In boxing there’s something called a one-two punch.
You might deflect or evade the “one” but if you forget about the “two” you could end up face down on the mat.
So it is with the Chinese regime. Most of the attention is on how to take on the People’s Liberation Army (PLA) and its rapid build-up of ships, aircraft, and capabilities that pose a serious threat—even to the Americans.
Solve that and you’ve ducked the blow and can breathe easy. Or it’s thought.
But in fact, China’s economic power is the “two” in the one-two punch—and that’s how Beijing intends it.
The Chinese even have a doctrine for this—”civil-military fusion.” It means civil activities such as commercial and economic activities (the second punch) tie into military activities (the first punch) as mutually reinforcing elements of national power.
The Second Punch
Chinese economic power equals political power—but it also feeds China’s military power.
How so? China earns money to fund the Chinese defense build-up—and the Chinese Communist Party (CCP) is not forced to choose between “guns and butter.” Indeed, it can have both.
The so-called Belt and Road Initiative (BRI) plays a prominent role in the CCP’s effort to gain economic, political (and military) dominance. The BRI’s principal feature is Chinese funding of infrastructure and commercial projects throughout much of the Indo-Pacific—and in Latin America, Africa, Central Asia, and Europe as well.
BRI has both financial and strategic angles. If projects can make some money and put otherwise idle Chinese labor to work, that’s good. But if China can gain access, political influence, and create dependency in BRI nations—that’s priceless, and financial results don’t matter much.
To that end, many of the BRI projects—ports and airfields, for example—have a “dual-use” aspect. They work just as well for commercial purposes as for military purposes. Look at where the CCP has developed port and airfield access around the globe and the military “power projection” usefulness is obvious. Chinese officials and military officers regularly talk about it—it’s not hidden.
A good example of the Chinese regime successfully using the promise of BRI investment to gain strategic advantage was seen in the Solomon Islands and Kiribati. In 2019, as a result of opaque promises from Beijing, both nations de-recognized Taiwan. Now there is talk of China refurbishing an old American airfield in Kiribati and rumors of military facilities in the Solomons. That’s worth any price to Beijing—and has gotten attention in Washington and Canberra.
China’s BRI is often criticized as predatory—or so-called “debt-trap diplomacy.” And indeed the deals usually are opaque, stacked in China’s favor, way overpriced beyond what is fair or affordable, and rife with bribery of local officials and politicians.
But get closer and the locals will often tell you: “What else are we supposed to do?” The president of a Central Pacific nation was overheard several years back commenting: “We don’t do this by choice, but by necessity.”
And China takes time to lay the groundwork. Since long before BRI, Chinese commercial activity was literally everywhere out to the far ends of the Indo-Pacific region—even down to the corner shop level. For example, 80 percent of retail businesses in Tonga are run by recent Chinese arrivals.
The economic to political to strategic progression creates dependency and influence, and also no little resentment. But by then it’s too late, the second punch has landed.
There is an aggregate effect as well, as neighbors see what is going on and perceptions are shaped. China’s economic clout not only reinforces its defense buildup, but it also helps feed the perception that China is a powerful country on the rise—the country that’s destined to dominate (while America declines). This spurs some other nations to want to get closer—either to attach themselves to the future winner—or for self-preservation. Meanwhile, adversaries are worried and even intimidated.
Perception or Delusion?
In the Indo-Pacific and elsewhere, many nations are hooked on the perception of the necessity of China’s market and money. Even countries that are wary of China have convinced themselves—or at least their businesses and political classes have—that their prosperity depends on plugging into Chinese demand and/or attracting Chinese money via investment, aid, tourism, etc.
This is a bit of a delusion. One needs only to look back 30 years when the China market didn’t matter and the world was still prosperous.
China is indeed successfully using its economic power to expand its presence and influence, and bulking up military might and expanding potential military positioning. But will it continue going from strength to strength? It also faces some serious challenges.
