What if China turned its back on the world?

Nader Mousavizadeh on the rise of nationalism in China and what it could mean for a fragile world economy. The interview is part of the Risk Response Network’s “What if?” series.

What is your main field of expertise and current research?
I run Oxford Analytica, which is a global analysis and advisory firm. We advise clients in the public and private sector on what we term macro-diligence. That is really the full range of diligence, anticipating risks, identifying them and having the right measures in place for alleviating them. We are very active in advising companies investing in emerging markets, i.e. South-South capital flows. Our business has spent a lot of time in the Middle East recently given all the upheaval. Another focus has been the global economy and ways in which China, the United States and the Eurozone are trying to manage this; what kind of measures are working, what are not and how clients both in the public and private side can try to secure the best position in what it is going to be a turbulent period.

Given your research, what would you say is the most under-appreciated risk?
I think the most under-appreciated risk now is an inward turn politically in China. There is a sentiment building among important groups of younger, educated, mobile-connected Chinese, who are becoming more nationalist and are taking a more zero-sum view of China’s relationships with the world.

Given the economic challenges facing the United States and the Eurozone, if China were to either slow its growth meaningfully or otherwise seek to play a different role in global markets, one that is less constructive, we would have a major international event.

How would you frame this risk as a hypothetical scenario: “what if” this was to actually happen?
We are going to see what I call an “archipelago world” emerge, where power, capital and ideas are fragmenting, where countries and regions increasingly are going to define their interests individually and discretely, rather than being part of the global community with a common set of interests.

What you could see in China is a political movement, stemming from the sort of neo-Maoist, nationalist groups of young people who, in their tens of millions, are forces on the internet, trying to articulate a different view. That is a far more serious risk to the steady management of China’s economic rise than the political dissent from dissidents of a sort of Western human rights character, such as the artist Ai Weiwei and others.

What would the consequences be?
You could see increased tension in the South China Sea, increased tension over Taiwan, a greater willingness of China’s neighbours in Asia to try to get the US to stay as a major Pacific power even as the US is going to withdraw forces. I think from most countries or most regions you are going to see a steady incremental threat to various free trade regimes.

Given how much the global economy has been driven by Chinese demand and Chinese production over the past 20 years, and the long deleveraging and low or no growth that the West is facing, if China were to come off the global train of free-ish trade and of relatively open markets, you would definitely see higher tariffs, higher transaction costs, all of which would eat into profitability, jobs, employment and all the rest of it.

I should stress I do not think it is a likely event, I do not think it is near term, but I do think it is a major risk that is very rarely contemplated at any length.

Aside from political sentiment in China, what are the other signals which pre-empt this situation?
If we pay attention to the cultural movements that are going on within China, slightly away from the kind of things that most Western observers pay attention to, it is a form of democratic, popular citizen opinion.

It is also much harder for Beijing to control because it does not actually challenge Beijing in the conventional way that dissidents or the students of Tiananmen did, but in a way challenges the regime from the Right, i.e.: is Beijing being sufficiently sensitive to China’s own core national interests, is it giving the West or the US too easy a deal?

We are going to see a change of leadership in China in the next year which would bring individuals to the top who have a less acute memory of the hardships of 30 years ago. Rather, they have a greater sense of China’s achievement: they are more assertive and you see that in the rhetoric that comes from them.

Who would feel the impact the most, and how?
China in the first instance, because it could impact China’s own development in a significant way. Then clearly the United States as the other global power. Third would be China’s neighbours in East Asia, Japan and Korea, but other countries in the region as well.

I think you will see evidence of the archipelago world emerging as countries such as Brazil, South Africa, Nigeria, Egypt and others in Africa increasingly assert their national interests in a less globally oriented way and more nationally competitive way.

What is your top mitigation approach for this risk?
The risk is the Chinese turning inward and I think the top mitigation would be a broadened understanding on the part of Western policy-makers and institutions of the ways in which countries can govern themselves legitimately. This would be an important way of taking the sting out of some of the charges coming out of this younger generation in China.

On the flip side of risk, what opportunities do you see associated with this scenario?
There is opportunity for businesses and countries which are willing to have a different dialogue with China – again it is about understanding where some of this national agenda is coming from.

This is also a broad point about developing countries and the way they interact with global markets. There needs to be an understanding that there has to be a re-cutting of the cake so that more of the benefit and the wealth that come out of the emerging markets, particularly in the extractive industries, has to be shared with the countries in which these resources are actually found.

I think it is much more of a challenge for those who think they can continue to deal with these countries on the terms that they have been dealing with them over the past 30 years. But if you understand that there is a fairer deal to be done for them which can still be very rewarding for an outside investor, I think there is a great opportunity.

Do you think the present Chinese government has anticipated the resentment within the country?
No, I think some of this is definitely a surprise. I think it is less of a surprise to some of the regional leaders and governors who are closer to the public mood. But I think the Chinese leadership is properly now aware of this sentiment, and the limits to which it can be controlled given that so much of it is going online. So taking steps against them has different implications than taking steps against the likes of Ai Weiwei.

Pictured: The Chinese flag flies from the top of the National Museum of China (Reuters)

Nader Mousavizadeh is the Chief Executive Officer of Oxford Analytica and a member of the World Economic Forum’s Global Agenda Council on Geopolitical Risk.