Overcoming the lack of trust between China and the US

Posted on June 1, 2023 by Jim Hassett

We don’t trust China, and they don’t trust us. Which makes it very difficult to find solutions to diplomatic disputes. Our deep mutual suspicion is based on a history of misunderstandings and broken agreements between the two most powerful countries on Earth.

Last year, I wrote a post describing seven cultural differences that complicate US-Chinese relations, including “the relativity of truth.” The key to understanding this difference was summarized by Robert Conrad in his book Culture Hacks (p. 166): “China has one set of [ethical] rules for conduct within the extended family or clan group and a much different set of rules for those outside of the group.”

One area where it is particularly easy to see the effects of this cultural difference is in education. For example:

Chinese students in the US “might think it’s acceptable to collaborate on homework or to find the answers to a test online in advance… They think it’s a gray area, but in the U.S. it’s [not].”
A Chinese company that helps students apply to US colleges estimated that “90 percent of recommendation letters and 70 percent of college essays submitted by Chinese students are fraudulent.”
Some Chinese who want to study in the US but whose English is weak hire other people to take the TOEFL English proficiency exam for them.
“Problems with cheating on the Chinese university entrance exam, known as the Gaokao, have gotten so out of hand that it is now a criminal offense punishable with a seven year jail sentence.”

Differences in the definition of truth that are troublesome in the classroom become much more serious when they are involved in foreign policy. For example, consider what happened when China was accepted as a member of the World Trade Organization in 2001.

While negotiations were underway, both sides saw this as a win-win.

Hu Jintao, then President of China, said China wanted “access to new trading partners… raising prospects for improved living standards domestically and giving China a seat at the table in a globalizing world… This “major strategic decision [was taken] to push forward China’s reform and opening-up.”

On the US side, President Clinton seemed even more enthusiastic in describing this as “an agreement which will open China’s markets to American products made on American soil.” He went on to predict the agreement would lead to “a China that is more open to our products and more respectful of the rule of law at home and abroad.”

How did that turn out for us?

Not well, according to most experts. In 2018, the White House issued a report with the ominous title “How China’s Economic Aggression Threatens the Technologies and Intellectual Property of the United States and the World.” It documented China’s many violations of WTO rules, including “physical theft, cyber-espionage, evasion of U.S. export control laws, counterfeiting, [forcing] technology transfer from foreign companies, typically in exchange for limited access to the Chinese market… and talent recruitment of business, finance, science, and technology experts.” (page 2)

I summarized some of the effects of this cheating four years ago in one of the first posts in this blog: “The biggest theft in human history.” The title was based on a quote from the director of the US National Security agency describing how China steals as much as $600 billion per year by ignoring international law protecting patents and trademarks.

For example, according to former FBI special agent Kevin Brock, in America, “we pay for software licenses, the lifeblood of today’s economy. In China, 99 percent of Microsoft licenses are counterfeit and unpaid for.” The result, he continued is that since China “didn’t have to recover the considerable sunk costs of R&D or pay for valuable products, [they] could undercut prices and build massive trade imbalances in their favor.”

Another example of diplomatic deception can be seen in one of the key flashpoints of the relationship: the South China Sea. Since 2014, China has been building artificial islands on top of rocks and reefs, identifying them as Chinese territory, and using them to defend its broad claims over international shipping waters.

When President Obama and Xi Jinping held a summit in 2015, Xi stood in the Rose Garden and said: “Construction activities that China [is] undertaking in the… Nansha Islands do not target or impact any country, and China does not intend to pursue militarization.”

Again, that’s not how things turned out. “China has fully militarized at least three of the islands it built in the disputed South China Sea, arming them with anti-ship and anti-aircraft missile systems, laser and jamming equipment and fighter jets.”

The result of these and many similar experiences is that there is a “long-running view formed over many generations among American officials… [that China] is not only opaque but also has zero moral compunction about actively lying to foreigners whenever its political needs so dictate.” (Paul Rudd, The Avoidable War, Kindle loc 1141)

So, from our perspective, it’s easy to see why the US doesn’t trust China. But why don’t they trust us?

“Americans typically believe,” Rudd also wrote in his book (Kindle loc 999), “that [our] approach to China has been driven by high ideals in defense of democracy, free trade, and the integrity of the global rules-based order.” But the Chinese government sees things differently. According to Stanford researcher Thomas Fingar, they have “decided that we’re out to get them, and that we will not tolerate China’s rise to a point at which it could be a peer competitor, let alone displace us as king of the mountain.” China also believes, according to the South China Morning Post, that “the US is manipulating the concept of national security to conceal its true agenda of containing China’s rise… [and] it is the US that is provoking military tensions in Asia, particularly over Taiwan.”

Chinese diplomats often point to the US hypocrisy which justifies such wars as Iraq and Afghanistan efforts to build democracy while we simultaneously embrace dictatorships which are allies, such as Saudi Arabia, the United Arab Emirates, and Turkey. (You have to admit, they’ve got a point on that one.)

As Xi Jinping summarized this view in a speech last March “Western countries led by the United States have implemented all-round containment, encirclement and suppression of China, which has brought unprecedented grave challenges to our nation’s development.”

Given this fundamental mutual mistrust, what can be done to begin to thaw relations between the countries?

In the 1980s, when President Reagan was negotiating arms reduction with the Soviet Union, he frequently quoted the old Russian proverb: “Trust but verify.” In 2013, when US Secretary of State John Kerry negotiated to a treaty to destroy Syria’s stockpile of chemical weapons, he went a step further and said that “President Reagan’s old adage about ‘trust but verify’… is in need of an update. And we have committed here to a standard here that says ‘verify and verify.’”

That is exactly the approach that the US and China could use today. For now the diplomatic motto in both countries could be: don’t even try to trust each other. It won’t work. But do engage in diplomatic discussions in areas of mutual interest such as climate change, pandemics, terrorism, and the global economy. And when you reach an agreement, make sure that it can and will be verified.

In February, US-China relations may have hit a new low when “a 200-foot-tall Chinese airship, which U.S. officials said was a spy balloon designed for eavesdropping, traversed the U.S. for several days before it was shot down by a U.S. fighter jet.”

This led US Secretary of State Antony Blinken to cancel a planned visit to Beijing. Even worse “more than 100 communication channels between different government ministries and agencies are dormant, depriving each side of mechanisms that can defuse smaller disagreements and disputes.”

As Stephen Roach, a senior fellow at Yale’s China Center put it: “If a balloon can derail this relationship the way it did so swiftly, it just tells you how damaged and distrustful the two nations are of this relationship.”

But there is hope. Last week at the G7 meetings, President Biden predicted that tensions with China are going to “begin to thaw very shortly.” Let’s hope he’s right.

Is war over Taiwan inevitable?

Posted on May 3, 2023 by Jim Hassett

There is an enormous amount of controversy about if and when China will invade Taiwan. “In one recent poll… of top specialists on China… 63 percent of respondents believed an invasion to be ‘possible within the next 10 years.’” Note that this survey did not ask whether it was probable, just whether it was possible. So, by implication, over a third of this group of experts (the remaining 37%) thought that invasion was NOT POSSIBLE in the next decade.

While many experts do think an invasion is coming, they disagree strongly about when. At one extreme, Air Force Gen. Mike Minihan was in the headlines a few months ago when he a released a memo arguing “that China cannot be deterred from invading Taiwan. ‘My gut tells me we will fight in 2025.’” At the other extreme, many point to 2049 as the final deadline, since it’s the 100^th anniversary of the Chinese Communist Revolution.

Still, if current threats to world-wide peace could be ranked, Taiwan would probably be #2, just behind the Ukraine. The basic issues of the conflict have remained the same since I wrote my 2021 post on “The Taiwan Conundrum.” What’s changed in the last two years is that the temperature has gone up.

A Taiwan-China war is harder to predict than most conflicts for two reasons. The first is the lack of transparency into Chinese politics, making it hard to define the gap between what Chinese politicians say, and what they may actually do. The second is the United States’ longstanding policy of “strategic ambiguity.” Under this purposely vague policy, the US strongly supports Taiwan both politically and militarily, but does not guarantee that it will help defend Taiwan if it is attacked.

In contrast, there can be no doubt about China’s long-term intentions. At the 20^th National Congress of the Chinese Communist Party last October, the 2,300 delegates voted to add these words to the Party Constitution: “resolving the Taiwan issue and achieving the complete reunification of the motherland is a historical task to which the Chinese Communist Party will never relent.”

So the key question is not about China’s goal, but rather about whether it will lead to war. Some Taiwanese political parties favor a peaceful re-unification with the mainland. However, their popularity declined dramatically a few years ago, after Hong Kong’s freedoms were slashed when the island was forcefully taken over by Beijing.

