Two problems with companies in China

There are two major problems with evaluating the performance of companies based in China:  the lack of transparency, and the near-absolute power of the Chinese Communist Party.

Do these problems affect you directly?  They might. 

Roughly what percent of your savings are in stocks in Chinese companies?  If you invest in mutual funds, you probably have no idea. 

China is currently a favorite among mutual fund managers and individual investors who are willing to take risk to maximize their long-term returns.  As one analyst quoted in a January article in US News and World Report put it:  “China is the only major economy in this COVID-pandemic era that’s actually on a growth path.” 

And “there [are] 217 Chinese companies listed on [the three big US stock exchanges – New York, American, and NASDAQ] with a total market capitalization of $2.2 trillion.”  So if you invest in certain types of mutual funds you almost certainly own a small piece of some of them.

If you’re not worried about the first problem – lack of transparency — consider the case of Luckin Coffee, the “Chinese Starbucks.”  When the company went public on NASDAQ in 2019, they had 4,500 stores in China, and reported $413 million in sales for the previous nine months.

The price rose quickly from $17 per share to $50 per share. and a lot of investors made a lot of money.  As long as they sold their stock near the peak.  Because in April 2020, less than a year after the company went public, “it came out that its COO, along with a number of other employees, had overstated revenue figures by some 40%.”  Within a week of this fraud announcement, the price per share dropped to $4.  By June, NASDAQ had delisted the stock.    

Luckin Coffee has agreed to pay a $180 million penalty to the SEC (Securities and Exchange Commission) and in February filed for Chapter 15 Bankruptcy.

Luckin Coffee’s stock price crashed when the company admitted fraud.

Could this type of fraud happen in a US company?  Of course, fraud is always a possibility when humans are involved.  That’s why there will always be accountants. 

But in the US, the PCAOB (Public Company Accounting Oversight Board) oversees external audits which greatly reduce the risk of fraud in publicly traded companies.  Chinese companies traded on US stock exchanges have agreed to be audited by the PCAOB.  But they consistently violate this promise.  Which is an excellent illustration of the first problem highlighted in this post:  Lack of transparency.

Indeed, in general “China’s economy [is] incredibly opaque, not only to foreigners but to the Chinese as well… [The government controls the flow of information including] the massaging of data, faking it outright, turning a blind eye to its misreporting [and] rationing its publication.”  Even worse, “its rules are fluid.”  (China’s Great Wall of Debt, p. 10)

China’s lack of transparency has been “a thorn in the side of the U.S. Securities and Exchange Commission (SEC) for a decade.”  Last year, the SEC issued a warning to investors explaining that “in many emerging markets, including China, there is substantially greater risk that disclosures will be incomplete or misleading and, in the event of investor harm, substantially less access to recourse.”

What’s the SEC’s solution?  Be careful out there. 

Or, to use the governmental phrasing of the authors of that SEC report, investors should “consider the environment in which the company operates in assessing whether the company has sufficient controls, processes and personnel to address its accounting or financial reporting issues.” 

How likely is it that the average investor will find time to do intensive background research on each and every Chinese company listed in the prospectus for their mutual funds?  I’d say it’s roughly about 0%. 

And then there’s the second problem:  the near-absolute power of the Chinese Communist Party.

The Party has the greatest impact on state-owned enterprises (SOEs), which are partially or fully owned by the Chinese government.  (13 SOEs are traded on American stock exchanges.)  SOEs are designed to meet specific goals such as driving growth, maintaining employment, and increasing China’s technical expertise in areas that give the country an economic or strategic advantage, such as artificial intelligence, robotics, and green energy.  Note that making a profit is NOT one of their primary goals.  As a result, according to the World Economic Forum: “SOEs are highly over-leveraged and structurally less efficient than their private peers… It is widely argued that the SOEs would not survive in an innovation-driven market environment without the perks they currently enjoy.”

But even companies that are 100% privately owned must be very careful to support the Communist Party.  If you doubt this, just ask Jack Ma.  If you can find him.

According to Forbes magazine’s rankings of billionaires Jack Ma is one of the richest people in the world with a net worth of $38.8 billion.  His fortune grew out of co-founding online shopping giant Alibaba, sometimes referred to as “China’s Amazon.” 

Among many other things, Alibaba owns a 33% stake in Ant Group, an online payment service that resembles a supercharged Venmo plus PayPal, and is used by over 1 billion Chinese. Last fall, Ma was expected to become even richer when Ant Group was poised to offer the world’s largest initial public offering (IPO).  But then Jack made a big mistake:  he gave a speech in October criticizing China’s banking system.

Within days, the IPO was canceled and Ma disappeared.  For three months, journalists speculated that he was under house arrest or maybe even dead.  Ma reappeared January 20 in a video address for a charity event and was seen in February playing golf.  Nevertheless Ma is still keeping a very very low profile.

Another sign of the Party’s power over “private” companies, is its Military-Civil Fusion (MCF) strategy.  According to a US State Department fact sheet, the goal of MCF “is to enable [China] to develop the most technologically advanced military in the world. As the name suggests, a key part of MCF is the elimination of barriers between China’s civilian research and commercial sectors, and its military and defense industrial sectors.”

Do you remember my post on “The biggest theft in human history”  and its discussion of how the government “encourages Chinese who study and work abroad to copy or steal technology and rewards them when they do.”  That’s a natural outgrowth of MCF.

Critics have noted that “As a strategy, MCF is still in its early stages, and its success is difficult to evaluate.”  But there is no ambiguity in the law.  Article 7 of China’s National Intelligence Law reads: “Any organization or citizen shall support, assist, and cooperate with state intelligence work in accordance with the law, and maintain the secrecy of all knowledge of state intelligence work.” And Article 11 of China’s National Security Law states, “All citizens of the People’s Republic of China …. shall have the responsibility and obligation to maintain national security.”

I could cite numerous other legal examples, but you get the idea:  Every Chinese citizen is required to assist intelligence authorities.   

Would you invest in a company’s stock if you thought they prioritized China’s political goals over making money?  How about if you thought its sales numbers might be fraudulent?  Me either.

But there is a counter-argument.  Many financial analysts believe that China’s 1.4 billion consumers offer unique opportunities for growth, and that justifies the risks.  For example, consider these recommendations from three unrelated analysts:

Like everything else in the stock market, it comes down to the “risk-return tradeoff”:  the more risk you are willing to take, the higher your gains may be.  Not to mention your losses. My personal conclusion?  Before I started researching this topic, nearly 10% of my retirement portfolio was invested in companies in China and other emerging markets, based on the advice of our financial advisor.  But my parents lived through the Great Depression of 1929, and I am highly risk averse by nature.  So now that I know more, I’ve sold off almost all of that foreign stock and invested it in US companies instead. 

China’s rise is accelerating

In a previous post, I explained four reasons I think China is likely to become the most powerful country in the world, sooner or later.  It’s starting to look like sooner.

Last year, the Chinese economy went up and ours went down.  In 2020, GDP (Gross Domestic Product – the total market value of all goods and services produced by a country) increased 2.3% in China and decreased 3.5% in the US.

When global insurance company Euler Hermes published an analysis of world economic trends a few weeks ago, they titled it “The world is moving East, fast.”  The report concluded:  “we now expect China to catch up with US GDP in 2030 instead of 2032, as expected at the end of 2019.” 

As a country, we have grown quite comfortable in our spot as the largest economy in the world.  According to a recent book by Singapore diplomat Kishore Mahbubani (Has China Won?, p.4) “At the end of World War II… America’s share of the global GDP was close to 50%… [although it had only] 4 percent of the world’s population… Throughout the Cold War, the GDP of the Soviet Union never came close in size to that of America, reaching only 40% that of American at its peak.”  (p. 4)

So the US has been “number one” for 76 years.  Starting nine years from now, in 2030, we may need to get used to being “number two.”

