Author Archives: Jim Hassett

Will China grow old before it grows rich?

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A few months ago, in a post entitled China’s rise is accelerating I argued that “China is likely to become the most powerful country in the world, sooner or later [and]…it’s starting to look like sooner.”  While I stand by that conclusion, I will readily admit it’s not a sure thing, and there are a number of factors that could slow or even reverse China’s rise.

Chief among them is what some experts have called China’s “number one economic problem… going forward”:  the aging of its population.  Very simply, as any country’s population gets older, fewer workers must support a larger number of retirees. 

In 1978, around the start of China’s economic rise, there were nine workers for each retiree.  Today, that number has slipped to five workers per retiree, and according to a recent Forbes article, by 2040 China will have “barely three workers for each dependent adult. Those three workers will have to produce enough for their own consumption, those of their other dependents, and… [for] retiree’s needs.” 

China’s initial wave of growth was largely based on cheap labor producing cheap products.  “Demographics were not the only contributor to China’s fabulous growth…” the Forbes article explained, “but they were a substantive part to be sure.”  Since then, wages in China have gone up and many of its manufacturing jobs have moved to India, Brazil, and other countries with lower labor costs.  

To sum up, according to a Time article entitled China’s aging population is a major threat to its future: “China, whose extraordinary economic heft has been built on labor-intensive manufacturing and which has no social safety net to protect the aged, is uniquely ill-prepared for the societal changes this gray wave will bring.” Or, as a Washington Post editorial a few weeks ago phrased it “The ambitions of China’s rulers may be undone by the baby bust.”

The continued aging of China’s population will also have more subtle negative effects, such as reducing innovation. “Research into patents and Nobel Prizes [has shown] that in all cultures and economic systems, the 30-40 age cohort provides the bulk of society’s inventiveness. In China, that age cohort is expected to shrink by 100 million over the next 20 years, from 43% of the workforce to 37%.”

Of course, China is not the only country facing problems associated with too many elderly retirees.  For example, according to Time, in Japan “more adult diapers are sold… than infant ones.”

In fact, “having an aging population is a common demographic problem in developed countries, where birthrates decline as a result of higher levels of income, healthcare, and education.” 

A study published in The Lancet last year predicted that “an accelerated decline in fertility rates means the global population could peak in 2064 at 9.7 billion and fall to 8.8 billion by century’s end… An important underlying reason behind the conclusions is the improvement in access to modern contraception and the education of girls and women, which the study said would ‘hasten declines in fertility and slow population growth.’” 

The economic effects will be much worse in China than elsewhere since it began “the aging process at an earlier stage of [economic] development… than most countries… and at a more accelerated pace.”

Put it all together, and the New York Times called this demographic trend a “looming crisis” that threatens the country’s position on the world stage.  A population that is growing older and living longer could not only slow consumer spending but also limit the military’s manpower.  It may even require China to build a huge social welfare state over the coming generation.

There are many reasons to believe that China’s population will continue to get older.  The first and foremost has been the increase in life expectancy.  In 1959, life expectancy in China was just 44; today it is 77, largely as a result of improved medical care.

A second reason is the “middle income trap,” a term introduced by the World Bank in 2006 to refer to developing economies which first grow rapidly, until wages rise to the point where a middle class emerges and has fewer babies.  In China, “urban couples, particularly those born after 1990, tend to value their independence and careers more than raising a family despite parental pressure to have children.  Surging living costs in big cities, where most Chinese now live, have also deterred couples from having children.”

Still another cause of this problem was self-induced.  According to Time, “The scale of the problem is partly due to the legacy of the one-child policy: history’s biggest social-engineering experiment… introduced in 1980 to reduce the number of hungry mouths to feed.”

Enforcement of the limit of one child per couple was harsh. “Corrupt and brutal family-planning officials demolished the homes of some who resisted. Women had their menstrual cycles recorded on blackboards, for all to see. As birth quotas bit, gender ratios became more skewed by infanticide and sex-selective abortions of girls.”

When it became clear that this policy was interfering with long-term economic growth, in 2016 China changed the law to allow two children per couple.  This didn’t work, so a few months ago China again increased the limit, this time to three children per married couple.  On Weibo – one of China’s largest social media platforms – this latest change “was met with cynicism and ridicule. [As] one user wrote, ‘Whether you change the policy to five children or eight children, [high] housing prices are still the best sterilization tool.’”

The same day it announced the new three child policy, the Politburo also “said it would reduce the costs of education, improve maternity care and insurance and provide other support to families on housing and taxes… [and that] they would gradually raise the country’s retirement age, which is currently 60 for men and 55 for women.”

