With the fireworks of the Chinese Spring Festival having just launched the Year of the Rooster into flight, we’re looking ahead to ask what every self-respecting China-watcher needs to know about the year ahead. This article, the first of a three-part series, reflects upon the political changes that likely lie ahead for the emerging superpower.

Shaking the boughs of China’s leadership tree

China is embarking on a year that will carry enormous significance for the future trajectory of its political and economic development, with a sweeping reshuffle of its top leadership planned at the 19th Party Congress in the autumn. The quinquennial political gathering will mark the beginning of President Xi Jinping’s second five-year term at the party-state’s helm and approve one of the largest elite turnovers in decades, with five of the seven members of the Politburo Standing Committee, the apex of political power in China, expected to step down due to an unofficial retirement age of 68. The extensive reapportioning of senior political slots, including a number of those on the Central Military Commission and the 25-person Politburo, will also usher in a new generation of leaders, possibly including the eventual successors to the presidency and premiership. However, some China watchers have speculated that the unveiling of the heirs apparent may depend on whether President Xi uses his core leader status to change the leadership succession rules and decide to stay on as party leader beyond 2022 when his second term expires.

Ahead of such a pivotal leadership transition, Beijing is overwhelmingly focused on averting any economic or social disruptions and controlling risks, with maintaining stability set as the paramount objective for 2017. In particular, the leadership’s imperative of sustaining an even keel of growth indicates that the implementation of long-awaited economic reforms will likely be shelved until after the Party Congress.

Furthermore, although the topmost changeovers will monopolize most media coverage, international businesses should be aware that the political shake-up will occur at all levels of the party-state apparatus across China as officials migrate upwards to new positions within the hierarchy. Executives should prepare for the possibility of needing to establish relationships with new government stakeholders following the personnel rearrangements.

Tangling with Trump’s talons

As China enters an intense political season building up to the Party Congress, the U.S. has already veered off into uncharted waters following one of the greatest upsets in modern politics. Donald Trump’s shock electoral victory in the U.S. presidential election swooped down as the biggest black swan to rock the global order in 2016, and the January kick-off of his first term in office may ultimately see the Year of the Rooster fly into the history books as a crucial inflection point for bilateral relations between the U.S. and China.

While on the campaign trail and as the president-elect, Mr. Trump took a particularly hawkish stance towards China, repeatedly faulting the country for much of America’s ongoing economic malaise, particularly the decimation of U.S. manufacturing in recent decades. He excoriated Beijing for what he called its predatory trade practices and currency manipulations, threatening to erect trade barriers in retaliation, such as the imposition of a 45% tariff on imported Chinese goods.

Furthermore, Mr. Trump’s more combative posturing also extended to some of the thorniest geopolitical issues weighing down on bilateral relations. Prior to assuming office, the new president, as well as members of his administration, took an especially hard line over Beijing’s sovereignty claims in the South China Sea as well as its relations with North Korea, raising the harrowing possibility of a regional crisis sparking a severe diplomatic rupture in the near future.

Fortunately, the risk of an early cataclysm besetting bilateral relations appears to have been lowered significantly after the Trump administration moved to defuse rising tensions and extended several olive branches to Beijing during its initial weeks in office, most prominently the president’s pledge to uphold the longstanding One China policy during his first official phone call with President Xi. Mr. Trump’s reassurance that his administration would not seek to overturn the bedrock diplomatic principle underpinning bilateral relations for more than four decades marked an abrupt volte-face from his earlier threat as the president-elect to abandon the policy unless the U.S. managed to extract concessions from Beijing in trade and other areas in return for Washington’s continued commitment to the arrangement. Soothing concerns that U.S.-China relations were teetering on the brink of a catastrophic break-down, the administration’s acquiescence on a red-line issue that is sacrosanct and inviolable for Beijing unfroze the deadlock in high-level communications and raised hopes that both sides will now be able to constructively address and make inroads on other more pressing issues of contention, including the trading relationship and regional challenges, such as the South China Sea and North Korea.

However, it remains to be seen whether Mr. Trump’s seemingly softening approach towards China will endure as he makes the difficult transition from campaigning to governing in the early months of his presidency. The translation of his previous broadsides launched against Beijing into actual policy dictated from the Oval Office would inevitably escalate bilateral frictions, setting the stage for a period defined by excessive volatility and potentially massive disruptions in U.S.-China relations. Looking ahead, international businesses should be mindful of the prospect of more adversarial relations between the world’s two largest economies spooking up yet another black swan in the Year of the Rooster.

Mining the silver linings of “America First”

With a more hawkish administration now holding Washington’s reins, Beijing may be bracing for a bumpier ride in bilateral relations, but the leadership is no doubt also eyeing the potential silver linings that President Trump’s unabashed “America First” policy may create for China’s regional and global ambitions. In particular, Mr. Trump’s fierce repudiation of the benefits of globalization heightens the likelihood that the world is now venturing into a time of receding U.S. leadership, presenting a significant geostrategic opportunity for China to increasingly fill the void vacated by a more inward-looking America.