One of the biggest is that the Chinese currency, the yuan or RMB, is not freely convertible. Meanwhile, China must have convertible currency for anything it wants to do overseas or buy from overseas, for example, to pay for overseas construction projects, or to buy companies (some with defense or dual-use technologies), or to buy up or into properties such as ports and airfields, and to purchase political influence to gain control over territory.
It needs convertible currency to fuel its expansion. And nobody accepts Chinese yuan. But not to worry, much of Beijing’s overseas activity is funded by American, Western, and Japanese financial institutions and companies pouring huge amounts (say a few hundred billion U.S. dollars) of convertible currency into China each year.
This allows the CCP not only to expand its reach but to paper over many internal problems and to look more successful than it really is. As a bonus, the foreign investors also apply pressure on their home governments to not “upset” China.
But you see the vulnerability for Beijing: Given that the U.S. military advantage over China is diminishing, the U.S. dollar (and the threat of cutting off Beijing from it) is Washington’s last major “counterpunch” to use against the regime.
Beijing is keen to eliminate this American advantage and is trying a number of ways to do so, including digital currencies, swap arrangements, and “talking up” the yuan and “talking down” the U.S. dollar. This is all intended to present the yuan as a desirable currency and to weaken confidence in the U.S. dollar.
Washington’s response to COVID—spending astronomical amounts that debase the American currency—is nicely helping Beijing’s attempts to dethrone the U.S. dollar.
Will Beijing’s one-two punch work? Will it increasingly dominate industries and markets worldwide, while extending its political and military reach in the process?
Possibly. But the CCP has domestic weaknesses that belie its message of inexorable upward economic growth and expansion. Beijing faces problems with bad debt, inflation, loss of confidence (at home and abroad) in the economy and financial system, lack of foreign exchange, and all exacerbated by potential sanctions. And there is also the fact that China’s “markets” are subject to the capricious orders of the Chinese Communist Party. The CCP hasn’t figured out new laws of economics that nobody else has in the last 5,000 years.
Also, consider that the most successful people in the Chinese system—including at the very top of the CCP—have been trying for decades to get their wealth out of China and to put it somewhere safe—like America, Canada, Australia, and the UK. That suggests that those benefiting most from the system have great doubts about its reliability, if not survival.
Just remove export controls on the yuan for a few weeks and you’ll see it flooding out of China to “safe havens.”
There is also talk of foreigners “decoupling” from the China market—and some very nascent attempts to do so, not least to mitigate supply chain dependencies.
But for now, it seems that Western and Japanese commercial and financial interests—and the politicians they fund—aren’t interested in pulling back from the China market.
And statements by groups such as the U.S.-China Business Council, Japan’s Keidanren, and major companies such as Boeing and Nike bear this out. Instead, they are “all in” on China, while turning a blind eye to the CCP’s opaque financial management, mafia-like regulatory enforcement, and human rights atrocities.
As noted earlier, to their credit, the Chinese are willing to go “out there” and do the hard work of commerce the way the “Yankee trader” of old used to—these days U.S. businesses (and most others) seem uninterested in places where the living isn’t so easy and returns aren’t guaranteed or big enough.
To change the current trajectory, the United States and its friends need to provide real alternatives to Chinese economic offerings, and increase proscriptions on investing in or taking investment from China. And shareholders (and their lawyers) should start asking company CEOs why they are investing in a rigged market that aims to destroy the foreign competition? But this had better be done fast.
There’s a common expression in the Indo-Pacific and beyond that—“The U.S. provides security, China provides our business. We don’t want to choose.”
At some point, if the CCP keeps landing enough one-two punches, the United States will be on the mat. Then China will be making the security and business decisions for everybody—and nobody will be able to raise a glove.
Grant Newsham is a retired U.S. Marine officer and a former U.S. diplomat and business executive who lived and worked for many years in the Asia/Pacific region. He served as a reserve head of intelligence for Marine Forces Pacific, and was the U.S. Marine attaché, U.S. Embassy Tokyo on two occasions. He is a senior fellow with the Center for Security Policy.