Many experts are skeptical that these new policies will make much difference.

As the Forbes article summed it up, this is not to argue that “China will disappear as a major power or that its economy will cease growing. It does say, however, that contrary to most media commentary today, the country’s growth rate will slow appreciably going forward, as will its pace of development and innovation. China will begin to resemble Japan in crucial ways, except that Japan got rich before it aged, whereas China, still not rich, will age first.”

How families are changing

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For the last several thousand years, “The family [has been]… the most important social institution in China and blood ties have traditionally been the cornerstone of society…” 

But all that has started to change.  As an article last month in Foreign Affairs entitled China’s Shrinking Families explained, “the impending implosion of the extended family… is essentially certain.” The full implications for Chinese society are just beginning to be understood. 

Traditional family norms are being shattered as China adapts to modernization. 

The impact of these changes is greater on women than on men.  According to the Confucian tradition, “women should observe the Three Obediences… to be obedient to the father and elder brothers when young, to the husband when married, and to the sons when widowed.”

That doesn’t leave women a lot of time for education, careers or self-actualization.  Not to mention yoga.

A traditional Chinese extended family.

Women’s reproductive rights have been trampled in the transition to a modern society.  From about 1980 to 2015, China enforced a “one child policy” which included significant fines for any couple that had two children.  One result is that “By 2050, two-fifths of Chinese under 50 will be only children… Many… will traverse life from school through work and on into retirement with little or no firsthand experience of the traditional extended family so integral to Chinese culture. Theirs will be the generation that in effect finds 2,500 years of Confucian tradition coming to an end.”

Of course, it also produced the population drop the government was aiming for, but that too had some unfortunate effects. “As countries become more developed, birth rates tend to fall due to education or other priorities such as careers… But with the biggest population in the world and an economy that [China is] trying to make more reliant on domestic consumption, this is a particularly salient issue.”

On an individual level, when two only children marry, the results are “4-2-1 families” which place enormous financial and emotional burdens on the two parents who must care for one child and four grandparents.  (On the plus side, these families have six adults available to help raise each child.) The government changed the policy in 2016, and there is now a two-child limit per family. 

This head snapping reversal in policy has reinforced the pressure on women to marry young.  “Women are vigorously discouraged to delay marriage for career, with the derisive label sheng nu, or ‘leftover women,’ given to unmarried women over 27…[The government] encourages Chinese citizens to see unmarried women as unhappy and unfulfilled.”

A 2019 documentary entitled “Leftover Women” illustrates this stigma by following three women to illustrate the pressures they face, including an unmarried female lawyer named Qiu Hua Mei.  In one scene “At a ‘marriage market’ in Beijing, where parents solicit dates for their children, one mother shies away from Qiu after learning that she’s a lawyer, claiming Qiu might sue a potential husband’s family. When you have a degree, Qiu said, people think, ‘This woman must be very tough, not obedient. Maybe very bossy. Maybe she wouldn’t follow the orders of a husband.’”

In contrast, for men “Under Confucianism, the oldest male and the father are regarded as the unchallengeable authorities. They set rules, and the ‘duty and virtue’ of everyone else is to follow them.” 

You can tell Confucius was a guy.  Under his system, the most powerful people were old men since he also promoted the concept of filial piety “that it was important to worship one’s parents while they are still living and old people should be venerated because even though they are weak physically they are at the peak of their knowledge and wisdom.” 

This didn’t make a lot of sense to me in my teens or twenties.  But now that I am 73, I can see the profound wisdom of this approach.  In China, the veneration of parents went further than just following their rules.  “In the old days a son was expected to honor his deceased father by occupying a hut by his grave and abstaining from meat, wine and sex for 25 months.”

To sum it up: “In a traditional family, the father is dominant, the mother is home-centered and devoted to raising her children, and grandparents, aunts and uncles play an important role in a youngster’s life. A husband’s first duty has traditionally been to his parents and a wife’s duty has been to her parents-in-law…” 

But this 2,500-year-old family structure is now giving way.  One expert quoted in a New York Times article went so far as to say that these days “Filial piety is a myth.”

In fact, it’s gotten so bad that “In a country famous for its Confucian traditions of filial obedience, tens of millions of elderly Chinese are being left behind… suffering poverty, illness and depression. It has become such a serious problem that the Chinese government put into effect a law [in 2012] allowing parents to sue their children if they failed to visit and support them.”

Other traditional attitudes are changing more slowly.  For example, “It is [still] taken for granted that everyone should marry, and marriage remains part of the definition of normal adult status. Marriage is expected to be permanent.”

