This coming week, schools and businesses in Beijing will shut down for three days as the capital prepares for a military parade showcasing China’s progress toward major power status.
While such displays are common in China, the timing of the parade has provoked questions about what the event means for China’s foreign policy, and perhaps more importantly, what it means for domestic politics. This summer Chinese leaders have experienced triumph - winning the 2022 Winter Olympics bid - but they have also faced many challenges - stabilizing a stock market crash and reacting to a chemical warehouse explosion in Tianjin. It is against this backdrop that we offer our insights on the parade and China’s ongoing political, social, and economic change.
China’s upcoming September 3 military parade has garnered significant attention from international commentators in recent weeks. Such parades are a major political event in China. In the post-Mao era, each General Secretary has overseen one such parade, normally held once per decade on China’s National Day (October 1) to commemorate the founding of the People’s Republic. This year’s parade comes four years early and is scheduled to coincide with the 70th anniversary of the end of World War II, eliciting discussion about what this deviation means for both domestic and international audiences. According to Foreign Ministry spokesman Hua Chunying, the event will showcase China’s commitment to safeguarding the post-war international order and upholding peace. In that spirit, the PLA has invited troops from Mongolia, North and South Korea and other nations to participate.
A Provocation to Japan?
China’s Foreign Ministry refers to the parade as commemorating victory in the “Chinese People’s War of Resistance Against Japanese Aggression,” and state-run newspapers have asserted the parade’s intent to “deter” any nascent “militaristic tendencies” in Japan. In his recent statement on the 70th anniversary of the end of WWII, Japanese Prime Minister Shinzo Abe reiterated Japan’s “deep remorse” for their role in the war, but stopped short of issuing the unambiguous apology that China was hoping for. Recent measures designed to normalize Japan’s Self Defense Forces provide plenty of tension between the two nations, making the parade an occasion for potential flare ups. The parade’s show of strength may also be meant to send a message to countries in the East and South China Seas where ongoing territorial disputes threaten regional stability.
The parade will display new, domestically-produced military hardware, showcasing China’s push toward manufacturing modern weapons systems.
The ramp-up represents a step forward for China as its burgeoning military power becomes a greater source of trepidation for China watchers in the United States and the Asia-Pacific region. Taken together, these dynamics indicate China’s changing attitude about its role in the region and around the world.
Towards A New Type of Great Power Relations
Shifts in China’s regional policy reflect a change in how China views itself and its role in the international system. While China is deploying new tools of economic diplomacy like the One Belt, One Road policy and increased investment through the Asia Infrastructure Investment Bank (AIIB), it is also using one-sided measures to change the status quo, exemplified by land-reclamation in disputed areas of the South China Sea and vocal protestation of the Filipino case currently before international arbitration. From involvement in Afghan peace talks to growing investment in Africa and Latin America, China’s influence is also being felt farther afield as it exercises a more prominent leadership role in global affairs.
The emphasis on China’s role as a victor of WWII has led some analysts to infer that China wants to leverage their position as an Allied power to gain a greater role in the shaping (or re-shaping) of the international order which emerged from that conflict. Xi Jinping appears to be moving away from Deng Xiaoping’s “tao guang yang hui” (hiding strength and biding time) strategy in foreign relations and replacing it with more overt displays of strength, suggesting that China is willing to defend its increasingly global interests.
As China continues to establish its confidence and footing in the international arena, it will demand greater influence in international organizations and seek to defend its interests through specific accommodations and actions. These shifts, coupled with structural changes within China could have a significant impact on the environment for foreign investment and business operations.
Foreign Policy Implications
For China’s leaders and citizens, the September 3 parade is another important marker in China’s “great rejuvenation,” reflecting their status as a major global power, a message the government has sought to reinforce by inviting high-profile world leaders. However, at the time of writing only a handful of world leaders have confirmed their attendance: Russian President Vladimir Putin, Czech President Milos Zeman as well as the leaders of several Central Asian nations. With its nationalist overtones, Western leaders are wary of what message their attendance at the military parade might send. Some western leaders – like Angela Merkel of Germany – may arrange to visit Beijing in the days preceding or following the parade in order to show support for China’s important international role while avoiding overt support for a display of military force.
Speculation that no senior American government representative will attend the parade has raised questions about the U.S.-China relationship leading up to the Obama-Xi summit in Washington DC scheduled for late September. During the meeting Presidents Obama and Xi will address many important issues, including climate change, the Bilateral Investment Treaty (BIT), and the sensitive issue of cyber-security. If an American decision not to attend the parade is interpreted as a loss of face for China, the September summit could fall short of its potential. If, however, the U.S. handles the event with appropriate tact and diplomacy, major progress could be made.
The BIT will be a focus of the meeting and closely watched by American business leaders. According to the U.S.-China Business Council, an effective BIT would create a much more favorable commercial environment for American businesses in China, enhancing economic openness and improving transparency. This would alleviate uncertainty among foreign investors and business leaders within China, a group whose confidence in the market has waned over the past year.
Foreign Business, Domestic Politics
The China market is losing its allure to foreign investors. Members of the American and EU Chambers of Commerce in China have experienced a drop in optimism about their prospects, citing slower economic growth, rising labor costs and opaque rules for foreign investors. Contributing factors, such as aggressive regulators and antimonopoly law investigations, have been connected to President Xi’s anti-corruption campaign – a sure sign of how the changing domestic equilibrium can impact foreign businesses.
