The Chinese are intentionally torching theirdiplomatic relationships with the wider world. Thequestion is why? The short version is that China’sspasming belligerency is a sign not of confidence and strength, but insteadinsecurity and weakness. It is an exceedingly appropriate response to thepickle the Chinese find themselves in. Some of these problems arose becauseof coronavirus, of course. Chinese trade has collapsed from both the supply anddemand sides. In the first quarter of 2020 Chinaexperienced its first recession since the reinvention of the Chinese economyunder Deng Xiaoping in 1979. Blame for this recession can be fully (andaccurately) laid at the feet of China’s coronavirus epidemic. But in Q2 China’srecession is certain to continue because the virus’ spread worldwide meansChina’s export-led economy doesn’t have anyone to export to. Nor are China’s recent economicproblems limited to coronavirus. One of the first things someone living in arapidly industrializing economy does once their standard of living increases ispurchase a car, but car purchases in China started turning negative nearlytwo years before coronavirus reared its head. Why the collapse even in what“should” be happening with the economy? It really comes down to China’sfinancial model. In the United States (and to a lesser degree, in most of theadvanced world) money is an economic good. Something that has value in and ofitself, and so it should be applied with a degree of forethought for howefficiently it can be mobilized This is why banks require collateral and/orbusiness plans before they’ll fund loans. That’s totally not how itworks in China. In China, money – capital, to be more technical – is considereda political good, and it only has value if it can be used to achievepolitical goals. Common concepts in the advanced worldsuch as rates of return or profit margins simply don’t exist in China,especially for the state owned enterprises (of which there are many) and otherfavored corporate giants that act as pillars of the economy. Does this generategrowth? Sure. Explosive growth? Absolutely. Provide anyone with a bottomlesssupply of zero (or even subzero) percent loans and of course they’ll be able toemploy scads of people and produce tsunamis of products and wash away any andall competition. This is why China’s economy didn’tslow despite sky-high commodity prices in the 2000s – bottomless lending meansChinese businesses are not price sensitive. This is why Chinese exporters wereable to out-compete firms the world over in manufactured goods – bottomlesslending enabled them to subsidize their sales. This is why Chinese firms havebeen able to take over entire industries such as cement and steel fabrication –bottomless lending means the Chinese don’t care about the costs of theinputs or the market conditions for the outputs. This is why the OneBelt One Road program has been so far reaching – bottomless lending means theChinese produce without regard for market, and so don’t get tweaky aboutdumping product globally, even in locales no one has ever felt the need tobuild road or rail links to. (I mean, come on, a rail line through a bunch ofpoor, nearly-marketless post-Soviet ‘Stans’ to dust-poor, absolutely-marketlessAfghanistan? Seriously, what does the winner get?) Investment decisions not driven bythe concept of returns tend to add up. Conservatively, corporate debt in Chinais about 150% of GDP. That doesn’t count federal government debt, or provincialgovernment debt, or local government debt. Nor does it involve the bond market,or non-standard borrowing such as LendingTree-like person-to-person programs,or shadow financing designed to evade even China’s hyper-lax financialregulatory authorities. It doesn’t even include US dollar-denominated debt thatcropped up in those rare moments when Beijing took a few baby steps to addressthe debt issue and so firms sought funds from outside of China. With that sortof attitude towards capital, it shouldn’t come as much of a surprise thatChina’s stock markets are in essence gambling dens utterly disconnected fromissues of supply and labor and markets and logistics and cashflow (andlegality). Simply put, in China, debt levels simply are not perceived as anissue. Until suddenly, catastrophically,they are. As every country or sectoror firm that has followed a similar growth-over-productivity model hasdiscovered, throwing more and more money into the system generates less andless activity. China has undoubtedly passed that point where the modelgenerates reasonable outcomes. China’s economy roughly quadrupled in size since2000, but its debt load has increased by a factor of twenty-four. Since the2007-2009 financial crisis China has added something like 100% of GDP of newdebt, for increasingly middling results. But more important than high debtlevels is that eventually, inevitably, economic reality forces a correction. Ifthis correction happens soon enough, it only takes down a small sliver of thesystem (think Enron’s death). If the inefficiencies are allowed to fester andexpand, they might take down a whole sector (think America’s dot.com bust in 2000). If the distortions get toolarge, they can spread to other sectors and trigger a broader recession (thinkAmerica’s 2007 subprime-initiated financial crisis). If they become systemicthey can bring down not only the economy, but the political system (thinkIndonesia’s 1998 government collapse). It is worse than it sounds. The CCPhas long presented the Chinese citizenry with a strict social contract: the CCPenjoys an absolute political monopoly in exchange for providing steadilyincreasing standards of living. That means no elections. That means nounsanctioned protests. That means never establishing an independent legal orcourt system which might challenge CCP whim. It means firmly and permanentlydefining “China’s” interests as those of the CCP. It makes the system firm, but sovery, very brittle. And it means that the CCP fears – reasonably and accurately– that when the piper arrives it will mean the fall of the Party. Knowing fullwell both that the model is unsustainable and that China’sincarnation of the model is already past the use-by date, the CCP haschosen not to reform the Chinese economy for fear of being consumedby its own population. The only short-term patch is toquadruple down on the long-term debt-debt-debt strategy that the CCP alreadyknows no longer works, a strategy it has already followed more aggressively andfor longer than any country previous, both in absolute and relative terms. Thetop tier of the Chinese Communist Party (CCP) – and most certainly Xi himself –realize that means China’s inevitable “correction” will be far worse thananything that has happened in any recessionary period anywhere in the world inthe past several decades. And of course that’s not all. Chinafaces plenty of other of issues that range from the strategically hobbling tothe truly system-killing.