One reason why is obvious to every American who has been locked in the house for the last year, lost their job, binged on Netflix, or actually gotten covid: the differing reactions of the two countries to the pandemic.  As of February 11, 2021, the official death rate from covid was 1,430 per million people in the US, and under 4 per million in China.  This difference in success combatting the virus, and in the economic and political implications, are outlined in a January 26 CNN piece entitled  “China is rehearsing for when it overtakes America.” It explains how China managed to expand its economy while the rest of the world was slipping into the covid recession:  with “harsh quarantine measures and additional actions intended to spur growth.”

For example, last month when just 16 new covid cases were reported in Heilongjiang province, one city in the province put 5.2 million people under lockdown and another city banned people and vehicles from leaving for three days.  I despise the very idea of authoritarianism, but it sure can come in handy during a pandemic.

Another advantage China has in this situation its central control, with approximately one third of the economy managed by State Owned Enterprises which, according to the Euler Hermes report, were required by the government “to maintain economic activity and retain employment (even [when it was] unprofitable).”

The result: “While countries worldwide are sliding into recession… from the Covid-19 crisis… China has emerged stronger and more assertive.”

Sooner rather than later, the US is likely to be faced with a problem it has never faced before:  “what to do if a rich and capable rival with very different conceptions of liberty, human rights, social order, justice, and the role of government in society emerged and was fully committed to a course of action that threatens U.S. security?”

Along with their economic progress, China is also winning the propaganda war for what Harvard political scientist Joseph Nye has called “soft power”:  foreign policy success based on using attraction and persuasion rather than force. 

Mahbubani argues (Has China Won? p. 6) that “From the 1960s to the 1980s, American soft power soared.  [But] since 9/11, America has violated… international law and international human rights conventions (and became the first Western country to reintroduce torture)… and American soft power has declined considerably.” 

Meanwhile, in the next few years, as the pandemic recedes, many countries will face internal challenges and perhaps instability.  In this type of environment, the “countries most adept in using soft power to facilitate positive collaboration will be better placed to… shape global events.”

According to a Mercator Institute for China Studies report on China’s 2021 agenda. “One thing is certain, China will continue to gain influence globally. Its ‘vaccine diplomacy’ will probably contribute to this: China supplying urgently needed Covid-19 vaccines – as it is currently doing in Indonesia – will shore up relations with developing countries.”

The worldwide reaction to the January 6 Capitol riots has reduced US power and influence.

And, as if all that is not bad enough, all of our post-election mayhem last month has had a very negative impact on perceptions of the US by enemies and allies alike.  A February 4 Washington Post article summarized how the Chinese propaganda machine quickly seized this opportunity.  Within 24 hours of the January 6 Capital riot, videos began to appear on Chinese social media with headlines that referred to the US with such terms as “permanently damaged,” “a failed state,” and “the greatest threat to world peace.”

Graphika, a company that uses artificial intelligence “to reveal and study online communities” issued a report which summarized Chinese social media use of Capitol riot videos, and concluded that the overall message was that  “The United States, which has always promoted democracy and human rights, has become a country of riots, conflict and curfew.”  The report went on to say that “The unifying theme that underlay such posts was that America is broken, and American democracy is not a model that any country should emulate, regardless of which party rules in Washington: the storming of the Capitol ‘tore the false mask of American democracy to pieces,’ as one video narration stated.”

Ouch.

The Global Times, an English newspaper published by the Chinese Communist Party, poured it on by tweeting “@SpeakerPelosi once referred to the Hong Kong riots as ‘a beautiful sight to behold’ — it remains yet to be seen whether she will say the same about the recent developments in Capitol Hill.”

In short, as the Washington Post article summed it up, all of 2020’s “bad news for America has been good news for [China]. Because the overall narrative they’ve been building is China’s rising and America’s falling.”

But before you start studying Mandarin, it is important to note that China has plenty of problems of its own.  According to a recent Foreign Affairs article with the ominous sub-title “The Risk of War Is Greatest in the Next Decade,” “The Sino-American contest for supremacy won’t be settled anytime soon.”

The article goes on to note that “Since 2007, China’s annual economic growth rate has dropped by more than half, and productivity has declined by ten percent. Meanwhile, debt has ballooned eightfold and is on pace to total 335 percent of GDP by the end of 2020. China has little hope of reversing these trends, because it will lose 200 million working-age adults and gain 300 million senior citizens over the next 30 years.”

In short “America would present a formidable challenge to China if it were a united, strong, and self-confident country.” (Has China Won?, p 51)

Let me think.  A truly United States of America?  In which Republicans and Democrats met in the middle with a bi-partisan approach, and politicians put the good of the country above their personal ambitions?  I sure would like to believe that’s in our future.

How China is redefining communism

In the mid 1980’s, a group of Western bankers and consultants invited Chen Yuan, later Chairman of the China Development Bank, to a lunch in Washington to discuss the emerging Chinese economy.  The host of the lunch repeatedly cross-questioned Chen about how he could consider himself a communist, given the growth of the free market in China.  “After a while, Chen tired of the inquisition, ostentatiously put down his knife and fork, [and said] … ‘We are the Communist Party… We will decide what Communism means.’” (The Party, p. 37)

In the three decades since this lunch, according to a recent Forbes article “China’s private sector… is now serving as the main driver of China’s economic growth. The combination of numbers 60/70/80/90 are frequently used to describe the private sector’s contribution to the Chinese economy: they contribute 60% of China’s GDP, and are responsible for 70% of innovation, 80% of urban employment and provide 90% of new jobs.”

What has not changed is the sort of pragmatic thinking Mr. Chen referred to.  The concept that “communism is whatever we say it is” has served the CCP (Chinese Communist Party) well as they have adapted Marxist-Leninist writings from over a century ago to the rapidly changing realities of 21st century Asia.  It also represents an extremely important break from the original goals of the CCP.   One expert summed up the key difference in just two sentences: “Mao [China’s leader from 1949-1976] had sought revolution at home and abroad. Deng [Xiaoping who led China from 1978 to 1989] set his eyes on more earthly goals: making China powerful, prosperous and respected.” (Belt and Road: A Chinese World Order, p. 14)

Since 1982, Chinese political theorists have used the term “socialism with Chinese characteristics” to describe their particular brand of communism.  This school of thought is rooted in China’s 5000-year history but updated whenever needed to meet China’s evolving needs.  In the 1980s, when China’s economy first started taking off, it was derived in part from “Deng Xiaoping thought,” named after China’s leader at that time.  As China has grown, the theory has been revised several times to fit China’s rapidly changing society.  The most recent version is derived in part from “Xi Jinping Thought,” which was incorporated into the Constitution of the CCP in 2017.

The key concepts of “socialism with Chinese characteristics” were summarized a few years ago in a short statement published by Xinhua, China’s official state press agency.  The main points included combatting poverty, creating an innovative market economy, and “following its own path… The bitter experience of the past has taught China about the dangers of blindly copying the western model, both politically and economically.”

Several items on the list are directly related to authoritarianism, including a determination to “build the strongest ruling party in the world to keep the country stable and guide its reform and opening up.”  Oh, by the way, that also justifies the CCP’s authoritarianism and its intent to stay in power.

I was very surprised to learn that the CCP also considers its current system an “effective democracy.”  Wait a minute.  China is a democracy?  The Xinhua explanation is so convoluted that I must quote their exact wording: “The essence of democracy is to answer to the people…  The contemporary Chinese state inherited a long political tradition of selecting and appointing talent, establishing a merit-based ‘selection plus election’ system with a special focus on public opinion…  In some countries, checks on power become deadlocks, and money can be used to tamper in elections… This type of democracy may be ‘pretty,’ but it hardly leads to good governance. Rather, it is likely to cause surprise and unwanted events… Chinese democracy has a higher level of quality and efficiency.” 

Hmm.  While just about everyone believes China has a strong central government, I haven’t heard too many arguing that it is an “effective democracy.”  But hey, it’s their theory and their country, so I guess they can call their system whatever they want.

