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It`s trade that fosters good neighbours not confrontation.

Over at least the past 25 years, the case for investing in China came with little in the way of political strings attached. That could now be changing.


Years of relative calm have suddenly given way to rising tensions all along China’s maritime borders. Friction is also growing between Beijing and Hong Kong, where the Central Government is taking on democracy activists ahead of the 2017 election of the territory’s chief executive. This is all occurring against a backdrop of a slowing economy as the debt-fuelled, investment- driven growth model which sustained GDP rates for the past 20 years runs out of steam.


The threat of a hard economic landing had always been the key concern about China. Investors now must weigh up the risks associated with a more assertive Chinese foreign policy, as well as a dramatic hardening of official attitudes on the mainland.
It’s not enough to blame this sudden shift on the appointment of Xi Jinping as head of the Communist Party at the end of 2012. A globally more assertive China is the product of a confluence of factors, including the country’s own historical experience and surging economic growth. Changes in the international order - not least the perceived decline of the west following the global financial crisis - have also helped change Beijing’s thinking.


Chinese scholars blame the U.S. for upsetting the regional status quo after President Barack Obama’s “pivot to Asia,” starting in 2011. U.S. attention had been dominated by the “War on Terror” for the previous decade, and the Obama White House’s attempt to refocus on Asia was seen in Beijing as an effort to contain a rising China. Obama denied that this was U.S. strategy throughout his high-profile visit to the region at the end of 2011. The president’s visits to the countries on China’s periphery, including historical rival Japan, were intended to send the message that the U.S. remains committed to keeping the peace in East Asia.


If they were also intended to send a message to Beijing to back down from its various territorial disputes in the region, then Obama’s trip was a failure.


If the nationalists hogging internet message boards and composing editorials for the Global Times newspaper had their way, conflict in the Pacific would begin tomorrow. The increase in the official Chinese military budget has exceeded official GDP growth rates for years, though analysts believe the People’s Liberation Army still isn’t ready to adequately project power beyond China’s borders.


That hasn’t stopped long-simmering territorial disputes between China and its neighbors from deteriorating into open bickering. China and Vietnam are trading accusations about incidents of vessels ramming each other in the South China Sea, while the Japanese and US air forces complain of Chinese jets buzzing their planes in the skies above the East China Sea. China’s neighbours accuse Beijing of throwing its weight around, refusing to accept arbitration and risking open conflict.


This shift in perceptions about China can’t all be blamed on Xi Jinping, but his appointment to lead the country has brought with it a notable hardening in China’s foreign and domestic policy forgetting the adage that it`s trade that fosters good neighbours and not confrontation.


The optimistic view is that China, now the world’s second biggest economy and on track to be the largest by the middle of the decade, is attempting to redraw the lines of a post-World War II settlement that it wasn’t given a say in the first time around. An alternative view is that a newly assertive People’s Liberation Army, bolstered by China’s economic rise, with the civilian government in tow and cheered on by nationalist voices, is looking to settle historical scores in a dangerous game which risks open conflict.


It’s too early to say with any certainty what Xi Jinping intends, though it’s clear that his vision for China includes a more assertive stance overseas and less political dissent at home.


Xi’s domestic policy has so far been marked by a sweeping anti-corruption campaign, which has surprised both for its length and breadth. It’s not just corrupt officials and military officers who have suffered. Political activists, lawyers and journalists have been swept up in the campaign. Simultaneously terrorist attacks tied to Uyghur separatist groups have resulted in a more visible security presence on the streets of many cities.


This increase in political tensions hasn’t had much impact yet from an investment point of view. For now, business executives in China see the country’s deteriorating relations with its neighbours as an unwanted distraction. Meanwhile, the anti-corruption crackdown has only served to expose the dangers of basing a China business model on the practice of gift-giving, as some luxury brands have discovered to their cost.


Businesses operating here would rather focus on long-standing gripes about market access, unfavorable treatment and an opaque and arbitrary regulatory framework. But the investment case for China becomes harder to make as the onshore market cools without any corresponding improvement in the operating environment.


It used to be a given that the Communist Party would not threaten its economic development by challenging Asia’s long-standing balance of power. The Communist Party intends to bring China’s urbanization rate up to around 75% from the current 52% over the coming years, and that process requires a still-intense focus on domestic policy and avoidance of territorial entanglements.


But that view has been shaken in recent months by increasingly violent clashes between China and its various neighbours. The anniversary of the centenary of the start of the First World War has resulted in more than a few comparisons between modern China and Kaiser Wilhelm’s disastrous attempt to push Germany up the rankings of the Great Powers. If China could only resolve it`s identity crisis and become so much more than simply an enviable development model, it would find a more receptive Asia to its leadership ambitions and remove uncertainty about where the region is headed.




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