Facts about China that may surprise you
- Secrets of China's success
- Human Rights
- Foreign Policy
The decline and fall of China has been predicted for more than 20 years.
Instead, China's economy started growing in 1978, following Xiaoping Deng's reforms, and China has not had a recession since: 42 years of continuous growth.
This is unprecedented in the world since economic data have been kept.
China's poverty rate has fallen from 88% in 1981 to less than 1%:
it has lifted about 700 million people out of poverty in 40 years
(poverty is defined as an annual income of less than $700).
At every step, China's economic decisions have been criticized by Western experts (from both universities and governments) as doomed to fail. Western experts have predicted a Chinese economic crash since at least the late 1990s. Here are some examples:
1998: The Economist: China may be about to catch the Japanese disease.
1999: University of Wollongong: China's Economic Growth Slowdown
2001: Gordon Chang: The Coming Collapse of China
2003: New York Times: Banking crisis imperils China
2004: The Economist: The great fall of China?
2005: Nouriel Roubini: Will the Bretton Woods 2 Regime Unravel Soon? The Risk of a Hard Landing in China
2006: International Economy: Can China Achieve a Soft Landing?
2007: TIME: Is China's Economy Overheating? Can China avoid a hard landing?
2008: Forbes: Hard Landing In China?
2008: Asia-Pacific Journal: The Rising Risk of a Hard Landing in China:
2009: CNN: China's hard landing - With exports shrinking and unemployment rising, China must find a way to recover
2011: Business Insider: A Chinese Hard Landing May Be Closer Than You Think
2011: Foreign Policy: China's hard landing
2011: Nouriel Roubini: China's Bad Growth Bet
2012: American Interest: More Dismal Economic News from China: Is a Hard Landing Coming?
2012: Business Insider: Chinese Hard Landing: Here's Why It's Finally Happening
2012: Financial Times: Economists weigh Chinese 'hard landing'
2013: Zero Hedge: Seven Reasons Why China Is Facing A Hard Landing
2014: CNBC: A hard landing in China: The risks in one graphic
2014: Harvard Business Review: Why China Can't Innovate
2015: Forbes: Congratulations, You Got Yourself A Chinese Hard Landing.
2015: The Diplomat: The End of CCP Rule and the Collapse of China
2015: Wall Street Journal: "The Coming Chinese Crackup"
2016: Economist Intelligence Unit: Hard landing looms for China
2017: National Interest: A Mountain of Debt: Is China's Economy Going To Crash
2017: International Journal of Economics and Finance: Will Rising Debt in China Lead to a Hard Landing?
2018: BBC: China's economic slowdown: How bad is it?
2018: Guardian: A Chinese recession is inevitable - don't think it won't affect you
2019: Forbes: How Close Is China To A Financial Crisis?
2019: Bloomberg: Forget the Trade War. China Is Already in Crisis
2019: The Diplomat: China Collapse
2020: Noema: Has China Peaked Already?
And, yet, it is the West that has had multiple financial crises, one bigger than the other: the stock market crash of 1987, the Asian financial crisis of 1997, the dotcom crash of 2000, the Great Recession of 2007, the covid recession of 2020.
Why are the Western analysts so wrong so often about China?
I don't know. But here are some notes about China that may help the casual reader who is not familiar with China.
- Secrets of China's success
- The first secret of China's success has been infrastructure. China's productivity has increased rapidly and the main reason is its massive investment in infrastructure. China invests 45% of its revenues in infrastructure, the USA invests 17%. The problem is not that China somehow exploits the USA, but that the USA doesn't invest enough in infrastructure. By 2019 China had the largest high-speed railway in the world, with 25,000 kms of tracks, while US citizens were still driving or flying.
- China's second secret is education: China has invested massively in STEM education (science, technology, engineering and math). It has built and expanded a lot of universities and hires teachers and professors from abroad. Its high schools are extremely competitive, and education is mostly free. China graduates ten times more engineers, mathematicians and scientists than the USA, and the gap is growing. China is fully aware that the real engine of growth is knowledge, and that the USA became the world power also because its investment in education that has created the leading universities in the world that have graduated the most successful inventors in the world. Note that both these "secrets" were also the secrets of the ascent of the USA: massive infrastructure development (railways and canals in the 19th century, roads and dams in the 20th) and education.
- Another secret of China's success is urbanization. Moving hundreds of millions of people from the countryside to the cities has been an engine of growth and a source of optimization.
- Another secret of China's success is (believe it or not) corruption. Corruption in countries like India slows down the economy: an entrepreneur has to pay bribes at every step of the process in order to obtain what he needs to make his firm work. In China corruption actually speeds up the economy. In fact, one can argue that China developed rapidly precisely because of corruption among government officials at the local level. The Chinese state controls all key resources, including mines and land. The private sector needs natural resources and land to make money. In theory in communist China the government cannot privatize resources and land, which are supposed to belong to the people, i.e. to the state. Corruption is the means by which key resources are transferred from the communist state to the private sector. The officials share in the profit and therefore have a vested interest in speeding the process, and even to find loopholes around laws that they are supposed to enforce.
- Another secret is the meritocracy of the communist system. The Chinese system is much more based on competition than on collaboration. The provinces compete against each other: each governor has a mandate to improve the economy of his province, and is competing with the other governors. His promotion depends on his results. The Communist Party is largely a meritocracy. The results matter more than ideological purity. And state enterprises compete against each other to contribute as much as they can to the nation's GDP. The whole system motivates officials and firms to produce as much as possible. China's system (call it "communism" or whatever) is a highly efficient system that can make rational decisions faster than the typical Western democracy can. Its leadership tends to be technocratic, well educated and competent.
Chinese leaders tend to listen closely to experts because that has been the way they rose through the ranks: by learning from the experts and implementing smart policies. The USA often gets a president who is a celebrity, a showman, a salesman, but has little competence and little respect for the experts that he doesn't understand. US leaders are much more likely to listen to the public opinion than to the experts: they are elected and reelected by the public, not by the experts.
As the saying goes, the USA is run by alwyers whereas China is run by engineers.
- Another secret is that China has thrived in a world policed by the USA, and has steered away from military conflicts. It has basically offsourced the security of its own trade routes to the US military.
- A great success of China has been in applying Western inventions (I include Japan in the West). For example, the USA invented the Internet, ecommerce, gene editing, the cell phone, 5G wireless, and artificial intelligence but China has deployed all of these on a much bigger scale and much more rapidly. Over the last 20 years China has not invented anything, but over the last 20 years China has been very good at implementing the inventions of the West. China succeeded in almost every field by adopting the inventions of the West and adapting them to the Chinese world: the Chinese model is "adopt + adapt". Chinese politicians ask us Westerners: "what's wrong with adopt+adapt if it works?" In fact, China has proven very good at applying new technology on a very large scale even before the Western nations did it (e.g. using the phone to pay is still rare in the USA whereas it has been common in China for years). Real innovation in China has actually been relatively modest for an economy that is second or first in the world and a population of 1.4 billion. Yes, they can use deep learning to build a better face recognizer by tweaking the parameters, and they can build more high-speed trains than Japan and Germany combined; and they will soon have more robots than anyone else; but this is all application (fantastic application) of research done elsewhere.
- Another secret of China's success: China has been happy to let the West do all the "inventing", the painful and costly process of trial and error before a new technology emerges. China has basically used the West as a free-of-charge research center: "let the West do all the basic research, and then we'll apply what works". The USA, Europe, Israel, Japan, South Korea, etc took all the risk, while China waited. Whatever worked, China applied. China has basically offsourced research to the West. Once the West invents a new technology and proves that it is mature, China gladly adopts it and adapts it. China has the further advantage that many of the most brilliant scientists in Western labs are Chinese, and some of them are lured back to China with valuable know-how. China uses foreign universities to train Chinese students: some of them return to China after having been trained in the technologies that survived "natural selection", and that's another way to offsourcing research (offsourcing the training of its own skilled workforce).
- The final secret of China is long-term thinking. China values long-term thinking in everything, and then really implements it (along the way it also sets metrics to judge the performance of those in charge of achieving the goals). Some programs are ten-year programs: and all national resources are used to achieve the goals. In 2015 China announced the plan titled "Made in China 2025" to become the world's leader in several high-tech industries: it was widely ignored in the Western press until the trade war started and then the anti-Chinese media started talking about it as if they had discovered a top-secret plan: it had been widely publicized by all Chinese media for months. All you had to do was to listen to what China was saying. In 2017 China announced its plan to become the world's leader in the field of artificial intelligence by 2030: same reaction in the Western media. I spoke about it repeatedly at the time in places like Stanford and Xerox PARC (video: "Intelligence is not Artificial" at Xerox PARC, August 2017) because nobody was paying attention: it wasn't a secret, it was widely publicized by Chinese media. China is about to release a 15-year plan known as "China Standards 2035" about how China will try to set the global standards for future technologies, and Xi has announced a plan to make China carbon neutral by 2060. China is planning to spend over $1.5 trillion over the next decade in semiconductor research and development. The USA, on the other hand, is incapable of planning beyond four years, and even that rarely happens. Because of the election cycle and endless political bickering, the USA is limited to short-term thinking. China does not believe in traditional communist planning economies but does believe that the state can and should shape and steer industrial future. The government has the vision and can mobilize enormous resources. Therefore China has an industrial policy that states clearly where they want to be 5, 10, 20 years from now.
China's long-term thinking was visible in the current pandemic. China's response to the covid crisis was markedly different from the West but in line with what China has been doing for decades: China did not pass a disaster-relief package like the USA and EU did; China rolled out a multibillion dollar plan for new infrastructure centered around 5G and AI. The USA called its covid package a "stimulus" but in reality it was a short-term disaster relief. China's was a long-term stimulus package.
China's passion for long-term thinking versus the USA's chronic inability to do any long-term thinking is one of the reasons why the two countries can't get along.
- China's passion for long-term thinking also explains why China prefers to deal with dictators. Some of those dictators are hardly fans of China, and hardly communists (Putin himself is a vocal anti-communist, and obviously the Islamic Republic of Iran is not a fan of a communist regime that persecutes Islam): but China values stable regimes, regardless of ideology. China likes partnerships that are stable and long-lasting. The problem with Western countries is that, with the exception of Germany, they change leader too frequently, and the policies of the next leader are unpredictable.
- China is a major trading partner with the USA, and the USA views this as a sign that China needs the USA. But one can argue that the USA needs China more than China needs the USA. To put it bluntly: no empire survives without slaves, and the modern "slaves" of the USA are the Chinese workers. They are the ones who make US products competitive. Entire products, like Apple's products, are made in China, and that's what makes them competitive worldwide. The USA also needs "slaves" to extract the "rare earths" needed in its high-tech products, from smartphones to fighter planes: China has 40% of the world's reserves of rare earths and mining them is a nasty business with lots of pollution and even radioactivity. A Stanford political scientist told me: "We (the USA) need China to exploit its workers because our own democracy won't allow us to do the same to our workers".
- The USA will lose the trade war with China. Trade now accounts for less than 40% of China's GDP. China and USA have something in common: they are continental nations which are mostly self-sufficient and therefore don't need to depend on trade as much as Germany and Japan. In fact, the view from China is that trade is necessary but does NOT account for and canNOT sustain growth. Because trade is shrinking as a percentage of GDP, trade is generating "negative" growth, and this has been going on for the last several years. The view from China is that growth is now coming from consumption and investment. Anything that the USA does to reduce trade with China, simply encourages China to focus more on consumption and investment, which are the real growth factors. China's state companies don't export much (they mostly deal with mining, transportation, construction), so they are not hurt by tariffs. About 60% of Chinese exports to the USA are managed by US companies, so any tariff hits US companies more than it hits the Chinese manufacturers. The USA and China are so economically interlocked that US tariffs on Chinese goods amount to self-sanctions.
The USA makes a big deal of all the low-value goods that it imports from China (the kind of goods found in US chains like Wallmart) but the USA can exert little leverage through tariffs on China's high-value strategic firms: Baidu has zero revenues in the USA; Alibaba has very small revenues in the USA; Tencent also has very small revenues in the USA; Didi doesn't even exist in the USA; Huawei's business has always been blocked in the USA, and you can hardly find a Huawei phone in the USA. Pretty much every major high-tech Chinese company that one can name does not depend on sales to the USA. Sure: many Chinese companies that make kitchen appliances and textiles depend on the US market; but the strategic corporations that China really cares about for its future (the high-tech companies) are hardly present in the US market at all. Their future is largely independent of the US market. They have been buyers, not sellers; something most US analyst don't seem to realize. Oversimplifying: the USA buys cheap shoes that China actually doesn't want to make anymore; the USA doesn't buy the things that China really wants to make, i.e. the digital economy.
On the other hand, some of the largest US corporations depend on their exports to China. During the Great Recession of 2007-10, General Motors was saved by China, the only market that was rapidly expanding, and General Motors still sells more cars in China than in the USA. Tesla's Model 3 has been the market leader in China since its introduction, despite a price tag of $43,000. In 2020 the big success story was the $4,200 electric micro car Hongguang Mini EV, made by General Motors' joint venture SAIC-GM-Wuling. The majority of Intel's and Qualcomm's semiconductor products are bought by China. China also buys a lot of German luxury cars, and those "German" cars are often produced in the USA. The iPhone is the canonic example of how US corporations profit from trade with China. All Apple products are made in China, mostly by Foxconn. The iPhone is therefore a Chinese good exported to the USA. But in reality only about $25 remain in China. About $200-300 are spent to purchase components from other east Asian countries, and Apple gets an almost 50% profit margin on every iPhone. The real winner is Apple, not China. Apple could make the same iPhone in the USA but it would cost a lot more. The iPhone is made by Foxconn workers paid $2/hour. If made in the USA, it would be made by workers paid at least $25/hour. The finished product would cost too much and then it would have no customers. Apple would be out of business within a few months. Apple could move its production from China to other countries where labor is as cheap or even cheaper than in China, but it's difficult to find another country that also offers reliable electricity, quality machinery, skilled workers, efficient shipping, fast communications, etc. Wages of Chinese workers are higher than wages in the Philippines, Vietnam, etc but the cost of producing in these countries ends up being higher. Furthermore, whenever it wants to, China can easily avoid US tariffs: it can outsource the last step of production to countries like Vietnam and Malaysia that are not affected by the tariffs: the finished good will arrive in the USA as a Vietnamese or Malaysian imports.
- It is possible that Xi welcomed the trade war with the USA, simply because it offers a pretext to explain some problems that Xi created. Xi tried too hard to establish China as a geopolitical and technological superpower. He overreached. The Chinese Communist Party started using it as a patriotic call to arms for the Chinese people, but the truth is that there are consequences to the costs of the One Belt One Road initiative (the new "Silk Road") and to the growing national debt. Without Trump's trade war, the troubles ahead would have been blamed squarely on Xi. Thanks to Trump, instead, the Chinese Communist Party found the perfect scapegoat (the evil USA) and the perfect motivation for citizens to be heroic about a downturn and work together to build a more self-sufficient China. The truth is that the USA does not have an exit strategy if China does not give in, whereas China already has an exit strategy: no compromise and start a "long march" towards technological independence from the USA.