For a fascinating “behind the scenes” view of how Chinese political theorists reconcile the growth of the private sector with Marxism, look no further than an article in the current issue of Foreign Affairs. Author Cai Xia was formerly a was a Professor at the Central Party School of the CCP, the highly prestigious Beijing school that has been responsible for training party leaders since the 1930s. 

When Cai was earning her Ph.D., she was so devoted to traditional theories “that behind my back, my classmates called me ‘Old Mrs. Marx.’”  But once she began teaching, the limits on independent thought became clear.  “Video cameras in the classrooms recorded our lectures, which were then reviewed by our supervisors. We had to make the subject come alive… without interpreting the doctrine too flexibly or drawing attention to its weak spots.”

Early in Ms. Cai’s teaching career, when Jiang Zemin succeeded Deng Xiaoping as China’s leader in 1989, Cai embraced Mr. Jiang’s teaching that “the role of the party was no longer to make violent revolution against the exploitative capitalists—instead, it was to encourage the creation of wealth and balance the interests of different groups in society.” 

She was asked to write a TV program explaining Jiang’s views.  But when TV executives reviewed Cai’s draft of the three-episode script, they stopped after the first part. “‘Only the safest things can be shown on TV’ [they said] … At that point, nobody was quite sure what [Jiang’s new theory] would ultimately be interpreted to mean, and [the reviewer] worried that my script might be out of step with the Propaganda Department’s views.”  Cai was forced to rewrite the script to remove any hint of controversy. Her Foreign Affairs article includes many other examples of how she had to twist her thinking into a pretzel to please Party censors, and then later into a new and different theoretical pretzel each time leadership changed. 

As Cai got older, her personal flexibility decreased, and she found herself in conflict with superiors more and more often.  In 2019, she traveled to the US on a tourist visa.  “While there, I received a message from a friend telling me that the Chinese authorities… would arrest me if I returned.”  Soon after, she was expelled from the party, her bank accounts in China were frozen, her retirement benefits were eliminated, and “Officials… made vague threats against my daughter in China and her young son. It was at this point that I accepted the truth: there was no going back.”

The title of Cai’s article was “The Party that Failed.”  I assume this refers to a failure in freedom.  Last I heard, the Party was pretty strong in most other categories. 

For me, the moral of the story goes back to what Mr. Chen implied at that Washington lunch mentioned at the beginning of this post:  in China, the theory and the very definition of communism can be completely redefined at any time and in any way that powerful leaders want.  Ultimately, the CCP’s success will be measured not by the underlying theory, but by how the day-to-day practice of communism affects the people of China and of the world.   

Cyberwarfare

In cyberwarfare, one nation attacks or disrupts another’s operations by hacking into its computer networks.  The term covers a wide range of activities, including computer-based attacks on physical infrastructure, cyber-espionage and ransomware. 

In a speech last July, FBI Director Christopher Wray said of the cyber-threat from China: “The stakes could not be higher, and the potential economic harm to American businesses and the economy as a whole almost defies calculation.”  Similarly, a senior defense quoted in a New York Times article said:  “In the cold war, we were focused every day on the nuclear command centers around Moscow… Today, it’s fair to say that we worry as much about the computer servers in Shanghai.”

In 2018, the US established the Cybersecurity and Infrastructure Security Agency (CISA) to deal with this threat and to improve security across all government computer systems.  Why just two years ago?  As a recent Washington Post article noted “The majority of major destructive cyberattacks have taken place in the past few years… [And] with many militaries… racing to develop and integrate their own offensive hacking tools, the trend of geopolitical aggression seems set to grow.”

When specific US cyberthreats are identified, CISA issues special advisories.  For example, in  August one advisory warned “organizations researching COVID-19 of likely targeting and attempted network compromise by the People’s Republic of China.”  In October, another advisory warned of the threats of increased US-China tension, and described some of the known viruses, worms, and other tactics that have been associated with the Chinese government and their proxies.

In their most extreme forms, computer viruses and worms could theoretically shut down the US  power grid and its military Command and Control centers.  Or, on a more pedestrian level, cyberwarfare could prevent every American from accessing their bank accounts, and sow havoc throughout our heavily computerized society. 

Could China actually do any of these things yet?  Answers may appear in classified documents somewhere, but you and I will not know anytime soon.  As a Forbes article last year summed it up “Offensive cyber capabilities have long been the most sensitive and nationalistic of government activities, clouded in secrecy and deniability.”

To date, there have been only a few attacks major cyberattacks on infrastructure.  The most famous may have been in 2015 and 2016, when Russian computer viruses shut down power plants in the Western Ukraine, and hundreds of thousands of customers lost electricity temporarily.  Another candidate for the most famous example is the 2010 Stuxnet virus, which damaged and destroyed Iranian nuclear centrifuges by causing them to spin out of control.  Although no country has ever admitted to the Stuxnet attacks, it is widely accepted that two governments were responsible:  Israel, and our very own US of A.

Although China has not yet been associated with an attack of this magnitude, China’s hackers have been detected probing a Canadian company that “designs software that gives oil and gas pipeline companies and power grid operators remote access to valves, switches and security systems.” 

But as a Washington Post review noted, “looking for theatrical cyberattacks means missing the ones that matter most. Cyber-engagements between nations are daily competitions in which the United States, Russia, China and others continually struggle for advantage.”

Perhaps the greatest cyber-threats these days are in the area of espionage.  The Chinese government is believed to be behind stealing designs of a number of US weapons systems, including “the F-35 Joint Strike Fighter; the advanced Patriot PAC-3 missile system; the Army system for shooting down ballistic missiles known as Terminal High Altitude Area Defense; and the Navy’s new Littoral Combat Ship, a small surface vessel designed for near-shore operations.”

Chinese agents now seem focused on stealing intellectual property in a wide variety of emerging industries “including healthcare, financial services, defense industrial base, energy, government facilities, chemical, critical manufacturing (including automotive and aerospace), communications, IT, international trade, education, videogaming, faith-based organizations, and law firms.”

In September, the Department of Justice unsealed indictments which charged that “a group of hackers associated with China’s main intelligence service had infiltrated more than 100 companies and organizations around the world to steal intelligence, hijack their networks and extort their victims… These for-profit criminal activities took place with the tacit approval of the government of the People’s Republic of China.” Unfortunately, according to a department of Justice press release regarding this case, “the Chinese communist party has chosen… [to make] China safe for cybercriminals so long as they attack computers outside China and steal intellectual property helpful to China.”

Unless Chinese national Wang Dong, alias “Ugly Gorilla,” visits the US, he is likely to remain wanted for the rest of his life.

The charges against the defendants include “racketeering, conspiracy, wire fraud, money laundering, and aggravated identity theft.”  (I would have thought that all identify theft is pretty aggravating, so I had to look up the last term.  Turns out it refers to using stolen identities in a felony.)  In a new low, the Chinese hackers even conducted “a ransomware attack on the network of a non-profit organization dedicated to combating global poverty.”

The hacking tactics they used were so sophisticated that it is clear that the Chinese government must have been involved.

For example, in some cases the Chinese hackers used “supply chain attacks,” the same approach Russians used in a massive hack revealed a few days ago. According to an article in yesterday’s Washington Post, the Russians first hacked, into “SolarWinds, a Texas-based maker of network-monitoring software, and then slipped the malware into automatic updates that network administrators… routinely install to keep their systems current.” Solar Winds has reported “that nearly 18,000 of its customers may have been affected worldwide,” including servers in the US Departments of State, Treasury, Homeland Security, Commerce, the National Institutes of Health, and maybe others.  After getting a classified briefing on Solar Winds two days ago, Sen. Richard Blumenthal (D-Conn.) tweeted that the details “left me deeply alarmed, in fact downright scared.”

