A crisis that opened the gates for China
The implosion of the western banking system was a stroke of good fortune
Philip Stephens
When historians cast around for 21st-century hinge points they will settle on two events during the late summer and early autumn of 2008.
At the Beijing Olympics in August of that year China laid out its claim to be counted one of the world’s great powers.
Weeks later, the west’s assumption of global hegemony was laid low by the collapse of Lehman Brothers. Just as China began to push on the gates to power, the west threw them open.
Fast forward a decade and the geopolitical map has been redrawn. The lavish spectacle of the Beijing games has slipped from memory amid anniversary ruminations on the causes and consequences of the financial crash. Yet the coincidence was pivotal; the west’s lost decade became China’s march to power.
Between the turn of the millennium and 2008 the size of China’s economy more than tripled. Hosting the Olympics was at once a celebration of this leap and a statement of intent. Topping the medals table, Beijing threw off the calculated modesty of the “hide and bide” policy pursued since Deng Xiaoping’s opening at the end of the 1970s.
The occasion had been an essential expression of national self-confidence, I heard a senior Communist party figure say some time later. China had drawn a veil over the centuries of humiliation.
The People’s Liberation Army soon moved to assert historic, but hitherto passive, claims to island chains in the south and east China seas. The “nine-dash line” delineating Beijing’s assumed sovereignty over most of the South China Sea suddenly looked rather solid.
President Xi Jinping’s Belt and Road Initiative has since added an overarching geopolitical purpose to the country’s expanding economic reach. Visitors to Beijing are now invited to acknowledge the “fact” of China’s great power status. Officials have shed their reluctance to speculate as to when China will overtake the US as the world’s largest economy.
By these lights, the implosion of the western banking system in September 2008 was an extraordinary stroke of good fortune. The wars in Iraq and Afghanistan had badly dented America’s post-cold-war primacy.
The financial crash was of a different order. It marked the collapse of the US-designed international system and of the liberal market worldview embedded in the Washington consensus. Previous crashes had hit Asia, or Latin America. This failure struck at the system’s core.
The resulting psychological boost for rising nations of the east and south — and for none more than China — was as significant as the heavy economic costs imposed on rich democracies by recession and austerity. China acted decisively to mitigate the deflationary impact of the crash. Europe opted for self-defeating fiscal austerity.
The emperor had shed his clothes. The end-of-history theorising so fashionable after the fall of Soviet communism was revealed as hubris — an impression bolstered further by the west’s slide towards populism and beggar-thy-neighbour nationalism.
Before the crash, Chinese policymakers never seemed quite sure how far they might have to travel towards liberal capitalism to sustain economic growth; nor were they certain they could hold the line against some loosening of control to the forces of democracy.
The west’s misfortunes removed the self-doubt. Mr Xi is unapologetic about state direction of the economy. He has tightened the party’s grip on power. We can forget about any notion of democracy with Chinese characteristics.
During the decade since the Olympics, the size of the Chinese economy has almost tripled again. The Belt and Road Initiative has emerged as a grand strategy to shrink the distance between east and west and thus establish China as the pre-eminent Eurasian power.
Its military might still trail far behind the US, but Beijing is investing heavily in aircraft carriers and expeditionary capabilities. By many calculations its military budget is more than twice that of Russia and three times that of India.
Washington’s rhetorical response has been to designate China, along with Russia, a “strategic competitor” — a revisionist power intent on shaping a “world antithetical to US values and interests”, as the US National Security Strategy puts it. Donald Trump has slapped import tariffs on Chinese products in response to “economic aggression”.
Yet all the while America has been surrendering its greatest advantage — the network of alliances, treaties and norms underpinning a US-designed global system. Chinese officials once fretted it would take decades to undercut the world order established after 1945.
China has few natural allies — think Cambodia, Myanmar. The US, in theory, has dozens. Washington gave itself a leadership role in the big international institutions. China mostly sat at the other end of the table.
Now, each successive attack by the US president on the post-1945 multilateral order creates more space for the new competitor. Beijing need not show fealty to a system now disavowed by the US.
None of this predetermines China’s trajectory. The country has its problems — an ageing population, a deeply unequal distribution of its riches, and growling resentment in poorer nations at the political price Beijing extracts for financial largesse.
All that said, if Mr Xi does stumble along the way, he can scarcely blame the west for failing to offer a helping hand.
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