- After the Korean War of 1950-53, the USA imposed a trade embargo on Mao's China. Mao remarked: "Go ahead. We have everything". The USA laughed at that declaration but one decade later Mao had nuclear weapons and two decades later it was the US president (Nixon) who traveled to meet Mao and normalize relations.
- The European Union will not support the USA in its trade war against China, and not only because Trump insulted the European Union repeatedly (while never once insulting the EU's main enemy: Putin's Russia). European corporations make a lot of money in China: some sell expensive items to China, and some simply make things cheaper in China which makes them more competitive around the world. The latter is, again, the problem of assessing the real costs of trade deficits: if a French company makes something in China and pays China $20 for it and then sells it in New York for $400, it has added $20 to the trade deficit of France towards China but it also made a profit of $380. For example, Suzhou's industrial zone is half German like in the good old days of European colonialism. A non-negligible detail is that the EU is the one that would benefit most from any (real) trade war between China and the USA. This is particularly the case of France and Germany, the two countries that control the EU's foreign policy. Furthermore, countries like Italy are more or less secretly hoping that China will help post-covid reconstruction, they basically hope to be bailed out by China. The EU's motivation to start a trade dispute with China is very low right now. Exhausted by the issues of illegal immigration from Africa and the Middle East, by the covid pandemic, by Brexit, by the rise of neofascist parties, by the Syrian civil war, by the Ukrainian civil war, by the Libyan civil war, and by Russia's interference in their elections, and by Trump's frontal attacks of NATO and the EU itself, few Europeans would mobilize for causes such as Hong Kong, the Muslims of Xinjiang or the China Seas islands. Lacking a political motivation, the economic motivation to annoy China is very low. In fact, Europeans are more likely to be worried about competition from ASEAN in trade with China: ASEAN's trade with China just passed the EU's trade with China. And "Brexit" has created a new competitor for the EU: Britain. Thus this is the worst possible time for the EU to start a trade dispute with China; but the best possible time for the EU to do business with China. On the other hand, the EU could be tempted to do what many Europeans have proposed over the years: create EU champions the same way that China did with Baidu, Alibaba, Tencent and Huawei. In other words, there are calls for the EU to become more like China and less like the USA, at least in the world of services. This may hurt more the USA than China, though.
- China is a convenient scapegoat, but it is debatable how much it really impacts the trade deficit of the USA. The trade deficit of the USA is largely self-inflicted. The USA has been running a trade deficit for more than 40 years, way before China became an economic power. The USA has had a trade deficit with 98 countries for 43 years. The total trade deficit of the USA expanded rapidly in the years 1999-2004, when China did not have much of a trade surplus, hence China was not the cause of the USA's trade deficit skyrocketing out of control. Recently the trade deficit of the USA keeps getting larger while China's trade surplus has been getting smaller (China has a huge surplus with the West but has a deficit with commodity producers because it buys a lot of commodities around the world). China does have tariffs on goods imported from the USA but they are low by the standards of developing countries, and even lower than South Korea's tariffs (although per-income income is much higher in South Korea than in China). Of course China is so big that even a small distortion created by China has a much bigger effect on global trade than the distortion created by much smaller South Korea. But the US trade deficit must have other causes than China's trade surplus. The European Union, for example, has a trade deficit with China but not as big. The EU trades almost twice as much with China as the US does, but its trade deficit is much lower, so it is not impossible to have a large balanced trade with China: of course, you have to be willing to sell China what China wants to buy. The main reasons for a trade deficit are usually government debt and that households don't save enough. The US trade deficit is largely a reflection of savings and investment imbalances in the USA. The EU balanced its budget whereas the budget deficit of the USA is out of control. A treaty of the European Union defines a "balanced budget" as a budget deficit not exceeding 3% of the GDP. The US government, on the other hand, has no obligation to keep the deficit under a certain percentage of GDP (and in fact the deficit is projected to remain well above 4% for the next decade). When the budget of a country is so imbalanced, the country always has a trade deficit. Despite Trump's trade war and the tariffs slapped on Chinese imports, the trade deficit of the USA reached a 14-year-high of $67.1 billion in September 2020. Furthermore, as long as the dollar is the global currency, the USA will run a trade deficit: the world wants to hold dollars as a reserve currency, and that means that the world wants to sell to the USA more than it buys from the USA (and the difference is the dollars that it can save). If the USA wants the dollar to remain the global reserve currency, the USA must run a trade deficit. The economist Robert Triffin explained this when he testified before the US Congress in 1960.
- China would love to buy more hightech products from the USA (which are also the high-value products), something that would help reduce the trade deficit of the USA, but the USA won't sell them to China for security reasons, so China can only buy agricultural products and maybe some natural resources, which is too little to balance the trade deficit. In 2019 China imported over $300 billion of microchips from the rest of the world: in that year the USA trade deficit with China was $346 billion. If the USA sold China all the microchips that China wants to buy, the trade deficit would be much lower. Now that China views the USA as an unreliable provider of semiconductors, it started importing them from Southeast Asia: shipments of semiconductors from ASEAN countries to China increased 24% and those from China to ASEAN increased 29% in 2019. Maybe it makes perfect sense that the USA bans China from buying some products, but don't blame it on China if China doesn't buy the best US products.
- Ironically, communist China understands the benefits of trade better than the populist politicians of the democratic West. Demonized by the new nationalist far-right (after being promoted for decades by right-wing politicians), trade is generally a good thing: if A is a farmer who grows food, B makes furniture, and C cuts trees, it makes perfect sense that C sells the trees to B who makes furniture that he sells to A, and then B and C use their profits to buy food from A. It makes sense because B and C are not as efficient as A at growing food, A and C are not as good as B at making furniture, etc. Both Mao's China and the Soviet Union experimented with a closed economy: Soviet citizens had to buy goods of terrible quality and experienced shortages all the time; Mao's citizens starved. Modern China has learned the lesson.
- China has been a vehicle for US growth. Why would the USA accept a trade deficit specifically with China for such a long time? Firstly, US corporations were made more competitive thanks to cheap manufacturing in China, and they were able to become world leaders thanks to being more competitive. Apple is a prime example. Secondly, the USA at large benefited a lot from low-price goods from China: US consumers can save more and spend it in the USA. Indirectly the trade deficit with China fuels investment in the US economy by the USA's own consumers. By lowering the price of goods, trade increases the amount of money that the USA can invest in improving productivity and innovation. Thirdly, China reinvests in the USA quite a bit of the dollars that it earns from trade: Chinese investors invest in high-tech startups, Chinese families buy homes in California or Florida and send their children to study in US schools; and the Chinese government buys US government debt. Fourthly, the dollar is a global currency: as long as the world accepts it, the USA can run a trade deficit. The advantages of having the dominant global reserve currency are colossal. To start with, demand by foreigners for government bonds remains high and so interest rates remain low. This is good for US citizens, who can borrow money at low interest rates, but even better for the USA as a whole: foreigners end up buying low-interest US assets (the bonds) while the USA can invest in high-yield foreign assets. Another colossal advantage is that the USA can print money: for the USA printing a $100 bill is the cost of printing a piece of paper with Benjamin Franklin's picture on it, but for the rest of the world that $100 bill must be earned by selling goods to the USA. Another advantage, of course, is that the USA pays imported goods in its own currency, whereas other countries see the cost of imports fluctuate in their own currency (for example, they buy oil in dollars and if their currency falls towards the dollar the price of oil goes up in their own currency). De facto, as Barry Eichengreen famously put it, foreign countries support the living standards of US consumers and subsidize US multinationals. The real problem due to trade with China is the social disruption caused by jobs that have moved to China, but that has to do with the fact that the USA (unlike Europe, Australia and Japan) doesn't have a national plan to help workers who lose their job. And, by the way, this problem pales in comparison with the social disruption caused by jobs that have been automated by Silicon Valley: are you going to start a trade war also with Silicon Valley?
- The Trans-Pacific Pact (TPP) worked out by Obama was not only an excellent trade deal but China should have been invited to join it. Why? Because the TPP was going to set standards for everybody: workers rights, environmental regulations, tariff restrictions, and so on. The TPP was a good deal to start with, but, a TPP with China in it would have been an even better deal for the USA. In any case the TPP would have placed China in a difficult position: join the TPP and be forced to accept its strict regulations, or reject it and remain isolated in Asia. Instead the opposite happened: after Trump canceled the TPP, China went ahead and forged its own economic alliances with its neighbors, and the one that is increasingly isolated is the USA. Canceling the TPP was a gift to China.
- China is not responsible for the decline of manufacturing in the USA: China's own employment in manufacturing is declining because of rapid automation and because of offsourcing to cheaper countries like Vietnam. In any case, only 8% of the US workforce is employed in manufacturing. Most people in the USA would rather have a job in the service industry that pays higher wages. The decline in manufacturing jobs was largely due to economic forces internal to the USA, namely automation and the transition to the service economy. Not many coal miners or assembly-chain workers dream that their children will have the same job as theirs. US employment in manufacturing has actually (slightly) increased during the last years of the Obama presidency, but that's not something to boast about. China, like all advanced economies, boasts about the increase in service jobs, not manufacturing jobs.
- China's manufacturing workforce has been declining for years.
First of all there is the demographics: because of the one-child policy,
China now has a smaller working population than before.
Second, wages of Chinese workers are 7 times higher than 10 times ago, and one
reason is precisely the shrinking workforce.
This has motivated the communist ideologues to call for automation to replace many manual jobs; which sounds ironic if one views communism as an ideology that should defend the jobs of the workers, but makes perfect sense if your goal is to maintain and improve competitiveness and productivity.
For several years now the Chinese entrepreneurs have been under pressure to automate their factories.
- Trump and his followers in the USA are obsessed with reducing the trade deficit with China, but the USA should make sure that it doesn't get what it wishes. China was already trying to reduce its dependence on exports. The day could come that domestic consumption will drive the Chinese economy (just like in the USA), and that China will become the top importer in the world. And that could become the new normal, with China replacing the USA as the main engine of growth in the world.
- It is China (not the USA) that is suffering from the global supply chain and that is trying to redesign it. China has suffered from two disruptions: the Trump trade war and the covid pandemic in the West. Both have damaged Chinese manufacturers because they depend on imports from Europe and USA. Chinese companies could return to full pre-covid production but they cannot get adequate components from Europe and the USA. USA and Europe don't want to depend on China for a number of reasons (trade deficit, fears of espionage, unfair Chinese practices, pharmaceutical dependence and so on) but China also doesn't want to depend on unreliable Western sources. The USA and Europe are selective in what they want to do: what they want to do is to achieved a rebalanced relationship with China. China, on the other hand, is getting fed up with all things Western. Ironically, it's not the USA that is trying to decouple for real: now it's China.
- China notoriously creates obstacles to foreign companies to sell tech in China in order to help its own domestic tech firms emerge without having to fight foreign competition. However, the USA creates obstacles to Chinese companies (such as Huawei) that would like to sell tech in the USA for fear of industrial and political espionage. When Huawei became a global tech giant (the world's largest maker of smartphones in Q2 2020) despite being banned from the US market, the USA pressured the Europeans and others to ban Huawei technology. The motivations are different but de facto the USA banned from its market a potentially dangerous foreign competitor for the US champion, Apple. China bans software like Google and Facebook on the ground that they don't comply with Chinese censorship laws.
The USA is now trying to ban WeChat, which is China's biggest software success story, on the ground that it can be used by China to spy on its users. China has not become more like the USA, but the USA has become more like China. (This is true in general: think of Trump's attorney general William Barr prosecuting those who investigate Trump. Perhaps the most terrifying thing the pandemic has revealed about the two great powers of the 21st century is the ways in which they resemble each other, two regimes steeped in cover-ups and vendettas).
- China's government maintains unfair business practices that penalize foreign firms. This is a real legitimate problem: China's government makes it difficult for foreign firms to compete with local champions. For example, the three digital giants Baidu, Alibaba and Tencent were helped by the fact that the operations of the established digital giants of the USA were banned in China or severely crippled. Uber didn't have a chance against Didi. The strength of the USA is in the service economy and that's where China is very restrictive. The US industries that are penalized in China are service industries (in particular, all the dotcoms), not the manufacturing industries. On the other hand, if you make something that the Chinese don't make, you are welcome: Apple was welcome when China was not making smartphones, General Motors was welcome when China was not making cars, and Tesla is welcome now that China just started making electric cars. Foreign companies are also subject to the unfair practice of having to form a joint venture with a Chinese partner: the goal is clearly to transfer know-how from the Western firm to the Chinese partner. This is forced technology transfer. To be fair to China, foreign companies fail in China also for other reasons: they don't understand the needs of the Chinese consumer the way a local Chinese firm does; they find it hard to live in the ferocious competitive atmosphere of China, where even small firms can quickly hire dozens of engineers and copy a product and even make the copy better than the original; etc. Economists, however, point out that China's closed market is not necessarily bad news for the USA. Suppose that China liberalizes its business regulations and US firms can suddenly invest in China without any discrimination. Then investment would certainly flow from the USA into China, for the simple reason that China is one of the most lucrative markets in the world and that producing in China is very efficient. This means that there would be less capital for investing in US firms. The trade deficit might even get worse because the investment in China could be aimed at making products for the US market, i.e. at exporting goods back to the USA. When the USA, via the CFIUS (Committee on Foreign Investment in the United States) panel, tightens the money that China can invest in the USA while asking China to allow more US capital to flow into China, it shoot itself in the foot.
- 20-25% of the foreign investment of Japan, South Korea and Taiwan goes to China. The USA, instead, invests almost nothing in China: about 1% of US foreign investment goes to China. How much does Apple invest in China? Zero. Foxconn invests. (Foxconn is the Taiwanese company that makes Apple products in its Chinese factories). The USA cannot seriously hurt China by reducing its investment in China. In order to hurt China, the USA would have to force all the countries of the world to stop investing in China, an unlikely scenario.
- China steals industrial secrets: true. China has stolen technology from the USA but the USA became a world power by stealing technology from Britain and Germany (see for example Katherine Epstein's talk at Stanford on 15 October 2020); and Britain became a world power by raiding Spanish ships and ports. China doesn't feel particularly guilty that its public and private companies managed to steal industrial secrets.