But here too, change is underway. “Urban couples, particularly those born after 1990, tend to value their independence and careers more than raising a family despite parental pressure to have children.”  One result is that “The divorce rate in China has soared from around 0.96 divorces per 1,000 people in 2000 to 3.36 divorces in 2019.”  (China’s divorce rate is now higher than the US rate of 2.7 per 1000.) And when the results of China’s 2020 census were announced two weeks ago, the average size of a family household had significantly shrunk (from 3.10 people per household in 2010 to 2.62 in 2020). 

This is a massive social change when multiplied by China’s total population of 1.4 billion.  It can be explained largely by “increasing population mobility and the fact that young people after marriage [now] live… with improved housing conditions… separately from parents.”

The implications of these huge demographic shifts will be rippling through Chinese society for decades, sometimes with surprising consequences.  To cite just one example, China has traditionally been classified as a “low-trust” society.  A lack of confidence in both laws and the government has led to the system of guanxi in which people rely on social networks of trusted family and friends.  According to the article China’s shrinking family “From China’s earliest recorded history, guanxi networks of informal social relations (mainly but not exclusively through family ties) have helped get business done for the modest and the mighty alike by reducing uncertainty and facilitating economic transactions. These sorts of networks remain essential today and supply the necessary trust that helps business get done. The coming decades’ implosion of China’s extended family networks portends a national decline in this kind of trust and social capital.”

The same article goes on to argue that “the changing structure of the Chinese family poses a threat to the country’s great-power ambitions in the decades to come… to a degree that China’s leaders may not yet anticipate.”

The greatest implication of all these changes is that “a diminishing pool of working adults [which] will also test China’s ability to pay and care for an aging nation.”  But that’s another story. I will discuss it in my next post.

The Taiwan conundrum

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Beijing is irrevocably committed to regaining control of Taiwan, an island about 100 miles off China’s coast.  But the US and its allies are committed to the opposite:  helping Taiwan maintain its status as an independent county.  Something’s got to give. 

To put the problem in context, Taiwan was part of China for over 200 years, until it was ceded to Japan in 1895 when China lost the first Sino-Japanese War.    Taiwan was returned to China at the end of World War II, but then taken over by the Nationalist Chinese forces after they lost their civil war to the Communist Party in 1949.    

As recently as a few weeks ago, Chinese Foreign Ministry spokesman Zhao Lijian told reporters that: “China’s position on the Taiwan question is consistent and clear. There is but one China in the world, and Taiwan is an inalienable part of China’s territory.”  

Zhao is certainly correct that the Chinese have been both consistent and clear.  Nearly 50 years ago, when President Nixon visited China in 1972 to reopen relations between the two countries, Chinese Premier Zhou Enlai’s “principal goal was to persuade [US Secretary of State Henry] Kissinger to agree to ‘recognize the PRC as the sole legitimate government in China’ and ‘Taiwan Province’ as ‘an inalienable part of Chinese territory which must be restored to the motherland.’”

In 2019, on the 40th anniversary of the US establishing diplomatic relations with China, President Xi Jinping gave a speech explaining how the need for re-unification with Taiwan remains critical. Xi also emphasized the need for a peaceful solution, repeating a line from a 1995 speech by former Chinese president Jiang Zemin that “Chinese will not fight Chinese.” But Xi also went on to say that Beijing ultimately “reserves the option to take any necessary measure,” and that the problem “should not be passed down generation after generation.”

Xi described the re-unification of Taiwan as part of the “great rejuvenation of the Chinese nation,” a phrase often used when referring to China’s “century of humiliation” at the hands of foreign powers, and its current rise to true superpower status. As a New York Times article summed up the situation a few weeks ago, “to Beijing, Taiwan continues to be a source of embarrassment, the island where the losers in the country’s civil war fled in 1949 and whose government is propped up by foreign powers.”

In his provocative book Has China Won? (p. 94), former president of the UN Security Council Kishore Mahbubani concluded that “the one issue where the Chinese leaders cannot bend and compromise is Taiwan… [this issue could even] trigger a war.”

The American position is quite a bit muddier.  In 1979 Congress passed the Taiwan Relations Act which stated in part that the U.S. will consider “any effort to determine the future of Taiwan by other than peaceful means, including by boycotts or embargoes, a threat to the peace and security of the Western Pacific area and of grave concern to the United States.” 

More recently, in one of his fist major speeches on China, Secretary of State Antony Blinken has warned that “when China uses coercion or aggression to get its way… We will push back if necessary.” 

Both statements are consistent with the US’ longstanding policy of “strategic ambiguity.”  As a New York Times article recently explained “Under a longstanding — and famously convoluted — policy 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.”

