Foreign Policy: China Will Run Out of Growth if it Doesn't Fix its Rural Crisis

No country with China’s vast education and public health problems has ever broken out of the ranks of middle-income countries.

"At a time when every other major economy is shrinking, China announced in late January that its GDP grew 2.3 percent in 2020. Beneath that impressive achievement, however, lies a very unbalanced recovery: As in the past, Beijing relied heavily on state investment and a state-led push for higher industrial production, while private investment and consumer spending remained weak. Easy credit to fuel growth has likely formed even more so-called zombie companies with little prospect of future profitability and filled the books of Chinese banks with even more bad loans.

That much is familiar to many who have taken a closer look at China’s skewed model for economic growth. What’s much less well known is the disproportionate burden of the COVID-19-induced downturn that has fallen on rural Chinese, including the 290 million migrant workers with rural hukou (household registrations) who work in cities throughout China. Lockdowns forced by the pandemic paralyzed economic sectors where many migrants work, such as services and retail. According to one estimate, Chinese migrant workers lost about $100 billion in wages that they are unlikely ever to recover.

Among migrant workers and the underdeveloped rural communities that depend on the wages they send home, a quiet crisis is taking place—with potentially dramatic consequences for China’s future growth. Despite what the GDP number suggests about the country’s successful handling of the pandemic, China’s longer-term economic risks have only grown—and are a direct result of the crisis in rural China. As Stanford University researchers Scott Rozelle and Natalie Hell document in their meticulously researched book, Invisible China: How the Urban-Rural Divide Threatens China’s Rise, hundreds of millions of rural Chinese face a dangerous lack of human capital and suffer from pervasive health problems, including widespread iron-deficiency anemia, uncorrected myopia, and parasitic intestinal worms. Exacerbated by the pandemic, China’s rural crisis remains largely invisible to outside observers, and even to many Chinese."

Read the full article from Foreign Policy.

On February 10, 2021, the China Program at Shorenstein APARC hosted Professor Oriana Skylar Mastro, Center Fellow at the Freeman Spogli Institute for International Studies​ for the virtual program "Military Competition with China: Harder to Win Than During the Cold War?" Professor Jean Oi, William Haas Professor of Chinese Politics and director of the APARC China Program, moderated the event.

As US-China competition intensifies, experts debate the degree to which the current strategic environment resembles that of the Cold War. Those that argue against the analogy often highlight how China is deeply integrated into the US-led world order. They also point out that, while tense, US-China relations have not turned overtly adversarial. But there is another, less optimistic reason the comparison is unhelpful: deterring and defeating Chinese aggression is harder now than it was against the Soviet Union. In her talk, Dr. Mastro analyzed how technology, geography, relative resources and the alliance system complicate U.S. efforts to enhance the credibility of its deterrence posture and, in a crisis, form any sort of coalition. Mastro and Oi's thought-provoking discussion ranged from the topic of why even US allies are hesitant to take a strong stance against China to whether or not Taiwan could be a catalyst for military conflict. Watch now: 

This piece was originally published by the Lowy Institute's The Interpreter. 

To break the border stand-off between India and China in the Himalayas, some Indian analysts have advocated going on the offensive against China in the Indian Ocean. But that would be vague, illogical and imprudent, with little chance of success and significant risk of blowback. Instead, India and its partners should prioritize a more effective denial strategy in the Indian Ocean, to deter and counter any potential future coercion there.

Strategies of denial seek to reinforce defensive bulwarks so that potential aggressors are dissuaded from launching an attack – or, failing that, thwarted from succeeding. They are generally considered more effective and reliable than strategies of punishment, which rely instead on the threat of retaliation after the aggressor launches its attack. Punishment was the cornerstone of nuclear deterrence during the Cold War and since, but that strategy is considerably less reliable in the conventional and sub-conventional conflicts which India now faces.