- In April 2018 the USA blocked ZTE from buying US semiconductors. ZTE is a $17 billion telecom firm that employs 75,000 workers and heavily depends on semiconductor components made in the USA. This was a "Sputnik" moment for China. In May 2019 the USA further restricted which technology China can buy from the USA, notably forbidding Google to sell its software to China's top electronic company Huawei. The ZTE and Huawei cases showed painfully to the Chinese leadership how far behind China is in (real) research. China's "adopt + adapt" model works only insofar as the West is willing to share the know-how of new inventions. What if the West decided to ban publication of all future papers on new technologies? Throughout its amazing boom, China neglected to raise a generation of real scientists. Today its scientists can publish a lot of papers on deep learning... after they studied deep learning from Western papers and in Western labs. Today its scientists can genetically engineer babies with CRISPR... after they studied CRISPR from Western papers and in Western labs. (Incidentally, He, the scientist who genetically engineered two babies, is a consequence of the Chinese eagerness to apply Western inventions). But what if tomorrow the West decides that any new scientific discovery will not be shared? China's science has been shaped to excel at applying Western inventions, not at inventing, and this goes all the way down to the way students are raised in high school and college, at the way corporations are organized, at the way startups are funded, at the way managers think, at the way entrepreneurs plan.
China has some of the smartest students and scientists in the world, but they were not trained to invent technologies that don't exist: they were trained to copy the ones that exist.
Now China is getting serious about doing "real" research, but it won't be easy to change the mindset of university professors, students, startup founders, corporate managers, CEOs, etc (not to mention government officials) to create a culture of real innovation. For three decades they defined "innovation" as "applying what the West has invented" (and very often they even made it even better). Changing that definition will not be trivial. So far their mission was: "learn how to do x y z" where x y z are Western inventions. The new mission is "learn how in heaven the West managed to invent things like x y z and the next one that still doesn't have a name". It may require a complete rewiring of Chinese society.
- When the USA had to react to its "Sputnik moment" (literally after the Soviet Union launched the Sputnik) and wanted to catch up, it didn't have to worry about the fundamental technology: it had all the technology that it needed. It certainly didn't have to import it from the Soviet Union. China is in a more complicated situation because it wants to catch up but it depends on the USA for the fundamental technology (notably, semiconductors). This is now a national-security concern for China: a US control of exports (due to the USA's national-security concern) could wipe out major companies in China. This situation is due to an odd case of complacency: throughout its economic boom, China assumed that the USA would continue to sell the technology that China needed; and China was perfectly happy to depend on the USA. It appears that no Chinese leader saw it coming that some day the USA would stop providing technology to China. Maybe the Chinese couldn't fathom that capitalists would not sell what others want to buy. Whatever the reason, China's new priority is to rapidly become self-sufficient in all the strategic areas in which it was happy to depend on the USA.
- Western media routinely assume that China has staged impressive progress in artificial intelligence and possibly even surpassed the USA or close to becoming the world leader. But first one has to define A.I. because the definition has never been so loose. Everything is now called A.I.: statistics is now AI, robotic arms are now AI, anything that is automated is now AI. If the dishwasher were invented today, it would be labeled AI. So: the "world leader" in what, exactly? In robotic arms? In dishwashers? Depending on the definition, the answer can be that China has already become the world leader or that China is failing miserably. Almost all the theoretical progress comes from North America and Europe.
- Don't be fooled by the stunning number of patents. See ChinaPower's 2019 study "Are patents indicative of Chinese innovation?" The government plan "Made in China 2025" mandated an increase in the number of domestically filed patents, therefore all Chinese companies and universities rushed to file patents for just about anything. This is similar to when Mao or Castro ordered record productions of rice or sugar. Of course everybody starts producing rice and sugar, but it is not necessarily good news for agriculture. A better measure of innovation is the number of "triadic" patents (patents filed in the US, EU and Japan): then China ranks behind all the major economies and even behind tiny South Korea. The CNIPA (the Chinese agency) grants 3 types of patents: the one that correspond to the US patent is the "innovation" patent. Less than 20% of Chinese patents are "innovation" patents and 25% of these Chinese innovation patents in 2018 were actually filed by Western companies. Almost 90% of Chinese patents have been discarded within 5 years (compared with 15% of US patents) which means that the patent holders themselves didn't consider them valuable
- China is not the scientific and technological powerhouse that the Western media and some politicians describe in order to create panic. China is big and acts quickly: that is true. But China lags behind in every scientific field. This 2020 study ranked China #42, after all the major Western countries and even after countries like Costarica, Slovakia and Bahrain. How many Chinese scientists win a Nobel Prize for something that they invented? Zero. If you don't have good science, you'll always be behind. China is the best at applying other people's ideas, but not at discovering them: the ideas come from other countries. If Western countries screw up and don't implement their own inventions as fast as China does, that's a problem for those countries to solve, but China is generally 10-20 years behind the West in real innovation (not just application of innovation). In particular, the USA still dominates the semiconductor field: in 2019 US firms (mostly based in California) accounted for almost half of global sales: Chinese semiconductor firms accounted for only 5%. And the quality of Chinese semiconductors is much lower. Proof? Only Chinese firms buy Chinese semiconductors. It is telling that the USA bans firms like ZTE and Huawei from buying US semiconductors but China does not ban any US firm from buying Chinese semiconductors. In June 2018 Yadong Liu, the chief editor of China's Science and Technology Daily, delivered a famous presentation on the 35 key technologies in which China lags behind the USA (famous in China, ignored by the Western media): lithography machines, high-end chips, operating systems, radio frequency devices, iCLIP technology to bind proteins and RNA molecules for the development of drugs, high-end capacitor resistance (a not well known but very good example of how China still lags behind both Japan and Taiwan in electronic components), electronic computer-aided design, etc.
- After the ZTE and Huawei incidents, China is particularly motivated to develop its own chip industry. China's leading maker of chips is Semiconductor Manufacturing International Corporation (SMIC). As of 2020, SMIC is stuck with 14-nanometer chip technology, while TSMC in Taiwan and Samsung in Korea are using machines by Dutch firm ASML to make 5 nanometer chips (respectively for Apple and Qualcomm). Can China catch up in the near future? There is a Cambridge University study titled "Technology Transfer Between the US, China and Taiwan" (2014) that gets it absolutely right when it says (i paraphrase): Taiwan coupled the global market and local capital to create a vibrant semiconductor industry; China coupled the local market and global capital to create a vibrant Internet industry. Both took two realities and combined them into a fast-growing lucrative industry. But the difference is that Taiwan did it in the old days when it was still feasible to catch up with the US hardware industry, whereas China did it in the 2000s when it was feasible to catch up with the US software industry, not with the hardware industry. Taiwan did it by acquiring US firms: UMC grew out of ITRI's acquisition of RCA in 1979 and TSMC started as a joint-venture with Philips in 1987. It is hard to imagine that the USA would tolerate similar operations today by the Chinese.
Taiwan and South Korea also acquired know-how thanks to the "fabless" model that became popular in the USA during the 1980s. David Angel's "New Firm Formation in the Semiconductor Industry" (1990) estimated that between 1978 and 1987 the majority of semiconductor startups in the USA were fabless. They were happy to offsource the complex process technology and the huge investment in factories to Taiwan; and Taiwan was happy to receive that gift. Korea got a similar "gift" from Japanese firms. China is unlikely to receive the same gift from any of these countries. Taiwan also benefited from the DARPA project called MOSIS that "invented" the fabless chipmaker, whereas China will not be allowed to benefit from any Western government project.
China also suffers from a scarcity of human resources. China's university train legions of software engineers but not as many chip designers. And those chip designers have little practical experience. China needs time to build the many layers of equipment necessary to master the nanotechnology of a chip and the raise a generation of skilled designers.
Japanese firms ruled the semiconductor industry in 1990. Now there isn't any Japanese firm in the top 10 (Toshiba is the only one, but it has been acquired by a US group). If it is difficult for Japan to regain a top position in the chip industry, it is obviously even more difficult for China that doesn't have Japan's experience and equipment. On the other hand, China is probably looking at South Korea, whose semiconductor industry started later but now is the only one that (via Samsung and SK Hynix) competes with Silicon Valley and Taiwan.
- Chinese scientists are trained to "think small", so they have trouble thinking "big". Western scientists in both academic and industrial laboratories are trained to think big, to invent something that nobody has ever done, to create something that is believed to be impossible. A Chinese post-doc at Stanford told me that in China he was asked to make little improvements to an existing technology, while at Stanford he is asked to invent a completely new kind of that technology. Every time he told his Stanford project leader "i have an idea on how to improve the existing technology a little bit" the project leader sent him back to the drawing board with a "that's boring" and ignored his idea. In China he would be rewarded for any idea on how to improve the existing technology by a tiny bit.
- China used to be the cradle of creative interdisciplinary culture way before the Renaissance. One thousand years ago China was inventing everything and the West was copying. The West was lagging one or two centuries behind China. Therefore it is not impossible for China to become the most creative nation in the world, it is not genetically or culturally impossible. It is a political choice. China's politicians enact plans like "Made in China 2025" that basically means "Copied in China 2025". They don't enact plans like "Invent in China 2025".
- There aren't many lessons that China can learn from the success of Japan. China suffered from a long cultural and scientific stagnation under the Ming and Qing dynasties. Then it suffered the Japanese invasion, World War II, the civil war, Mao's cultural revolution. China's history is almost exactly the opposite of Japan's history. Japan launched a Westernization process and an industrialization program in the second half of the 19th century (Japan was the first Asian country to win a war against a European power, against Russia in 1905). Then came its imperial expansion (evil and eventually failed, but different from stagnation). Then US investment and influence after the war. In the last 150 years, Japan's history is almost exactly the opposite of China's.
- The future of innovation in a world dominated by China would probably be one of no real innovation. China is becoming powerful by adopting and refining Western inventions. If this China comes to rule the world, there will be mo more progress. We will indeed return to the situation pre-1900 when China had the largest GDP but virtually no science. Progress is in the Western genes, stability is in the genes of today's communist China. China dominating the world economy would probably bring to an end the accelerating progress that started with the electrical revolution of a century ago. China is inherently a static system that adopts new technology only insofar as it allows it to reach stability. There is a tendency in Chinese politics to maintain the status quo. One could argue that this syndrome originated back in the days when foreigners (Europeans, Japanese, US) were bringing modern technology to Qing China, the so-called "century of humiliations" that China should really rename "the century of modernization".
- Chinese scientists are moving back to China and the West should be worried. China already graduates more STEM students than the whole West combined. Traditionally, many of the brightest students would study in Western universities and then find employment in Western firms. This is changing. China has financial programs that lure Chinese scientists and engineers back to China. Some are lured back simply by the fact that the Chinese market has become one of the largest in the world (the largest for ecommerce, electrical vehicles and several other technologies). Those who studied in the USA are also discouraged by the increasingly hostile and humiliating immigration laws of the USA and by the racism of the Trump administration (that, for example, calls covid "the China virus"). This is a big gift to China that in the past struggled to lure back the brightest students. China is also trying to make its educational system more similar to the Western one, so that its students don't feel that they miss something if they return to study in China. For example, Duke University is teaching lecturers at Chinese university how to teach students the US way. After the chronic chaos in the USA and Europe, notably the election of a senile corrupt idiot like Trump in the USA and the clownish Brexit referendum in Britain, Chinese all over the world are also skeptic that the democratic liberal states can match the success of China's one-party system. In this already negative scenario, the discouraging immigration policies of the USA are often the proverbial "last straw".
- The single biggest mistake that the USA has made under its Russian-appointed president Donald Trump when it comes to China could be about decoupling not the two economies (which remain very coupled) but the two scientific communities. He has acted to separate the scientific communities of the USA and of China. He has launched a sort of witch hunt against the Chinese scientists, engineers and students who are in the USA, fearing that they will transfer ("steal") know-how to China. See for example US revokes visas for 1,000 Chinese students deemed security risk. There is an obvious precedent. It is hard to believe it today, but one century ago the leading country in science and engineering was Germany. It was Germans who invented quantum mechanics, relativity, the electrical motor, the car and countless electrical devices. German, not English, was the language of physics and mathematics. Then Germany became suspicious of foreigners and began to restrict how much foreigners could learn from its universities. The result? Soon the leading countries in science and engineers were its enemies: Britain and the USA. Britain and the USA simply "decoupled" and invested in their own laboratories. Even the Soviet Union advanced to the point of developing a nuclear weapon (which Germany never achieved during World War II) and sending an astronaut into space (while German rockets largely failed). When the leading country decides to curtail access to its own know-how, it indirectly promotes an odd theory: that the scientists and engineers of the other countries are somehow too dumb to catch up. They are not. British and US scientists were as smart as the Germans. They just didn't have the same tradition, but they created it within a few years. The Chinese scientists are as smart as the US scientists: they just don't have the same tradition, but they will create it within a few years. The more the US restricts access to know-how, the stronger the motivation for every Chinese scientist (whether directed by its government or not) to catch up with US science.
- Membership in the Communist Party is a pure formality. Many students join it when they graduate because it is required for their profession. You cannot work for media or for a bank in China if you are not a member. Beware of politicians like Guy Reschenthaler (R-PA) who is trying to pass a law banning members of the Chinese Communist Party from entering the USA: that would be a godsend to the Chinese regime that has been trying for years to stem the exodus of its citizens. In particular, many top Chinese scientists and engineers got their membership in the Communist Party while they were in high school: the top students of many high schools are encouraged to join the communist party (in return for subsidies and preferred treatment) because the high school wants to show that the top students are also good communists. All these scientists and engineers who became members during their high-school years would be banned by Reschenthaler from entering the USA, a gift of incalculable value to the Chinese Communist Party. Don't be misled by the rhetoric: Reschenthaler is de facto (whether paid or not) a lobbyist for the Chinese Communist Party. (See his 2020 proposal).
- Immigration is an engine of innovation that has proven particularly beneficial to the USA. When people ask me who will win between the USA and China, i always reply that the USA has the big advantage of immigrants from all over the world. Many places of the USA (particularly California and Boston) attract creative minds from all over the world. That translates into quality of innovation that still eludes China. China is currently incapable of attracting those creative minds, and its trend towards blocking more and more of the Internet is making it less and less appealing to foreigners, especially young educated ones. How many Indians, Germans, Russians and so are trying to emigrate to China? How many are trying to emigrate to the USA, including millions of young Chinese students and engineers? So far that has been the USA's big advantage over China, and over any other country of the world. China has a much bigger population and therefore its GDP will inevitably surpass the USA's GDP, and that economic power will translate into increased geopolitical power. But that will not matter much if the USA remains the engine of technological and scientific creativity. The future of the USA as a world power will depend on whether it will keep attracting millions of immigrants, both the educated ones and the ones who fill the low-level jobs.
- China grew rapidly with no rule of law and weak institutions. Conventional wisdom is that a country needs the rule of law and strong institutions to grow rapidly. China has defied conventional wisdom for 40 years. This has generated the view in China that exactly the opposite is true. Look at what happened to the Soviet Union when it tried to become democratic: it disintegrated. China, by the way, learned from other authoritarian regimes that were very successful: Singapore, Taiwan and South Korea.
- The bestselling book for the communist elite is Alexis de Tocqueville's "The Old Regime and the Revolution" (1856). It describes how the "old regime" of the French monarchy collapsed when it started giving concessions to the revolutionaries.
