tangible plus point for China. I see US China collaboration as the only means for Xi to wean many inefficient state owned enterprises (SOE) from protectionist measures that in my opinion can no longer be staved off, if China is to fulfil its fourth generation industrial revolution.

Q: Fourth level industrial revolution? What has this got to do with inefficiently run state owned enterprises?

A: The description Fourth level industrial revolution is the way by which we describe the next challenge of the Chinese economy – it is a term that refers specifically to our own history known as the Foundation – where we reached a point in our virtual economy where we had to make the transition from just copying stuff to actually synthesizing new products and services by leveraging specifically on intellectual capital.

China has reached that economic maturity tipping point – it can no longer continue to rely on its ultra low cost to further carve out competitive advantage as other cheaper cost centers in the world are likely to spring up a she needs to make the industrial and technological jump.

And one of the main hindrances that prevents her from making this jump is their SOE’s. As when we speak about over capacity in the context of China – it’s really quite a fuzzy term that simply denotes surplus in conversion capacity i.e you have more steel mills than what the market actually needs. But no one really bothers to ask. Not even Western economist – how did China’s industrial production become so loopy in the first place. What really accounts for this lack of syncrhonization between industrial supply and market demand?

For me I think it’s very important to go further and ask, what does over capacity in the Chinese context really mean? Because it is quite unique and particular to only China and the failure of western analyst to drill deeper into this area has been one of the reasons why they consistently fail to understand the push and pull forces that are responsible for the Chinese leadership doing what they do.

One major reason has to do with the vested power of these state owned oligarchs like the PLA – that is not only riven with corruption, but since they wield so much regional influence by virtue of their sheer size and support base they can even resist change.

This is a very big problem for China. That’s why if you go to China you find whole complete cities like ten Sengkang’s being built and it’s a ghost town. Or antiquated steel mills that are still churning out millions of tons of pig iron that’s really only good for making skillets. Because they don’t meet any known engineering specifications or benchmarks. The larger SOEs maintain monopolies over key sectors of the economy (energy, mining, infrastructure) and smaller SOEs are characterised by low productivity and high debt levels. As I see it many of the inefficiencies stem from the fact that the interests controlling SOE are not necessarily aligned with those of the wider economy or society. In some of time honoured sectors such a coal mining – it’s not even about business per se and has more to do with advancing the Maoist idea communism is a way of life hence everyone in the village gets employed even should they run into debt every year.

Many of these state owned enterprises are so monstrously huge they can even be considered a country within a country.

Q: How did these SOE’s become so big as to present a real and present danger to the Chinese economy?

A: It’s a legacy of soviet industrial planning what’s called regional industrial specialisation – the idea is every province is designated a field of industrial competence. So if you go to Shenyang for example. You find all the kids play only with toy jets. And the only vocation that is ever taught in universities is aeronautical engineering as since all the factories build planes or supply parts to the aerospace industry – that’s the way to go. Go to another province and all the kids play with only trains. As all the factories there all build trains and locomotive related parts and componentry and ditto.

What you need to understand is these SOE’s are based in the provinces – they’re very far from central government, so that accounts for why many have had the autonomy to developed their own power base along with their own unique pathways of perpetuating their own interest even if it comes at the cost of creating unhealthy monopolies or puts them in direct collision course with modern free market practices.

The problem as I see it is these SOE’s are just not enterprises in the true sense, but since they derive a political power base in the provinces they are also the de facto power behind the curtain of the communist party. As they have the power to vote and in some cases even veto central government.

Q: How has previous Chinese leaders reconciled this hubris of the SOE’s with modern free market practices?

A: The short answer is no Chinese leader since Deng to present date Xi has been able to exert any significant influence in the form of real change or for that matter reform. Except maybe begging them to merge or consolidate thru forced acquisitions in an attempt to buy their debts from time to time.

These SOE’s are a bit like our own order of purple or Templar knights or imperial household eunuchs. They are very powerful. They can even resist all attempts at change. And this accounts for what I believe to be the primary motivation behind OBOR.

As what Xi is saying to the SOE’s is simply this – ‘I cannot institute reforms for change….no premier in China can….but I know the world can change you all….so go forth!’

Q: Do you really believe that is the primary motivation behind OBOR?

A: I think if it so structured in that way. Neither you, I or anyone can possibly believe that could possibly be the primary motivation behind OBOR. But when one ask the question how does one go about modernising the communist party? Then that could well possibly be the primary motivation behind OBOR simply because the destiny of the communist party is so enmeshed with the SOE’s. One could even say the SOE’s is a microcosm or maybe a diorama of the communist party. They are really one of the same reality. Both are riven with the endless intrigues of power and politics. Both continue to enjoy a monopoly and both are also inexorably headed to doom if they cannot find the impetus to effect change from within.

Within the communist party of China there is a mechanism of self destruction….as this whole idea of trying to fuse capitalism with communism is a wholly unnatural alliance. It’s a bit like trying to retrofit a Tang Dynasty hutong with modern ameneties. Sure in the beginning some level of happiness thru forced accommodation can be accomplished like China’s hubris of one country, two systems to accommodate Hong Kong. But as China’s economy becomes more interowoven with the world’s economy. At some point – all attempts at accommodation can only produce more problems than solutions.

This is a subject that is intensely debated within the inner circle in China. Can China continue to perpetuate itself coherently in the political and economic sphere while holding steadfastly to a bullocart of the communism?

You don’t hear about such talk. Because in China it’s treason.

But the fact that people do feel the need to discuss these topics should not come as a surprise. Not at all – as China has reached a point of economic maturity where for it to migrate further up the value chain, it has to be able to manage change within effectively. And when we speak about change in the context of communist party we are also speaking about changing the SOE’s as well – it’s one of the same reality – this goes beyond just getting the SOE’s to talk to each other from different localities to assess their strengths and weaknesses honestly, cooperate, share and consolidate economic and social planning and resources there has to be a means to purge the old before a new order can be put in place.

This may sound like something out of management 101. But it is not something that comes naturally to either the communist party or SOE’s in China.

But as OBOR compels them to go into the wider world – they would ultimately be forced into a leaner shape by mercantile realities such as the need to abide by intellectual property guidelines, transparency in reportage of their financial dealings to shareholders along with learning the ropes of how to do business the worlds way rather than holding on to their old way of doing things.

This I feel is where America can come in to add considerable value to modernising and even streamlining many of these SOE’s – weaning them from protectionism and forcing them to work under enhanced intellectual property laws would dramatically assist many of SOE’s in transitioning to a consumption and service-based market needed for stable economic growth.

Q: What do you think the chances of America coming into OBOR in a big way stands at – as you have so described?

A: For the moment OBOR is still very much a picture painted in bold strokes – it’s just a sketch. And I don’t think it’s wise to speculate too much on the specifics. But even as it is I can tell you with a high level of certainty it can definitely benefit from both US corporate and industrial inputs. There are many undertakings within the scope of OBOR which are simply too complicated for China to do – I mean it’s like opening up the entire prairies all over again. No one just decides to draw a line on a map circa 1900 style any longer, environmental assessment has to be conducted, remote sensing, feasibility studies and the odd mountain may have to be moved.

I see all this as a great source of employment and opportunities for American firms.

I think as the OBOR picture starts to get more defined then you will see the level of enthusiasm getting much higher on the American side.

Q: Do you think that the US will abandon the TPP even if they stand to benefit economically from OBOR?

A: Go right back to the question I posed in the beginning – how does one go about making America great again? To me what does it matter if it is OBOR or the TPP that can fulfil that imperative. Let me put it another way, black cat or white, does it really matter at all if either can catch mice?

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