So, in a world that already has more than enough problems, we can now add a messy new “kind of guerrilla warfare characterized by continued digital skirmishing between the United States and China, together with a threatening proliferation of intelligence-gathering activities, sabotage and influence.”  And, according to a NY Times opinion piece “there is particular danger in cyberwar, with its inchoate rules of engagement, lack of international consensus on the legitimacy of different types of targets, and lack of meaningful experience to underpin the understanding of collateral effects.”

This situation is likely to get worse before it gets better, maybe much worse. 

A few years ago, “former FBI director Robert Mueller commented that there are only two types of companies: those that have been hacked and those that will be… Since then, more than 80% of economic espionage cases against the United States have been linked to China.”

And, as Marietje Schaake, International Policy Director at the Cyber Policy Center at Stanford has written in Foreign Affairs, “Perpetual intrusions and cyberattacks suggest that in the battle between hackers and governments, democratic governments are losing.”

The single most important question for the future of US-China relations

In my previous post, I explained the clear consensus among policymakers that past US-China policy has failed.  But what should we do instead?

In my opinion, the United States’ future actions should revolve around the answer to a single question:

Realistically, which American interests are most critical and achievable?

The underlying assumption of this phrasing is that some American interests may seem critical, but realistically the chances of success are so low that it is unproductive to pursue them.  As the Rolling Stones put it: “You can’t always get what you want.” 

If we fail to take a new approach to US-China relations, the alternative could be disastrous.

As Christopher Layne, Professor of International Affairs at Texas A&M, wrote in the most recent issue of Foreign Affairs:  “Over the past few years, multiple observers… have suggested that the United States and China might be, like the United Kingdom and Germany in 1914, ‘sleepwalking’ into war.”  Similarly, Andrew Bacevich, President of the Quincy Institute for Responsible Statecraft, wrote in the Boston Globe that “allowing US-China relations to devolve into a new Cold War will revive the danger of war on an apocalyptic scale.”

To implement a more selective approach to diplomacy, the US needs to start by re-assessing not just its most critical interests, but also which tactics are most likely to work with China, and which ones won’t.   Government decision makers need time to build consensus over what is most critical and what will work.  Their analysis should be shaped by three major considerations. 

1. The US must recognize and accept China’s growing power.

In a previous post, I explained why I believe that China will someday become the most powerful superpower in the world.  It may take 10 years or 50 years, but it’s coming. 

Whether you agree with my conclusion or not, there’s no denying that China is currently the number two superpower.

In a recent article in Foreign Policy, Kurt Campbell and Ely Ratner described the implications of China’s rise: “The starting point for a better approach [to foreign relations] is a new degree of humility about the United States’ ability to change China. Neither seeking to isolate and weaken it nor trying to transform it for the better should be the lodestar of US strategy in Asia. Washington should instead focus more on its own power and behavior, and the power and behavior of its allies and partners.”

To put this approach another way, before taking action anywhere in the world, US policy makers should first ask two simple questions:

1. How likely is it to work? 

Based on our experience in Vietnam, Afghanistan, Iraq, and countless other actions, it is reasonable to be skeptical about military intervention.

2. Can we afford it?

The US National Debt is now approximately $27 trillion, or nearly 100% of GDP.  Given that Congress is considering several multi-trillion proposals to prop up the economy, this debt can only be expected to rise.  How much debt is too much?  Someday, the US may find out the hard way, but that’s another story.

This philosophy is closely aligned with the work of the Quincy Institute for Responsible Statecraft, a Washington think tank.  Major funding came last year from two political philanthropists who have rarely agreed on anything before:  right-wing billionaire Charles Koch and left wing billionaire George Soros contributed $500 million each.

The Quincy Institute’s core message was described by Deputy Director Stephen Wertheim in a recent interview with the Washington Post.  “US foreign policy should derive from a searching analysis of the interests of the American people. If US interests truly do warrant the significant projection of military power, then policymakers should act accordingly. The trouble is that now… armed dominance has become an end unto itself… to protect [our number one] position in the world.”

With a new more selective approach, according to Fareed Zakaria “The challenge for the United States, and the West at large, will be to define a tolerable range for China’s growing influence and accommodate it—so as to have credibility when Beijing’s actions cross the line.”

Then Vice President Joe Biden welcomed Chinese President Xi Jinping on a US visit in 2015.

2. The US should work closely with China to maximize benefits in areas of common interest.  

Isolationism is not an option in today’s global economy.   As Kurt Campbell and Jake Sullivan explained in an article entitled “Competition without catastrophe”: “Global problems that are difficult enough to solve even when the United States and China work together will be impossible to solve if they fail to do so—climate change foremost among them, given that the United States and China are the two biggest polluters.”

The most important international treaty in this area was of course the 2015 Paris Agreement, signed by almost 200 countries, with a goal of holding warming well below 3.6°F (2°C).

As I explained in my post on Climate change and China, the US signed the Paris Agreement in 2015, then announced in 2017 that we would withdraw as soon as possible, which turned out to be November 4, 2020, the day after the presidential election.  Bloomberg News reported last week that President-Elect Biden has “said he would apply to rejoin on his first day as president and then ‘lead an effort to get every major country to ramp up the ambition of their domestic climate targets.’”

The whole world is waiting to see how the US approach to climate change will play out in the coming months and years.  Hopefully, it can be accomplished in a more consistent way so businesses can plan and “don’t have this snap back and forth every time a new administration comes to town,” Marty Durbin, president of the U.S. Chamber of Commerce’s Global Energy Institute said last week.

3. The US should avoid pursuing policies which will be difficult or impossible to enforce.

When I wrote in this blog about the one million Muslim Uyghurs who have been sent to Chinese prison camps over the last few years for “political re-education,” I wondered how the US might help.  The US government has been wondering too.

In extremely rare show of bipartisan agreement, the “Uyghur Human Rights Policy Act of 2020,” passed 413-1 in the House and by unanimous consent in the Senate.  It was signed into law by the President in June.  It calls for investigations by the FBI, State Department, Director of National Intelligence and others to identify the individuals who are responsible for these human rights abuses in Xinjiang, the westernmost province of China where most Uyghurs live. 

Possible sanctions against these individuals will include blocking their assets in the US and making them ineligible to come to the US.  They will also have to pay double to enter Shanghai’s Disneyland Park. 

Just kidding about the Disneyland part.  The point is that it is hard to put teeth into US punishments of Chinese citizens. 

But let’s step back for a moment.  Suppose the Chinese government passed a law announcing an investigation into civil rights abuses in the US.  Any individual found responsible would be unable to visit China.  How much do you think that law would change US behavior?  Not at all?  Good guess.  That’s also a good description on the amount of visible impact that the US law has had on China to date.

Of course, there is something to be said for objecting very publicly and strenuously to policies that violate human rights, even if our objections will have no obvious effect. Such objections can serve a moral and political purpose, and may even have a realpolitik impact.

But do you think it helped when Secretary of State Mike Pompeo said “The Chinese Communist Party’s human rights abuses in Xinjiang… ranks as the stain of the century.”  I don’t. 

US diplomats need to find exactly the right line to walk as they try to promote change in China.  Name-calling like Pompeo’s just risks making things worse.  As Quincy Institute researchers Michael Swaine, Jessica Lee and Rachel Odell wrote recently, “Treating China as an enemy… makes Beijing less willing to compromise in disputes and endangers bilateral cooperation on the most urgent of shared challenges, including climate change, pandemic disease, and North Korea’s nuclear and missile programs.”

Another complicating factor is the cultural gap between the US definition of human rights and China’s.  In a book on the East-West culture gap (p. 44), Gish Jen wrote that “The Mainland Chinese government… believes that… it is the people’s collective right to a livelihood that constitutes their ‘human rights’… [China argues that] when it arrests dissidents or suppresses public protests… it is protecting human rights against self-centered individuals.”

If the two countries cannot even agree on how to define human rights, how could they ever expect to agree on how to enforce them?

The current US response to the Uyghur problem reminds me of the old saying:  You can’t teach a pig to whistle.  It doesn’t work and it annoys the pig.