- The most important lesson that the Chinese leaders have learned from modern history is the disintegration of the Soviet Union: they see it as a lesson about what happens if you try to democratize. The Soviet Union disintegrated and then Russia descended into chaos. Today Russia has a GDP smaller than Texas. The Chinese leaders are well aware that Russia used to have a much bigger GDP than China and used to be much ahead of China in science and technology. The country that dismissed communism is no longer a leader in science and technology. The country that is still ruled by a communist party has become a world leader in science and technology. This fact, often neglected by Western analysts, is obvious to the Chinese leaders.
- There is an unusual degree of accountability in the Chinese government. The politicians are accountable to the party. A politician that fails to deliver gets demoted and sometimes loses his entire wealth. This has happened to many officials at all levels of government, from municipal level to provincial level (most recently to the top officials of Hubei province for the mishandling of the covid pandemic). It would be nice if there was some accountability also for Western politicians. For example, it is hard to name one accomplishment of the George W Bush government: the September 11 terrorist attacks, two pointless wars (both lost, with the Taliban now controlling most of Afghanistan and Iraq basically become an Iranian protectorate), the Katrina disaster, the financial crisis of 2007... And, yet, nobody was ever punished. George W Bush is still a wealthy man with a huge Texas ranch. Condoleezza Rice is professor at Stanford and the director of the Hoover Institution.
- There is a fundamental difference between Putin and Xi that Western media don't appreciate. Putin created his political party: the party is a manifestation of Putin's power. Xi was created by the Chinese Communist Party: Xi is a manifestation of the party's power. Xi is accountable to those who appointed him, unlike Putin who is accountable to nobody.
- China's Communist Party is no longer a Marxist-Leninist party but it has adopted an ideology of sort: that "economic rights" prevail over political rights. This can be dated back to the days when Deng said that it doesn't matter whether the cat is white or black as long as it catches the mouse: it's about catching the mouse, not about the color of the cat. The Chinese Communist Party never promised free elections or free speech, but does promise a prosperous future.
- China's young people of 2020 are very different from the young people of the Tiannamen Square generation. Back then they wished for democratic reforms, more or less influenced by the fall of the Berlin Wall, the disintegration of the Soviet Union, and the democratization of their neighbors (South Korea, Japan and Taiwan). Today's young Chinese have been raised in an endless economic boom, and are reminded daily of the giant progress that China has made to become a world economic power... under a socialist regime. Many of them are aware that China achieved this thanks to the benevolence of Western benefactors (that granted China trading privileges and tolerated China's unfair practices like banning most of the USA's digital giants). But others only see China's own merits. And even the former join in feeling part of a patriotic nationalist mobilization to make China great again.
- Chinese media delight in showing Trump's clownish behavior and declarations. Some of the top-shared videos in China are simply videos of what Trump said. Chinese propaganda doesn't need to invent fake news: all it has to do is show real Trump press conferences. It proves the point that Western democracies are a joke, and that the Chinese are lucky to have a socialist system.
- Way before Trump copied him, China's president Xi presented himself as a wartime president: he led the war against covid-19. By winning that war, he demonstrated to his subjects the superiority of the socialist system over the democratic system.
- China is no less fragmented than Europe, and, historically, its provinces have taken their own decisions about their economic development. The view of the current leadership is that China's growth is largely the byproduct of a centralization effort that started timidly with Deng (after the chaos of Mao's Cultural Revolution) and has accelerated under Xi. This has both practical and historical reasons. Historically, Chinese empires have collapsed and fragmented into independent kingdoms, and the central government has a strong motivation to avoid that history repeats itself. Practically, it is the central planning of the government that has launched the various waves of reforms, from Deng's reforms to Xi's "Made in China 2025"; and, so far, successfully.
- Xi's policy is an attempt to combine three distinct groups and traditions: the neo-Maoists who still believe in Marxism-Leninism and are even nostalgic about Mao's Cultural Revolution; the nationalists who uphold Chinese traditional culture; and the prosperity-focused reformists in the tradition of Deng Xiaoping. Xi represents a synthesis of these three currents and the current composition of the ruling Politburo Standing Committee is precisely an expression of this synthesis. One of Xi's very first speeches in January 2013 emphasized that there was no difference between the 1949-78 period of Mao's socialism and the post-1978 period of reform started by Deng, an argument that sounds like a convoluted lawyer's harangue trying to twist blatant evidence to the contrary (here is an excerpt and translation).
- Those who think that Xi is a new Mao have not paid attention to his speeches: Xi frequently quotes classical Chinese culture, including classics of Daoism, Legalism and Confucianism. These were all anathema to Mao, who saw them as a mix of ignorant superstition and feudal backwardness, and clearly enemies of Marxism-Leninism. Just like in Russia, the revival of traditional culture has great popular appeal in China. Unlike in Russia, this revival does not extend to religion: Putin respects the Russian Orthodox Church, Xi persecutes all religions. Temples are tolerated as symbols of ancient Chinese wisdom (and as money-making tourist traps), not as repositories of divinely-revealed knowledge. Xi's pseudo-Confucianism is still materialist like Marxism-Leninism and places the party and the state as absolute authorities, above gods.
- The Chinese perception is that the US leadership is less competent than the Chinese leadership, and that the US system is less effective than the Chinese system in fighting an emergency such as climate change or a pandemic (or simply crime). This is sincerely believed by politicians and widely believed among the general public. The same people would admit that in the past (in the past) the USA had great and competent politicians, basically up to World War II (in which the USA fought alongside China against Japan).
- Confidence in China's socialism has increased among the elite because the perception in China is that the Chinese system is working for China better than the US system is working for the USA. Why follow the example of the loser?
- China is not the first totalitarian regime that manages to develop sophisticated technology and science. People forget that the first astronaut was a Russian. Russia developed its own nuclear weapons, with no help from the West. Japan, Taiwan and South Korea were not democratic when they began their astronomical rise in science and technology. It is a myth that only a free democratic society can excel in science and technology.
- The Chinese government tolerates popular protests and even benefits from them. There are thousands of protests every year in China. But the protests in China are never against the central government: they are about local issues. The central government gets involved just like the king of feudal Europe used to get involved in a dispute: as a sort of wise, impartial judge. Beijing is viewed by the people of the provinces as the savior, the one who can come and punish the local officials and restore justice. Therefore protests tend to strengthen the central government.
- China is less communist than most Western democracies. Notably, health care is famously horrible and horribly expensive in the USA, but China has a very similar system: most health care is privatized (although not as expensive as in the USA). The countries that need socialized medicine include, ironically, communist China. During its 40 years of rapid economic development, China forgot to build an adequate health care system. We are used to discussions about the embarrassing state of the health care system in the USA, but China's is in even worse conditions. Ironically for a communist country, it is especially the proletarian population that is left unprotected. According to 2019 government data, only 22% of migrant workers enjoy basic medical insurance, and it's really basic. According to 2019 data from the World Health Organization, China spends only $323 per capita on health care, about half what Belarus and Bulgaria spend. Since launching the economic reforms in the late 1970s, China has invested mostly in buildings, bridges, roads, power plants and weapons. It is de facto an unfinished state, with large holes in the welfare that it provides to its citizens, especially to the poorest ones. Ironically, the majority of the population was receiving better health care in the old days, when China was one of the poorest countries in the world (possibly the poorest): health care was provided (for free) by an army of so-called "barefoot doctors". Back then every citizen was guaranteed treatment and medicines. Today, rich Chinese can afford top-quality health care, but poor Chinese get almost no health care. Furthermore, regulations for food and drugs are non-existent or loosely enforced, resulting in several scandals that would have brought down governments had they happened in Western countries: the lead paint scandal of 2007, the melamine milk scandal of 2008, the "gutter oil" scandal of 2011, the fake vaccine scandals of 2018 and 2019, and so on. The covid-19 epidemic didn't happen in a vacuum: it happened in a socioeconomic context that made it likely to happen.
- Another social problem is related to an apparent contradiction: China wants rural workers to move to cities, but cities make it difficult for them to use the local services. China's residency policy means that hundreds of millions of citizens do not have health care and cannot send children to good schools. In order to use the social services of a city, people must have residency papers in that city, but 40% of the population in coastal cities have no residency rights, which means that they can't use the hospitals and can't send the children to the city's schools. Nor can they buy a "house for living", the kind of housing whose prices are set by the government and that is leased for 70 years.
- So far the government's legitimacy has come from infrastructure investment, which has generated jobs and improved the quality of life, but it can't build infrastructure forever and its legitimacy won't come from growth rate anymore: it will be measured on China's welfare system: pensions, health care, etc; and property rights.
- China's other big lurking problem is income inequality. Both the USA and China have an embarrassing Gini coefficient (that measures income inequality), pretty much the same number. The difference is that the USA has one party and several lobbies that support income inequality and consider it the inevitable outcome of a free system. China, however, has only one party but two social classes: the rich and the middle class, and the gap between the two is staggering. There is noone advocating for income inequality in China, noone providing a rational explanation for why it should exist, while there is clearly a reference for eliminating it: the very foundation and history of the Chinese Communist Party. Hence this is a national issue that may become a rallying cry for one billion people.
- In general, China's challenge is to escape the "middle-income trap". Since the establishment of the World Bank, many developing countries have reached the middle-income status but only one that has more than 30 million people managed to enter the high-income tier: South Korea. Once a country reaches the middle-income tier, its citizens begin to expect and demand services that cost money and slow down growth. This is especially true in urbanized societies, that tend to have more costly demands than the rural ones.
- The USA does not believe in big government and believes instead in a free market, as little regulated as possible: China believes that the free market must be heavily regulated and that big government is the way to create a vibrant and properly regulated free market. That highly regulated "free" market has de facto replaced Marx's communism. The ideologues in the Chinese Communist Party believe that the new technologies make Marxist utopia possible, hence any means to develop those technologies is justified.
- The West sometimes exaggerates the importance of the Communist Party in China, and sometimes forgets it. The West, in particular, forgets that the biggest economic miracle of the last century (and perhaps of all centuries) has been the staggering boom of China, a country run by a communist party. The Western politicians that inveigh against "big government" always forget to mention that China is the most obvious example of "big government", and it has recorded the most spectacular economic boom in history.
- The West has predicted a crisis in China for many years. That has never materialized. But is the West ready if such a crisis occus? What will happen worldwide if China enters a crisis similar to the collapse of the Soviet Union? or even just like the economic crisis of Russia under Yeltsin? The consequences are hard to estimate, but one feels that noone has ever planned for it. If it comes, the West could be hurt as much as China itself because China is not Russia: China is the largest economy in the world whereas Russia was and is a small economy, mostly a seller of natural resources. The West should be careful to support regime change in China. The collapse of communist regimes has often led to authoritarian, nationalist, xenophobic regimes: in Russia (Putin), in Poland, and in Hungary.
- In 2010, Standard Chartered predicted that China's economy would overtake the US economy by 2020, and this remained the consensus among many reputable economists and political scientists even as recently as three years ago; but this is based on the belief that China's numbers are correct. According to the report "A Forensic Examination of China's National Accounts" of March 2019, compiled by Chang-Tai Hsieh of the University of Chicago and Zheng Song of the Chinese University of Hong Kong, China's official GDP data are about 16% larger than reality, and real GDP growth is consistently overstated by 2%.
- China's government doesn't necessarily know the truth about the economy (and everything else). China's bureaucracy is a meritocracy. Officials get promoted if they meet specific economic targets. Therefore they have a vested interest in exaggerating what they have achieved. For example, data about production (the data that eventually make up the GDP), are fudged from the bottom, not from the top. In the Soviet Union it was the top that fudged the numbers to make people believe that the economy so doing well. In China the local officials are the ones who have the strongest motivation to fudge the numbers. As one goes up the pyramid, the numbers get improved at each step. By comparison, the motivation in the USA is exactly the opposite: local governments tend to exaggerate their problems because they goal is to obtain aid from state and federal governments. When the government in Beijing assembles the data, it tends to get what it had asked for, which is not necessarily what happened. Therefore, Beijing doesn't really know the real numbers. This is true also in non-economic fields. For example, it probably took a month for Beijing to find out what was really happening in Hubei province with the covid epidemic: the motivation for the local officials was to hide the problem, since they get promoted only if they send good news to Beijing. Eventually, Beijing had to sent its own trusted expert and then it fired the local officials. People tell the national leader what he wants to hear, and then bad decisions are made from those premises. For example, Xi appointed a commission that is in charge of fighting corruption but also to punish officials who don't deliver according to expectations: no official wants to tell Xi that expectations were not met.
(Incidentally, most likely the cover-up in Wuhan about the covid pandemic has the same cause: the provincial officials didn't want to relay to Beijing the bad news that their province was the epicenter of a new SARS-like epidemic. Western analysts underestimate the political crisis precipitated by the SARS epidemic of 2002-03, possibly the most severe since the Tiananmen Square massacre of 1989. China created an apparatus to deal with pandemics, and that apparatus worked wonders for the H1N1 epidemic of 2009 and the avian flu H7N9 of 2013. The Hubei officials were probably terrified of the consequences of telling Beijing that a severe virus had appeared in their province).
- China's unfair trade boils down to its protection of its "champions". It protects companies like Baidu, Tencent, Alibaba, Huawei and Didi from foreign competition in China. However, it would be wrong to imagine that the Chinese government picks a winner. These are companies that survived ferocious competition inside China. One can view China as a giant free-trade continent of 1.4 billion people. There is mostly free competition within China, and often it is more brutal than anything that Westerners have ever experienced. The firms that emerge as the national leaders have proven to be truly the best. Only then does the government pick that company as its international champion and defend it from foreign competition.
- China has "swarm innovation", to use a term coined by George Yip: hundreds of firms innovating in the same market. The moment someone discovers a lucrative market, hundreds of competitors pop up all over China, each one offering a copy of the original idea with a little variation that makes it unique and more useful (or cheaper). It is difficult for a Chinese company to become a monopoly. Alibaba does have competitors that grew very rapidly. Huawei has competitors that grew very rapidly. On the other hand, in the USA there are virtually no competitors for Amazon and Apple.
- Chinese entrepreneurial culture is very different from the Western one. Too often the success of China in developing its economy is credited by Western analysts to the government and not enough credit is given to the Chinese entrepreneurial class, but the latter are truly the ones that "made it happen". There were no Chinese entrepreneurs under Mao, but 44 years later Chinese entrepreneurs have created millions of enterprises, and some of them have become world leaders. If the engineer is the secret to the success of Silicon Valley, the entrepreneur is the secret to the success of China. First of all, Chinese entrepreneurs are extremely good at learning from foreigners. Something similar happened in Taiwan: at first the local firms simply make components for foreign firms; then they learn to make the same things, but cheaper; then they learn how to assemble them to make products that mimic foreign products but are tailored to the domestic market; then they learn how to make products that directly compete against foreign products in foreign markets. In China all of this happened in 44 years. That's the story of Haier (refrigerators and A/C), Goodbaby (strollers), Yuwell, Neusoft and Mindray (medical devices), DJI (aerial drones), Comac (C919 passenger jet), CRRC (highspeed trains) and many makers of electrical vehicles. The bigger Chinese companies also used other methods: acquire foreign companies for know-how (IBM's PC division, Volvo, Kuka) and setup labs in foreign countries. This is not any different than what many European and east Asian corporations have done over the same period of time. That's the learning side. Then there's the implementation side. Chinese entrepreneurs invest almost all their cash into R&D. They have to: competition is ferocious in China. Any new idea is immediately copied by hundreds of copycats. All of them can quickly hire dozens of bright engineers and create a product in a few weeks.
