On September 26 last year, China passed a milestone that was barely mentioned and certainly not celebrated.
The People’s Republic had on that Wednesday in autumn outlived its one-time ally and patron, the Soviet Union.
It was an achievement that showcased both the success of China’s Communist Party and the fallibility of authoritarian regimes, an awkward combination that ensured the occasion was marked with silence by China’s state-controlled media.
At an elite level, however, the milestone has always hovered around the Party’s official literature and was referenced in a speech by President Xi Jinping released in June.
Xi said the Soviet Union’s collapse had served as a “lesson” for the Party, while assuring newly appointed members of the Politburo that socialism would eventually triumph over capitalism.
It appears more than a coincidence the speech, delivered six years ago, was released just before Communist China surpassed the Soviet Union in longevity and as Beijing prepares to celebrate 70 years of Party rule on October 1.
This is a milestone that won’t be ignored.
It will be marked with a military parade down Chang’an Avenue past Tiananmen Square and the Forbidden City.
The event is designed to showcase China’s military hardware and the country’s associated economic strength and technological expertise.
But the larger message is of China’s arrival as a challenger power to the United States and one that aims to eventually supplant Washington as the world’s largest economy and the region’s dominant power.
Magnus, who last year published Red Flags; Why Xi’s China is in Jeopardy, cites demographics, debt levels and the lack of independent institutions as the key points of Beijing’s vulnerability. And he says any faltering of the economy would have a “big impact” on China’s military spending at a time when strategists are already raising doubts about its ability to exercise dominance across the region.
It’s a view that has been gaining some traction.
Bruce Millar, who previously ran Australia’s peak intelligence agency – the Office of National Assessments – and before that was ambassador in Tokyo, told a security conference at the Australian National University in March: “we are working our way towards a messy, probably multi-polar order that lacks easy definition”.
While Millar stressed he was no longer an “insider”, his speech suggests there is more than a passing acceptance of his view within government that China will never become the region’s dominant power.
As Donald Trump said of China last week: “They have lots of problems.”
This view is built largely around economics, but it’s one that quickly spills over into defence technology and Beijing’s military capability.
Experts like Magnus believe that by 2030, China’s economy may have already peaked rather than be marching ever higher into the 2050s. For Australian business, this would require a significant recalibration towards other customers and markets.
For strategic planners, it suggests China’s window to act on territorial ambitions in the South and East China Seas or around Taiwan will not remain open much beyond the next decade, raising the possibility of Beijing lashing out.
“The 2020s are shaping up as the dangerous decade,” says Ross Babbage a former official at Defence and ONA.
“Our biggest fear in the security sector is that China does something rash.”
Now a fellow with the Centre for Strategic and Budgetary Assessment in Washington, Babbage says the risk of Chinese “adventurism” is rising, while great power rivalry is no longer happening in Central Europe, like during the Cold War, but in Australia’s region.
“Australia is now close to centre stage,” he says.
“And that means US expectations around Australia’s contribution are rising.”
Rash is the word defence strategists use when they don’t want to sound alarmist.
The theory is that Beijing’s ability to project power, or more precisely deny the US fleet access to its claimed territorial waters, won’t be maintained beyond the 2020s.
“The Chinese have over-invested in ballistic missiles and we are now in a position to use this against them,” says Tom Mahnken an assistant secretary of Defence under Barack Obama who had carriage for military planning.
As it sits now, the US would be very wary of sending the Pacific fleet deep into the South China Sea as it would be vulnerable to Beijing’s intermediate-range ballistic missiles.
There’s also a cost element. Mahnken, who now sits on the National Defence Strategy Commission, says that in a hot war, the US could be spending $US3 million a shot to bring down scores of Chinese ballistic missiles, which cost $US500,000 each, while still having no guarantee its fleet would be protected.
Put another way, China could spend $US100 million sinking a $US2 billion ship, even after the US had spent $US300 million trying to protect it.
That’s China’s “anti-access” or “area denial” capability, which has not made Beijing a dominant military player in the region but has put a very large check on US power.
This capability has in recent years stretched beyond China’s claimed territorial waters to the so-called “second island chain”, which takes in US bases such as Guam.
Not surprisingly, Washington has begun to push back.
At the same time as being criticised for having an overly passive posture towards China, the Obama administration set about countering Beijing’s ballistic missile capability through what was termed the “third offset”.
It’s as much a cost-savings measure as a plan to develop the next generation of military technology.
The most prospective among this new kit are “directed energy” weapons or high-powered lasers, which could be deployed on ships to shoot down ballistic missiles at less than $US100 a shot.
“Directed energy will be deployed in an operationally relevant capacity in the next five years,” says Mahnken.
The unknown factor is how China will respond, while at the same time others worry that the US has a cultural bias, or even arrogance, around its perceived technological edge.
It’s an argument yet to be settled. There is greater agreement around the emerging capability of the US’ anti-ship missiles and how these may swing the balance of power back towards Washington and its allies in the region.
These highly mobile, relatively cheap and hard-to-detect cruise missiles can be mounted on the back of a truck and fired from a Pacific atoll or a jungle in the Philippines. If successful, this new capability may limit the Chinese fleet moving beyond the so-called “first island chain”, which takes in Taiwan, Malaysian Borneo, the Philippines and Vietnam.
“The Chinese will have to respect this threat and it will greatly lessen the coercive power of China’s capability,” says Mahnken.
