In the wake of the recent historic meeting of the leaders of China and Taiwan, the Stanford News Service asked two of the university's Asia experts about the aftermath of that meeting and its possible effects on political relations between the two countries, the military situation and Taiwan's Jan. 16 presidential and parliamentary elections.

The first presidential meeting between the leaders of the communist mainland and the democratic island, split by civil war in 1949, was held in early November on neutral territory in Singapore.

Kharis Templeman is the Taiwan Democracy program manager at Stanford's Center on Democracy, Development, and the Rule of Law at the Freeman Spogli Institute for International Studies. He recently wrote about why Taiwan's defense spending has fallen as China's has risen. Thomas Fingar is a distinguished fellow at Stanford's Walter H. Shorenstein Asia-Pacific Research Center. He served as the chairman of the National Intelligence Council and in other key positions in Washington. 

Do you anticipate any lasting effects from the face-to-face meeting of Chinese leader Xi Jinping and Taiwanese President Ma Ying-jeou?

Thomas Fingar: At a minimum, the meeting appears intended by both sides to validate and lock in the much-improved cross-Taiwan Strait relationship that has evolved over the past several years.

Kharis Templeman: I do think the Ma-Xi meeting itself will have one lasting legacy: it has created a precedent for treating the directly elected president of the Republic of China as an equal and as the rightful representative of Taiwanese interests in cross-strait relations. From now on, leaders in Beijing are going to have a hard time arguing that a non-KMT (the Kuomintang, Taiwan's governing party,) president is illegitimate, as they did during the [former Taiwanese president] Chen Shui-Bian era, or to continue to insist on referring to Taiwan’s leaders as provincial-level officials. So, the next president will come into office somewhat strengthened by that precedent.   

Will the meeting have any effect on the January elections in Taiwan?

Templeman: I don’t think it will make much, if any, difference. Taiwanese public opinion is deeply divided about Ma Ying-Jeou’s meeting with Xi. Ma himself remains quite unpopular, the economy is barely growing, and the KMT presidential candidate remains at least 20 points behind in the polls. There’s little indication that this meeting has shaken up what has been a large and steady lead for DPP (Democratic Progressive Party) presidential candidate Tsai Ing-Wen, and I would be shocked if she didn’t win a comfortable victory in January.

Fingar: Probably not. Beijing seems to have learned that its past attempts to influence elections on Taiwan have been ineffectual or counterproductive, and the meeting is unlikely to change minds or votes on the island. 

How might the elections affect military spending on either sides, or China's aggressive island-building for military bases?

Fingar: The meeting will not have any effect on military spending or the building of artificial islands in the South China Sea, but Beijing may have hoped that agreeing to meet with Ma to demonstrate how "good" the relationship is might persuade Washington not to approve another round of arms sales to Taiwan.  Regardless of who wins the election on Taiwan, the next administration is likely to seek another round of U.S. arms sales in order to prove that it has the support of the United States.

Templeman: The meeting will have no impact on the security balance in the region. Ma reportedly raised the issue of PRC (People's Republic of China) missiles within easy range of Taiwan, but Xi claimed, implausibly, that they were not targeted at Taiwan, and that was the end of it. The broader trends are unchanged: the PRC’s military budget is growing annually by double-digit rates while Taiwan’s remains essentially flat. The consequence is that the PRC’s capacity to take coercive measures against Taiwan continues to expand, even as cross-strait cooperation has been improved and institutionalized.

Dan Stober is at the Stanford News Service.

China's tight control over its economy is one reason why it is facing an economic slowdown of global implications, Stanford scholars say.

China's stock market fall is now in its third week, and share prices have lost a third of their value since mid-June, though the market is still higher than a year ago. China has the world's second-largest economy, with deep financial links to the United States.

Nicholas Hope, director of the China Program at the Stanford Center for International Development, which is part of the Stanford Institute for Economic Policy Research, said the simple answer behind the slowdown is that "nothing grows at 10 percent forever."