Still, as Kevin Rudd wrote in his excellent book The Avoidable War (Kindle loc 1318): “Xi’s objective is to secure China’s territorial claims in… Taiwan without ever having to fire a shot.” Similarly, a recent CNN article put it this way: “The Chinese are going to do everything they can… to avoid a military conflict with anybody… To challenge the United States for global dominance, they’ll use industrial and economic power instead of military force.”

Let’s hope CNN is right on this one, because if the US and China ever do go to war, the effects would fall somewhere between disastrous and the end of the world.

In January, The Center for Strategic and International Studies (CSIS) released a fascinating white paper with the ominous title The First Battle of the Next War. It summarizes the results of 24 elaborate war games that simulated a Chinese amphibious assault of Taiwan, with the US and Japan coming to its defense. The headline conclusion was “China is unlikely to succeed in an invasion of Taiwan in 2026.” (p. 83) But the cost is extremely high to both sides. China would suffer tens of thousands of casualties, plus similar numbers of prisoners of war, and its navy would be left “in shambles.” (p. 3)

Taiwan would suffer even more. “While Taiwan’s military [would be] unbroken, it [would be] severely degraded and left to defend a damaged economy on an island without electricity and basic services.” (p. 83) As a result, Taiwan’s economy would be crippled for years.

Finally, the report concluded, “The United States might win a pyrrhic victory, suffering more in the long run than the ‘defeated’ Chinese… In three weeks, the US would suffer about half as many casualties as it did in 20 years of war in Iraq and Afghanistan.” (p. 4) We would also lose dozens of ships and hundreds of aircraft.

Given that both sides would prefer not to fight, at least in the next few years, what could spark a US-China war? Grandstanding politicians. For the most prominent recent example, see the post I wrote last year entitled “The Sheer Stupidity of Nancy Pelosi’s visit to Taiwan.” In August, while still Speaker of the House of Representatives, Pelosi became the first speaker to visit Taiwan since Newt Gingrich toured the island in 1997. In a Washington Post op-ed, Pelosi described the purpose of her visit as “reaffirming that the freedoms of Taiwan — and all democracies — must be respected.”

China considered this an insulting and hostile act, and responded by “holding its largest military drills in decades and, in a first, sending a missile over the island.” The Taiwanese public weren’t exactly grateful for the trip, they were scared by it. Taiwanese surveys conducted soon after the visit found that “respondents overwhelmingly believed that Pelosi’s trip and the large-scale People’s Liberation Army exercises created a serious threat to Taiwan.” In another sign of trouble, “Goldman Sachs’ Cross-Strait Risk Index, which gauges the intensity of geopolitical risk between Taiwan and mainland China, hit a record high last August after… Pelosi’s trip.”

So what have American politicians learned from this fiasco? Nada. Not to be outdone, current House Speaker Kevin McCarthy visited with Taiwanese President Tsai Ing-wen in Los Angeles on April 5. Which was followed by another increase in Chinese military drills around Taiwan.

All this activity has increased the chances of accidental war. According to Taiwanese professor Chieh Chung, “Chinese air and naval forces have occasionally acted in a more provocative manner — such as with aggressive midair maneuvers that force Taiwanese fighter jets to jockey for advantage — ‘and there is no cross-strait mechanism or communication channel on how to avoid military accidents.’”

Recent military exercises around Taiwan are increasing the risk of accidental war.

Even worse, according to classified documents recently leaked by Air National Guardsman Jack Teixeira, “China’s intensifying military activity around Taiwan is undermining the intelligence community’s ability to accurately track what is normal and what is escalatory, raising the risk of accidents and miscalculation.”

As Paul Rudd, Australia’s ambassador to the US, put it in The Avoidable War, it seems “less and less a question of if Beijing will have to handle the operational and diplomatic consequences of an unintended collision between Chinese, American, or Japanese military vessels or aircraft in the future, but when.” (Kindle loc 5809)

As explained in my post “Avoiding a US-China war,” Rudd’s book contains numerous detailed suggestions to reduce the risk of war over Taiwan, accidental or intentional. “First, the United States and China must both develop a clear understanding of the other’s irreducible strategic redlines in order to help prevent conflict through miscalculation,” Rudd wrote. Then China and the US should “channel the burden of strategic rivalry into a competitive race to enhance their military, economic, and technological capabilities.”

This great power rivalry is unlike any in past history, and not just because of the ultimate threat of nuclear war. As Pulitzer Prize winning columnist Thomas Friedman wrote in the New York Times a few weeks ago: “Neither China nor America has ever had a rival quite like the other… [the two] nations have become as economically intertwined as the strands of a DNA molecule.”

But these days, he continued “Relations between our two countries have soured so badly, so quickly… that we’re now like two giant gorillas looking at each other through a pinhole. Nothing good will come from this… [In fact], the smallest misstep by either side could ignite a U.S.-China war that would make Ukraine look like a neighborhood dust-up.”

The hawkish statements now increasing in both China and in the US certainly aren’t helping. In a self-fulfilling prophecy, the fear of war can actually increase its likelihood. As one Rand consultant put it, “An exaggerated sense of danger can exacerbate tensions and aggravate perceptions of hostile intent.” What we need is more communication, better communication, and a sense of calm.

As to the question of inevitability, I agree with Friedman’s conclusion: “I don’t buy the argument that we are destined for war. I believe that we are doomed to compete with each other, doomed to cooperate with each other and doomed to find some way to balance the two. Otherwise we are both going to have a very bad 21st century.”

Xi Jinping – A five minute bio

Posted on March 29, 2023 by Jim Hassett

Xi Jinping has been called “the most powerful person in the world” by Forbes Magazine. Kevin Rudd, Australia’s ambassador to the US and the author of “The Avoidable War” put it this way: “Mr. Xi has in effect become the ‘Chairman of everything’ across the machinery of the [Chinese] state, the party and the military.”

As another expert said in “The Prince,” a recent series of podcasts on Xi’s life: “The future of China’s 1.4 billion people, and maybe world peace, hinge on the mind of one man.”

When that one man was born in 1953, his father Xi Zhongxun was China’s propaganda minister. Like almost all senior leaders in China at that time, Xi’s father had fought under Mao Zedong in the Chinese Revolution. That gave the younger Xi a unique privileged position as a potential leader of the next generation, what the Chinese call a “princeling.” He lived in an affluent private community, and went to a school where students “compared one another on the basis of whose father had a higher rank [and] whose father rode in a better car.”

All that began to change when Xi was nine, and his father was accused of supporting a novel about the Chinese revolution that was not sufficiently enthusiastic about Mao’s role. The elder Xi was purged from senior leadership and sent to manage a tractor factory hundreds of miles away from his four children.

Four years later, when Xi was 13, life got worse again at the start of China’s “Cultural Revolution” to root out intellectuals and enemies of the people who threatened the socialist revolution. Mao said that many senior leaders and intellectuals had become bourgeois, and he urged China’s students to rise up against them. Which they did, with a vengeance.

Many students formed groups of Red Guards to enforce Mao’s wishes by attacking everyone they suspected for any reason, no matter how flimsy. They gleefully shut down schools and attacked first their professors and personal enemies, and later attacked other competing Red Guard groups. It was a dream come true for teenaged bullies and anyone with a grudge. The military stood aside and it seemed there were no longer any adults in charge.

Hundreds of thousands of people, or maybe millions, were killed in the ensuing chaos; no one will ever know the true death toll. Countless others, including Xi Jinping’s father, were publicly beaten, tortured and humiliated in “struggle sessions” in which they were forced to describe their crimes, real and imagined, while large crowds shouted slogans and taunted them.

During the Cultural Revolution, Xi Jinping’s father was beaten, tortured, and humiliated in a series of “struggle sessions” after he was purged by Mao. In this photo, a sign covered with slogans was hung around his neck, while a large crowd taunted him for hours for such imagined crimes as owning a secret radio and “having gazed at West Berlin through binoculars during a visit to East Germany years earlier.”

Xi Jinping’s entire family was targeted so frequently that, according to the New York Times, one of his sisters committed suicide. Xi himself became the target of struggle sessions with crowds shouting ‘Down with Xi Jinping!’ His own mother was sometimes required to attend and when the crowd “yelled, his mother was forced to raise her arm and shout the slogan along with everyone [else].”

The impact on Xi was overwhelming. “When the pandemonium of the Cultural Revolution erupted, he was a slight, softly spoken 13-year-old who loved classical Chinese poetry. Two years later, adrift in a city torn apart by warring Red Guards, Xi Jinping had hardened into a combative street survivor.”

By 1968 the entire Cultural Revolution had spun out of control. To avoid further disorder “Mao ordered the Red Guards and other students to the countryside, to be ‘reeducated by the poor and lower-middle-class peasants.’” Xi was sent to Liangjiahe, a small village in northwest China where he “lived in a cave dwelling with villagers, slept on a kang, a traditional Chinese bed made of bricks and clay, endured flea bites, carried manure, built dams and repaired roads.”