The quick centralization of power around Xi gives credence to claims that he wants to be a different type of president, with complete control over the Party and the Army. Rivals in the senior leadership have been removed from power, notably including the recent arrest of Guo Boxiong, the last remaining holdover from Hu Jintao’s era in the military top brass. It is a common view that by holding the first major military parade early in his tenure, Xi hopes to signal his tight grip on the ruling apparatus and strengthened control over Chinese policy.
As he continues to consolidate power, high-level decision-making will remain opaque, doing little to assuage the uncertainty felt by foreign entities operating in China. On the other hand, Xi’s influence over the policymakers could create the necessary alignment of interests in order to push through difficult economic reforms. Recent developments suggest that the state’s “dominant role” will continue to compete with the market’s “decisive role” in economic affairs for the foreseeable future.
Shifting Domestic Priorities
As the government puts on an image of strength and control for the parade, major explosions at a chemical warehouse in Tianjin have highlighted challenges to their credibility. Upset citizens have complained about poor district zoning, loose security supervision, slow emergency response, and strict control over information. As China promotes its high speed trains and nuclear power technologies to overseas markets, the explosion also raises questions over the reliability and security of “Made in China” products.
While already on the agenda, this event is likely to increase the pressure on the government to accelerate the shift toward greater emphasis on the environment and safety in place of a growth-at-all-costs mentality. When the Politburo gathers to meet for the Party’s Fifth Plenum in October, the top leadership will prioritize this shift as part of their design for the 13th Five Year Plan. This ongoing trend will provide greater opportunities for companies and organizations that can contribute in key areas such as work safety, emissions reduction, clean energy, and food safety
Economic Reforms: State Role vs. Market Forces
With the eyes of the world on China for the parade, the government is taking measures to ensure a good global impression of Beijing. Policies to reduce air pollution and create blue skies include banning vehicles from the road, halting construction projects, and suspending major polluting industries. The disruption caused by factory closures surrounding these types of events, including not only the parade but also the August World Athletics Championships, have the potential to hurt manufacturing and infrastructure construction, major drivers of growth. At a time when GDP growth is slowing, Beijing can hardly afford to shutter factories over an extended period, regardless of how good blue skies look on camera.
Regulators are also exercising great care to make sure the stock market does not take another embarrassing dive after the tumult of July. This could mean increased regulatory action, which, given the heavy-handed nature of previous interventions, could result in unwanted dips or spikes. While specific adverse effects for businesses in China may be limited, the long-term result of such interventions are a loss of faith in the government’s commitment to the Third Plenum reform agenda, backtracking on the “decisive role” for market forces in place of the state’s “dominant role.”
Hardliners within the leadership fear the public’s loss of faith in the government’s ability to deliver on core promises of growth and prosperity. Coupled with the recent explosions in Tianjin, a lack of demonstrated control over the economy threatens to undermine the credibility of the Party and the leadership and introduce new levels of instability. Over time, such heavy-handed and sustained government intervention could complicate decision-making and operations for foreign business leaders as regulatory decisions become more politically motivated.
While the stock market intervention may be a step backwards, optimists view recent exchange rate reforms as a promising step forwards for the role of the market. The move by the People’s Bank of China to adjust the mechanism by which the starting point for daily RMB trading is determined led to a greater than 4% devaluation of the RMB. Because the announcement came on the heels of an 8.3% decline in July exports, some analysts have pointed to the economic slowdown as the main driver of the change. As the U.S. dollar has appreciated sharply against other global currencies over the past 12-18 months, the RMB has appreciated with it – making Chinese exports less competitive. While the government is certainly concerned about the slowdown, the reform is more likely tied to China’s goal of establishing the RMB as a global reserve currency. The IMF stated their approval of the move which is consistent with China’s long-term efforts to internationalize the RMB; the IMF executive board will vote on whether to include the RMB in the “special drawing rights”basket later this year.
Conclusion
The ultimate takeaway for foreign businesses may be much less dramatic than commentators suggest. The parade itself involves a great deal of optics. Although such a large and obviously pointed display of military might has the potential to raise concern, China will continue to avoid outright conflict with other nations. Excessive bluster, even when delivered during a military parade, is unlikely to cause tectonic shifts in China’s important relationships, nor fundamentally affect the ability of MNCs to conduct business inside the country. Important economic trends including the One Belt, One Road initiative; the gradual cool down of Chinese economic growth; or the intended shift from a low-cost manufacturing-driven economy to one based on consumption and high-tech manufacturing are unlikely to be affected by the parade.
The big question that remains is whether the government is using nationalist rhetoric to counter the effects of lower-than-expected growth on social stability. The parade is one more step in a trend of growing nationalism and more obvious displays of force in a China that believes it should get its way more of the time. In the short term, strong rhetoric and symbolism have limited influence on high-level negotiations. Such fluctuations and posturing are common features of the domestic political system.
However, a shift in China’s worldview not only affects its foreign relations but also how it approaches regulatory issues and the management of foreign business. As President Xi strives to turn China into a global leader, resistance to dominant foreign businesses may translate into differential treatment for foreign entities. The success of the reform agenda and Beijing’s willingness to let the market drive economic growth will either support or undercut the creation of an economic environment conducive to investment. Change in China always proceeds gradually, and a single event like September’s parade needs to be weighed against the many forces facing China’s complex political, social, and economic development.
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