If the US adopts the approach described in this post, the most obvious place to start is, as Julian Gewirtz has written to work closely with China “to head off foreseeable disasters, such as the looming risk of cyberwar and the prospect of a conflict in the contested South China Sea. In these most volatile and dangerous areas, [the US and China] should negotiate redlines and effective mechanisms for crisis management and de-escalation.”

The failure of US policy towards China

A few weeks ago, the US House of Representatives’ Task Force on China released a report which called China “the greatest national and economic security challenge of this generation.”(Executive Summary, p. 1)

How did this happen?

In 1971, when President Richard Nixon announced that he was planning a visit to China, the world was stunned.  Nixon had built his career on fighting the “Red Menace,” and for decades had opposed diplomatic recognition of Mao’s “rogue regime.”   But Nixon’s National Security Advisor Henry Kissinger convinced him to try to drive a wedge between China and Russia, by discussing diplomatic and trade relations during this 1972 visit.

Over the next several decades, both Republican and Democratic administrations generally agreed on a liberal approach to diplomatic policy, based on the theory that “After being welcomed into the international political and economic order, China would play by the rules, open its markets, and privatize its economy. As the country became more prosperous, the Chinese government would respect the rights of its people and liberalize politically.”

The part of the theory about becoming prosperous proved to be correct.  As China began to slowly embrace some elements of the Western system, it raised 850 million people out of poverty, and became the number two economy in the world. 

But the other part of the theory — that China’s prosperity would lead them to become more liberal and play by the rules — didn’t.  It has taken nearly five decades for US policy makers to give up on this idea. 

Instead, economic success has tightened the authoritarian grip of the Chinese Communist Party.  The country shows no signs of adopting Western values.  In fact, China has explicitly rejected the Western model on numerous occasions.  For example, “an internal Communist Party memo known as Document No. 9 has explicitly warned against ‘Western constitutional democracy’ and other ‘universal values’ as stalking-horses meant to weaken, destabilize, and even break up China.”

As a senior Congressional staffer who would prefer to remain anonymous told me recently:  “For several decades, Members of Congress on both sides of the aisle spoke enthusiastically about the need to engage China to make China more like us.  But over the years, frustration among lawmakers has grown exponentially because the strategy has simply not worked.  Time and time again we’ve been faced with Chinese theft, underhandedness, and deception.  Even worse, China is using its economic and commercial influence to bring other countries into its orbit and to strengthen its economic and political power.”

One of the things that makes China so hard to deal with is the fact that, as former Wall Street Journal reporter Dinny McMahon put it in his book China’s Great Wall of Debt (p. 11), “China’s economy [is] incredibly opaque… [The government’s] control of information – be it the massaging of data [or] faking it outright – is not the root cause of China’s opacity.  It is merely a symptom.  What makes China so opaque is that its rules are fluid.” 

Why do so many major American companies try to operate in an environment in which the rules change constantly, Chinese companies violate contracts, and steal intellectual property worth hundreds of billions a year in what has been called the “greatest theft in human history”?  The answer is quite simple:    Because 1.4 billion people live there.  No other country in the world offers companies as much potential for revenue growth.

While many US corporations seem to care only about this quarter’s profits, policy makers take a much longer view.  And one of the very few things that most Democrats and Republicans agree on these days is that China poses a significant threat to the US. 

What should we do about it?  Clearly in the past we have misjudged China, so the first step toward an improved foreign policy is to establish a firm foundation of knowledge about China’s approach and intent.  As a country, we need to better understand the many complex interrelated dimensions of the US-China relationship including security, competition, trade, supply chains, artificial intelligence, emerging technologies, cyberwarfare, energy, human rights, and much much more.

How is the US doing when it comes to improved understanding of China?  Badly. 

A few months ago, the House Permanent Select Committee on Intelligence published the results of a two year study of China based on hundreds of hours of interviews and thousands of reviews of analyst reports.  The quick bottom line, as summarized in a Foreign Affairs article by the Committee’s Chair, is that “What we found was unsettling. Our nation’s intelligence agencies are not ready—not by a long shot.”  According to a redacted summary of their final report, the committee offered 100 classified recommendations and 36 public ones. 

But, if one goes by the statements of our politicians, our current goal seems to be, as US Secretary of State Pompeo put it in a speech last year:  “the United States and its allies must keep China in ‘its proper place.’”  In a 2020 Foreign Affairs article Fareed Zakaria described this as “a patronizing statement that would surely infuriate any Chinese citizen.”

Things are not much better on the other side of the Pacific. Zhao Lijian, a spokesperson for China’s Foreign Ministry, said a few months ago “that the United States is ‘a far cry from the major power it used to be,’ and its leaders are “working to suppress China because they fear China’s growth.’”  Similarly, the state-backed newspaper Ta Kung Pao recently proclaimed that“America is moving from ‘declining’ to ‘declining faster.’”

On the plus side, at least the rhetoric has been dialed down since the days when Mao Zedong led China from 1949 to 1976. For example, in a speech about nuclear war in 1957, Mao famously said “If the worst came to the worst and half of mankind died, the other half would remain while imperialism would be razed to the ground and the whole world would become socialist.”

Fortunately, since then, Chinese policy has completed “a remarkable shift from a radical agenda of revolution to a conservative concern for stability.” 

So, for those who see every glass as half full, there is some good news:  the Chinese Communist Partyviews Washington “as an obstacle to its goals of preserving its own rule and gaining regional dominance, but it does not believe that the United States or its system of government has to be defeated in order to achieve these aims.”

As Fareed Zakaria summed it up:  “Beijing’s elites know that their country has prospered in a stable, open world. They do not want to destroy that world.”

We don’t either, so that’s a start.  In my next post, I’ll provide a five minute review of what experts say about how a better approach to US-China relations could be formulated in the future.

From Gucci to mud huts: China’s income inequality

A Chinese billionaire recently commissioned a team of jewelers to design the most expensive pandemic fashion accessory in the world:  the $1.5 million N95 mask shown below.  It may feel a little heavy since it weighs about 100 times as much as a standard surgical mask.  That could be because it includes the 250 grams of 18-carat gold, or maybe it’s the 3,600 black and white diamonds.   But the anonymous buyer was not thinking about practicality; he or she was thinking about style.  I’d feel a little silly wearing it to a party, but then I can’t remember the last party of billionaires that I was invited to.

This mask could be an extreme example of a trend Blomberg News reported a few weeks ago:  “Bored after months of strict social distancing measures and unable to vacation overseas, wealthy Chinese consumers are seeking comfort in retail therapy.”

A $1.5 million Covid mask

According to a recent report in Forbes, about one out of every five billionaires on the planet now lives in China.   To be exact, there are 455 billionaires in mainland China and Hong Kong.  This is 22% of the total 2,089 billionaires worldwide, a percentage exceeded only by the 29% in the US.

That’s in addition to China’s 4,400,000 millionaires.  Here too, the US is still ahead with 18,600,000 millionaires according to a Credit Suisse report.

But the Chinese are catching up.  The same report notes that another way to measure comparative wealth is to look at how many of the “top 10% of the world’s richest people” live in each country.   (If you are wondering whether you qualify, according to Credit Suisse’s definition, you need $109,430 or more in personal savings.)  By that criterion, “The number of wealthy Chinese people has overtaken the number of rich Americans for the first time.”

That’s one of the reasons that some experts describe China as the future “driving force of luxury brands.” According to Gartner, the top ten luxury brands in China are, in order:  Louis Vuitton, Bulgari, Cartier, Gucci, Montblanc, Coach, Tiffany, Piaget, Burberry, and Chow Tai Fook.  If you’re like me, you recognize the names of the first nine brands, but have never before heard of the last.  Chow Tai Fook is a jeweler based in China.  It represents the start of another emerging trend:  the number of luxury brands based in China is expected to grow.   