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The False Promise of Punishment

Since May 2020, Indian and Chinese troops have been locked in a tense – and, at times, violent – stand-off in the Himalayas, after Chinese incursions into the Indian-controlled territory of Ladakh. This scenario looks likely to last for months, if not years, to come. Some Indian analyses have called for bold action hundreds of kilometers away, in the Indian Ocean. They argue that horizontal escalation would broaden the Himalayas confrontation to an arena where India enjoys clear strategic advantages, allowing it to counter Chinese coercion more effectively.

The idea of taking the fight to the oceans has superficial appeal. India sits astride some of the world’s most vital sea lines of communication in the northern Indian Ocean – on which China, like all of East Asia, depends critically for trade and energy flows. India’s Navy dominates the Indian Ocean and could, the argument goes, apply excruciating pressure on the Chinese economy. This leverage could be applied in times of crisis, such as the ongoing border stand-off, or even in peacetime as a deterrent against Chinese coercion. Surely this would be less bloody than a war between the two largest armies in the world.

But the concept is unclear. It is often framed as a vague statement of Indian power, without elucidating exactly how force should be used. Should India impose a blockade of all oil tankers bound for East Asia? Board and inspect some Chinese trading vessels? Intimidate a Chinese survey ship in the Bay of Bengal, or sink a Chinese navy ship conducting anti-piracy patrols? Some of these moves would be seen as acts of war – and most would be dramatically escalatory, especially for an Indian government that has been at pains to downplay the current crisis.

More fundamentally, such moves would have no “theory of success”. How would such pressure create the desired political effect in countering Chinese coercion? A blockade would be tantamount to an act of war – but a painfully slow war that would likely require months of stringent application and be unlikely to decisively strangle the Chinese economy. Short of a long blockade, in any realistic contingency, incremental Indian pressure in the Indian Ocean is unlikely to compel a Chinese regime that has staked its legitimacy on national rejuvenation and regional hegemony.

On the other hand, history suggests that even minor Indian naval offensives against China would invite an escalating retaliation. China would not only unleash its rapidly expanding surface and sub-surface fleet against India’s navy, but it could also impose pain elsewhere. China’s options against the Indian homeland – from long-range missile strikes to cyberattacks to more land grabs on the border – would be militarily feasible and politically devastating to New Delhi. Going on the offensive in the Indian Ocean, therefore, is likely to backfire, probably very badly.

Building “Strategic Leverage” in the Indian Ocean

While the Indian Ocean may not offer a magic bullet to resolve the border crisis, it is intrinsically important for India-China competition. China’s military expansion into the Indian Ocean poses multiple risks for India and its partners such as Australia and the United States. These like-minded partners should build their strategic leverage – political relationships and military capability – to manage these risks.

India enjoys unique advantages in the Indian Ocean, due to its geography and informal networks across the region. But rather than using its advantages to start a war it would lose, a denial strategy would be mindful of India’s limitations and focus on erecting political and military obstacles to Chinese coercion in the region.

India could focus on more actively binding itself to smaller regional states – as it already does by sharing maritime domain awareness and space-based surveillance data. Building strategic interdependence would cultivate smaller states’ desire for continued cooperation with India, and institutional resistance to Chinese attempts to coerce or bribe their political leadership.

India could also enhance its sea denial capabilities. Improving its anti-submarine warfare capabilities and expanding its stock of long-range precision missiles, for example, would help to deter the prospect of Chinese direct military intervention. This could be done at a fraction of the cost of building a small number of large capital ships. The Indian Navy is doctrinally committed to pursuing sea control, which like-minded partners such as Australia should welcome. But rapidly expanding its capabilities for sea denial would serve as a stopgap and hedge against China’s ballooning naval power, which will soon be able to contest India’s dominance in the ocean.

A denial strategy in the Indian Ocean will not resolve the current border crisis in Ladakh. But it would offer a realistic roadmap for building political influence and military power in the region. It would provide the strategic leverage necessary to deter or counter future acts of coercion in the Indian Ocean.