Their R&D is almost never "R" and almost entirely "D": the Chinese entrepreneur aims for incremental innovation, not radical revolution. This also means that Chinese firms are doomed to work around inventions coming from other countries: there is noone trying to invent something that is completely new.
The product is generally designed by a large team of engineers: engineers are cheaper than in the West and a Chinese firm can assemble a large team and still make it cost-effective.
Chinese firms are also more likely to abort projects and start new ones: again, the cost of failure is not as high as in Western firms. Therefore Chinese firms exhibit faster trial-and-error learning than Western ones.
The CEO is the key person of a firm. The CEO is the main driving force behind a firm's products. The CEO is much more important than process. This is somewhat true also in Silicon Valley but the contrast with Europe, where process rules, could not be starker.
The "Great Firewall of China" (that bans most Western websites providing free information) is an obstacle to R&D because it makes it difficult for engineers to find out the latest technology trends, but there is an easy way to work around it for Chinese firms: set up a research lab in Hong Kong, where engineers can access the whole Internet.
Finally, all CEOs have close ties to the government. Many firms have an official of the Communist Party on the board of directors. Westerners think that the Communist Party must interfere in the R&D but instead the purpose is often the reverse: the firm is trying to get favors from the government. Party interference in managing a firm is not an obstacle but an aid. It can be compared to the role of a venture capitalist in Silicon Valley.
In reality, the influence of the Communist Party is limited. Chinese enterpreneurs excel at finding loopholes in every law (as the adage goes, "the mountain is high and the emperor is far away"). Both entrepreneurs and local officials
find innovative ways to get around national regulations. Apparent contradictions (like the boom of Bitcoin in a country where Bitcoin is officially banned) are due to the fact that the Chinese are as good at obeying the orders as at finding ways around it.
Whereas the CEOs of US corporations lobby forcefully to oppose some government decisions, Chinese entrepreneurs see business opportunities in every government decision. A great example is climate science. One day the Chinese government decided to become a champion of "greentech" and Chinese entrepreneurs flocked to that field. It has become a major growth driver in China while it is still controversial in the USA. That government decision created a new market. Thousands of Chinese firms shifted their focus to greentech and some have become world leaders and export their products to the international markets. It's not that Chinese enterpreneurs are concerned about climate change: they are interested in making money. By 2019, there were already 2.58 million battery electric vehicles (BEVs) in China, compared to just 0.97 million in Europe, and 0.88 million in the USA, according to the International Energy Agency. Alibaba, the ecommerce giant, backed the electric car start-up Xpeng, which in 2020 launched a 700-km range car (equipped with Nvidia's autonomous driving software) and demonstrated a flying electrical vehicle. BYD Auto, which is 25% owned by Warren Buffett's Berkshire Hathaway, the luxury sedan Han. The high-end EP9 hits 100 km/h in 2.7 seconds and reach a top speed of over 320 km/h, and costs more than a Ferrari.
- China is still largely a communist country. First of all, the state owns all the land. Citizens cannot "buy" a home: they can only "lease" it (usually for 70 years). Secondly, the state sector is still dominates the Chinese economy. Despite the much hyped success stories of Alibaba, Huawei, Baidu, Tencent, etc, China has more than 100,000 state-owned enterprises. The Chinese Communist Party has always been consistent in arguing that state ownership is the foundation of China's "socialist market economy" (as it was defined by the third plenum of the 18th Communist Party central committee in November 2013). In 2018 the assets of state-owned nonfinancial firms (according to China's State Council) were about 230% of China's GDP (210 trillion RMBs). The Fortune Global 500 lists a record 109 Chinese companies but only 15% of them are privately owned. When Xi became president, Chinese banks were lending approximately half to state companies and half to private companies. In 2014, instead, more than 60% went to state companies; and by 2016 state companies received 83% of bank loans. The revival of state firms is often attributed to the rise of Xi and the hard-liners (see for example Nick Lardy's book "The State Strikes Back: The End of Economic Reform in China?"), but in reality it began during the Great Recession of the West (the financial crisis of 2007): the total assets of nonfinancial state-owned enterprises grew only 1.6 times from 1998 to 2007 but 4.3 times from 2007 to 2017. The revival of state firms has more to do with China's rising skepticism towards Western economic models than with Xi's ideological revisionism. Some reforms that started in 1997 (officially meant to reconcile socialist principles with the market economy) outlined the guidelines for which companies should remain state-owned: state firms must be profitable and financially stable; state firms must operate in areas important for China's national security (like defense, energy, telecom, aviation and railways); state firms must contribute to China's own innovation. Notably in 2003 China created the State-owned Asset Supervision and Administration Commission (SASAC) to reduce the number of state firms through privatisation, asset sales, and mergers & acquisitions (the "zhuada fangxiao" or "Grasp the Large and Let Go of the Small" policy enacted in 1999 by the fourth plenum of the Communist Party's central committee). SASAC was meant to own all the state-owned firms (except banks, owned by Central Huijin) but some of them have remained under the control of central government ministries. The general scheme is that SASAC consolidates a number of state-owned firms into a holding and then spins off a profitable entity that qualifies for the stock exchange (but the holding company always retains the controlling majority). For example, six state-owned steel manufacturers were consolidated in just one, BaoSteel, which is wholly owned by the Chinese central government, but one of its subsidiaries (Baoshan) is publicly listed on the Shanghai stock exchange although 75% owned by BaoSteel: investors are welcome to buy the 25%. In 2015 the Communist Party published a document titled "Guiding Opinions on Deepening the Reform of State-owned Enterprises" that divided state firms into "commercial" ones (who are allowed to compete freely with the private sector, like brick'n'mortar retail giant Bailian, that in 2012 was the biggest chain but now has lost to Suning) and "public service" ones (who are protected from private competition). Note that even the "public service" ones can compete with each other, as is the case of the telecoms (China Mobile, China Unicom and China Telecom). Both kinds obtain funding directly from the banks (which are all owned by the government) and, in my opinion, this is because China does not view the stock market as an efficient way to allocate resources (contrary to the view held in the West): China sees the stock market as a useful contributor but also as a hobby for speculators, a little bit like a casino (and don't forget that the stock market is something new in China, established only in 1993).
These reforms greatly improved the performance of state firms while retaining central control. Nonetheless the state sector is still underperforming compared with the private sector. Chinese economists talk of the "60/70/80/90" qualities of China's private sector: it contributes 60% of China's GDP, is responsible for 70% of innovation, it provides 80% of urban jobs and 90% of all new jobs. The private sector also accounts for 90% of exports (not including OBOR-related projects).
The common view in the West is that this contradiction is typical of a communist regime that is paranoid about retaining control. I think it has more to do with strictly business considerations (sorry but i see the Chinese regime more like a business enterprise than a political entity). China is still the "Wild West" when it comes to investment, intellectual property and regulatory frameworks. Furthermore, Xi's anti-corruption campaign, which mainly affected state-owned firms, has caused a significant turnover at management level. Within a few years, these state-owne companies will be better managed and more profitable and will exist in a better structured legal environment. In other words, they are likely to be worth a lot more.
There are also other reasons to like state-owned firms, although some of these may become obsolete soon in China: jumpstarting Western-quality capital-intensive industries requires large capital and a long-term vision, which are unlikely to come from the market; and state-owned firms provide social stability, for example by hiring excess labor when the market doesn't generate enough jobs.
Last but not least, don't forget that China has enjoyed an economic boom for almost 40 years despite (and, in some cases, thanks to) its reliance on state-owned enterprises: Western economists are convinced that state-owned firms are inefficient and unproductive, but China is entitled to disagree. China's motivation to change dramatically its economic model is very low: it's the West that needs to figure out what has been wrong with an economic model that has improved very little the median income of its citizens. You may not like the word "socialism" but the Chinese public loves it: it took one billion people out of poverty and created the longest economic boom in history.
- China is hugely inefficient. This may sound like a contradiction but so far the inefficiency has been offset by other factors and therefore not important. First of all, China still has several giant state monopolies in mining and manufacturing. State enterprises are not motivated by profit but by the GDP goals set by the Communist Party. Secondly, China's agriculture cannot be mechanized like in the USA because of the laws about land-owing: land is divided in small plots and the owner is not allowed to sell its plot because this would recreate the powerful landowners of the past that Mao's revolution took down. Small plots, however, cannot be made as efficient as large plots by mechanization. Cotton, for example, is more expensive in China than on the international markets (and sure enough China has to force its textile industry to buy expensive Chinese cotton otherwise nobody would). Thirdly, China's economy is very much built on debt. There has been a rapid accumulation of debt for wasteful projects. For example, China makes more steel and more cement than China will ever need.
(And this is the real reason why China "dumps" steel at very low prices to other countries like the USA: it makes it anyway so why not try to sell it abroad even if at a loss).
China has more office space than it will ever need. State enterprises spent money to build factories that are not needed (but increase GDP). Local governments spend money for public works and homes, only some of which are needed. The goal of meeting GDP forecasts by the party blinds officials from seeing the real needs and the real costs. However, you can also see it the other way around: while debt is bad for the US and European economies, debt means growth in China. Incidentally, China's debt ratio (considering all corporate, household and government debts) is 270% of GDP, pretty much the same as the USA's and Britain's.
- Have you seen the videos of new high-rise buildings with nobody around? Those newly-built ghost towns at the periphery of big cities where nobody seems to live? Surprise: almost all those apartments have actually been sold, and many of them were sold even before construction began. What the videos don't tell you is that Chinese families are buying as many homes as they can, even if they only need one. It's considered the only safe investment. An incredible number of families owns three homes but only uses one. That's in contrast with the USA where most families rent. Gan Li, director of the China Household Finance Survey, estimates that 22% of China's urban housing is vacant: that's about 50 million empty apartments. It sounds like a lot but it is exactly the same percentage of 2013. In July 2020 (while the USA was battling the covid pandemic) the city of Shenzhen, where home prices were skyrocketing again (a 12% increase from 2019), announced restrictions on home purchases in an attempt to curb speculation. The Chinese in general don't trust the stock market, that crashed in 2015 and never went back to all-time highs, and they don't trust their own currency. It would be difficult to explain the skyrocketing prices of Chinese homes if there were millions of empty apartments as those videos imply. Home prices will continue to rise because many cities are relaxing resident rules and allowing people from rural areas to acquire property. Hangzhou added 500,000 residents in 2019, a 5% increase. When new housing goes on sale online (sometimes hundreds of apartments at the same time), it gets sold in a few minutes. Despite the covid pandemic, in the year ended in June 2020, the Chinese invested about $1,4 trillion in housing. This is about ordinary families, sometimes with yearly incomes of less than $20,000: the rich ones don't buy in China. Wealthy Chinese investors can be found in every country of the world, from Africa to California.
Among ordinary households, the surge in private property has resulted in a debt surge. Under Mao there was no private property, so it is hard to judge whether people are overpaying the homes they buy. After all, Shanghai is still cheaper than Mumbai despite the fact that the average Chinese makes more money than the average Indian.
- China's residential real estate is a depreciating asset: you don't buy a home, you lease it. All property belongs to the state and the state only leases you a home. Usually the lease is for 70 years but some modern homes have a lease of only 40 years. While in theory, the state should renew all these leases for free, it has never happened yet, so we don't really know. Meanwhile, if one has to sell a home that has only a 62 or 54 year lease, that home is worth less than a brand new home that comes with a 70-year lease.
- China never made the RMB convertible. Despite its ambitions to make the RMB a world currency, China never made it convertible, which means that everybody (including its own citizens) prefer the US dollar. However, China has kept the RMB free from speculation.
- Human Rights
- The USA has consistently operated under the assumption that economic integration with China would bring regime change. The Chinese government, however, has consistently operated under the assumption that trade with the USA would strengthen its hold on power. There is an obvious disconnect there. China never assumed that economic integration with the USA would lead to regime change in the USA!
- It is not difficult to find precedents in history to China's current system. There have been many one-party capitalist systems (most famously Mussolini's and Hitler's) in which the government set long-term goals and picked national champions. China, however, is also more similar to the Soviet Union than it would like to be. The Soviet Union of the Breznev and post-Breznev era was a large economy and a military power, obsessed with controlling and censuring the flow of information, headed by a gerontocracy mostly focused on ensuring its own survival, pretending to defend an ideology (Marxist-Leninism) when in fact there was no ideology. The difference between China and the Soviet Union is the entrepreneurial spirit of the Chinese people: Deng realized that this was the one freedom that the party could grant without losing its power, and actually strengthening it.
- China and Russia have different ways to suppress dissent. China has a preventive approach: it uses technology to prevent dissent. It also uses reeducation camps, like the famous ones in Xinjiang to reeducate Muslims. Russia on the other hand lets dissidents speak and write, but then they are imprisoned and sometimes killed. Not a single dissident has been killed in China in recent times, and not a single Muslim has been killed in the reeducation camps (as far as we know). Many Chinese dissidents who have been sentenced to prison are actually under house arrest or hospitalized.
- The truly horrific story in China is that for decades the Chinese government condoned the practice of harvesting organs (such as livers and kidneys) from executed prisoners. The organs were then sold on the open market (see this Human Rights Watch report of 1994). Transplant tourism to China rose dramatically after China authorized the practice of harvesting organs from executed prisoners in 1984: the waiting time for a transplant in China is 7 or 10 days compared with months or years in the West. Westerners have always known that organs are easy to obtain in China, but didn't want to know where those organs are coming from. In 2015 the Chinese government officially banned this practice and announced that only voluntary donations of organs would be allowed. Alas, such voluntary donations skyrocketed in 2016 leading to suspicions that organs were still coming from prisoners. A study by Wendy Rogers at Macquarie University in Australia found that 86% of documented cases didn't state the provenance of the organs nor stated the cause of death of the donors. The numbers are even more suspicious if one considers the fact that the number of executions declined significantly in China after the year 2000, but the number of organs available for transplant increased significantly, leading to speculations that the organs were now coming from living prisoners (read an extensive survey here). Alas, much of the "evidence" comes from the religious cult Falun Gong and its emanations: the Epoch Times, the China Tribunal, and the International Coalition to End Transplant Abuse in China (ETAC); and these are not very credible sources.
