China’s Glass Ceiling

Sure, the Middle Kingdom is becoming a superpower, but it's always going to be No. 2.

"It's over for America," a Chinese academic told me in late 2008, two days after Goldman Sachs turned itself into a commercial bank in order to fend off possible collapse. "From here on, it's all downhill." Sitting in Beijing as American capitalism seemed to be hanging by a thread, it was easy to believe that one era was ending and another beginning.

The past half-decade should have been the glory years for the spread of Chinese influence around the world. After China's ravishing 2008 Beijing Summer Olympics, and its startling recovery from the financial crisis, it had a platform to push for a bigger voice in international affairs. At a time when the United States has been navel-gazing on its own deficiencies and beset by dysfunction and infighting in Congress, China has quickly become the main trading partner for a long list of countries, not just in Asia, which should give it all sorts of sway. And at the very least, many Chinese assume, the country should start to resume its role as the natural leader in Asia.

Yet the years since the crisis have demonstrated something very different. Rather than usher in a new era of Chinese influence, Beijing's missteps have shown why it is unlikely to become the world's leading power. Even if it overtakes the United States to have the biggest economy in the world, which many economists believe could happen over the next decade, China will not dislodge Washington from its central position in global affairs for decades to come.

China is certainly not lacking in ambition, even if many of its final goals are not clearly articulated. It is implementing plans which challenge U.S. military, economic, and even political supremacy. But on each front, the last few years have demonstrated China's limitations, not the inevitability of its rise.

China's effort to gradually squeeze the U.S. Navy out of the Western Pacific did not start with the financial crisis in 2008. The financial crisis did, however, coincide with a new aggressiveness in the way China has pushed its territorial claims in the South China Sea and the East China Sea. Beijing has scored at least one victory, securing control of the Scarborough Shoal, a group of small islands in the South China Sea, from the Philippines in 2012.

But among these tactical successes, China has been sowing the seeds of a strategic defeat. China's assertiveness is generating intense suspicion, if not outright enmity, among its neighbors. Its "peaceful rise" is not taking place in isolation. There may be echoes in today's Asia of the late-nineteenth century in Europe and North America, but this is the one critical difference. The United States came into its own as a great power without any major challenge from its neighbors, while Germany's ascent was aided by the collapsing Austro-Hungarian and Ottoman empires and Russian monarchy on its frontiers. China, on the other hand, is surrounded by vibrant countries with fast-growing economies, from South Korea to India to Vietnam, who all believe that this is their time, as well. Even Japan, after two decades of stagnation, still has one of the most formidable navies in the world, as well as the world's third largest economy. China's strategic misfortune is to be bordered by robust and proud nation-states which expect their own stake in the modern world.

The last few years have shown that these countries have no desire to return to a Sinocentric Asia, as existed before the arrival of Western powers in the late-fifteenth century, and one where China is the undisputed leader. All the talk about the Obama administration's "pivot" to Asia has obscured the much bigger shift that has taken place in the region since the crisis -- almost all of China's neighbors are now deeply anxious about what a powerful, expansionist leadership in Beijing portends for their future. They still want to trade with China, but they also want protection from Beijing's bullying.

Rather than undercutting U.S. influence in the region, the result of China's post-crisis assertiveness has been to push most of its neighbors closer towards Washington. Yet Beijing seems tone-deaf to the tensions it is creating, falling back instead on complaints about U.S. containment and trying to resurrect the specter of Japanese militarism. China's leaders should be asking themselves: why has every Asian leader, with the possible exception of Kim Jong Un, welcomed the pivot? The answer: in the last few years, Washington has become more relevant, not less, to Asia's future.

On the economic front, Beijing is taking aim at another pillar of U.S. power: the dominance of the dollar. China is putting in place an ambitious long-term plan to turn the renminbi into one of the main international currencies. Chinese leaders often discuss the project in technical terms, about reducing currency risk for their companies, but they also do little to hide their frustration with the dollar's privileged status. One Chinese academic even likens the importance of the project to turn the renminbi into a major reserve currency to China's acquisition of a nuclear weapon in the 1960s.

The politics of the currency plan are themselves an interesting sidebar to the over-hyping of Chinese influence. While American politicians have been worrying loudly about the risk of China owning so many Treasury bonds ("How do you deal toughly with your banker?" Hillary Clinton asked at a private lunch with then Australian Prime Minister Kevin Rudd in March 2009) China has been fretting about how little leverage its U.S. bond holdings give it. The desire to dethrone the dollar is partly rooted in China's frustration that it has absolutely no influence over the Federal Reserve. And yet it has few options other than buying American debt, because the U.S. Treasury bond market is the largest and most liquid in the world. "We hate you guys!" Luo Ping, a senior Chinese banking official admitted in 2009, only half-jokingly. "Once you start issuing $1 trillion-$2 trillion [in new debt]," he said, the dollar will depreciate, "but there is nothing much we can do."