For a picture of the other end of China’s wealth spectrum, consider the story of “Ice Boy” who became an internet sensation two years ago after the picture below went viral.  It was taken by his teacher after the student arrived at school on a day when the temperature was 16 degrees F, and he had walked more than an hour to school. 

At the time, the picture was taken, “Ice Boy” lived in a mud hut with his grandmother.  He is among the 60 million “left behind children” in rural China, whose parents moved to cities to get jobs, and can visit home only once or twice a year.  The internet uproar that resulted from the picture led to numerous newspaper articles, and to charitable and government contributions to help “Ice Boy” and his classmates. 

“Ice Boy”

By the following year, according to a Washington Post follow-up story entitled “China’s ‘Ice Boy’ Has a New Home” he had moved to a two story home closer to school.   The government also built a new school with heaters in each class, and a dormitory “which has new thick quilts and mattresses for the 73 students who live there [during the school week] … They are [also] given medicine to prevent frostbite.”

It is always heart-warming to see the outpouring of human concern and help for individual cases like this, but as one Chinese social media commenter put it, at the end of the day “helping one is only helping one.”

In my previous post, I described how China has lifted 850 million people from extreme poverty over the last few decades.  But one of the side-effects has been a substantial increase in the gap between rich and poor.  As the International Monetary Fund put it, “Income inequality in China increased sharply from the early 1980s [when Deng Xiaoping’s economic reforms  began to have an effect] and rendered China among the most unequal countries in the world by 2013.”  Since then, China has slowly reduced inequality, but it still has a long way to go.

The best way to compare China’s income equality to other countries is to look at their Gini coefficients, figures which varies from 0 for a totally equal economy where everyone earns exactly the same amount, to 1where a single individual has all the wealth.  (For the mathematicians in the audience – including my brother – here’s how it is computed:   “The Gini coefficient is equal to the area below the line of perfect equality… minus the area below the Lorenz curve, divided by the area below the line of perfect equality.”  Have you got that?)

According to a 2020 comparison of the Gini coefficients of 172 countries, China is toward the middle of the list, more equal than the US (ranked the fourth most unequal country in the world in this list), but less equal than such countries as France, Spain, Portugal, Belgium and Japan.  (An aside — that same article pointed out that worldwide inequality has been growing for the last 200 years: “In 1820, the Gini coefficient was 0.50 and in 1980 and 1992, the figure was 0.657.”)  In short, at this time “the huge inequality in China does not fit into the title of socialist country and its socialist extent is far less than the European’s, [and] even inferior to typical capitalist countries.”

The Chinese government has repeatedly stated its goal of reducing this embarrassingly non-Communist income gap.  For example, one of the goals of its Twelfth Five Year Plan in 2011 was “speeding up the formation of a reasonable pattern of income distribution . . ., and reversing the widening income gap as soon as possible.” In 2016, the Thirteenth Five Year Plan repeated this goal and its intent to “eradicate rural poverty” by this year, 2020.

Eradicate rural poverty?  How could a country with 1.3 billion people verify that every single one of its rural residents had been lifted above the poverty line?  Especially since, as one review put it:  “Estimating the number of people in poverty in China is like trying to nail Jell-O to the wall.. There’s no one standard definition of poverty across all of China.” 

That’s not stopping loyal Communist Party members from trying.  For example, according to a 2020 BBC article, when Jiangsu province reported its latest statistics to Beijing, it claimed that out of its 80 million plus residents, only 17 were still living in poverty.  The government even offered details on these unfortunate few: “The 17 still living below the poverty standard are all capable of working, according to authorities who spoke to Chinese media, although four ‘have diseases.’”  The BBC article also quoted a social media user on Weibo – China’s equivalent of Twitter – who asked skeptically “How could they be so accurate?”

Well, one way bureaucrats meet their “poverty targets [is] administratively: certain areas have stopped logging residents as ‘impoverished’ since the start of the year.”

2020 has proven to be an unfortunate target date for this long running initiative, since it could easily be “undermined by the coronavirus outbreak that has shaken the world’s second largest economy.”  But, as Kerry Brown, Professor of Chinese Studies at London’s King College, put it, you can be sure that “somehow or other, this [poverty] target will be declared to have been achieved.” 

China has 90 million Party members whose job is to make it succeed, even if that means an occasional fudged figure or two.  Or maybe three.  So you can be sure there will be a “mission accomplished: rural poverty eradicated” celebration no later next July at the 2021 centenary celebration of the 100th anniversary of the founding of the Chinese Communist Party.

In an excellent article published a few months ago entitled “Inside China’s race to beat poverty” the Financial Times noted that “the true level of poverty may be impossible to gauge in a system not designed to admit mistakes.”  But as the same article also noted, this should not overshadow the fact that hundreds of millions of Chinese are much better off economically than they were a few decades ago:  “the rapid rate of [poverty] alleviation is real.”

How the “China Model” lifted 850 million people out of poverty

In 1989 more than 9 out of 10 Chinese were living in extreme poverty (defined by the World Bank as living on less than $1.90 per day).  Today, that proportion has been reduced to about 1 out of 100.  The World Bank has described China’s development during this period as “the fastest sustained expansion by a major economy in history.”

Or, to put it another way:  “In less than forty years, China has quintupled its share of global output, and transformed itself from a poor country and source of cheap toys and textiles to a fierce competitor in high-end manufacturing, advanced technologies, and military might.”  (p. 1 Red Flags)

Near the beginning of this transformation, Chinese leader Deng Xiaoping announced that economic development was aimed in part at providing “four big items… to consumers in the countryside: a bicycle, a sewing machine, a radio and a wristwatch.”  (p. 6) 

Today’s economic goals are a bit more ambitious.  The government plan “Made in China 2025,” includes such goals as leading the world in robotics, information technology, and clean energy within the next five years.  The plan also aims for China to produce 70% of the component parts in its products domestically.  This will reduce imports and also create “self-sufficiency for domestic companies [which] would then enable Chinese companies to compete for a greater foothold in global markets.”

In a TED talk about some of the implications of all this growth, Harvard Professor Graham Allison noted that:  “If you have two dollars a day, most of your [time] is spent trying to find enough food to eat for you and your family, just barely struggling to survive… [But today] from Louis Vuitton stores in Beijing to a buzzing stock exchange in Shanghai, the trappings of capitalism are ubiquitous in China… Former Czech president, Vaclav Havel… put it best:  ‘All this has happened so fast, we haven’t yet had time to be astonished.’”

How did China do it?

Scholars who have studied this success and how it could be applied in other countries call it the “China model.”  While experts have actually proposed a number of different “China models,” all agree that the central feature in China’s success has been the government’s unrelenting focus on the economy, and its willingness to do whatever it takes to raise living standards.  And, oh yeah, the China model also assumes an authoritarian government that can crush all opposition.

As William Overholt put it in his fascinating book China’s Crisis of Success, p. 9:  “The policies required for rapid growth entail enormous social dislocations. And [in democratic countries] political leaders who consider imposing such dislocations reasonably fear for their jobs.”  But strong dictators don’t spend a lot of time worrying about their job security, so they can take whatever steps they deem necessary to grow.

In capitalist economies, companies must make a profit, or they will go out of business.  At least that’s the theory.  (Unless they are like Uber, Lyft, Tesla, Pinterest, Spotify, Zillow, Snapchat, and Pinterest, all companies that are valued at over $1 billion, despite the fact that they have never made any money.  Investors are gambling that the stock prices of these tech giants will not crash the way Napster, Lycos, Kozmo, Pets.com, and many other companies did in 2001 when the dot com bubble burst.)

In China, a significant portion of the economy is controlled not by private capitalists who are motivated by profit, but rather by “State Owned Enterprises,” companies financed by state-owned banks that do not need to ever make a profit.  Instead, they primarily aim to meet government objectives, such as increasing the Gross Domestic Product (GDP), by any means necessary.