- China increasingly manages to censor the rest of the world, including the USA and Europe. Mao's censorship was limited to China itself. Xi's censorship reaches every firm and every individual who wants to do business with China, today or tomorrow. When in 2017 Apple's CEO Tim Cook said that "Each country in the world decides their laws and their regulations" to justify Apple's presence in China, many wondered "what if a country mandated the internment and gasing of Jews"? One gets the feeling that many Western firms would gladly abide with any law in order to get access to a major market. American Airlines was threatened by China for listing Taiwan as an independent country, and American Airlines quickly complied listing Taiwan as a province of China (of course, Taiwan's nationalists would ask "why not list mainland China as a province of Taiwan instead"?) Mercedes-Benz apologized for quoting the Dalai Lama, one of the most respected people of our age. Marriott fired an employee for simply "liking" a tweet about Tibetan independence. China reacted to a tweet by Daryl Morey, the general manager of a basketball team who hailed Hong Kong's pro-democracy demonstrators, by banning all US basketball matches from its TV channels. The USA basketball association quickly apologized to China. Both Google and Apple remove apps from their marketplaces in certain countries in response to foreign government requests. For example, Apple removed 851 apps in the year between July 2018 and June 2019. But 85% of those removed apps followed a Chinese request: it is rare for other countries to make such a request, and generally those requests are related to pornography, gambling and criminal activities. In October 2019 Apple removed from its app store the app HKmap.live that enabled protesters in Hong Kong to track the police. Hollywood is in no hurry to make a movie about the Tiannamen Square massacre or the Dalai Lama: it would jeopardize a $10 billion market (barely second to the USA) and more importantly it would upset its main investors (there is hardly a movie made without Chinese investors). In any case the script would be remade by the Chinese censors because Hollywood scripts are routinely submitted for approval to Chinese authorities before they are made into movies. If you watched "2012" or "Gravity", you may have noticed that the savior is not the US cavalry (like in the old Western movies) but the Chinese government. Have you noticed that Richard Gere has disappeared from Hollywood movies? He is a close friend of the Dalai Lama and the Chinese censors let Hollywood know that any movie with Richard Gere would never be shown in China. The choice for all these Western firms is between self-censorship and loss of access to a lucrative market (soon to be the world's largest market). The "three Ts" (Tibet, Tiananmen and Taiwan) have become taboo on countless websites and even in many universities. China is clearly able to expand its censorship beyond its borders, all the way into the heart of Western democracies. The Soviet Union never even dreamed of achieving such a goal. The reason is simple: the profits of Western firms didn't depend on doing business with the Soviet Union. The reason we still can see videos of the Tianamen Square massacre or find pages on Chinese dissidents is simple: China made the mistake of banning Google. If Google were not banned, and in fact made a lot of money in China, Google too would probably bend to China's demands and remove the "three Ts" from its search engine and from YouTube. If Google's revenues depended on China, the whole world would quickly be brainwashed by Google itself according to the wishes of the Chinese Communist Party. Ditto if Wikipedia became a for-profit company and decided to get business from China: it would remove all articles deemed offensive to the Chinese regime. It is not the winner who writes the history, but the richest. Beware of the day when Google and Wikipedia start getting revenues from China: the history of the world will be rewritten based on what the Chinese Communist Party wants it to be. This is clearly a weakness of the democratic capitalist world that China has become very good at exploiting.
- The Chinese government is becoming an algorithmic government. The priority for the Chinese government is certainly to preserve its power: which government doesn't fight to preserve its power? The notion that the Chinese government needs more violence to control its people than Western democratic countries do is increasingly false: anti-government sentiment is minimal, given the success of the government in creating a vibrant economy. In theory the Chinese government doesn't need a lot of policing to control its people, which are mostly supporters of the current regime, but the Chinese government has the problem of controlling a vast empire with 1.4 billion people. Internal security is costing China more than China spends in weapons, warships and warplanes. There might be as many as one million people controlling the Chinese media alone. The good news for the Chinese government is that Chinese public opinion is almost entirely online, which makes it easy to control it with software. Besides public opinion, even monetary transactions are mostly done online: people pay with their phones, even when they buy a home. There are no cheques and no credit cards. This means that the government can use algorithms to find out the entire financial history of an individual. Hence China has a practical motivation to use algorithms to control its people. An algorithmic approach to policing public opinion certainly serves the goal of enforcing ideological purity but it also saves China a lot of money and it is more efficient.
- The "social credit score" introduced by some cities in 2014 (mostly misrepresented in the current sinophobic environment) is a reward and punishment mechanism that certainly includes some level of political discrimination but was originally designed and it is mostly used to enforce the laws. In fact, initially it wasn't even about criminal laws but simply about financial laws, aimed at punishing those who don't pay debts or bills. Many cities then expanded it to administrative laws, for example punishing those who disturb the public (eg with loud music), those who eat food in the subway, those who violate traffic rules, those who throw garbage in the street, and in general uncivilized behavior. (See for example this analysis). Crime has become so rare in China that most media don't even mention it but of course that is also included in the calculation of an individual's score. The punishment consists in becoming a second-class citizen: you may be denied train and airplane tickets, you may be denied access to the best hospitals, your children may be denied access to the best schools. Western democracies generally separate the financial system, the judicial system and the political system. Many people have a low credit score but no criminal record, and some with a criminal record have a high credit score; and everybody has the right to free speech. Western democracies do have ratings for criminal activities, and even for driving violations. Western democracies allow all sorts of ratings linked to a consumer's behavior: eBay, Airbnb and Uber are just some of the systems that rate their users. China is combining all these systems into one, and the big difference with the Western systems is that there is no free speech: what you say or write affects your social credit score. The other big difference with the "rating" systems of the West is that China's "social credit score" is also a reward system: good citizens can win rewards if they do something good for society that nobody forced them to do. That includes several volunteer services, taking care of disabled people and elderly people who are not relatives, donating blood, donating to charities for poor students, for contributing to noble causes. China has a tradition of advertising both bad and good behavior. For example, those who violated the one-child policy were publicly shamed (and then also punished financially, but first of all publicly shamed); while the evening news frequently present "heroes" who stand out for altruism or generosity. If you forget for a second that this system can also be used for political purposes, it is fundamentally a system to enforce the laws and to promote altruistic social behavior. As of now, there is no "national" system of social credit scores: it is a patchwork of pilot programs run by many cities. But the goal is to have a national system. Western analysis see it as a dangerous tool in the hands of a totalitarian government. On the other hand, many Chinese who emigrate to the USA see the rating systems of the USA (especially the "credit score") as outrageous: a private company, with no government oversight, can decide that you don't deserve credit and any bank may decide to trust that private company. There are three credit bureaus in the USA (Equifax, Experian, and TransUnion) and they are all for-profit corporations: they indirectly decide if you can have a credit card and even if you can buy a home.
- China's mass surveillance system (nicknamed "Skynet" by the West) was officially introduced to fight crime, and by all accounts it has succeeded in dramatically reducing crime in all major cities, but it can also be used by the government for spying on citizens. Initially it was simply a network of security cameras deployed massively around big cities, but then it was augmented with facial recognition technology. While the accuracy of the technology is debatable, in theory it can provide in a few seconds a detailed chronology of where a person has been spotted. In addition, since 2018 the police officers of several cities can wear special smartglasses equipped with facial recognition that help identify criminals. Skynet is a huge business opportunity for both large companies like Tencent, Huawei and ZTE, and for A.I. startups like SenseTime and Megvii.
- Since 2014 real names are required in order to write or upload videos to Chinese web sites. In Western countries anyone can defame you publicly on social media without having to disclose their real names and address. Since 2016 China mandates that all Internet companies store all data about Internet traffic, including all personal messages, transactions and location, for at least six months; which means that investigators can quickly and easily find out everything that an individual has done over the last six months, including travel and purchases (the Chinese buy almost everything either online or paying with the phone).
- The Chinese Communist Party has an ally in its campaign to create this mass surveillance system: Chinese public opinion. Monitoring and surveillance are widely popular in China. They enforce the "harmony" that traditionally Chinese aspire to.
- There is an argument that religion has historically been important to create social cohesion. Nazi Germany and the Soviet Union created social cohesion by coercing mass media. The new generation of personal digital media destroys social cohesion in free countries like the USA but creates even more cohesion in countries like China where information is strictly controlled. China's Communist Party is basically creating a new religion in order to create a new form of social cohesion.
- Foreigners living outside China are no longer immune from China's laws. the Draft Data Security Law published in July 2020 explicitly states that foreign organizations and individuals will be held liable if they engage in data activities which may harm China's national security. Since the law still has to take effect, nobody knows how far China will go to enforce "data activities" by foreigners living outside China, but it could be that in the future you won't be able to travel to China or do business with China if you wrote something in your country criticizing the Chinese government or simply recommended a book by the Dalai Lama.
- Hong Kong was returned by Britain to mainland China in 1997. Now it is pointless to complain about what China does with Hong Kong. If Britain had returned Hong Kong to Taiwan, things would be different. Britain obtained Hong Kong from China in 1842. It is debatable whether mainland China (Beijing) or Taiwan (Taipei) is the legitimate successor of that China: before Mao seized power in 1949, the whole world recognized Chiang Kai-shek as the legitimate ruler of China, and his successors are in Taipei, not Beijing. Britain chose mainland China (Beijing), and that was a consequence of the USA recognizing mainland China in 1979 as the sole legitimate government of China. Once you return Hong Kong to Beijing, Beijing rules.
(See also Doom and Gloom in Hong Kong)
- Hong Kong gets no sympathy from the rest of mainland China. From the point of view of China's public opinion, democracy in Hong Kong is simply chaos, polarization and anti-China sentiment. It is China's public opinion that demands action from the Chinese Communist Party. Given the spectacle of US and British politics, "democracy" has a bad reputation all over China (and not only China). Hong Kong wants something (democracy) that it never had under Britain and that (to most Chinese) is a really bad idea.
- Foreign Policy
- China so far has shown no ambition of becoming an ideological counterpart to the USA the way the Soviet Union was: it entertains friendly relationships with all regimes, whether they are democratic, fascist or communist. The Chinese government has repeatedly rejected similar accusations. "We have no intention of becoming another United States. China does not export ideology, and never interferes in other countries' internal affairs," Chinese Foreign Minister Wang Yi said earlier this month.
- Today's China is not the new Soviet Union. China does not have a worldwide ideological aim like the Soviet Union did, it is not funding a world revolution against capitalism and democracy like the Soviet Union did. China is happy to trade with the democracies of Europe, North America, Oceania and east Asia as well as with all sorts of authoritarian regimes (Russia, Turkey, Iran, Saudi Arabia, ...) China makes no ideological distinctions. After WWII, between 1945 and 1991, the world had two leaders, and every country of the world was pretty much forced to choose one or the other: Soviet Union or USA. China, instead, is not forcing Israel or Pakistan to choose one or the other. The Soviet Union was a military rival of the USA, China is an economic rival (and so far most economists think that the USA had benefited, not suffered, from China's economic growth). China's top priority is economic: obtain the natural resources that it needs for its economy, and generate revenues by exporting finished goods and its own minieral resources (notably the "rare earths" that are in high demand in the West). Ironically, it is US policies that tend to grow China's sphere of influence. For example, Trump's "maximum pressure" on Iran has convinced Iran to do something that even during the worst times of its isolation it never did: to become a satellite of China (they are about to sign a 25-year strategic partnership). For the first time, China will be a major player in the Middle East. China is not actively looking for engagements in the conflicts of other regions like Russia does in Syria, Lybia and Ukraine, but China doesn't mind filling the vacuums created by US blunders. We are heading towards a leader-less world than a world where China replaces the USA.
- China does not want to overthrow the democratic world. In fact, it needs the democratic world. China is aware that it cannot produce the kind of research that comes out of the free world. And China also needs to export to the democratic world (that tends to be a world of non-ideological consumers). China knows that an autocratic West would probably do what China is now doing to the West and, for example, it would stop buying from China and would protect its industries from Chinese competition. China has zero interest in turning the West into something similar to China. Most autocrats are nationalists, not apostles of free trade. China does not want to remake other countries in its own model, quite the opposite: China sees itself as an exception, not as an ideological rival. China's Communist Party is nationalist, not internationalist like the communist party of the Soviet Union was. Besides, whenever China tries to advance its model in other countries, it loses those countries.
- The Soviet Union had an ideological dogma: that democracy and capitalism must lose in order for communism to win. China doesn't see a zero-sum situation. On the contrary, Chinese socialism relies on a free market for its products.
- Unlike the Soviet Union, that controlled half of the world (half of the Arab world, half of Africa, half of Europe, half of southeast Asia, and even a country in the Americas) and that supported wars in multiple continents, China has neither installed frieendly dictators nor funded civil wars nor intervened militarily anywhere.
- What China certainly wants is to change the psychology of its masses. The Chinese were born and raised thinking of themselves as poor and weak citizens of the world. In November 2006 (way before Xi became president) the national television CCTV broadcast a 12-part documentary series titled "The Rise of the Great Powers" that explained how countries like Spain, Portugal, Holland, France, Britain, the Soviet Union and the USA became world empires. Note that it only features Western powers. Not a word about Mongols, Arabs, Indians and Chinese themselves. Ironically these were the very powers that Mao's propaganda condemned as aggressors and oppressors. Suddenly, the Chinese leaders wanted the Chinese people to learn from those aggressors and oppressors. That's when China started thinking like a great power, not just a third-world country. (As many critics noted, CCTV never produced a documentary on the decline of the great powers, which is instead a topic of great interest in the West).
- In 2017, during the congress of the Communist Party, Xi openly announced the beginning of a "new era" of "great-power diplomacy with Chinese characteristics", promising that China would "take an active part in leading the reform of the global governance system." This has been misinterpreted as a goal to assert a Soviet-style world ideology. In reality, China has refrained to discriminate friends and partners based on ideology. China's "great-power diplomacy" is about joining and influencing the international organizations that represent the world order. That project begins with the United Nations itself. While US politicians often dismiss the United Nations are a useless bureaucracy, China routinely sends its best and most experienced diplomats to the United Nations, and strives to get them appointed to important positions, like Liu Zhenmin, formerly China's vice minister for foreign affairs and now in charge of economic and social affairs at the United Nations. Chinese diplomats run the International Civil Aviation Organization, the International Telecommunication Union, the Food and Agriculture Organization, and the UN Industrial Development Organization.
- China now loves the west more than the east. West and East mean different things in China: Japan and America are to the east, the Middle East, Africa and Europe are to the west. The foreigners that originally humiliated the China were the Europeans and then the Japanese. The USA actually fought alongside the Chinese against Japan. China after Mao has mostly traded with the USA and measured itself after the USA, to the point of wanting to create Silicon Valleys everywhere. The USA's hostility towards China is causing China to reexamine that relationship. When a Chinese official looks east, he sees only trouble: Taiwan, Japan, the USA. When a Chinese official looks west, he sees friendlier faces: Turkey, Iran, Saudi Arabia, the European Union. No wonder, therefore, that China decided to invest massively in their OBOR (One Belt One Road) initiative. There is both a land and a maritime OBOR, but both point west. China is transferring its "ideology" to the west: the secret to growth is infrastructure, and therefore OBOR is mostly about building infrastructure in the perceived future trading partners of China. China can leverage the good reputation of its regime versus the messy EU and US democracies. China values stability more than human rights or anything else, and most of its partners tend to do the same. China thinks that the world can be stabilized by infrastructure, and many places of the world agree.