The story of Xi’s years of back breaking peasant labor in Liangjiahe have become a key to the myth of Xi Jinping, protector of the peasants and man of the people. Patriotic tourists now flock there on vacation to see such sites as “an underground chamber that Xi is said to have hand-dug, a place to ferment human and cow feces into natural gas.”

The Cultural Revolution led many Chinese at home and abroad to question their faith in Communism. Xi went in the other direction and re-dedicated himself to the CCP. “When I went to the countryside as a 15-year-old, I was perplexed and lost,” Xi wrote in a 2002 essay. “By the time I left at the age of 22, I had a clear life goal and was filled with confidence.” As one analyst summed it up in The Prince podcasts, Xi “does not want the chaos he saw as a young person to return to China, and he sees the Party as the one institution that can prevent that from happening.”

When Xi was still in the countryside, he applied to join the Communist Youth League of China and was rejected due to his father’s history. So he applied again. And again. On his eight try, he was accepted. His path to becoming a full Party member was no easier, with nine applications rejected before he finally became a member in 1974 on his tenth try. From there, his rise in the party proceeded slowly and steadily, including a series of increasingly important political posts around the country.

In his personal life, at the age of 33 Xi married Peng Liyuan, one of the most famous singers in China. It was the Chinese equivalent of Joe Biden marrying Beyonce or Taylor Swift back when he was a virtually unknown junior senator from Delaware. (An aside: for historical realism, a better analogy might be to say it was as if Biden had married Stevie Nicks or Dolly Parton, since they were both famous when he was 33. Neither Beyonce nor Swift had been born yet.) These days, both Xi’s wife and his daughter and only child keep a low public profile. The daughter – Xi Mingzhe – currently lives in the US. She earned a BA in psychology from Harvard in 2014 (using a pseudonym), then returned to China until 2019, when she re-enrolled in Harvard’s graduate program.

Back in the world of politics, Xi ascended to the national stage in 2002, when he became a member of China’s 200 person Central Committee. In 2007, Xi was elected to the highest political group in China, the CCP Politburo, which then had nine members, and in 2012 he ascended to the top position.

A few years later, a profile in the New Yorker described Xi’s “essential project as a rescue: he must save the People’s Republic and the Communist Party before they are swamped by corruption; environmental pollution; unrest in Hong Kong, Xinjiang, and other regions; and the pressures imposed by an economy that is growing more slowly than at any time since 1990.”

Xi has also been obsessed with the collapse of the Soviet Union, and avoiding a similar scenario in China. In 2009, he commissioned a study of the topic, which included this joke: When Leonid Brezhnev was one of the last General Secretary’s of the Communist Party of the Soviet Union, he proudly gave his mother a tour of his Kremlin apartment, his limousine, and his many luxuries. “I’m so proud of you, Leonid Ilyich,” his mother said, “but what happens if the Communists find out?”

This is one mistake Xi will not make. Instead, he has “associated himself with an earthier generation of Communists, a military caste that emphasized ‘hard work and plain living.’”

When Xi first took over the country’s top position in 2012, the Chinese constitution limited the presidency to two five year terms. So Xi had the constitution changed, and on March 10 he was officially elected to an unprecedented third term by the National People’s Congress by a vote of 2,952 to 0.

As a recent Foreign Affairs article summed up the current situation: “Now, as under Mao, China is a one-man show.”

Who will come after Xi, and how will it affect China and the world? The US may have to survive several decades of co-existing with Xi before we find out. There is no sign that he has chosen a successor, and “as a lifelong student and practitioner of Chinese politics, he knows full well that if he did leave office, he and his family would be vulnerable to retribution from his successors. So Xi is likely to lead the country for the rest of his life.”

At “just” 69, Xi is younger than 1/3 of the members of the US Senate. If he lives as long as his 96 year old mother, it could be the 2050s before there is a change in leadership.

National Debt – China vs US

Posted on February 22, 2023 by Jim Hassett

The US national debt now stands at about $31 trillion. $31,571,627,957,068 to be exact. At least, that was the exact figure when I started to type this sentence a few seconds ago. By the time I finished the sentence, we owed more.

$31 trillion seems an impossibly large figure; almost beyond human comprehension. Here’s one way to think about it: if the US paid off $100 of this debt every second, it would take over 10,000 years to fully repay.

As one host of the Daily Show recently summed it up: “America is so broke, the government might have to resort to extraordinary measures, like taxing the rich.”

How do economists evaluate national debt? Most start by dividing each country’s debt by the size of its economy, as measured by GDP. (GDP – gross domestic product – equals the total market value of all finished goods and services produced within a country’s borders, typically in one year.) For the US, debt divided by GDP is about 123%. In other words, we owe more than the entire US economy produces in a year.

In a shocking turn of events, economists can’t seem to agree about whether that’s a problem. As Harvard professors and former White House economists Jason Furman and Larry Summers put it in an article in Foreign Affairs: “In truth, no one knows the benefits and costs of different debt levels—75 percent of GDP, 100 percent of GDP, or even 150 percent of GDP.”

However bad the US debt problem turns out to be, debt is worse in China. In fact, “China’s debt… is one of the biggest economic challenges confronting the ruling Chinese Communist Party.”

Exactly how much does China owe? Here’s where it gets really complicated. Different sources will give you significantly different answers about the total size of China’s national debt. Due to the lack of transparency in Chinese financing, nobody outside China really knows how much money the country owes. In fact, bankers and politicians have done such a good job of hiding debt and blowing smoke, that probably no one inside China is quite sure either.

An online site called “China’s national debt clock” puts the total amount at $9.4 trillion, or 63% of China’s GDP. However, that website goes on to note in large print that “We suggest you multiply [this figure] by at least 3.25 [to include]… local government financing vehicles… Then consider adding [an additional amount] for China’s shadow banking (loans outside of formal banks).”

The term “local government financing vehicles” refers to a wide variety of Chinese financial instruments which fund national initiatives such as infrastructure development. Under the US system, this type of spending would appear as part of the national debt. However, “China has historically kept central government borrowing down by shifting the fiscal burden to local governments… [where] opportunities for creative debt management seem to be greater.”

The result? According to a CNN article a few weeks ago, “even the country’s top officials have admitted that one of the biggest threats to financial stability in 2023 is hidden local government debt, which is opaque, huge and hard to track.”

Add to this the “shadow banking system” which was designed to enable bankers to hide bad debts outside bank regulations. For example, some banks have re-packaged and sold their bad debts as securities. As a result, those repackaged debts have disappeared from the banks’ balance sheets and from official estimates of national debt.

Any discussion of US vs Chinese banking systems must also keep in mind the fact that as, explained in a previous post, the Constitution of the Communist Party of China specifically states that “the interests of the Party and the people come before all else.” As a result, Chinese bankers “often make decisions based on government edict rather than economic pragmatism. This includes loaning money to state-owned, state-controlled, or state-favored companies and industries in spite of the risk that the money may not be repaid.” (Digression: If you are ever tempted to invest in high interest bonds offered by Chinese banks, keep this in mind. While US banks are committed to maximizing your profit and theirs, Chinese banks are dedicated to financing CCP initiatives.)

The resulting “mountains of debt” have set the stage for problems which are just starting to affect the lives of ordinary Chinese citizens.

For example, last year China “experienced its first wave of bank runs, triggered by frozen deposits in online accounts worth… $6 billion and affecting 400,000 depositors… Not being able to withdraw their life savings has led to protests by depositors, triggered panic over the solvency of small banks, and increased the nationwide risk of runs on small banks.”

People who were denied access to their deposits at a small bank in Henan Province
protested in this bank run last summer.

The Chinese government is currently drafting a new financial stability law which is “likely [to be implemented] this year.” The current draft includes “emergency funding to weak banks to preserve system financial stability.”

Another problem is that the finances of some municipal governments have gotten so bad that they are unable to pay for basic services. “As the financial pressure has mounted, regional governments have reportedly been slashing wages, cutting transportation services and reducing fuel subsidies in the middle of a harsh winter.”

Still another problem started in the real estate sector, which has been over-building new apartments for many years, as a result of government policies to keep the economy growing at all costs. In 2021, I wrote in this blog about a failure to make debt payments by Evergrande, one of the largest developers in China with more than 1,300 projects in 280 cities. With over $300 billion in excess debt, they no longer had enough cash to finish building some developments, and were unable to repay the deposits some buyers had made on their unfinished apartments. In that 2021 post, I also reported then that the owners were promising that they would soon announce how they would restructure the debt to minimize the damage. In the 18 months since, Evergrande executives have continued to promise that a plan is coming soon. Meanwhile, they have missed several self-imposed deadlines. And many individuals who put money down are still waiting to hear what will happen to their deposits.

Of course, the US has not yet experienced problems this extreme, despite its own enormous debts. One reason is that the US dollar is the largest reserve currency in the world. Most international trades are based on dollars, and 51% of the reserves held by central banks around the world are in dollars. In comparison, just 2% of international reserves are held in China’s renminbi or yuan (Dalio, p. 441). The rest is held in Euros (20%), gold (12%), Japanese yen (6%) British pounds (5%), and other currencies (4%).