So, to sum it up, if China takes aggressive action on Taiwan, the US will consider it a matter of “grave concern” and we will push back “if necessary.”  Any questions?

I suspect that nobody knows exactly what the US would do in response to a direct threat to Taiwan, not even in Washington.

When the Senate Armed Services Committee recently reviewed the nomination of Adm. John Aquilino to lead the US military’s Indo-Pacific Command, one Senator asked was why the US should defend Taiwan at all.  Aquilino replied that “Washington’s credibility as an ally to places like Japan and the Philippines is at stake if the island were to fall to Beijing.”

In a Bloomberg opinion column ominously titled “A Taiwan Crisis May Mark the End of the American Empire” Niall Ferguson added several other reasons, notably that “Taiwan in recent years has also gained a greater strategic importance as one of the world’s leading producers of semiconductors — the high-tech equivalent of oil in the emerging supercomputing showdown between the United States and China, which faces microchip supply shortages.”

An article in Asia Times about the microchip shortage noted cynically that the US used to be a leader in “all forms of high tech, especially semiconductor chips, [but] now spends its time redesigning chocolate chips.”  Meanwhile, the Taiwan Semiconductor Manufacturing Company (TSMC) has become “pretty much the only place to get processor chips fabricated, unless you’re Intel.” 

Often missing from discussions of this diplomatic stalemate is a discussion of what the 24 million people who live on Taiwan want.  This is unfortunate since “it is the people of Taiwan who will suffer if American actions provoke military responses from China.”  (Has China Won, p. 98)

One way to answer this question is to look at the results of Taiwan’s most recent presidential election. “Taiwanese President Tsai Ing-wen won a landslide election last year on a promise of defending the island’s democracy and standing up to China.”  The Unionist Party, which favors re-unification with the mainland, got just 0.23 percent of the vote. 

The implication is obvious, according to Taiwan News: “the majority of Taiwanese do not believe Communist China can peacefully coexist with a free society, and voters rejected China’s ‘one country, two systems’ framework by casting a vote for the presidential candidate who opposes it.”

A few weeks ago, Taiwan’s foreign minister said that if China attacks “We will fight a war if we need to fight a war, and if we need to defend ourselves to the very last day, then we will defend ourselves to the very last day.”

What are the chances of winning?  One way of estimating this, and of refining military strategy, is to look at the results of simulated war games conducted by military officers.  According to David Ochmanek, a former senior Defense Department official who helps run war games for the Pentagon “the results are sobering and the United States often loses.”   In an article in Foreign Affairs, Fareed Zakaria was more specific “The Pentagon has reportedly enacted 18 war games against China over Taiwan, and China has prevailed in every one.”  Hmm.

And therein lies the conundrum:  What should the US do?  And when?

If Hu Jintao (President 2003-2013) or Jiang Zemin (President 1993-2003) or any of China’s other recent leaders were in power, I believe that they would try to bring Taiwan under control the same way that they gained control over Hong Kong, patiently and without major violence.  As Chinese general Sun Tzu wrote in The Art of War in the 5th century BC, “The supreme art of war is to subdue the enemy without fighting.”  The result has been, in the words of the Washington Post “Hong Kong’s fall from a relatively free, boisterous territory to an Orwellian place that resembles the repressive mainland.”

But current president Xi Jinping may be on a faster, more aggressive path with Taiwan.

Interestingly, Niall Ferguson has reported that, “I was told by one of Xi’s economic advisers that bringing Taiwan back under the mainland’s control was his president’s most cherished objective— and the reason [Xi] had secured an end to the rule that had confined previous Chinese presidents to two terms.” 

Since January, China has significantly increased flights of military aircraft violating Taiwan’s airspace, in “attempts to intimidate” the Taiwanese government.  Two weeks ago, China “conducted simultaneous military exercises to the west and east of Taiwan… [which] showed that the People’s Liberation Army is capable of surrounding the island of Taiwan, isolating its troops and leaving them nowhere to run and no chance to win.”

The clock is ticking.  When Adm. Philip Davidson, commander of the U.S. Indo-Pacific Command, was asked by the Senate Armed Services Committee about timing he replied that “The threat is manifest during this decade, in fact, in the next six years.”

Similarly, a New York Times article two weeks ago entitled The New Taiwan Tensions quoted Anne Applebaum of The Atlantic “that a Chinese invasion ‘could happen at any moment.’”  

The article’s conclusion was a bit more optimistic: “a military conflict still seems unlikely. Then again, military conflicts often seem unlikely until the moment they begin.”

Two problems with companies in China

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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

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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

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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

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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

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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

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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

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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.”