David Shambaugh’s Foreign Policy essay cited by Francesco Sisci concludes with this boiler-plate recommendation:

What China fails to understand is that despite its world-class culture, cuisine, and human capital, and despite its extraordinary economic rise over the last several decades, so long as its political system denies, rather than enables, free human development, its propaganda efforts will face an uphill battle.

Soft power cannot be bought. It must be earned. And it is best earned when a society’s talented citizens are allowed to interact directly with the world, rather than being controlled by authorities. For China, that would mean loosening draconian restraints at home and reducing efforts to control opinion abroad. Only then could the country tap its enormous reserves of unrealized soft power.

Interacting freely with the world, though, does not necessasrily lead to more efficient exercise of power, as the United States has proved over and over again since Woodrow Wilson set out to make the world safe for democracy. No-one is more sophisticated than the Chinese diaspora, for example in Singapore, and there was no wiser observer of world affairs than the late Lee Kuan Yew.

China has had something of a free ride these past four decades on the back of American power, that is, America’s stabilizing role in world affairs and the central role of the American currency and capital markets in the world economy. As late as early 2014, Chinese foreign policy specialists talked of China’s willingness to “follow the lead of the dominant superpower” in such matters as energy security in the Persian Gulf. A wrenching change in perceptions has occurred in Beijing during the past year and a half. The breakdown of nation states in the Levant and Mesopotamia in the wake of America’s Quixotic nation-building campaigns, as well as the rupture between Russia and the West over Ukraine, have created new problems and opportunities. For the first time, Beijing does not trust Washington to safeguard the common interests of oil-importing countries, and for the first time, it has the opportunity through the Shanghai Cooperation Organization to advance an independent policy.

There is a another problem. China has kept the RMB pegged to the US dollar since the 2008 crisis. That was the right thing to do in 2008, but the appreciation of the US dollar has led to a nearly 60% appreciation of the RMB real effective exchange rate over the past six years. The RMB peg has required excessively high real interest rates, in turn, and has also priced Chinese goods out of some of its export markets. We observe in the chart below that there is a close relationship between year-on-year changes in the RMB real effective exchange rate (lagged three months) and year-on-year changes in Chinese exports (Note that the right hand scale is reversed).

Note Reversed Right-Hand Scale
Note Reversed Right-Hand Scale

China can no longer follow American security or monetary leadership. China problem, in my view, has nothing to do with Shambaugh’s critique: It is that Beijing has been too reticent, too modest, too timid in developing an independent foreign policy as well as monetary policy.

Both the problems and the power have fallen into China’s lap suddenly and unexpectedly, and China does not know what to do with them. “One Belt, One Road” is a plan of enormous merit, and the Asian Infrastructure Bank is a praiseworthy initiative. By themselves, these economic policy measures will not solve China problems.

I am no expert on Chinese policy, to be sure, but in my discussions with Chinese policy-makers I have gotten the strong impression that China thinks in terms of a simple balance of power. Sell older weapons (lots of them) to Iran and sell top-of-the-line intermediate-range missiles to the Saudis, and they will be afraid to attack each other. Iran and Israel (I have been told by a respected PLA expert) will never have a nuclear exchange because Israel could annihilate Iran with nuclear weapons. China is supremely rational in its calculations, and assumes that other countries employ the same sort of rationality. This could be a fatal error. Parts of the Middle East simply are not viable as presently constituted, and there is no way to avoid a certain amount of violence. One cannot simply stand athwart such situations as a benevolent suzerain and encourage everyone to live peacefully and get rich; a great power has to find effective ways to intervene other commitment of military force, which China will not (and should not) attempt.

In the case of monetary policy, I can propose a simple solution: the People’s Bank of China should hire Dr. Guonan Ma, formerly a senior China specialist at the Bank for International Settlements. Dr. Ma has argued for unpegging the RMB from the dollar.

Strategic policy is a bit subtler. Most of the things I would advise Beijing to do are not suitable for publication for the time being.

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