The simple fact that the US borrows in dollars and pays off in dollars gives it an enormous advantage. As a last resort, it can pay its debts by printing more dollars. Which is essentially what the US has done as our national debt has increased from $19.6 trillion in 2016 to $31 trillion today. How did it go up so fast? Feel free to blame Congress, on both sides of the aisle. In 2017, Republicans increased the debt with tax cuts that “overwhelmingly benefited wealthy shareholders and highly paid executives.” In 2020 and 2021, Democrats spent several trillion more to reduce the impact of covid and to rebuild US infrastructure. The fact that the country essentially “printed more money” to finance these laws led to widespread inflation. Which is why the price of a dozen eggs has increased from $1.38 at the end of 2016 to $4.82 today.

The “good news” is that most economists agree that China’s debt problems are worse than ours. But they disagree about exactly how much worse, or how much it matters. Deficit fundamentalists fear that China, the US and many other countries are headed into debt traps which will reduce economic growth. When an economy slows, it reduces tax revenue, which further increases debt until it spirals out of control. In contrast, proponents of what is called Modern Monetary Theory argue “that governments that borrow in their own currencies [such as the US] have no reason to concern themselves with budget constraints.”

Ultimately, how will we know which group is right? When there is a major debt crisis. Until then, governments are likely to keep kicking the can down the road, borrowing and spending freely to meet their goals.

As discussed in my previous post, after analyzing several hundred years of world economic history, billionaire investor Ray Dalio has concluded that repeated up and down debt cycles like the current one are an inevitable consequence of human nature. As countries become richer and more powerful, he wrote in “The Changing World Order: Why Nations Succeed and Fail,” their people “tend to not work as hard, enjoy more leisure, [and] pursue the finer things in life… [As] people get used to doing well, they increasingly bet on the good times continuing—and [they] borrow money to do that—which leads to financial bubbles.” (p. 47)

Which debt bubbles will pop first, and when? I guess we’ll just have to wait and see.

China’s rise and the “big cycles” of human history

Posted on December 31, 2022 by Jim Hassett

“The United States is the most powerful country [in the world], but [it is] declining. China is close behind and rising quickly.”

By itself, this quote from Ray Dalio’s fascinating book “The Changing World Order: Why Nations Succeed and Fail” (p. 496) would hardly be news. Many others have made similar claims in the past, including me. What’s different about this particular quote is the sheer amount of data and analysis that lies behind it. As one reviewer put it, the book is “a sprawling, holistic study of how the world has worked over hundreds of years of history.”

Author Ray Dalio is well known in business circles as the founder of Bridgewater Associates, the largest hedge fund in the world, with over $126 billion in assets under management. Dalio retired last year, and published this book (his fourth) near the end of 2021.

Over the course of his career, Dalio became interested in long-term trends in investment booms and busts. He began developing an enormous database of information on the rise and fall of “empires” which dominated world power and wealth. By combining 18 measures of power into a single number, he was able to map out the “big cycles” by which four countries have dominated the world over the last 500 years.

This graph summarizes Dalio’s “big cycles” in relative power and wealth over the last 500 years, for the four most influential countries in the world. For other countries, see Dalio’s book, or his free website.

As you can see in the graph above, the Netherlands (through the Dutch East India Company) was the most powerful empire in the world from the 1600s to the mid-1700s, followed by the UK through about 1900, and then the US. China’s graph is the most interesting of these four, since by Dalio’s measures, it was the most influential empire roughly 1500-1625. It declined suddenly in the 1800s due to the effects of European imperialism, including the Opium Wars, the Boxer Rebellion and more. China began rising again after the conclusion of its revolution in 1949, and now threatens the US for the position of number one in the world.

The “big cycles” in the graph above are based on three smaller, underlying cycles that last 50 to 100 years within each country: economics (long-term debt and capital), internal order/disorder, and external order/disorder. The ups and downs in these three sub-cycles can drive stock market booms and busts, and even wars. Given the length of 50-100 years, many people’s entire lives are spent when things are near the top or near the bottom of a cycle.

When examined from a distance, my entire post-war generation has lived near the top of the most comfortable peak in human history. Of course, on a day-to-day basis such events as climate change, nuclear proliferation, Vietnam, Iraq, Afghanistan and the Ukraine, and the death of Miles Davis have hardly felt like we are living near the top. But think big picture. I have never lived through a local war or a famine, and technical advances have made my life longer and more comfortable than for any of my ancestors.

As a result of living near the top, many people my age have become so comfortable taking Hawaii vacations on their credit cards, and so optimistic about the future value of stocks, real estate and other assets, that they have little or no savings to serve as a financial cushion for when the cycle inevitably heads down. (Unless they had parents like mine who passed along their fears from the Great Depression.) This reality has some intriguing implications for record setting levels of national debt in both the US (over 31 trillion dollars) and China (a mere 13 trillion or so). The details of Dalio’s models of economic cycles are complicated enough, that to deliver on my promise of “five minutes of understanding at a time,” they will have to be saved for my next post.

The US score for internal disorder has been increasing for decades, putting our country at an extreme disadvantage. Large numbers of Republicans and Democrats have not started shooting at each other yet, but some days it’s not looking good. China on the other hand, is the very model of internal order. Mind you, I think it would be absolutely horrible to try to live under all China’s authoritarian rules and surveillance. But these measures do increase China’s internal order, and thus the country’s power.

Increasing external disorder is a risk for both countries, as China and the US compete more forcefully in trade, technology, geopolitical influence and the economy. In the worst case, this could lead to military conflict, planned or accidental.

Dalio’s cycles are computed from the values of fifteen “gauges.” The most important ones are education, innovation and technology, cost competitiveness, military strength, trade, economic output, markets, and reserve currency status, which he classifies as the “eight key measures of power.” There are also seven “additional determinants of power” including geology (such as natural resources), infrastructure, and acts of nature (like Covid).

For the latest data on each element, Dalio provides annual updates which can be downloaded for free from his web page at www.economicprinciples.org. (This webpage also includes links to many other resources and presentations, all free.) As of this writing, Dalio’s most recent update is entitled the Country Power Index 2022. It summarizes the latest power and wealth data on 24 countries and adds details on how each of the gauges is calculated (p. 52-54).

For example, one gauge that is rising rapidly for China is “innovation and technology,” based on such variables as its share of global patents, R&D spending, and its large number of technology researchers. The US is still number one on this gauge, but China is quickly catching up. In fact, China is currently ahead of the US on only 2 of the 8 key measures of power: trade, as measured by China’s percent of global exports; and cost competitiveness, measured by variables such as “productivity adjusted labor costs.” As Dalio (p. 6) summed it up, “The eight major measures of power [for the US] are very strong today but are… falling slowly… [In addition], the US is in an unfavorable position in its economic and financial cycles… Internal disorder is a high risk… [and] external disorder is a risk… [Thus, the US is] a strong power in gradual decline.”

If China continues to rise while the US falls, the risk of conflict over a new world order will rise. The graph below summarizes 18 forces that determine the rise and fall of empires:

This is Dalio’s summary of the main forces that determine the rise and fall of every empire
(from The Changing World Order, p. 51)

For a quick intuitive overview of how you would rate the US-China standings, just check off which of these 18 points best apply to the US today in your opinion, and which apply to China. If you accept the validity of the list, you will certainly conclude, as I did, that China is on the way up, and the US is at the top in some ways and headed down in the rest.

Dalio argues that all this adds up to trouble for the US, and for the world. “Wealth, values, and political gaps are now larger than at any other point during my lifetime (p. 12) … There are great increases in internal conflict between the rich and poor and different ethnic, religious, and racial groups. This leads to political extremism that shows up as populism of the left or of the right… The most recent analogous time was the period from 1930 to 1945. This [is] very concerning to me.” (p. 2)

As I’ve written before, an understanding of the potential for conflict, and how to avoid it, is greatly complicated by cultural differences between the US and China, including their “political patience.” In his book (p 379), Dalio puts it this way “While most Americans focus on particular events, especially those that are happening now, most Chinese leaders view current events in the context of larger, more evolutionary patterns… Americans are impulsive and tactical; they fight for what they want in the present. Most Chinese are strategic; they plan for how they can get what they want in the future.”

One recent example of this difference appeared in a New York Times opinion piece by Nobel Prize winning economist Paul Krugman entitled “China’s Future Isn’t What It Used To Be.” In the piece, Krugman quotes several sources to support this, notably two studies that recently pushed back their estimates of when China will become number one in the world. One now projects that to happen in 2035 (vs. its previous projection of the mid 2020s), and the other projects says China at number one is “at least several decades” away (vs. its previous projection of 2033).