- China (and probably the whole of east Asia) wants to decouple from the USA. The USA is widely perceived as an incompetent and unreliable partner, and not only in China, but also in the whole of east Asia. China (and the whole of east Asia) is more interested in economics than in ideology. From a purely economic viewpoint, what matters is not the ideological bent of a partner, but stability. China likes trading partners that are predictable and stable, whether Saudi Arabia or Russia. The European Union is relatively stable, and so have been Turkey and Israel under their semi-dictators. The USA, on the other hand, is an absolute mess, frequently run by incompetent leaders and eternally paralyzed by political gridlock. China has little reason to continue a partnership with the USA that has become a burden. The USA is unpredictable. China likes predictable regimes because China likes long-term thinking. Compared with the wisdom of east Asian countries (that have lifted out of poverty a billion people in a few decades), the blunders of the USA have caused great damage to the world economy: first Saddam Hussein's weapons of mass destruction, then Great recession of 2007, and now Trump's mishandling of the epidemic, to name only the top three. China (and the whole of east Asia) wonders: "What next?" What other global problem will the USA cause?
- The Chinese Communist Party rarely criticized Trump before the covid pandemic. The CCP has instead hailed Trump as proof that China was right and the West was wrong: China has not become more democratic like the USA, whereas the USA has become less democratic like China. The CCP quotes Trump whenever he shows his admiration for dictators and whenever he shows his antipathy for the European democracies. China quoted Trump whenever he implied that he doesn't believe in universal rights, or at least he wouldn't fight for them. The media controlled by the CCP widely publicized the speech given in 2019 by Trump at the United Nations, that could have been written by a communist speechwriter: consciously or not, it used language typical of Chinese propaganda: "The future belongs to sovereign and independent nations who protect their citizens, respect their neighbors, and honor the differences that make each country special and unique." These are key concepts often repeated by the CCP when addressing foreign affairs. China also enjoys the fact that Trump never once criticized China's human-rights record: not a word about the Hong Kong protests, not a word about the reeducation camps in Xinjiang.
- From the point of view of public relations, Xi's foreign policy has been a disaster. It is hard to believe that just ten years ago most countries of the world viewed China as a benevolent power and welcomed its rise. In just a few years China has managed to upset an incredible number of countries in the world, for one reason or another. The One Belt One Road project has left behind a lot of hurt feelings. In some cases it has been complicit in the corruption scandals that rocked third-world governments (from Malaysia to Brazil). In some cases it has been viewed as an attemp to colonize poor countries (from Sri Lanka to Ecuador). The Muslim world is certainly not happy that Chine keeps a million Muslims of Xinjiang in concentration camps. China has picked multiple fights in the South China Sea, mainly with Vietnam and the Philippines. And now also the military confrontation with India, a country that has never had a positive view of China after China's annexation of Tibet and China's invasion of northern India in 1962.
The annexation of Tibet was not a detail: all the big rivers of the Indian subcontinent (India, Pakistan and Myanmar) originate from Tibet: the Indus, Ganges, Brahmaputra, Irrawaddy and Salween.
China has also causing a growing crisis in the Mekong basin: it has built 11 hydroelectric plants and dams on the Mekong that affect Thailand (mostly), Cambodia, Laos and Vietnam, all countries that now depend on China's benevolence for their water.
Ditto for Myanmar, whose two big rivers, the Irrawaddy and the Salween, also originate in China-controlled Tibet.
The result is that China is even less likely than before to ever forge the kind of alliances that have made the USA so powerful around the world. In 2019 the European Union declared China a "systemic rival" while signing a free trade agreement with Vietnam and Singapore and preparing a massive Regional Comprehensive Economic Partnership (RCEP) with the ASEAN countries.
- China's "alliance" with Russia is purely nominal, mostly to counterbalance the democratic West that constantly interferes with their internal politics. In reality, Russia and China compete for influence in Central Asia, formerly part of the Soviet Union, and it's likely that sooner or later there will be a Russian reaction to Central Asia increasingly becoming a Chinese sphere of influence: China is running its new Silk Road straight through that region. So far they managed to separate economic influence (where China prevails) and military influence (where Russia prevails), but China's huge economic power and expansionist ambitions are on a collision course with Russia: no Western power has ever "stolen" Russian influence from traditional Russian lands like China is doing now. This complacency towards China is perhaps Putin's biggest strategic mistake (there is never criticism of China in the Russian press, the way there is constant criticism of Europe and the USA) and it can only be explained as self-serving publicity: China proves to the Russian public opinion that a strong state is useful and even necessary to create and maintain prosperity and stability, whereas democracy causes the constant bickering and incompetence of the West.
- Incidentally, the contrast between China's and Russia's evolution in the last 40 years couldn't be more starking. Russia had a better educated population, and plenty of great scientists, writers and philosophers. China, coming out of Mao's Cultural Revolution, had destroyed whatever little science and culture was left in Mao's system. Russia has infinitely more natural resources than China, starting with energy. Russia was more industrialized than China throughout the existence of the Soviet Union (i.e. until 1991). China was wildly under-industrialized compared with the Soviet Union. Russia at the end of the Soviet Union was more urbanized and had more and better universities. China was a rural agricultural country until well into the 1990s. Last but not least, Russia had a much bigger GDP and highr GDP per capita. And, still, Russia's economy imploded and never really recovered. Russia didn't manage to recreate the scientific and cultural splendors of the past. On the other hand, poor and illiterate China managed to become the second economic power of the world, and to create a vast and ebullient scientific and engineering population.
- Russia tried a shock therapy under Yeltsin. China preferred gradualism (and started before Russia: Deng's reforms date from 1978, the Soviet Union collapsed in 1991). Russia tried to break with the past, China valued continuity (even when it sounded contradictory). Russia's shock therapy yielded a rapid implosion. China's gradualism yielded a speedy transition to the market economy.
- China studied the rise of Western powers but not their decline and fall. If and when China does study it, China will learn that winning a lot of small battles is usually a good way to create a lot of enemies in exchange for small territorial gains at a very high price. It is a prescription for decline, not rise.
- China's geopolitical influence is minimal and probably China doesn't even care that much to influence other country's politics (China cares for money, not ideology). But the political influence will come with the amount of trade. For example, one doesn't see Japan as a friend of China, but China is now Japan's largest trading partner, having replaced the USA. China has a trade deficit with Taiwan, Japan and South Korea and also with Australia, Saudi Arabia and Brazil. But the influence may go both ways. In 2019 the European Union was China's most important trading partner with a 15.4% share in total imports and exports, followed by the ASEAN block (Southeast Asia) with 14%, the USA with 11.8% and Japan with 6.9%. Since Britain left the EU and the USA started a trade war, and both the EU and the USA mishandled the covid pandemic, Southeast Asia became China's largest trade partner in the January-June 2020 period accounting for 14.7% of China's overall trade. In 2019 the USA, Japan, Germany, Russia, India, and Britain made up 30% of China's total trade; South Korea, Australia, Vietnam, Brazil, Singapore, Saudi Arabia, France, Canada, and Italy accounted for 24%. China and ASEAN enacted an updated free trade agreement in October 2019 (another side of effect of Trump having killed Obama's TPP).
- China's new Silk Roads (both the land one and the maritime one) are going to link Europe and Asia in a way that could make the Atlantic trade route (between Europe and the USA) a lot less relevant. The Atlantic trade route was for two centuries an engine of growth for both the USA and Europe. China's Silk Roads could decouple (at least partially) Europe from the USA.
- At the end of 2015 China launched and funded the Asian Infrastructure Investment Bank (AIIB) that has been widely viewed as China's attempt to create an alternative financial system in the world. It is very similar to the Asian Development Bank, based in Philippines and mostly funded by Japan, and very similar to the European Bank for Reconstruction and Development (EBRD), established in 1991 to aid ex-communist Eastern European countries. These are banks that finance infrastructure projects in developing countries. The AIIB has become China's tool to export to the rest of the world its own infrastructure-driven economic policy that has worked so well for China. China's motivation to launch its own international bank was actually simpler. China was demanding more voting rights in the International Monetary Fund since China was putting more money into it than others. Those voting rights would have come to the expense of the European countries. The USA under Obama actually backed China against the Europeans, but Congress stalled legislation that would have approved the change in the IMF and China lost its patience and decided to start a whole new bank. Obama decided not to join even though Australia, South Korea, Britain, Germany, France and Italy had already joined. The bank now has 103 members, which include even Canada, India, Russia, Turkey and Saudi Arabia (and virtually the whole of Europe). It was another big US mistake not to join the AIIB.
- China's new Silk Road, the OBOR (One Belt One Road) initiative, is turning into a diplomatic liability, widely referred to as "debt-trap diplomacy" by China's partners (victims?).
In 2019 Tanzania arrested four Chinese contractors and then suspended the Chinese construction of the port of Bagamoyo, which was conceived to become Africa's largest port: in 2013 Chinese officials had bribed the government of Tanzania to sign a contract that basically ceded that town to China the way China ceded Hong Kong to Britain a century earlier (a 99-year lease), which is precisely what happened in Sri Lanka (see below).
Kenya's govenment was equally bribed to sign a contract for China to build a railway between Kenya's capital Nairobi and the port of Mombasa (the largest in Africa) using Mombasa as collateral: if Kenya fails to repay China, China will be entitled to claim Mombasa.
China already controls the strategic African port of Djibouti because it owns most of Djibouti's public debt (about 85% of Djibouti's GDP).
China has already built the main ports of Namibia (Walvis Bay), of Pakistan (Gwadar), of Greece (Piraeus), and of Sri Lanka (Hambantota).
Sri Lanka's port was the first and it is still the biggest scandal tied to China's OBOR. In 2009 Sri Lanka's president Mahinda Rajapaksa began to borrow money from China to build a port in his home district. As usual, the contract assigned the project to a Chinese company that used Chinese workers. The port opened in 2010 but very few ships ever used it (there is a bigger port in nearby Colombo). In 2015 China spent a fortune to help Rajapaksa's reelection but his opponent Maithripala Sirisena won. The new government realized that Sri Lanka now had a huge debt towards China and at the end of 2017 was forced to surrender the port to erase some of the debt: a 99-year lease just like Hong Kong was. Sri Lanka still owes money to China because some debts still have to be repaid and the Rajapaksa government was bribed into accepting interest rates that were much higher than the market rates. The most recent elections (in 2019) were won by Gotabaya Rajapaksa, who appointed his brother (the corrupt president who created the whole mess) as prime minister and is planning a free-trade agreement with China: Sri Lanka has de facto become a Chinese colony.
Malaysia too owes money to China, thanks to overpriced contracts signed by former prime minister Najib Razak for a railway and a pipeline. The new prime minister Mahathir Mohamad suspended both projects that would bankrupt Malaysia (see Malaysia and Chinese colonialism).
In 2018 Bangladesh banned China from future contracts after Chinese officials tried to bribe their way into the ministry of roads.
China's OBOR contracts follow a standard scheme: China lends out billions of dollars for infrastructure projects like ports, railways and roads at inflated prices, and asks to be repaid at high interest rates while imposing as a condition that the project be assigned to Chinese firms employing Chinese workers. Unwritten in the contracts is the tacit agreement that some of the money will flow into the bank accounts of the officials who sign these contracts.
China's long arm has also reached Latin America. Initially welcome, China is now viewed with suspicion. China financed the construction of a controversial dam in Ecuador: by 2018, every top Ecuadorean official involved in the project (including a former vice president, a former minister and even the former anti-corruption czar) was accused of bribery and several of them were already in jail.
China has become Brazil's largest trading partner and its largest source of foreign investment. For example, in April 2015 China was the only country willing to lend money to Petrobras (Petroleo Brasileiro), the world's most indebted oil producer, after a continent-wide corruption scandal shut the company out of international bond markets. But now China is no longer viewed as a benefactor. Jair Bolsonaro, who became president in 2019, has been openly critic of China, and anti-China rhetoric is popular on social media. For example, in April 2020 Brazil's education minister Abraham Weintraub tweeted that covid-19 was part of China's "plan for world domination"; and the president'son, Eduardo, has referred to covid-19 as the "China virus."
- Another foreign-policy disaster has to do with Taiwan. Mainland China has always considered Taiwan a renegade province. The USA encouraged mainland China to think so when it recognized the principle of "one China" and accepted to replace Taiwan with mainland China in the United Nations. But the Taiwanese are increasingly hostile to the "one China" principle. Suppressing freedom in Hong Kong has caused Taiwan to re-elect a pro-independence president, Ing-wen Tsai, who has never once implied that Taiwan should ever become part of mainland China. Xi reacted by stating that he doesn't rule out using force to annex Taiwan. Taiwan reacted by pressuring the USA to patrol the South China Sea (which probably the USA had no intention of doing). China counter-reacted by repeatedly threatening Taiwan's airspace and territorial waters with both aircraft and warships. Taiwan's president is now planning to massively increase Taiwan's military spending in order to modernize its aircraft and submarines. If China will start shooting missiles at Taiwan, Taiwan may go nuclear. It is obvious to both China and Taiwan that the USA cannot defend Taiwan even if it wanted to. Taiwan has to be able to defend itself. Taiwan used to have a nuclear weapons program, started in 1967 at the Chung-Shan Institute of Science and Technology's Institute for Nuclear Energy Research, and in 1987 a defector to the USA (Hsien-yi Chang) leaked documents proving that the secret program was still underway. In theory this program was terminated in 1988 under pressure from the USA, but of course Taiwan could restart it at any time. (Trivia: in 1967 Taiwan was recognized at the United Nations as the legitimate government of China and had signed the non-proliferation treaty, so it was technically violating a treaty that it had signed, unlike Israel that never signed it). In May 2020 Li Zuocheng, China's chief of the joint staff and member of the central military commission, was quoted in official media saying: "We do not promise to abandon the use of force, and reserve the option to take all necessary measures, to stabilize and control the situation in the Taiwan Strait." It would be hard to believe that Taiwan has not learned from North Korea, a rogue regime that nonetheless remains in power and independent because it has nuclear weapons; or that it has not learned from Israel, a tiny country surrounded by enemies but safe precisely thanks to its nuclear arsenal.