On January 27, 2021, the China Program at Shorenstein APARC hosted Professor Hau L. Lee, The Thoma Professor of Operations, Information & Technology at the Stanford Graduate School of Business for the virtual program “The Pandemic, U.S-China Tensions and Redesigning the Global Supply Chain.” Professor Jean Oi, William Haas Professor of Chinese Politics and director of the APARC China Program, moderated the event.

Professor Lee focused on an important question that has only become more pressing due to the COVID-19 pandemic: How, if at all, should businesses redesign their supply chains? Since the beginning of the pandemic, explains Lee, there has been an increase in calls for “redundancy” in supply chains in order to protect them from the problems they faced early in the pandemic, when China was first hit by shut downs and slowed productivity. Advice has been varied, ranging from the “China Plus One” strategy in which businesses simply add a secondary production location, to completely domesticating supply chains.

Lee warns, however, of the perils of overreaction. There are numerous risks that come along with a fully domestic supply chain, not least the danger of “having all of your eggs in one basket.” Instead, says Lee, businesses should move cautiously and, instead of fully divesting from China, should use the country intelligently. 

Professor Lee’s “In and Out Design” encourages businesses to work from the inside out, securing and strengthening their supply chains by starting at home. Companies must first build “internal supply chain excellence,” after which they can move on to making sure their strategic partners are equally strong and can work to their advantage. Eventually, companies can move on to strengthening the extended value chain and, ultimately, their entire ecosystem. Using strategies like dual response, leveraging “lubricants,” and bolstering capacity-building capabilities, businesses can create a more stable future. 

The session concluded with a fruitful Q&A between Professor Lee and the audience, moderated by Professor Oi.

A video recording of this program is available upon request. Please contact Callista Wells, China Program Coordinator at cvwells@stanford.edu with any inquiries.

The COVID-19 pandemic has disrupted economies and expectations for economic growth and development the world over. But even before the pandemic, Asian economies were reassessing their growth strategies.

In a podcast conversation about the new edited volume Shifting Gears in Innovation Policy: Strategies from Asia, APARC's Korea Program Deputy Director Yong Suk Lee discusses some of the impediments Asian countries face in trying to encourage economic development and entrepreneurship, but also the inherent strengths that could allow innovative strategies take hold and grow in East Asia. Listen to the full conversation below.

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Edited by Lee, Gi-Wook Shin, and Takeo Hoshi, Shifting Gears in Innovation Policy is the first of three volumes resulting from APARC's Stanford Asia-Pacific Innovation project that produces policy research to promote innovation and entrepreneurship in East Asia and the greater Asia-Pacific region.

Lee explains, “Many Asian countries achieved economic growth by importing new technologies from advanced economies like the U.S., using them very effectively, and then expanding exports. But now where East Asia stands, many of these countries have already successfully caught up to the technological frontier of advanced economies, so if they want to maintain growth, there needs to be a shift in their strategies.”

The shift Lee and the other volume authors propose is one towards economic growth that is driven by innovation and entrepreneurship rather than the ‘catch-up’ model that Asian economies have commonly relied on. Unlike startup hubs such as the San Francisco Bay Area of California, Asian countries often lack an entrepreneurial tradition because of antagonistic financial structures and differences in cultural definitions of success. These additional financial and social risks have cast entrepreneurial endeavors in an unattractive light for multiple generations of workers.

But encouraging entrepreneurship and endemic innovation are crucial to maintaining stable economic growth. With rapidly aging populations, greater interconnections in both trade and diplomacy, and transformation in the workforce, workplace, and work itself, effectively adapting development strategies to meet present and future challenges remains a central priority for East Asia policymakers and innovators alike. As Lee advises, “There’s strong infrastructure in East Asia, both physically and digitally, which is a great advantage. But they’re now at a frontier with no trajectory to follow, and there needs to be indigenous growth and continuous innovation in order to not be surpassed by competitors.”