To mainland Chinese, delays of a few years or decades do not define “the future.” They are a mere blip on the screen in terms of 100-to-400-year cycles.

But at the end of the day, Dalio concludes (p. 485): “The fact that the US is simultaneously deeply indebted, its international standing is weakening, and it is experiencing serious conflict should be concerning both to Americans and to non-Americans who depend on them. At the same time, in its 245-year history the US has shown a great capacity to bend without breaking. The greatest challenges it faces are internal ones: can it remain strong and united, or will it continue to allow division and internal struggles to lead to decline?”

Reducing income inequality: China vs US

Posted on November 16, 2022 by Jim Hassett

A few weeks ago, in his opening speech to China’s 20^th National Congress, Xi Jinping doubled down on an initiative he introduced almost exactly one year ago: increasing common prosperity. The goal, Xi said, “is to meet the people’s aspirations for a better life. We will endeavor to maintain and promote social fairness and justice, bring prosperity to all, and prevent polarization.” During the week-long Congress, the concept of “common prosperity” was even added to the Party’s Constitution.

Increasing common prosperity is about more than just getting people more money, but like many social programs it certainly starts there. In a post entitled “How the ‘China Model’ lifted 850 million people out of poverty,” I described how China’s rapid economic rise was rooted in Deng Xiaoping’s decisions to liberalize the economy in the 1980s and “allow some people to get rich first.” Which they did, sometimes much too well.

According to the latest estimates, there are now about 5,738,000 millionaires in mainland China, and 539 billionaires. As described in other posts, these are the people who have been willing and able to spend $1,000 for a single bowl of soup at a business banquet, or $1.5 million for a Covid N95 mask covered in jewels.

But while the rich were savoring their $1,000 soup, the average person in China was scraping by on $13,000 per year. A graph of income distribution in China would look like a squeezed pyramid with a very broad bottom, a small middle, and a tiny spot for millionaires at the top. Xi’s goal is to change this picture to an “‘olive-shaped’ income structure, in which the middle-income class is large and the poor and rich classes are small.”

According to the CCP’s flagship tabloid, the program will “not only enhance people’s buying capabilities by enlarging markets, but also help eliminate wars and chaos by reducing cases of poverty.” Sounds good to me, but then I am not a Chinese millionaire. To reassure those who are, other Chinese experts quickly jumped in to explain that “Common prosperity means doing a proper job of expanding the pie and dividing the pie… We will not kill the rich to help the poor.”

Well then, what EXACTLY will China do? I don’t know, and Xi probably doesn’t either. The common prosperity initiative is not a well defined list of policies; it is instead a broad general framework for China’s future. It’s a campaign and a general direction, not a project plan.

Nevertheless, the work has begun. In June 2021, Zhejiang province (just south of Shanghai on China’s east coast) published aplan to develop itself into the first common prosperity pilot zone. The document proposed raising per capita disposable income starting by 2025, and listed many specific changes including “rural land reforms, a plan to let resident income double in 10 years, and train 100,000 rural entrepreneurs, as well as push a number of scientific plans with a special focus on Internet plus, life science, and new materials.” One example that is already underway: an “intelligent farm” that includes 50,000 sheep, each with their own ear tag or ID card and… control rooms where the sheep’s living and growing condition can be adjusted to provide it a suitable growth environment.”

The main reason Xi is stressing common prosperity now is a “tacit acceptance that China is entering a period of slower economic growth, something the leadership seems willing to accept as long as individual households are still seeing their prosperity rise.” The initiative has both national and international implications. In a 2021 speech, Xi noted that in some countries “the wealth gap and middle-class collapse have aggravated social divisions, political polarization and populism, giving a profound lesson to the world.”

You know, now that Xi mentions it, I have been feeling a little jealous about Elon Musk’s $80 million Gulfstream private jet. Not to mention Jeff Bezos’ $485 million mega yacht. Guess I’d better get used to it, because here in the US we seem to be heading in the opposite direction of China. Although the US has no written policy on income inequality, almost everything the government has done in the last few decades seems to have been designed to make the rich richer.

The biggest beneficiary of US laws and loopholes designed to make the rich richer may have been Elon Musk, currently the richest man in the world. For details see “Here’s how Elon Musk’s fortune has benefited from taxpayer help.” Musk is shown here on a yacht in Greece last July.

In fact, according to the nonpartisan Congressional Budget Office, income inequality in the United States has been rising for decades, with the incomes of the highest earners rapidly outpacing the rest of the population. According to a recent analysis by the Washington Post, “Many economists say decades of cuts to income tax rates on the highest earners are one of the drivers of the runaway inequality that’s come to characterize the modern U.S. economy.”

From the end of World War II until the 1980s, the top marginal US tax rate was 70% or higher. But then came Reagonomics and the idea that tax cuts for the rich would “trickle down” to boost the entire economy. The first Reagan tax cut in 1981 reduced the top tax rate to 50%. By 1986, the “IRS announced that… more than 900,000 Americans were millionaires, perhaps partially due to the high-level tax cuts under Reaganomics.” Like the poverty stricken urchins in Charles Dickens, the US rich then said “Please, sir, may I have some more?” And Reagan said: Sure. A second round of tax cuts took place in 1986, reducing the top tax rate for corporations from 50% to 35%, and for individuals from 50% to 28%.

The next big tax cut was the Tax Cuts and Jobs Act in 2017, which slashed individual, corporate and estate taxes some more. The law“was highly criticized for favoring billionaires and corporations instead of everyday Americans,” but rich people liked it a lot.

Many economists have studied the effects of tax cuts like this, and consistently found that very little money actually trickles down. The rich just keep it. For example, David Hope and Julian Limberg reviewed all major tax cuts in 18 countries between 1965 and 2015. Their conclusion? “Our analysis [found] strong evidence that cutting taxes on the rich increases income inequality but has no effect on growth or unemployment.”

When it comes to taxes, the top marginal rate is easy to observe, but what really matters is the effective tax rate that wealthy people actually pay after all the “write-offs, exceptions and loopholes top earners are able to take advantage of.”

According to a White House study released last year “the 400 wealthiest U.S. families paid an average income tax rate of just 8.2 percent from 2010 to 2018.” I don’t know about you, but it looks like I am paying two to three times as much as the 400 wealthiest families.

The original version of Biden’s Build Back Better agenda included provisions to “address these inequities by reforming capital gains taxes and providing tax cuts to families.” But a funny thing happened to the bill before it was passed; various congress people kept chipping away at the middle class tax cuts. Then, to add insult to injury, “Freshman Sen. Kyrsten Sinema (D-Ariz), held up passage in the evenly divided Senate at the last minute over a provision that would have closed… [a] loophole that allows private equity managers and hedge fund executives to pay significantly lower tax rates than most taxpayers.” Sinema triumphed and the hedge fund executives kept their loophole.

This Congressional meddling in favor of special interests was hardly an isolated event. In 2017, Sen. Ron Johnson (R-Wis) had refused to pass President Trump’s tax cut unless the bill “sweetened the tax break for a class of companies that are known as pass-throughs.” Johnson too got what he wanted.

It turns out that Johnson’s change was very popular with a few rich voters. An analysis of just two wealthy Wisconsin families who “had contributed around $20 million to groups backing Johnson’s 2016 reelection campaign” found that these two families will see a total return of about $500 million in tax savings over the next eight years. That’s a 2,500% return on the cost of helping elect Johnson. Now, in some parts of the world, that might be called corruption. Here in the US, we call it a perfectly legal result of effective lobbying.

Another example: Sometime during the process [of negotiating the 2017 tax cut], “eight words… that had been in neither the House nor the Senate bill were inserted… Who wrote the phrase — and which lawmaker inserted it — has been a much-discussed mystery in the tax policy world.” But we do know who benefited: wealthy families, For example, this single loophole has “netted [Bechtel family members] deductions of $111 million on $679 million in income.”

These examples offer just a small window into the “explosion in loopholes and fine print [that] makes the tax code [so] time-consuming to understand,” and so profitable for tax lawyers, accountants, and wealthy Americans. ProPublica’s ongoing study of “Secret IRS Files” provides a long list of additional “midnight deals and last-minute insertions of language [that have] resulted in a vast redistribution of wealth into the pockets of a select set of families, siphoning away billions in tax revenue from the nation’s coffers.”

At the end of the day, China’s common prosperity campaign could have significant advantages both inside and outside the country’s borders. According to an analysis by the Asia Society, “This is a populist strategy to revitalize the roots of communist ideology in China [by providing Xi with] a new opportunity to align with the people against the powerful… by soaking the rich.” Of course, the question here is can China pull it off? Because if it IS successful, this will surely help “to disseminate the ‘China Model’ worldwide as a tool to further China’s superiority in global politics.”

Meanwhile, the US is moving in the opposite direction: the gap between rich and poor has been growing since the Reagan tax cuts began. Will this ultimately affect America’s influence around the world?