“There are nine choke points between the Chinese mainland and the Pacific Ocean; five are in Japan and four are controlled by other US allies.”
New weapons and technologies
General David Berger, the commandant of the Marine Corps, which will have this new capability, put it more bluntly.
The Marines, he said, need to be able to once again “hunt and kill ships”.
Brendan Thomas-Noone from the US Studies Centre at the University of Sydney agrees that this new capability, to be deployed within five years if not sooner, could shift the balance of power towards the US and its allies.
“You are always moving so it’s very hard for your adversaries to find you,” he says.
At the same time, he cautions that these new weapons and technologies will still require the US to prioritise resources back to the Indo-Pacific if it wishes to counter China’s dominance.
“The US can’t continue to get distracted by non-strategic conflicts in the Middle East,” a position laid out in a report released last month by the US Studies Centre, titled Averting Crisis.
Another possible catalyst for China acting rashly could be an economic stumble or the far bigger realisation it does not possess the tools to move beyond a middle-income nation.
While the Oxford economist Magnus is acutely aware of China’s debt problems, he sees equally large structural problems ahead for Beijing.
The lack of independent institutions is top of his list.
“It’s about having the institutional flexibility to foster the productivity growth you rely on after running out of labour and the physical accumulation of capital,” he says.
China is fast reaching the point where it can no longer rely on cheap labour and infrastructure spending to drive productivity growth.
“Building strong institutions drives productivity growth. This is not done by sending satellites to the dark side of the moon,” he says.
Magnus names the need for an independent legal system, strong competition policy, regulators with teeth and a creative education system as the drivers for this next phase of productivity growth.
“The odds are stacked against China doing this,” he says.
That was not always the case. As Xi came to power in late 2012, there was an expectation that major economic reforms would restart after a “lost decade” under his predecessor, Hu Jintao.
This never happened and any pretence of reform was largely abandoned after the stock market crash of 2015 and the economic stumble this delivered.
Fearful of what a downturn would mean politically, the Party pushed the button again on stimulus, reflating the debt bubble that has so worried Magnus and other economists.
Beijing’s borrowings now exceed 300 per cent of GDP, a red-line that is unlikely to deliver a Lehman-style crisis, according to Magnus, but will take a decade to fix and have a big impact on growth.
“We are nearing a point where the capacity of borrowers to keep borrowing has been reached,” he says.
Magnus predicts China’s inability to digest more credit will push annual growth below 4 per cent in the medium term, forcing some hard fiscal choices on Beijing.
“They can’t continue to throw money at problems and still expect to have high growth, full employment and double-digit defence spending,” he says.
This suggests a long period of deleveraging lies ahead, which will put further pressure on China’s currency, the yuan.
“It’s an accident waiting to happen,” says Magnus.
He predicts its soft peg to the US dollar will crumble over the next three to five years. When this has happened in the past, he says, a devaluation of between 15 per cent and 35 per cent has been the result.
Magnus says the problem for China is that domestic liquidity or credit is growing faster than foreign reserves.
China’s US dollar holdings peaked at close to $US4 trillion in June 2014 and since then have declined by 25 per cent.
“That spells trouble for currency stability,” he says.
“If that devaluation happens, then China’s economy in 2030 may be the same size as today in USD terms.”
If this were to happen, it would cruel China’s ambitions to move beyond a middle-income country and its current GDP per capita of almost $US10,000.
To reach high-income status, this figure needs to grow a further 25 per cent in constant currency terms.
That would put China in the same league as the likes of Malaysia or Argentina, but still with income per capita at less than a quarter of Australia.
In absolute terms, its economy would remain 35 per cent smaller than the US.
Even without a major economic hiccup, there are others who cite China’s demographics as reason enough for it never outgrowing the US economy.
In his book, Big Country with an Empty Nest, Yi Fuxian says China’s ageing population will prove to be a big drag on growth.
“The younger an economy’s population structure, the stronger its vitality for economic innovation,” says Yi an academic at the University of Wisconsin.
He cites the example of Japan, whose economic growth slipped below that of the US in 1992, the same year the proportion of its working-age population aged over 65 surpassed America’s.
With the exception of 2010, Japan’s economic growth has remained below that of the US ever since. It’s the same story in South Korea and Taiwan.
Yi forecasts this inflection point for China and the US will arrive in 2033, when the mainland’s median age and proportion of working-age population will exceed that of America.
“We can conclude that China’s GDP growth may start to fall below the US’ in around 2033,” he says.
He estimates this will result in China’s economy peaking at 84 per cent of the size of the US in 14 years time.
This would confirm a view often put by former prime minister John Howard that “China will grow old before she grows rich”.
Veteran diplomat and the former head of ONA, Allan Gyngell, agrees there’s nothing inevitable about China’s trajectory and is quick to quash the idea of a “Sino-centric” region where Beijing sits unchallenged at the top.
“We are not going to see a return to the Qing Dynasty where other countries are mere tributaries to a Chinese empire,” he says.
“I think pragmatism will prevail as it’s the only way to deliver the continuous growth necessary to legitimise the leadership of the Party,” he says.
“Yes there are strong strains of nationalism [in China], but I think the leadership can be relied upon to understand that risk-taking behaviour is not going to end happily.”
An investigative reporter based in Sydney. He has worked as a foreign correpondent in China and Indonesia, and has won two Walkley Awards.