There is no doubt that China's currency will start to play a larger role in the international financial system, just as the euro and yen do. But toppling the dollar is a different matter. For a start, there is a huge amount of inertia, which means that big shifts in reserve currencies tend to happen only in the event of a major crisis. Admittedly, U.S. Republicans have flirted with the idea of default in order to win a congressional argument, but the likelihood remains that the dollar will only lose its leading status if the United States lets it happen.

For the renminbi to assume a central role, China would also have to make massive reforms to its own economy. The key to Chinese state capitalism is control over a relatively closed financial system, which allows the Communist Party to funnel huge volumes of cheap credit to select projects, industries, and companies. But to have a truly international currency, one that the world's central banks want to hold, China would have to let investors from around the world buy and sell large volumes of Chinese financial assets. As a result, Beijing would have to dismantle that system of controls. It would need to permit capital to flow freely in and out of the country, let the market set interest rates and allow the currency to float. An independent legal system and transparent economic policymaking would also be useful. China has a choice. It can have an international currency that might challenge the U.S. dollar or it can keep its brand of state capitalism that has driven the economy and kept the Communist Party in power. But it cannot have both.

On the third front, China is mounting a political challenge to the United States. Beijing is not looking to export its economic and political model around the world, but it has become obsessed with soft power -- the idea that countries can get their way through the attractiveness of their society, rather than just by force or money. China is opening hundreds of Confucius Institutes around the world and spending billions to send its main state-owned media groups overseas, including launching a cable news channel in the United States. At the very least, Beijing hopes these investments can shift the way the world thinks about China, and maybe even chip away at the cultural influence the United States enjoys.

That won't work. China treats soft power as a problem that can be solved by bureaucrats -- by throwing money at it, in the way that it has with high-speed rail or wind power. But modernity is not something that can be acquired off-the-shelf. Soft power is generated by society rather than the Ministry of Culture. The effort to shift its image is constantly undermined by the way that China actually treats its more awkward and interesting citizens -- from well-known figures like Nobel Peace Prize winner Liu Xiaobo and artist Ai Weiwei to the writer Yu Jie, who has been living in the United States since shortly after he wrote a critical book about former premier Wen Jiabao.

Its media companies will not prosper abroad because the one thing they really have to offer -- the inside story on what is really happening in China -- is the one thing they cannot report. China hopes its soft power investments will blunt criticism of its political system, but it is the political system that is holding back its soft power. Even favored artists suffer. I once asked Zhang Yimou, the film director and creative genius behind the Olympics opening ceremony, why his recent films had all been period pieces that shunned the fascinating complexities of contemporary China. If I made a film about today's China, he answered, I would have so many problems with the censors that it would not be worth my trouble.

If Beijing will struggle to displace Washington, where does this leave the United States? It will come as a huge psychological shock when the Chinese economy eventually overtakes the United States, which will be felt again perhaps even more powerfully when China also overtakes Washington with the world's largest military budget. (According to the International Institute for Strategic Studies, this could happen as soon as 2025.) The United States will have to get used to a different status.

But the one huge advantage it will continue to hold is its ability to organize and sustain alliances, coalitions, and important friendships. The balance of influence between the United States and China over the coming decades will hinge to a large degree on which nation can mobilize other nations to its cause. This is an area where Washington is far more skilled. The new bursts of free trade projects in the Pacific and with the European Union are one example, even if they are far from being completed, and its long-lasting military alliances in Asia and Europe another. (When the Berlin Wall fell, who imagined that NATO would still exist more than two decades later?) And China? It's only real ally is the mercurial, dangerous North Korea.

Of course, managing such a group of friends and allies in Asia will be extremely difficult in the years ahead. The distances across the region are huge and few of its allies have common interests, even if their anxiety about China is collective. The United States will find itself asked to pick up parts of the security bill that others could pay, and to intervene in squabbles in which it does not want to get involved. It will also require a big shift in attitude, with more emphasis on understanding the politics of its friends and allies, and less on shows of military power. Some might even be moved to describe the approach as leading from behind. But it's the United States, and not China, that has the capacity to shape the future of Asia and the world for decades to come.


Democracy Lab

Beyond Business: Rethinking Microfinance

Banking can do more good for the poor than only helping entrepreneurs.

In just 30 years, the microfinance movement has reached 200 million people who had been deemed "unbankable." That's a stunning success. But the narrative that drove this success has implicitly shut the vast majority of the unbanked out of the system. That's why it's time to change the story, and our minds, on how microfinance works.

The rise of the microfinance industry has been driven by a simple narrative, most closely associated with Muhammad Yunus and the Grameen Bank, joint recipients of the Nobel Peace Prize in 2006: Get capital into the hands of competent but cash-starved entrepreneurs, who would need loans of just a few hundred dollars to start shops and other micro-enterprises. While this sort of lending is more complicated than that, microfinance has certainly worked in the sense that most loans in most countries are repaid on time, most lenders have steadily grown, and most investors have been happy with the results.