Who said “The Chinese Communist Party is like the Mafia”?

Posted on October 6, 2022 by Jim Hassett

Who said the CCP is like the Mafia:

Tsai Ing-wen, President of Taiwan
Fumio Kishida, Prime Minister of Japan
Lloyd Austin, US Secretary of Defense
Tony “Big Tuna” Accardo, Mafia boss
None of the above

In a way, I wish the answer was #4, the now deceased Tony “Big Tuna” Accardo (Al Capone’s successor in Chicago), but it wasn’t. # 1- 3 are more reasonable guesses, and for all I know one of them has actually said something like this. But the answer I was looking for was #5 “none of the above,” because my quote came from a Chinese dissident with a lifetime of experience as a CCP insider: Cai Xia.

Cai was born into a “red family” with impeccable credentials: her grandfather was an early Party member and her parents fought in China’s Communist Revolution. Cai holds a PhD in Chinese Communist Theory, and worked for 15 years as a professor at the Central Party School in Beijing, where high ranking CCP cadres are trained. At the beginning of her career, she was so orthodox that classmates nicknamed her “Old Mrs. Marx.” But as her thinking evolved, Cai started getting into trouble for criticizing the Party.

She left her faculty position in 2012, but continued to publish and speak, almost as if she was testing how far she could go. She found out how far in 2016, when she gave a speech in which she likened Xi Jinping to a “mafia boss” and called the Party a “political zombie.” From that point forward, she wrote in an article in Foreign Affairs, “the CCP blocked me from all media in China—print, online, television. Even my name could not be published.” In 2019, while Cai was traveling on a tourist visa in the US, a friend told her that if she returned to China, she would be arrested. Cai decided to stay and now lives in exile in the US.

In an article in the current issue of Foreign Affairs, Cai spelled out the details of the Mafia analogy with Xi Jinping as the Don, the six members of the CCP Standing Committee as underbosses and consiglieres, and the remaining 18 members of CCP’s Politburo as capos who try to stay in Xi’s good graces by executing his orders. As a reward “they are allowed to enrich themselves as they see fit, seizing property and businesses without penalty. And like the mafia, the party uses blunt tools to get what it wants: bribery, extortion, even violence.”

Marlon Brando portrayed Mafia boss Don Corleone in the 1972 Oscar best picture “The Godfather.”

Cultural differences between the US and China have added to misunderstandings between the two countries. According to Cai “Americans are too naive… One basic cultural tradition of Americans is not to lie, to obey the rules, and to respect the spirit of contracts. In Chinese culture deception is in our blood. There is no spirit of the contract, no sense of fairness, and people often say different words to mean the same things under different circumstances. Something said today can change tomorrow.”

Well, I’m glad she said it. In my posts on cultural differences between China and the US, I talked about “the relativity of truth,” but if I had written anything quite this direct I might have been sued by an anti-Asian alliance.

Cai also highlighted another of the seven cultural differences I mentioned in my posts – “relationships as the key to success” – when she wrote “When it comes to one’s rise within the party hierarchy, individual relationships, including one’s family reputation and Communist pedigree, matter as much as competence and ideology.”

She sees President Xi Jinping as one example of the rise of a “princeling” (a descendant of an influential family) that has “failed upward.” “Over the course of his tenure,” she wrote elsewhere, “the regime has degenerated… into a political oligarchy bent on holding on to power through brutality and ruthlessness… People who haven’t lived in mainland China for the past eight years can hardly understand how brutal the regime has become.”

All of his policies ultimately come back to holding on to power in Cai’s view. When I wrote a post about Xi’s anti-corruption campaign, I quoted Professor Kerry Brown that Xi’s campaign “has really drawn blood.” Perhaps I should have put more emphasis on whose blood exactly. According to Cai, “since corruption was endemic in China, with nearly every official a potential target, Xi was able to use the campaign as a political purge.” She proceeded in the same article to quote how Xi targeted rivals while “those who helped Xi rise have been left untouched.” For example, while “there is reason to believe that… [Xi ally] Jia Qinglin… and his family are exceedingly corrupt—the Panama Papers, the trove of leaked documents from a law firm, revealed that his granddaughter and son-in-law own several secret offshore companies—they have not been caught up in Xi’s anticorruption campaign.”

One of the most important implications of Cai’s look behind the curtain is to remind us that the CCP is not monolithic, and that some Party members and elites strongly disagree with Xi Jinping’s policies. Based on “more than 30 years of contact with middle and high level CCP officials,” Cai wrote in a Hoover Institution white paper (p. 25), “I can say that at least 60-70 percent of the CCP’s high level officials understand… that only a democratic constitutional government can ensure long-term stability in China and protect human rights, personal dignity, and personal safety.”

Wait a minute. 60-70% of senior CCP officials want democracy? Can that be true? Why don’t they do something about it? Cai’s answer: “There is little chance for any form of opposition to organize under Xi’s heavy handed rule.”

Her advice to US policy makers is dark. The CCP’s goal she believes is “to replace the free and democratic system of modern mankind represented by the United States, and the values and order of peace, democracy, freedom and justice,” with its own model of governance. If that’s not bad enough, she has also argued that “relations with China are destined to be defined by standoff and confrontation in large part because the Chinese Communist Party is by nature totalitarian, belligerent, unpredictable, and unwilling to follow the norms of a democratic rules-based order.”

Given that Cai was basically thrown out of her home, in the country she loved, it may be wise to take what she says with a grain of salt. If I were thrown out of the US as a result of my politics, I’d certainly hold more than a few grudges. But it is also worth noting that her claims have an unusual credibility given that Cai is the highest ranking Chinese insider to provide insights into the hidden world of CCP politics.

In Cai’s view, if Xi were to have a fatal heart attack tomorrow, the nature of the US-China rivalry might change for the better. But that’s probably not going to happen soon.

What is likely to happen when the 20th Party Congress meets in Beijing October 16 is that Xi will be elected to an unprecedented third five year term as General Secretary of the People’s Republic of China. He is 69 now so he will be 74 if his third term ends on schedule in 2027. He could then be elected for additional terms and even become president for life.

There’s hope for US-China relations in a post-Xi world. But in the meantime, with an adversary like Xi on the other side of the negotiating table, the US needs a very clear understanding of China’s goals and methods. And we will also need to be prepared for a wide variety of surprises and unpredictable events.

The sheer stupidity of Nancy Pelosi’s trip to Taiwan

Posted on September 6, 2022 by Jim Hassett

Generally speaking, it’s not a good idea to poke a tiger in the eye with a stick. Especially if the tiger is up for re-election.

But that’s essentially what US House Speaker Nancy Pelosi did on her trip to Taiwan on August 2. In a few weeks, over 2,000 Communist Party delegates will meet in Beijing and select its leaders for the next five years at the CCP’s 20^th National Congress. Xi Jinping will almost certainly be re-elected to an unprecedented third term as President, but he and his political allies have been under pressure for some time due to the human and economic effects Xi’s “zero-COVID” policy, and continuing lockdowns of millions of citizens.

And as former Australian Prime Minister Kevin Rudd put it in his book The Avoidable War, “the ‘return’ of Taiwan remains the holy grail of Communist Party politics… many Americans may not appreciate how central the Taiwan question is to the CCP’s political priorities… or how much Taiwan shapes how China views its overall relationship with the United States.” (Kindle loc 1534 and 1604 )

It would have been hard for Pelosi to pick worse timing, or an issue more likely to further inflame China’s already rabid wolf warrior nationalist movement. And inflame it she did. Hu Xijin, a former editor of the party-run tabloid Global Times, wrote that the Chinese military should ‘shoot down Pelosi’s plane.’” Many Chinese thought they might, and nearly 3 million of them tracked the flight’s progress on the app Flightradar24 to see, making it “the most tracked flight of all time.”

So what has Pelosi’s controversial visit accomplished so far?

Minutes after her plane landed on August 2, China announced four days of its most aggressive military exercises ever against Taiwan.
Almost as soon as Pelosi left, Chinese warships circled Taiwan, in part to demonstrate how easy it would be to cut the island off from the rest of the world.
On August 4, China launched 11 ballistic missiles in the area, some flying directly over Taiwan.
On August 5, Taiwan reported 68 Chinese warplanes over the Strait separating them from mainland China.
Of these, 49 entered the disputed Air Defense Identification Zone, the midway point between China and Taiwan. This came close to setting a new daily record.
Flights crossing the median continued at a rate of about 10-20 per day for several weeks.
According to a CNN report “Chinese and foreign analysts say the PLA’s cross-strait sorties aren’t likely to go away anytime soon, effectively making them a daily routine that some say could wear down Taiwanese vigilance as well as that of its supporters, including the US.”
In response to the heightened tensions, Taiwan has announced a record jump in defense spending for next year.
Cyberattacks against Taiwan have increased to rates 23 times higher than the previous daily record.
While military activities are setting new highs, US-China communication is approaching new lows.
China has canceled future phone calls and meetings between defense leaders in the two countries.
They have also canceled bilateral discussions on such topics as immigration, drug operations, and climate change.
This last is particularly disturbing. As US Secretary of State Antony Blinken put it “China’s decision to suspend climate talks ‘could have lasting consequences for the future of the region, the future of our planet,’ and would punish the developing world rather than the US.”