Communist ideological purity is no longer an important goal.  Instead, “socialism with Chinese characteristics,” as the economic system is called, adapts Marxism-Leninism to China’s unique needs, as they exist at a moment in time.  For example, “Deng Xiaoping Theory” guided action in the 1980s when China was a very poor country.  But it has now been replaced by “Xi Jinping Thought” which outlines policies and principles which better fit the needs of a growing economic power.

Near the beginning of China’s transformation, according to Bloomberg News, “many outside the communist country expected that as its economy became more capitalist, its politics also would become more democratic. They didn’t. Instead, the Chinese system, which puts stability and cohesion ahead of individual freedoms, became adept at delivering prosperity, with the Communist Party still firmly in control.”

The geopolitical implications of China’s success are hard to overstate.  A few years ago, a South Sudanese politician named Anthony Kpandu “led a delegation to China. What he saw there blew him away: modern industrial parks, high-speed trains, gleaming infrastructure, dazzling skylines. ‘It was magnificent,’ he enthused. ‘You can’t believe it, but it’s there. I’ve never seen anything like it.’ 

Reactions like this, along with China’s focus on building relationships in the underdeveloped world, contribute to “a growing fear in the West that developing countries are finding the… ‘China model’ more appealing than liberal democracy.”

According to former Wall Street Journal writer Dinny McMahon in his book China’s Great Wall of Debt (p. 52) “The key to China’s success lies in the scale and speed at which it’s been able to build [the] infrastructure” that so impressed Mr. Kpandu.  They built “big shopping malls, huge dams, luxurious mega-hotels in small cities, the world’s greatest railroads” (China’s Crisis of Success p. 62) and more, whether each individual development made sense or not.  When state-owned banks decided whether to finance a new project, they were often less concerned with profits or even repayment than they were in supporting the government’s growth program.

China developed new standards of efficiency during this building boom.  In the United States, if a skyscraper is scheduled to be completed within one year, no one will be very surprised if it actually takes two years or more.  Someone will then be sure to say “Well, Rome wasn’t built in a day.”  But as Graham Allison has noted (Destined for War, p. 13), at the height of China’s building boom “Someone… forgot to tell the Chinese.  By 2005, the country was building the square foot equivalent of today’s Rome every two weeks.

They did this with remarkable construction techniques, like the company named Broad Sustainable Building (BSB) which built a 57-story skyscraper in a little less than three weeks.  A CNN report of this astonishing construction includes a time lapse video showing the building going up.  The article explained that “By preparing more than 2,700 modules in a factory for four months before site work began, BSB says it was able to assemble the structure at the rate of three stories per day — like a giant vertical jigsaw pieced together from a minutely detailed set of instructions.”

Of course, an enormous national program like this building boom has not been without problems.  One is that China’s banks had to borrow money to pay for unprofitable projects, and as a result “China’s debt accumulation could be among the fastest in modern history” (China’s Great Wall of Debt, Kindle loc 107).  China’s national debt now stands at $5.5 trillion, which represents about 48% of its GDP. 

That is indeed an enormous debt problem, but it’s not as bad as ours.  US national debt currently stands at $26.7 trillion and is growing fast.  It is projected to exceed 100% of GDP next year for the first time since World War II.  And the US actually ranks only 8th in the world in the debt to GDP ratio.  Number one is Japan whose debt is 234% of its GDP.  Greece, Portugal, Italy, Bhutan, Cyprus and Belgium also have higher debt to GDP ratios than the US.  Put it all together, and the picture is a world economy built on a foundation of hopes for the future rather than capital.  This is one of the reasons that some economists think a significant portion of the world’s wealth is a house of cards which could come crashing down in the wake of covid, as explained in a recent New York Times article entitled Why the Global Recession Could Last a Long Time.

Another problem which resulted from China’s rapid economic growth is an enormous gap between rich and poor.  850 million people may have increased their income, but a few have become billionaires while most others are struggling to join the middle class.  One would not expect to the rich do better than the poor so openly in a “Communist” country.  That is such an important issue, in China and around the world, that it will be the topic of a separate post in this blog.

Criminal “justice” in China

Last March, senior Communist Party official Ren Zhiqiang criticized President Xi Jinping’s handling of the coronavirus in Wuhan.  Writing in his social media account to tens of millions of followers, Ren said he hoped the party would “wake up from ignorance” and oust the leaders getting in its way. “I see not an emperor standing there exhibiting his new clothes,” he went on, “but a clown who stripped naked and insisted on continuing to be an emperor.”

Soon after calling Mr. Xi a clown, Mr. Ren disappeared.  A few weeks later, an official statement was released reporting that he was being investigated, but the announcement “did not provide Mr. Ren’s whereabouts, give details about the status of his case or make mention of [his social media post].” 

China experts assumed that Ren had fallen victim to “shuanggui,” a system which NYU Law Professor Jerome Cohen described as allowing officials “to indefinitely confine Party members incommunicado in secret… facilities. There, for as much as a year or two, the detained members have undergone investigation and have been interrogated [including]… torture… until their captors decided what to do with them…  So feared has been this secret process of indeterminate length that some who have been summoned have committed suicide rather than endure it.”

Note that the harsh realities of shuanggui apply only to the 92 million members of the Communist Party.  As Richard McGregor has noted in his book The Party (p 137)  “Senior Party members… cannot be arrested by civilian law enforcement bodies… until… allegations have been investigated by the Party first.”

In Mr. Ren’s case, the initial investigation was completed in July.  He was expelled from the Communist Party for “‘smearing the party and country’s image’ and resisting the party’s investigation into him — phrasing that suggests he has refused to admit any wrongdoing…”

Next, Mr. Ren will almost certainly be sent to the criminal justice system for trial. 

The good news about China’s criminal justice system is that there is one.  When Mao Zedong was in power (1949 – 1978), “the legal system was attacked as a counter-revolutionary institution and the concept of law itself was not accepted. Courts were closed [and] law schools were shut down.”  But since Mao’s death there has been a gradual attempt to create a fair and transparent criminal justice system.  For example, in 2012, the national Criminal Procedure Law was revised to ban the use of illegally obtained evidence in trials.  Limits were also set on how long the police can detain civilian suspects:  three to 30 days, depending on the type of offense. 

The bad news is that, according to Professor Cohen, the police have “demonstrate[d] their mastery of the art of distorting legislative attempts to curb their arbitrary powers…  they routinely allow themselves 30 days whenever they choose, regardless of the circumstances of the case.”

In addition, Cohen continued, for cases involving national security, terrorism or bribery, police frequently add “‘residential surveillance’ in a police-designated incommunicado location on suspects for up to six months… before deciding whether to treat them in accordance with the detention time limits prescribed for ordinary criminal cases…  in some cases that they regard as unusually important or difficult, [police] may repeat the initial extraordinary six-month detention.”    

This is one of many examples of the gap in China between the theory of law and its practice.  Another can be seen the fact that the practice of “re-education through labor” was banned in 2013.  For the half-century or so before that “it had empowered the police, without meaningful opportunity for defense or review by other official agencies, to detain people in the equivalent of a prison or a labor camp.”  However, the one million Muslim Uighurs and others who are currently being held in labor camps know that in fact “re-education through labor” is still very much alive and well.

So, put it all together, and Mr. Ren’s future prospects are not looking bright. The evidence collected in his investigation will next be turned over to civilian prosecutors who will decide whether the evidence is sufficient to proceed to trial. 

When it goes to trial, there will be no jury, no right to remain silent, and there may not even be a defense lawyer.  A panel of judges will ask all the questions. According to a website for defense lawyers compiled by International Bridges to Justice “Witness statements are merely read aloud in court, depriving either the prosecution or the defense of the opportunity of cross-examination.”  Defense lawyers “are rarely allowed by police to collect evidence or to conduct any other activities that would help [them] develop a solid defense case.”

Altogether, “Lawyers often play a small role in Chinese trials… [they] rarely dispute anything that the prosecutor alleges against the defendant or actually defend the client…” Their role is “usually limited to asking for more lenient sentences…”

The result of all this is that, as noted in an article entitled “China’s deeply flawed criminal justice system,” the conviction rate in China’s criminal courts is 99.9%.