- The USA routinely assumes that China's current president Xi is the one who came up with China's new aggressive stance. The USA underestimates the impact of the financial crisis of 2007 (the Great Recession). That crisis was widely viewed in China as proof that the USA is not such a big country after all, and it is generally ruled by incompetent and corrupt leaders. The farce of Brexit reinforced that impression. And Trump, an unstable, dumb and incompetent man, looks like the final proof of that theorem. The financial crisis of 2007 emboldened those in China who think that China had been shy for long enough and that it is time to take advantage of the decline of the West. Deng famously wrote on 4 June 1989: "Observe unfolding events with equanimity; remain secure in our stance; remain unperturbed in the face of challenges; hide our capacities and bide our time; avoid claiming leadership while advancing our cause" (which, in Chinese, it's six groups of four characters each). For 27 years it was self-evident that China had to be humble and clever. But 2007 radically altered this perception in many Chinese minds.
- Two key differences between the Soviet Union and China make China more vulnerable to naval blockades. Firstly, the Soviet Union was a mineral-rich power. China is less rich in minerals and, furthermore, it is consuming more resources than it has, and therefore has to import a lot of them, and not only oil. Secondly, the Soviet Union's economy did not depend on exports, whereas China's does. For these two reasons China depends on maritime trade in a way that the Soviet Union never did. As it stands today, the USA is in a position to blockade China's maritime trade with the whole world, both in the Indian and in the Pacific oceans. While this was true also for the Soviet Union, the difference is significant: the Soviet Union had little need for maritime trade, whereas China would collapse without it. Mutatis mutandis, China is in a situation that is eerily similar to the situation of Japan in the 1930s: Japan started World War II precisely to obtain access to mineral resources such as oil and iron when the USA tried to block such access.
- Japan has been important to contain China's naval expansion. Japan is a natural air carrier off the coast of China. During the Cold War it deterred the naval expansion of the Soviet Union and now it deters the naval expansion of China. Japan is the reason that the Soviet Union never became a Pacific power, and Japan is the reason that China remains primarily a land power. Imagine a map without Japan: China would be able to expand in the Pacific Ocean all the way to Hawaii; precisely what Japan did in World War II.
- The strategic importance of Taiwan for China is obvious: if China gained Taiwan, it would have its own air carrier in the Pacific Ocean. Not enough to avoid the various straits controlled by the USA but enough to gain an offensive capability that today it doesn't have.
- As many military strategists have argued over the years, a shrinking military gap encourages the rival to invest more in bridging the gap: if the USA has an overwhelming power over China, the doves prevail in China because the regime views the gap as impossible to bridge, hence better invest in domestic infrastructure; but if the gap shrinks, the hawks prevail because the regime can see the day that China will reach parity.
- History lesson: China's old and new imperialism.
China is an empire. Chinese historians like to talk (and disparage) the Western colonial empires but rarely admit that China itself was an empire. It was not a maritime empire like the British and the French empires, rather a land empire like Russia. While Britain and France were expanding by colonizing distant lands in Africa, North America and Asia, Qing China (the Manchu dynasty founded in 1644) expanded by colonizing and annexing neighboring regions, just like Russia was doing. All of them (whether they used ships or horses) were colonial empires. China annexed Taiwan in 1683, and it obtained outer Mongolia (roughly today's Mongolia) from the Khalkha Mongols in 1691. The first time that China invaded Tibet was 1720: China even installed the new dalai lama. In 1724 China conquered the Qinghai region from the Khoshut Mongols (today it is the fourth largest province of China). In 1755 China launched the "Ten Great Campaigns" to conquer eastern Turkestan from a Muslim khanate (today's Xinjiang), to defeat the Jinchuan Tibetans in today's Sichuan, and to fight wars with Taiwanese rebels and Burmese, Vietnamese and Nepalese kingdoms. Although most of them failed (in particular the Burmese one), those campaigns show the extent of Chinese imperial ambitions. The one that succeeded (in 1757) was the extermination of the Dzungars (nomadic Buddhist Mongol tribes), also known as the "Dzungar genocide" in what today is Xinjiang. The only region that was able to declare independence was Mongolia in 1912 (Tibet too declared independence in that year, but Mongolia was protected by Russia, whereas Tibet was protected by Britain and lost that protection when Britain withdrew from the Indian subcontinent). The rest is still part of China. As much as China likes to rail against the old European imperialist powers, those are gone, and China is one of the last remaining empires on Earth (the other one is Russia). The Chinese like to talk about China's century of humiliation: from 1842 to 1949 China was increasingly dominated by foreign powers. But they forget to mention that it was an empire fighting other empires.
Xi's policy of offending every neighboring country (except for North Korea and Russia) is a nation-level version of Trump's policy of offending everybody in the USA.
China now has territorial conflicts of one kind or another with: Japan, Vietnam, the Philippines, Malaysia, India and of course Taiwan.
In 2016 an international arbitration court rebuffed China's claims over some Philippine islands.
In 2013 China began militarizing the Senkaku Islands that are claimed by Japan.
Similar activities are taking place in the Paracel and Spratly islands that are claimed by Vietnam, Philippines, and even Malaysia.
In early 2020 a Chinese coast-guard vessel sank a Vietnamese fishing boat close to Vietnam's coast. In late 2020 Chinese and Indian troops exchanged fire along the border and scores of Indian soldiers were killed.
The OBOR (One Belt One Road) initiative has generated hostility towards China in multiple countries either because China bribed officials to get approval for its projects or because it subjected the partner country to humiliating conditions (eerily reminiscent of the humiliating treaties imposed on China by the European powers in the old days).
Muslims around the world resent the reeducation camps where China brainwashes the Muslims of Xinjiang province.
China is in the middle of a trade war with the USA (it is debatable who started it, since China has been banning US businesses like Google and Facebook for many years).
China has pitched fights with Canada (that arrested a prominent Chinese businesswoman accused of a crime in the USA in retaliation for which China arrested two Canadian citizens, Michael Kovrig and Michael Spavor, on spying charges) and with Australia.
The whole Western world supported the Hong Kong protests and condemned the national security law imposed by China.
The European Union was China's main trading partner in 2019 (before Brexit). In August 2020 Josep Borrell, the European Union's foreign policy chief, wrote two articles, one in Le Journal de Dimanche and the other one in Politica Exterior, in which he referred to China as a "new empire" and described China as "assertive", "expansionist" and "authoritarian".
And all of this in the middle of the covid pandemic that started in China and has already killed one million people worldwide.
Rising tensions with Australia (which has had no recession in 30 years thanks to lucrative exports to China) spiked during the pandemic. Everything Australia has done has become a blueprint for Trump's public shaming of China.
Australia accuses the Chinese Communist Party of covert influence over the 200,000 Chinese students who are studying in Australia, of cyber attacks targeting Australian companies, of interference in local Chinese-language media, and of pressures on Australian politicians.
In August 2018 (under Morrison's predecessor Malcolm Turnbull) Australia became the first country to ban China's Huawei from its 5G telecom network on national security grounds.
It didn't help that in January 2019 China arrested a China-born Australian blogger, Yang Hengjun, for espionage without providing any evidence.
A risk advisory now warns Australians that they might be "arbitrarily detained" if they visit China.
Australian prime minister Scott Morrison has been treating China as a threat to the Australia's sovereignty to the point of dramatically increasing defense spending as if a war were imminent.
India, which had a border war with China in the 1960s and has never recognized China's annexation of Tibet and is home to the Dalai Lama, has become a major diplomatic problem. Public opinion in India is strongly anti-Chinese, either because of Hindu nationalism when it comes to the border issue or because of Muslim solidarity with the persecuted Muslims of Xinjiang (Muslims are about 15% of India's population)
India became the first country to ban China's most successful smartphone app, WeChat, and has barred Indian telecom companies from using Huawei equipment.
Sentiment towards China was mostly positive among Western public opinion until a few years ago. China was seen as a benevolent emerging power. Now sentiment is negative in every part of the West, and in most of Asia. Australia is a good example: a majority (52%) of Australians had a positive view of China in 2018 whereas now only 23% do.
A similar shift in perception can be detected in most countries of the world, from Latin America to Africa: the more they get to know Xi's China the less they like what they see. Public opinion in Latin America now dislikes China: the only country that is more disliked is the USA.
In a poll taken by the Pew Center just before the covid pandemic erupted, the countries that had the best opinion of China were: Russia, Israel, Nigeria and Brazil.
The countries that had the worst opinion of China were (in the order): Japan, Canada, South Korea, Australia, and several Western European country (details).
This was before the covid pandemic started spreading in these countries, so we can only assume that now the views are even more negative in even more places.
It may look weird that China would suddenly start so many diplomatic conflicts around the world and even a military confrontation with India.
Three factors have played in China's favor. 1. The USA has suddenly become an unreliable partner for its regional rivals (no country in the world trusts Trump to honor any treaty); 2. There is no country that is in a position to
teach China a (military) lesson or curb in any other way its expansionism.
In the 1980s even tiny Vietnam could do that: China was still poor and technologically backwards (Vietnam successfully repelled a Chinese invasion in the 1980s). Now China dwarfs all its neighbors. Its army, navy and airforce are becoming increasingly sophisticated. India would risk a major humiliation if it started a real war against China. Vietnam and Australia are too economically entangled with China. Japan has a constitution that keeps it from becoming a military power. The only country that might respond militarily to provocations from mainland China is the other China: Taiwan.
Some day Japan may realize that it has been postponing the inevitable: becoming a nuclear power in order to counterbalance China's power and the unreliability of the US alliance; but it won't happen any time soon.
3. Every empire's power depends on being able to "divide and conquer". So far China has been successful at dividing its neighbors for the simple reason that they were divided before and still are, and each one prioritizes its own interests when dealing with China.
China, and the whole of East and South Asia, benefited from decades of peace and geopolitical stability guaranteed by the USA. China's expansionism and Trump's attacks on US alliances are slowly but steadily eroding that stability. The question now is whether Asia can sustain the same kind of economic growth in an unstable geopolitical situation.
If China could act as the new "policeman" of the region, stability would still be guaranteed, but it is unlikely that India, Australia and even Japan would trust and tolerate China as the policeman the way they trusted and tolerated the USA.
In any case, the one country that in my opinion isn't trying to establish a new world order is China.
China has done very well with the existing world order.
China's digital currency, China's One Belt One Road (OBOR) initiative and so on are often portrayed as China's attempt at creating a new world order, but
it is not clear why China would want to dismantle something that has worked so well for them.
The two countries that are trying to dismantle the existing world order are Trump's USA and Putin's Russia.
Russia is challenging precisely that world order that has the USA as the "policeman of the world", and the USA under Trump wants to stop being such a policeman.In a sense, Putin and Trump are aligned against Xi (although Putin is formally a friend of Xi).
It is not China that is threatening the existing world order: it is the USA and Russia.
Ironically, by challenging the existing world order, the USA and Russia may be forcing China to become more imperial.
- China has forgotten that it has a giant problem waiting to explode: the Dalai Lama. He is getting old and every year his chances of dying are higher. When he dies in exile, there will be trouble in Tibet but there will also be outrage all over the world that the cruel Chinese regime stopped an old man (widely viewed as a saint) from visiting his birthplace. The worldwide impact of the Dalai Lama dying in exile is hard to predict, but it could become the worst public-relations disaster ever for China.
- China is in no position to exert the kind of domination that the USA has exerted since the end of World War II: the USA's real strength was always the ability to build dream-like coalitions like NATO.
During World War II and during the Cold War, the USA has (whether deliberately or accidentally) forged the greatest alliances in the history of the world.
Never in history had someone managed to unite all the European powers in one alliance.
Never in history had someone managed to unite all of east Asia (except North Korea) in one alliance.
The USA may not have been much stronger than the Soviet Union, but the USA plus Britain plus Germany plus Japan plus France and so on was definitely much stronger than the Soviet Union. The USA had the largest economy in the world and, combined with Western Europe and the "Asian tigers" and Canada and Australia, it controlled the vast majority of the world economy.
It was the US-led alliances, not the USA itself, that controlled the world.
The USA lost in Korea, in Vietnam, in Lebanon, in Afghanistan and in Iraq, and nonetheless has remained the most influential and feared country in the world until recently.
As long as the USA retains these alliances, China will be surrounded by and will be trading with US proxies.
The USA's biggest strategic mistake in recent years was to cancel the Trans-Pacific Partnership (TPP) which would have created another formidable alliance in east and southeast Asia.
The TPP was the golden opportunity to cement an even bigger and more strategic alliance.
Trump's most damaging legacy could be of having decoupled the USA from its allies.
The USA may be losing its status of world leader, but China will never replace the USA as the world leader if it doesn't forge large alliances with the top countries of the world.
China may become the largest economy and some day the biggest military power but it is hard to see how it would create something similar to NATO.
(Incidentally, that's why China may prefer the reelection of Trump over a Biden administration: Biden is more likely to build and rebuild international coalitions that would reassert US superpower and curb China's expansion).
- The Chinese people mostly admire the USA. The Chinese have a love-hate relationship with the USA. The Chinese word for "USA" is "mei-guo", which means "beautiful country". The top communist officials send their children to US schools (eg Xi's daughter, who spent 4 years at Harvard). Most families want to send their children to study in the USA, and not only for the educational system (which may actually be better in China) but to experience life in a mythical country. Despite living in a place where news are controlled by the state, the Chinese are usually more aware of the state of China-USA relations than US citizens are. For example, when the USA threatened to block their national application WeChat, many Chinese commented that it was inevitable: after all, China has always blocked Google and Facebook.
- The pandemic was a big international win for China over the USA. The response to covid-19 confirmed to world public opinion that China has better management than the West. The facts speak for themselves: China had very few deaths after January, the USA has had more than 200,000. People are back to work and school in China, whereas the USA is a patchwork of (ineffective) regulations that certainly does not look like normal life and it doesn't seem to curb the pandemic. When covid spread, many countries looked at China's example, at South Korea, at Germany, and so on, but not a single country looked at the USA. The chaos and dysfunction demonstrated by the USA during the covid-19 crisis was the exact opposite of leadership, so much so that no country, not even Canada or Mexico, paid attention to what the USA was doing or not doing. In September 2020 the Pew Research Center polled people in 13 countries (all close allies of the USA such as Canada, Britain, Australia, Japan, South Korea and the largest Western European countries) about the covid pandemic: only 15% of respondents said the USA had done a good job at responding to the pandemic. By contrast, 37% said that China did a good job at handling the pandemic. South Korea had the highest number of respondents criticizing the US response: 93%. The World Health Organization (WHO) and the European Union (EU) fared a lot better in this poll: 64% approved the job of the WHO and 57% approved the job of the EU. Most of these countries warmly approved the decisions of their own government: 74%. If similar sentiments are spreading around the world, the conclusion is simple: the USA has lost a lot more credibility than China (in fact, it is probably the single biggest loser in the world) while international institutions gained credibility.
- Viewed from the outside, China is a strong centralized nation-state with clear national policies. The USA is a weak decentralized federation with a patchwork of policies that vary from state to state, and often from county to county; Basically a return to the fragmented medieval feudal world. In fact the USA resembles more the Holy Roman Empire of the middle ages, ruling over hundreds of semi-independent German, Italian, Dutch and Spanish states, than the nation-state that emerged later in Europe.
TM, ®, Copyright © 2020 Piero Scaruffi All rights reserved.
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