An anti-American protest in response to Pelosi’s visit.

Summing up these events and others, “the China Power Project at the US-based Center for Strategic and International Studies said Beijing ‘seeks to establish a new normal in which the PLA [People’s Liberation Army] no longer respects Taiwan’s claims to a separate airspace and territorial waters.’” Chinese commentators are using the same phrase “Military drills that simulate actual battles have become the new normal. China can now decide whether a future exercise will seamlessly be turned into actual combat.”

So what could Pelosi have been thinking when she decided to include Taiwan on this Congressional Delegation trip to Asia?

Pelosi had been asked to avoid Taiwan on this jaunt by a number of senior officials, including President Biden. According to a White House spokesperson, “The United States had seen indications over the last several months that China was considering unprecedented military activity across the Taiwan Strait, and officials had seen signs that China would use Pelosi’s visit as a pretext to act.” Which of course, is exactly what they did.

On July 28, Xi Jinping had even called Biden with a direct request: “Find a way to keep Pelosi from visiting.” Biden explained as a practical matter that would be difficult or impossible to accomplish. That’s not how we do things in the US.

Pelosi explained her reasons in a Washington Post op-ed published the same day she landed in Taiwan: “The CCP’s brutal crackdown against Hong Kong… cast the promises of ‘one-country, two-systems’ into the dustbin… By traveling to Taiwan, we honor our commitment to democracy.”

It is worth noting that Pelosi’s op-ed does not seem consistent with official US State Department policy, which still holds to the principle of “strategic ambiguity.” As explained in the New York Times, this “longstanding — and famously convoluted — policy [is] derived from America’s ‘one China’ stance that supports Taiwan without recognizing it as independent. The United States provides political and military support for Taiwan but does not explicitly promise to defend it from a Chinese attack.”

An opposing opinion piece published the same day in the Washington Post was entitled “The real crisis over Taiwan will start after Pelosi comes home.” It predicted that “The pace and intensity of U.S.-China competition are set to go up, changing the relationship forever, with Taiwan caught squarely in the middle.”

Writing a few weeks after Pelosi’s visit, two experts from the Carnegie Endowment provided several examples of how this prediction was already becoming true. “Beijing could use an American freedom of navigation operation as a pretext to escalate the crisis further, potentially leading to an unsafe incident or encounter at sea or in the air. The breakdown in bilateral communication channels and the broader distrust between the United States and China only makes such a contingency more likely. Recent reports indicate that U.S. Secretary of Defense Lloyd Austin was unable to reach his Chinese counterparts after Beijing suspended multiple military deconfliction protocols.”

And just a few days before this blog was posted, “Taiwan… shot down an unidentified civilian drone over one of its islands that lies just a few kilometers from mainland China.” Uh oh.

Pelosi is entitled to her opinions, of course. But you’d hope a highly successful 82 year old politician could find something better to do with her time than rattling her saber.

A number of analysts have offered a cynical view of her motives, including Ian Bremmer, the president of Eurasia Group, who said Pelosi “had wanted to visit Taiwan before her retirement as part of her personal legacy.”

It would be a shame for all of us if this is even partly true, and one congress member’s hubris ultimately helped lead to an accidental war.

Artificial intelligence: China’s race to be number one

Posted on July 27, 2022 by Jim Hassett

“Artificial intelligence (AI) will profoundly change human society… and change the world…” according to a 2017 report from China’s State Council. Similar language appears in a 756 page US report in 2020 from the National Security Commission on Artificial Intelligence, (p. 1, 7) “AI is… world altering… [and includes] the most powerful tools in generations for expanding knowledge, increasing prosperity, and enriching the human experience.”

So, what are the two countries doing about it? The Chinese report set this goal: “by 2030, China’s AI theories, technologies, and applications should achieve world-leading levels.” China has taken this recommendation very seriously. Its most recent five year plan calls for a total investment of almost $1.4 trillion in “building ‘new infrastructure’ through AI, data centers, 5G, the Industrial Internet, and other new technologies.”

According to a global AI index compiled by Stanford University, in 2021 the US was still number one and China was number two. But while China is racing ahead, “America is not prepared to defend or compete in the AI era” according to the US 2020 commission (p. 3).

So, if AI is so important, what is it exactly? There are two main schools of thought.

Theoreticians who support a broad view of general AI see it as an attempt to program computers to function like the human brain, only much much better. Unfortunately, to date, the field of trying to program general brain-like intelligence has been littered with failed predictions. For example, as Melanie Mitchell noted in her excellent introductory book Artificial Intelligence (p. 19), in the early 1960s “the future Nobel laureate Herbert Simon predicted, ‘Machines will be capable, within twenty years, of doing any work that a [person] can do.’” Oops, never mind.

Mitchell went on to explain that these days (p. 276) “Several surveys given to AI practitioners, asking when general AI or ‘superintelligent’ AI will arrive, have exposed a wide spectrum of opinion, ranging from ‘in the next ten years’ to ‘never.’ In other words, we don’t have a clue.”

In contrast, the more practical narrow approach to AI uses computers to solve just one problem at a time and has been astonishingly successful in the last few decades. According to Kai-Fu Lee, the former president of Google China, [in his book AI Superpowers, p. 19; italics added for emphasis] narrow AI programs “can now do a better job than humans at [a number of tasks including] identifying faces, recognizing speech, and issuing loans.”

Not to mention chess. When world champion Gary Kasparov was defeated by IBM’s Deep Blue AI in 1997, he was so “stunned… that he accused the IBM team of cheating” (Mitchell p. 44). If Kasparov felt that bad, he should have challenged the machine to play checkers, Go Fish, or “Duck, Duck, Goose” which he would have easily won. The only thing Deep Blue could do was play chess.

In 2017, Google’s AI program Alpha Go defeated world champion Go player Ke Jie. Some experts had thought a computer could never beat a Go champion because, according to AI Superpowers (p. 9), “the number of possible positions on a Go board exceeds the number of atoms in the known universe.”

Narrow AI accomplishes these feats with machine learning.

Traditional computer programs are based on algorithms, standard sets of instructions to solve problems such as adding a set of numbers or finding its average. If you run the program 100 times, the algorithm will always use the same steps.

But an AI algorithm learns from experience, by applying massive amounts of computing power to huge sets of data, and modifying its approach based on results. According to AI Superpowers (p. 18), “The data ‘trains’ the program to recognize patters by giving it many examples, and the computing power lets the program parse these examples at high speeds.”

Kai-Fu goes on to explain (p. 24) that “Harnessing the power of AI today—the ‘electricity’ of the twenty-first century—requires four analogous inputs: [big] data, hungry entrepreneurs, AI scientists, and an AI-friendly policy environment.” Both China and the US have all four.

But the more big data one has access to, the more accurate AI programs can learn to be. China’s biggest AI advantage is its access to the largest databases in the world. The country’s population is nearly four times larger than the US, and its culture and laws do little or nothing to protect privacy.

A few weeks ago, the New York Times published the results of a year-long study of “China’s expanding surveillance state.” The conclusions were ominous: “Phone-tracking devices are now everywhere [in China]. The police are creating some of the largest DNA databases in the world. And the authorities are building upon facial recognition technology to collect voice prints from the general public.”

According to the cybersecurity website Comparitech 54 percent of the world’s 1 billion [surveillance] cameras are located in China. And over a billion Chinese citizens use the messaging app WeChat (AI Superpowers, p. 27) to “[send] text and voice messages to friends, pay for groceries, book doctors’ appointments, file taxes, unlock shared bikes, and buy plane tickets, all without ever leaving the app… [This] wealth of information on users—their location every second of the day, how they commute, what foods they like, when and where they buy groceries and beer—will prove invaluable in the era of AI implementation.”

One company to benefit from this is the Alibaba group, China’s answer to Amazon. The two companies have somewhat different business models. While Amazon sells directly to consumers and maintains an ever-growing number of warehouses to fulfill orders, Alibaba serves as a middleman to allow businesses to reach consumers directly. Despite these differences, the two companies are in a race to attract to dominate global online markets.

One place this competition can be seen is in the AI algorithms used to offer buying recommendations. At Alibaba, historically recommendations were based only on each person’s past purchases and browsing history. In 2019, the company introduced a new “Artificial Intelligence Recommendation (AIRec) engine” to offer a more diverse group of recommendations. The details are of course a secret, but Alibaba claims the new AI based system “outperforms… [traditional] algorithms by 20-100%.”