However, the dropoff is sharper than the government of China expected or desires, he noted.

Hope said the deceleration is due to the effects of slow growth globally on international trade, slower progress than hoped in rebalancing the Chinese economy toward spending more on consumption and less on investment, and the inefficiency of much of Chinese investment. Another big problem is the debt load of local and regional governments.

Hope does not think the steep fall of China's stock market is comparable to the American crash of 1929 – "so long as the Shanghai market index remains comfortably above where it was a year ago."

Yet the "frighteningly sharp correction" over the past few weeks highlights the fragility of the Chinese financial system, he said. It also serves as a cautionary tale for the many small investors who speculated on high returns with borrowed money.

"Borrowed funds have financed many risky economic investments in infrastructure by subnational [regional and local] governments as well as stock purchases by unwise investors," he said. "The result threatens to be an unwanted increase in non-performing loans in the banking system as borrowers are unable to repay."

Hope believes China can overcome its problems if it adopts economic reforms aimed at fostering more private enterprise and less state control over the market. Back in 1993, China's Communist Party announced those reforms and updated them in 2013, so they are technically on the books.

"Paradoxically, current weaknesses could be a longer-term source of strength, as the shares of income and consumption in Chinese GDP rise, investment is increasingly more efficiently allocated by a transformed financial system and all factors of production – land, capital and labor – are put to more productive uses," he said.

To counteract the market drop, the government ordered state-owned companies to buy shares, hiked the amount of equities insurance companies can hold and offered more credit to finance trading. Hope said this may cause a problem.

"It is introducing considerable moral hazard by attempting to bail out small investors because of the concern over the potential for social unrest if too many of those investors lose all of their savings," he said.

Charlotte Lee, associate director of the China Program at Stanford's Walter H. Shorenstein Asia-Pacific Research Center, says it is too early to tell if the market fall will diminish the credibility of the government and Communist Party in the eyes of the people. China's President, Xi Jinping, does want to maintain his popularity.

"The government's management of the economy is, however, one of the pillars of its credibility," Lee said.

She described this as a "small dent" in that credibility, as the government has many other ways it aids the Chinese people.

Opening up the economy

Stanford Professor Darrell Duffie says that it will be hard for China to maintain its past high growth rates.

"China's growth rate is still very high, but it is less high than it was because most of the giant pool of cheap and underutilized labor that China had 20 years ago has by now been put to work relatively productively," said Duffie, the Dean Witter Distinguished Professor of Finance at the Graduate School of Business.

"Additional sources of productivity gains are harder to find," he added.

Duffie is concerned about excessive leverage in China's equity markets.

"Chinese investors have borrowed a lot of money to invest in equities. This margin financing was used too aggressively. China's corporations and local governments are heavily indebted, and that will be a drag on future growth," he said.

He suggests that China would do well to continue on its current course of opening up its economy to cross-border capital flows and reducing its economy's reliance on state-owned enterprises.

If China's economy slows down, the country will decrease its demand for American goods and services, he added. American businesses that plan to operate in China should learn as much as possible about how China's economy and government works.

And Duffie advised, "Whenever possible work with trusted partners in China."

Asian power games?

With China ramping up its military in recent years, what are the risks to U.S. national security if China's economy plunges?

Amy Zegart, co-director of Stanford's Center for International Security and Cooperation, said it is possible that a slowing economy might make China behave differently in terms of its hard and soft power.

"For all the worry about a rising China, a fragile China is bad for the United States. The Chinese Communist Party's legitimacy rests on a promise of economic prosperity. The more China's growth falters, the more party leaders will be driven to stoke the fires of nationalism to secure domestic support," said Zegart, who is also a senior fellow at the Hoover Institution.

She added, "We've seen this movie before. It stars Vladimir Putin behaving recklessly abroad to win political support at home as his economy stalls."

Clifton Parker is a writer for the Stanford News Service.