With a rate that high, you might guess that not everyone who is convicted in China is actually guilty.  Of course you’d be right, but you’d have a tough time proving it.

In one highly publicized case, a man confessed under torture to killing his wife and was sent to prison.  Eleven years later she showed up alive.  This man was released, but in a second well known case, the evidence of innocence came too late.  In 1995, 21 year old Nie Shubin was convicted of murder, then executed.  His family fought for years to clear his name, to no effect.  Finally, in 2005 another man admitted that he had committed the crime.  But it still took another 11 years after that for lawyers, journalists, and Nie’s family to officially clear his name. 

Like most red blooded Americans, I am appalled by these examples.  This criminal justice system clearly violates the United Nation’s Universal Declaration of Human Rights:  “recognition of the inherent dignity and of the equal and inalienable rights of all members of the human family is the foundation of freedom, justice and peace in the world.”

Many US politicians have taken up this cause, including US Secretary of State Mike Pompeo who recently said that: “We, the freedom-loving nations of the world, must induce China to change …” 

Good luck with that.

As I’ve been emphasizing since the first post in this blog, cultural differences often lead Chinese citizens to see the same facts in a very different way from Americans.

As Harvard Professor Graham Allison has noted “Chinese culture does not celebrate American-style individualism… Indeed, the Chinese term for ‘individualism’—gerenzhuyi—suggests a selfish preoccupation with oneself over one’s community…  For China, order is the highest value, and harmony results from a hierarchy in which participants obey Confucius’ first imperative: Know thy place… China’s equivalent of ‘give me liberty or give me death’ would be ‘give me a harmonious community or give me death.’”

In mainland China, most citizens seem to care less about liberty than about nationalism and the economy.  In their view, it is “social stability… [that] enabled China to lift hundreds of millions of people out of poverty in a mere few decades, generate huge economic growth, and peacefully re-establish China as a major power among nations.”  In addition, “there have been intense campaigns against what have been condemned as ‘Western’ or ‘universal’ legal values, such as… judicial independence, the separation of powers, [and] political and civil rights.”   

As China becomes more powerful, the US would be well advised to put less effort into exhorting Chinese politicians to think and act like Americans, and more effort into protecting world peace.  Once the State Department has world peace under control, then they can decide whether to encourage Chinese citizens to think and act more like Americans.

Climate change and China

Were you as alarmed as I was by the fact that much of Siberia, north of the Arctic Circle, just had a six month heat wave?  It was capped by a record high temperature over 100°F, and accompanied by record wildfires.  According to a recent Washington Post article, a team of “climate researchers from multiple institutions in France, Germany, the Netherlands, Russia, Switzerland and the United Kingdom [concluded this] would have been virtually impossible without human-induced global warming.”

If current trends continue, the Earth’s average temperature will increase somewhere between 2.5 and 10 degrees Fahrenheit over the next century.  Which, I guess, should not be surprising since “97 percent or more of actively publishing climate scientists agree [that] climate-warming trends over the past century are extremely likely due to human activities.”   

Unless we change our greenhouse gas emitting ways, our children and grandchildren will continue to see ever more damaging effects from climate change, including stronger and more intense hurricanes, more droughts and heat waves, more frequent wildfires, and sea levels rising 1-8 feet by the year 2100, threatening hundreds of millions of people who live in coastal areas.

So what is China doing about it?  More than you might think, and not nearly enough.

What Manhattan could look like as a result of rising sea levels from global warming.

“Since coming to power in 2013, President Xi Jinping has been calling on his countrymen to ‘build an ecological civilization’…  [and] the Chinese government has pledged more than $1 trillion dollars in air, water, and soil cleanup plans… [In the seven years since], Beijing has invested billions of dollars in green energy, including wind and solar, and is one of the largest markets for wind turbines, solar panels and electric vehicles. It also exports two-thirds of the world’s installed solar cells.” 

The best way to evaluate China’s impact is to compare their results to the goals for international progress which were negotiated by representatives of 196 countries at the meeting that led to the signing of the Paris Agreement. The goals of this treaty included “holding warming well below 3.6°F (2°C), and pursuing efforts to limit warming to 2.7°F (1.5°C)” over pre-industrial levels.

To date, 189 parties have signed the Paris Agreement including every country on the planet large enough to have an impact, except Iran and Turkey.  Oh yeah, you can put an asterisk next to the United States, since we did sign, but announced in 2017 that we plan to withdraw.  Advance notice is required under the terms of the agreement, so technically the US cannot withdraw until November 4, 2020, which ironically is one day after the next US Presidential election.

The Climate Action Tracker measures and evaluates “climate change mitigation commitments” to date by 32 countries which are responsible for about 80% of the planet’s emissions. Based on commitments to date, each country is categorized into one of six groups.  The group that has actually made the necessary commitments to meet Paris Agreement goals is called “role model” group. Unfortunately, this is a bit theoretical, since not a single one of these 32 countries can be classified as a role model. 

China’s results were most recently classified in the group that ranks 5th out of 6 with a “highly insufficient” response,  (The US results were even worse.  We were classified in the lowest category in this report:  “critically insufficient.”)    

China’s activities have been contradictory.  It is “both the greenest [country] in the world, [and] also the most polluting. It has more wind and solar power than anybody else, yet it is also the world’s biggest builder of new coal plants.”  

The most effective of Beijing’s green initiatives can be seen in its approach to solar power. China encouraged the development of this infant industry even before Xi Jinping made his first “ecological civilization” speech by offering a variety of financial incentives to develop solar power, including loan discounts and an above-market price for electricity delivered to the grid. They also succeeded in attracting investment from other countries, including California venture capital. 

The result was that “by the 2010s, China had a huge domestic market for solar panels and dominated the world market. It also brought the price of panels down far enough to stimulate the growth of solar energy markets around the world… [Then] with business booming, China began to reduce its subsidies to the solar industry in 2014.”

The industry has continued to grow.  As of 2018, “China [had] more solar energy capacity than any other country in the world, at a gargantuan 130 gigawatts [billion watts]. If it were all generating electricity at once, it could power the whole of the UK several times over.”

According to a study published last year, “344 Chinese cities… have solar systems producing energy at lower prices than the grid, without any subsidies.”  Experts say that “China is also driving down solar prices around the world thanks to the scale of production and learning curve effects.”   To put it another way, “in effect, China seeded the global green energy industry by lowering initial costs and creating artificial demand.”

As other countries turn to solar power, Chinese companies have also gained a huge competitive advantage in getting contracts to help build their solar farms, including the world’s largest, the Noor Complex Solar Power Plant in Morocco.  The first stages went online in 2016, and it will be fully completed in the near future.  When finished, it will “be the size of 3,500 football fields [and] produce enough electricity to power a city the size of Prague, or twice the size of Marrakesh.”

As a result of this type of progress, China is “in a very influential position as the world’s renewable energy superpower,” according to a report by the Global Commission on the Geopolitics of Energy Transformation and the International Renewable Energy Agency. 

So what does all this mean for US-China relations?  Well, you don’t have to be a regular reader of this blog to know that Americans have become increasingly aware of China’s opposition to US interests in many different areas.  But if there is one single goal that China and the US should be able to agree on, it is reducing the effects of global warming.  After all, we share the same planet, and if rising seas continue to threaten New York, they will also threaten Shanghai.

And since “China is simultaneously the world’s largest consumer of coal and the largest developer of renewable energy… the choice it makes, domestically and abroad, between the technology of the past versus the renewable future will have a lasting effect on the world’s ability to limit warming to 2.7˚F.”

This impact was underlined at a UN Climate Change conference in Madrid last year.  As the Washington Post summed it up:  “For all the good intentions of the governments gathered in Madrid, a humbling reality hangs over the latest climate change conference. The effectiveness of what is agreed and done will ultimately stand or fall on the actions of just one country: China.”