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Political heat is rising in China’s summer

It’s summer in China and, as usual, Beijing is hot and humid. Unexpectedly, the political temperature is not dissimilar. And it’s not just because of the trade tariff row between China and the US. According to recent stories emanating from the capital, not everyone in the Communist Party hierarchy is happy with the way that President Xi Jinping prepared for and has conducted what amounts to a reset of China’s most important external relationship. A clampdown on intellectuals, evoking memories of past political excesses, was announced recently, following an extraordinary essay, written by a legal scholar which did not mince words about opposition to the current leadership’s regime.  A scandal has erupted over substandard vaccines given to hundreds of thousands of children. The fabled Belt and Road Initiative has been getting some bad press about governance as a number of ‘beneficiary’ countries have run into serious debt capacity or safety difficulties. The stock market has plunged, the Renminbi has been falling, and the economy is losing traction.

Remember that at last autumn’s 19th Party Congress, President Xi was almost deified, and cast as one of China’s great leaders, alongside Mao and Deng Xiaoping. Having already established strong control over the Party, the Army and the internal security apparatus, Xi was hailed as a strong and unassailable authoritarian to lead China towards 21st century prosperity and great power status. At the National People’s Congress in March this year, the 10-year term limit on the presidency was abandoned, and extensive institutional reforms were announced, designed to strengthen the control of both Party and Xi.

This no-nonsense approach to government was contrasted with the huffing and puffing of Western democracies nowadays. But more savvy observers warned that the trouble with strong-man government is that when something goes wrong, there’s only one person to carry the can. This problem is exacerbated by Xi-style authoritarianism that tends to stifle opponents and dissent, and discourage alternative ways of thinking and creative challenge. We can see in China this summer why this more sceptical view is holding sway.

Last week, the Communist Party announced a new ideological campaign, or ‘patriotic struggle’, targeting specifically the country’s intellectuals. This dovetails with other campaigns that have targeted Western values, universities and trades union, religious minorities (Christians and especially the Muslim Uighurs in Xinjiang Province), human rights activists, and poor urban migrants. But this new campaign follows the publication in late July of a widely shared 10,000-character essay published on a Hong Kong website by Xu Zhangrun, a Tsinghua University legal scholar, which has captured opposition to Xi’s China. It warns of the danger of the return to totalitarianism, and appeals to end the cult of personality and reintroduce presidential term limits. Mr Xu’s extraordinary essay is not alone, and the government’s reaction does not speak to the idea of a government that feels secure.

It also recently came to light that officials in Jilin province uncovered a scandal involving a private pharmaceutical company with deep political connections to the Party. Changsheng Biotechnology Company falsified production data for a diphtheria, tetanus and whooping cough vaccine. They admitted, after finding faked data for its rabies vaccine last month, that this company had supplied more than 250,000 sub-standard does of the triple vaccine, and another had supplied 400,000 similar injections. China has had previous health and safety scandals, exposing fast-and-loose corporate practices and corrupt local officials and supervisors. Yet, this sort of thing reflects even more badly on this President, who has nailed his colours to (extra-judicial) anti-corruption and Party purity campaigns.

President Xi’s personal association with the Belt and Road Initiative, China’s de facto 21st century foreign policy, means he is closely aligned with both successes and failures. There are many examples of the former, and a rising number of the latter. This year alone, for example, Chinese financing of infrastructure projects has been associated with a corruption scandal in Malaysia, an external debt crisis in Pakistan, financial stress in Cambodia, and a hydro-electric dam safety scare in Colombia. There are many such cases, with a common cause that is flawed governance. According to the Washington consultancy, RWR Advisory, 14 per cent or 234 of the 1,674 projects undertaken in 66 countries since 2013 have run into trouble. Even if most haven’t, the claim that Belt and Road offers a new and improved growth and financing model for the global economy, rather than a China-centric global footprint strategy, is proving to be increasingly hollow.

The Shanghai Composite stock market index has fallen 23 per cent since its recent high in January, and is now around the worst levels reached in the 2015 crisis. The more closely managed Renminbi has fallen by over 8 per cent against the US dollar since the high in March to CNY6.83, not too far off the CNY6.96 low at the end of 2016. Both developments are related to the trade war with the US, but also to the Chinese economy losing traction, and the loosening of policy.

Last month, the US implemented a new 25 per cent tariff on $50 billion of imports from China. President Trump threatened to increase the tariff rate from 10 to 25 per cent on a further $200 billion of imports from China, if the latter retaliated (which it did),  and even subject all $500 billion or so of imports to tariffs. China’s riposte last week was to threaten variable tariffs on an additional $60 billion of imports from the US.

Since China only imports about $150 billion of goods from the US, the scope for its own tit-for-tat tariffs is almost exhausted. If it wanted to continue hitting back at the US, it would have to resort to some combination of currency depreciation, and punitive checks and regulations targeted at US products and companies doing business in China. The fall in the Renminbi so far has more or less compensated for the US tariffs imposed, but because China’s tariff capacity is now limited, any further widening of US tariffs would require the currency to fall to perhaps around 7.25-7.30 to the US dollar.

Washington would see this as a serious escalation, and it would probably unhinge a number of other Asian currencies and global markets. For now, this might be a bridge too far and a major instability risk for China. Indeed, it acted late last week to penalise traders wanting to short the currency, and it will be interesting to watch the actions of the People’s Bank of China.

As China’s top leaders gather for their annual meeting in Beidaihe this month, Xi Jinping’s position is almost certainly not under threat, to the extent that anyone can tell. Yet, the circumstances in which Xi’s China’s find itself the summer, and its reactions to them reveal something about the country and its President that doesn’t dovetail well with the conventional narrative.