By keeping the focus on small businesses, this microfinance narrative keeps us in our comfort zone. We can intuit how small loans can make a big difference for tiny enterprises that would otherwise depend on local loan sharks or never start in the first place. More important, we can imagine how such loans could be repaid with interest, yet still benefit the poor. The problem is, by clinging to this concept, we have kept ourselves from seeing what a more inclusive approach could mean for the world's poor -- and what it is that actually makes the micro-loan model work reasonably well today.

Consider Selco, an Indian company that sells solar-powered lighting to people unable to connect to the grid, or for whom power outages are way too common. The aim of Harish Hande, the engineer who founded Selco,, was to give households an alternative to expensive, non-renewable power sources.

Customers liked the Selco lanterns, but many balked at the price -- about $140 for the cheapest system. Hande saw that customers would only be interested if they could make payments over time. So Selco built partnerships with banks, and customers can now acquire lanterns and solar panels by taking out loans payable in installments over 3-5 years. Since 1995, about 150,000 customers have received such financing to purchase solar-powered systems. As a result, their children can do their homework at night, the air in their houses is cleaner, and their businesses (if they have them) can stay open later.

A similar story can be told about WaterCredit, a non-profit organization dedicated to financing improvements in household sanitation. To date, WaterCredit has made 65,000+ loans that have brought access to clean water and safe sanitation to close to 400,000 people in India, Bangladesh, Kenya, and Uganda. The loans fund household water and sewerage connections, toilets and pit latrines, tubewells, and rainwater harvesting tanks.

Finance is the key to making Selco and WaterCredit work, but not the sort we associate with microfinance. Rather, it is that most basic of consumer banking services: Loans that break up payments for large purchases into small installments. Indeed, recent studies of microcredit from sites as diverse as Mongolia, Peru, Indonesia, and Bangladesh show that in a substantial proportion of cases, micro-loans are being used to meet goals other than business investment -- health care, school fees, housing improvements, or simply keeping food on the table in periods of financial drought. And while those of us in the banked half of the world take this sort of thing for granted, the lack of reasonably-priced services to smooth out volatile and uncertain household cash flows represents a huge problem for poor households.

Microfinance thus turns out to do for the poor much of what credit cards do for the banked half of the world. Your card allows you to make purchases even if you don't have the cash in hand. The card allows you to stretch out expenditures so that they become more manageable. It allows you to build up a credit profile, so that the more successful you are at repaying now, the more you will be able to borrow later. Your credit card also allows you to pay for things remotely, perhaps online or even in a foreign currency, thereby getting maximum value for your cash.

Yet the traditional microfinance story casts poor households as a class apart -- as frustrated entrepreneurs whose concerns about meeting household needs are left unspoken. If you view the financial needs of the poor through the wider lens of money management, a new world opens up. The potential customer base for finance is no longer limited to the self-employed. It now includes those who work for others -- agricultural laborers, maids, construction workers, and the like. In other words, it allows us to focus on the majority of the world's unbanked half, not just the comparatively small slice targeted by traditional microfinance.

Market-driven microfinance has not completely ignored these needs. Yunus' Grameen Bank, which (like many micro-lenders) has consistently maintained the narrative centered on loans for business investment, has nonetheless stretched the concept to include loans for education and for housing improvements. Recently, it even introduced loan products that explicitly provide ready cash for emergencies, like health crises and food shortages.

Still, the industry remains leery of seeking customers who are not self-employed, and for an understandable reason: Microfinance's success has only been possible because socially conscious investors opened their pocketbooks in response to the narrative of  financing entrepreneurs.  Most microfinance banks, even those that are nominally profitable, have been implicitly subsidized by investors happy to trade financial returns for presumed social ones.

That was, and still is, necessary: Delivering services to poor households is expensive, even with the cost-saving operational innovations introduced by micro-financiers such as meeting with village customers in groups rather than in brick-and-mortar branches. Serving poor customers well requires as much (or more) effort and oversight as serving much wealthier ones -- there is simply no way around that.

The change required to reach the unbanked half of the world is thus less about transforming current practice than about transforming how we think and talk about the financial needs of the poor. At the most fundamental level, those needs are centered on money management -- ways to borrow for a wide variety of purposes, ways to save, ways to manage risk, ways to transfer funds quickly and securely.

The good news is that progress has been made on all those fronts, with the introduction of innovative products along with the research to show they are viable. Mobile banking, made practical by the surprisingly rapid penetration of cell phones in developing countries, is especially promising as a financial platform that reduces costs and offers a wider range of services. The big question is whether social investors will prove as willing to help low-income households spread the payments for, say, electric lighting (or, as important, to manage the complicated task of making ends meet each day) as they have been to fund boot-strapping female entrepreneurs. For this is always going to be a business in which doing good is as important as doing well.    

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