Beijing has had the political savvy to capitalize on widespread concerns about the prospects of a looming U.S. withdrawal from global leadership and secured a deft public relations coup at the World Economic Forum in Davos on the eve of Mr. Trump’s inauguration in January. As the first Chinese head of state to attend the annual gathering of international business and political elites, President Xi delivered a staunch defense of the continued need for free markets and economic globalism in his keynote address. Although he never mentioned Mr. Trump, or even the U.S., by name, the implicit rebuke of the incoming president’s protectionist leanings and America’s rising populism was unmistakable. Mr. Xi’s speech, juxtaposed with President Trump’s impassioned pledge to fully implement his “America First” agenda at his inauguration three days later, unleashed a firestorm of media coverage about whether the world was now entering an era where China would begin to usurp America’s role as the flag-bearer for economic globalization.

Immediately after assuming office, President Trump added further fuel to such speculation by signing an executive order to formally withdraw the U.S. from the Trans-Pacific Partnership (TPP), fulfilling one of his most prominent campaign pledges and giving the world its first taste of “America First” in action. Designed as an economic counterweight to China’s emerging clout throughout the Asia-Pacific region, the 12-nation trade accord was spearheaded by the Obama administration and formed the centerpiece of its “pivot to Asia” strategy. The demise of the TPP under President Trump may create enough of a vacuum for Beijing to supplant Washington as the guiding hand behind the crafting of Asia’s economic architecture, particularly by boosting the appeal of its proposed pan-Asian Regional Comprehensive Economic Partnership, an alternative trade pact to the TPP that is expected to be concluded by the end of the year.

The launch of the Beijing-led Asian Infrastructure Investment Bank (AIIB) last year had already begun to significantly expand China’s institutional and financing influence throughout the region. President Trump’s ringing of the TPP’s death knell will likely only further accelerate that process by signaling American disengagement from the region and diminishing Washington’s influence in the eyes of its Asian allies.

Navigating Brexit’s choppy waters

For China, it remains uncertain whether Britain’s startling decision to depart from the E.U. will ultimately conjure up a geopolitical windfall, an economic threat, or a mingling of risks and opportunities.

Looking at the bright side from Beijing’s perspective, Brexit may impel the U.K. to become even more outward-looking and pivot its strategic gaze beyond Europe, paving the way for China to emerge as a natural choice for a new global partner. Furthermore, Brexit’s dramatic fracturing of the European integration project could yield significant geostrategic gains to China, with a weakened E.U., diminished by disunity and lacking a strong voice on the world stage, creating greater space for China to pursue its own international agenda without powerful opposition from a unified E.U.

However, the Brexit fallout could rain down adverse consequences for China as well. Together with Donald Trump’s election, the E.U. referendum’s outcome indelibly marked off just how high the tide of anti-globalization has risen around the world. As the greatest beneficiary of globalization and the world’s largest exporter, China stands to lose enormously should Europe and the U.S. beat a sudden retreat from their longstanding commitment to free trade and open economies. In addition, the implementation of a hard Brexit could imperil the U.K.’s role as the leading Western hub for RMB internationalization and one of China’s favored overseas investment destinations and preferred gateway to Europe. Moreover, the loss of Beijing’s most prominent ally in Brussels and its E.U. cheerleader-in-chief for closer economic relations with China could upend the global push of Chinese corporates.

Flying into European electoral gusts

In the wake of Brexit and Mr. Trump’s move into the White House, the wind behind the sails of the hard-right, uber-nationalist movements coasting across Europe appears to be gathering momentum and blowing the trajectory of anti-establishment parties ever further into mainstream politics and away from the extremist fringes of society.

In 2017, the upcoming leadership elections in the Netherlands, France, and Germany, all three of which are founding members of the E.U. and account for more than half of the bloc’s economy, are slated to serve up Europe’s most tumultuous showdowns between the forces for globalism and nationalism and potentially play a defining role in the future of the continent. If voters deliver big victories to the euroskeptic parties and propel them higher up into the Europe’s political stratosphere, then the current E.U. order, already on shaky ground post-Brexit, will be put in further jeopardy. In addition, there will be a marked risk of newly protectionist European governments abandoning their multilateral trade agreements and taking steps to further close their economies.

With the E.U. absorbing close to 20% of China’s exports, the impact on the Chinese economy of Europe adopting more restrictive, anti-trade regimes could be considerable. This year, Beijing will no doubt be closely monitoring the prospect of European political turbulence upsetting its economic relations with the continent and disturbing the international expansion of its domestic champions.

Looking south to Hong Kong’s election and anniversary year

Much closer to home, Beijing will be closely following the spring election of its southernmost commercial powerhouse. The race for Hong Kong’s chief executive, the top government posting in the city, is now kicking off in full force following incumbent Leung Chun-ying’s surprise announcement in December that he will not be seeking re-election.

With this year marking the 20th anniversary of Hong Kong’s handover from the U.K. to China, the contest to lead the territory of seven million residents is expected not only to showcase the remarkable strides towards closer relations achieved by the city and the mainland under “One Country, Two Systems” but also some of the rising strains evident in that governing framework.

Following the official election on March 26th, President Xi is expected to visit Hong Kong this summer to administer the oath of office to Mr. Leung’s successor as chief executive as well as to commemorate the reunification anniversary.

 By Benjamin Cooper & Philippe Healey

H+K’s dedicated Government & Public Affairs (GPA) practice offers a wide range of services, including strategic counsel, stakeholder engagement monitoring and analysis services to a range of national and international leading companies.

 

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