This race between Alibaba and Amazon to improve buying recommendations may make a difference to revenues, profits and stock price. But whether Chinese consumers or American consumers buy more stuff they don’t need doesn’t make a difference to the future of world politics.

However, it does matter a great deal if China’s advantage in AI research leads to improvements in two key areas Xi Jinping identified in 2019: “Big data should be used as an engine to power the innovative development of public security work and a new growth point for nurturing combat capabilities.”

We will talk about military uses of AI in a future post, but we have already seen the effects of improved “public security” in a number of posts in this blog. My post on China’s social credit system describes how big data is being used to develop systems to reward “good citizens” — which could mean anything from serving in an important Party position to just getting to work on time every day. Rewarded citizens may be able to rent an apartment without a deposit, get a better interest rate at banks, skip hospital waiting rooms, and even get more matches on dating websites. On the other hand, dissenters can be punished by preventing them from getting a good job, staying at a luxury hotel, or even buying a plane ticket. At a more threatening level, as described in two other posts, mass surveillance is being used to imprison activists among the Uighurs, an ethnic group of about 11 million Sunni Muslims who live in Western China.

The New York Times investigation lists many other applications of AI, such as warning “the police if… a drug user makes too many calls to the same number [or]… each time a person with a history of mental illness gets near a school.”

And if these applications do not seem menacing enough, consider the way local officials can misuse these AI systems. Perhaps you’ve heard about the ongoing scandal in which Chinese savers have been unable to withdraw their money from four Chinese rural banks, and the government’s attempts to prevent the savers from publicly demonstrating. One of the techniques local officials applied was to misuse China’s AI based covid tracking system.

Some bank protestors found that “mobile apps used to identify and isolate people who might be spreading Covid had turned from green — meaning safe — to red, a designation that would prevent them from moving freely…. [local] authorities [who were] under pressure to account for the episode, later punished five officials for changing the codes of more than 1,300 customers.”

Whether used for good or bad, the race to be first in AI will have enormous political implications. In a Foreign Affairs article entitled How artificial intelligence will reshape the global order, Nicholas Wright describes the threat of “digital authoritarianism… [in which] new technologies will enable high levels of social control at a reasonable cost… [and empower dictators to] make their citizens rich while maintaining control over them… AI will offer authoritarian countries… the first… plausible alternative to liberal democracy… since the end of the Cold War.”

Let’s hope Mr. Wright is wrong.

Avoiding a US-China war

Posted on June 20, 2022 by Jim Hassett

In a speech last fall, President Xi Jinping ominously warned that : “The risks and challenges we face have obviously increased. It is unrealistic to always want to live a peaceful life and not want to fight. We must abandon our illusions [and] fight bravely.”

Meanwhile, on our side of the Pacific, 82% of Americans now have an unfavorable view of China; according to a Pew Research Center report released in April. When Pew started asking this question in 2005, 35% of Americans had an unfavorable view. The percentage has been rising steadily since then, and this latest figure is a new high.

Last year, The Battle at Lake Changjin became the highest grossing Chinese film of all time. It portrays the heroism of Chinese soldiers in winning a battle against the US in 1950, during the “war to resist US aggression and aid Korea.”

No sensible person on either side wants to risk a war that potentially could blow up the entire world. But what exactly can be done to reduce that risk?

Some suggestions can be found in Kevin Rudd’s new book The Avoidable War: The Dangers of a Catastrophic Conflict between the US and Xi Jinping’s China. In my opinion, this is the single best book to read not just on the topic of avoiding war, but also on contemporary Chinese politics.

In Rudd’s view, the risk of “armed conflict between China and the United States over the next decade, while not yet probable, has become a real possibility.” (p. 463). This risk is based, he says, on “the single hardest question of international relations of our century: how to preserve the peace and prosperity we have secured over the last three-quarters of a century while recognizing the reality of changing power relativities between Washington and Beijing.” (p. 23)

“Our best chance of avoiding war,” he goes on to write, “is to better understand the other side’s strategic thinking and to conceptualize a world where both the U.S. and China are able to competitively coexist, even if in a state of continuing rivalry reinforced by mutual deterrence.” (p. 23)

Rudd summarizes his advice in three major suggestions:

Understand each other’s “irreducible strategic redlines in order to help prevent conflict through miscalculation.” (p. 422)
Where the US and China have irreconcilable differences, channel disagreements into competitive economic races in such areas as artificial intelligence, advanced robotics, and aerospace engineering.
Where the US and China have common interests, such as in minimizing the effects of climate change, engage in strategic cooperation.

These three points are consistent with the advice from other experts, and have been discussed in previous posts in this blog, including “The single most important question for the future of US-China relations.” But the challenges of implementing suggestions like this are all in the details. And Rudd’s book stands head and shoulders above all the rest in his sophisticated presentation of the underlying details.

If the path to avoiding war begins with each side understanding what the other wants and needs. China’s lack of transparency serves as an immense obstacle. As Michael Pillsbury — a China expert in eight US presidential administrations – has summed up the result “Americans have been wrong about China again and again, sometimes with profound consequences.” (The Hundred Year Marathon, p. 4)

But, as noted in the New York Times review of Rudd’s book “Almost nobody has enjoyed the kind of access [the author] has had to Chinese officials.” Rudd is a former Prime Minister of Australia and current President of the Asia Society Policy Institute, a “think-do tank” dedicated to helping governments and businesses manage policy challenges within Asia, and between Asia and the West. Rudd speaks fluent Mandarin and has visited China more than 100 times. This background has enabled him to also have countless discussions with a wide variety of officials over the years, including Xi Jinping, whom he first met in 1986.

Much of Rudd’s book is organized around his analysis of Xi Jinping’s top ten priorities (slightly rephrased here, with links to related posts in this blog):

Assure that the Chinese Communist Party stays in power
Promote unity through nationalism
Guarantee economic prosperity
Ensure environmental sustainability
Modernize the military
Manage neighboring countries
Secure the Western Pacific
Increase Western influence through its Belt and Road Initiative
Increase its leverage in Europe, Africa, Latin America, and the Arctic
Change the global rules-based order

Rudd describes these priorities as “ten concentric circles of interest starting from the most important.” (p. 96)

Let’s start with number one on the list: staying in power. Of course, in one sense this is no surprise since almost every politician in every country in the world seems to want to stay in power. What makes this especially relevant in the case of China is its recent history. When the Soviet Union collapsed in 1991, Chinese leaders were afraid that communism could collapse around the world, including inside China itself.

This led to literally years of study groups on the Soviet collapse. In the end, China’s leaders concluded that “in the absence of the party’s strong central leadership… the country would simply dissolve into the bickering camps that had so often plagued China’s past.” (p. 106). Or to put it another way, China would be much better off if the current leaders and their friends remained in power.

Again from Rudd: “The shorthand form of Xi’s political narrative is simple: China’s historical greatness, across its dynastic histories, always lay in strong, authoritarian, hierarchical Confucian governments.” (p. 108) And all signs indicate that the resulting nationalist movement (#2 on the list) is succeeding, and that the Chinese Communist Party is safe for now. (See my post on “Wolf Warrior nationalism.”)

Which takes us to the economy — #3 on the list above – and “the unspoken social contract between party and people: that the public will continue to tolerate an authoritarian political system under the party so long as the people’s material livelihood continues to improve.” (p. 127)

To date, the party has certainly delivered. The last few decades of the Chinese economy have seen the fastest economic growth in the history of the planet, although progress has slowed in the last few years. (For details, see my post “How the ‘China Model’ lifted 850 million people out of poverty.”)

The next few years and maybe even decades are likely to be far more economically challenging not just for China, but for the entire world. In case you have been napping for the last few years, the world has been dealing with covid, supply chain disruption, the Ukraine War, inflation, economic inequality, food shortages, unsustainable levels of debt, and more. No one knows the long-term economic effects, but it doesn’t look pretty.

And then there’s #4 on Xi’s list: the environment. Material livelihood includes more than just annual income. The richest man in China — Zhong Shanshan, the chair of a bottled water company – is worth $66 billion, and ranks as the 17^th richest person in the world, according to Forbes. But no matter how much money Zhong has, it won’t do him much good if the planet burns up.

If you think the US has environmental problems, you should see China’s. “The tragedy of China’s rapid economic development over the last thirty-five years is that the CCP subordinated environmental concerns to economic growth. This led to serious and health-threatening levels of air and water pollution as well as desertification, significant loss of biodiversity, and water scarcity.” (p. 171) The resulting public concern has led to a “clean environment [becoming] a new part of the unofficial social contract between party and people.”

So when you put it all together, in the next few years Xi will have his hands full with internal issues – nationalism, the economy, and the environment. This may reduce the resources China has available to devote to foreign affairs (numbers 5 to 10 on the list).

As both China and the US governments are forced to focus on internal affairs, one can hope that it will give both countries a bit more time to try to understand each other better and avoid war.

Understanding China, five minutes at a time

5 minute summaries of key issues in US-China relations