China suffers from both poor soils and a drought-and-floodprone climatic geography. Its farmers can only keep China fed by applying five times the inputs of the global norm. This only works with, you guessed it, bottomless financing. So when China’s financial model inevitably fails, the country won’t simply suffer a subprime-style collapse in ever subsector simultaneously, it will face famine.
The archipelagic nature of the East Asian geography fences China off from the wider world, making economic access to it impossible without the very specific American-maintained global security environment of the past few decades.
China’s navy is largely designed around capturing a very specific bit of this First Island Chain, the island of Formosa (aka the country of Taiwan, aka the “rebellious Chinese province”. Problem is, China’s cruise-missile-heavy, short-range navy is utterly incapable of protecting China’s global supply chains, making China’s export-led economic model questionable at best.
Nor is home consumption an option. Pushing four decades of the One Child Policy means China has not only gutted its population growth and made the transition to a consumption-led economy technically impossible, but has now gone so far to bring the entire concept of “China” into question in the long-term.
Honestly, this – all ofthis – only scratches the surface. For the long and the short of just how weakand, to be blunt, doomed China is, I refer you my new book, DisunitedNations. Chapters 2 through 4 break down what makes for successful powers,global and otherwise…and how China fails on a historically unprecedented scaleon each and every measure. But on with the story of the day: These are the broader strategic andeconomic dislocations and fractures embedded in the Chinese system. Thatexplains the “why” as to why the Chinese leadership is terrified of theirfuture But what about the “why now?” Why has Xichosen this moment to institute a political lockdown? After all, noneof these problems are new. There are two explanations. First,exports in specific: The One Child Policy means thatChina can never be a true consumption-led system, but China is hardly the onlycountry facing that particular problem. The bulk of the world – ranging fromCanada to Germany to Brazil to Japan to Korea to Iran to Italy – haveexperienced catastrophic baby busts at various times during the past halfcentury. In nearly all cases, populations are no longer young, with many noteven being middle-aged. For most of the developed world, mass retirement andcomplete consumption collapses aren’t simply inevitable, they’ll arrive withinthe next 48 months. And thatwas before coronavirus gutted consumption ona global scale, presenting every export-oriented systemwith an existential crisis. Which means China, a country whose politicalfunctioning and social stability is predicated upon export-led growth, needs tofind a new reason for the population to support the CCP’s very existence. The second explanation for the “whynow?” is the status of Chinese trade in general: Remember way back when to the glossytime before coronavirus when the world was all tense about the Americans andChinese launching off into a knock-down, drag-out trade war? Back on January 15 everyone decided totake a breather. The Chinese committed to a rough doubling of imports ofAmerican products, plus efforts to tamp down rampant intellectual propertytheft and counterfeiting, in exchange for a mix of tariff suspensions andreductions. Announced with much fanfare, this “Phase I” deal was supposed toset the stage for a subsequent, far larger “Phase II” deal in which theAmericans planned to convince the Chinese to fundamentally rework theirregulatory, finance, legal and subsidy structures. These are all things the Chinesenever had any intention of carrying out. All the concessions the Americansimagined are wound up in China’s debt-binge model. Granting them would unleashsuch massive economic, financial and political instability that the survival ofthe CCP itself would be called into question. Any deal between any Americanadministration and Beijing is only possible if the American administrationfirst forces the issue. Pre-Trump, the last American administration to so forcethe issue was the W Bush administration at the height of the EP3 spy planeincident in mid-2001. Despite his faults, Donald Trump deserves credit forbeing the first president in the years since to expend political capital tocompel the Chinese to the table. But there’s more to a deal than itsnegotiation. There is also enforcement. In the utter absence of rule of law,enforcement requires even, unrelenting pressure akin to what the Americans didto the Soviets with Cold War era nuclear disarmament policy. No USadministration has ever had the sort of bandwidth required to policea trade deal with a large, non-market economy. There are simply too manyconstantly moving pieces. The current American administration is particularlyill-suited to the task. The Trump administration’s tendency to tweet out a bigannouncement and then move on to the next shiny object means the Chinesediscarded their “commitments” with confidence on the day they were made. Which means the Sino-American trade relationshipwas always going to collapse, and the United States andChina were always going to fall into acrimony. Coronavirus did theworld a favor (or disfavor based upon where you stand) in delaying thedegradation. In February and March the Chinese were under COVID’s heel and itwas perfectly reasonable to give Beijing extra time. In April it was theAmericans’ turn to be distracted. Now, four months later, with theAmericans emerging from their first coronavirus wave and edging back towardssomething that might at least rhyme with a shadow of normal, the bilateralrelationship is coming back into focus – and it is obvious the Chinesedeliberately and systematically lied to Trump. Such deception was pretty muchbaked in from the get-go. In part it is because the CCP has never been what I’dcall an honest negotiating partner. In part it is because the CCP honestlydoesn’t think the Chinese system can be reformed, particularly onissues such as rule of law. In part it is because the CCP honestly doesn’tthink it could survive what the Americans want it to attempt. But in thecurrent environment it all ends at the same place: I think we can all recall anexample or three of how Trump responds when he feels personally aggrieved. Which brings us to perhaps China’smost immediate problem. Nothing about the Chinese system – its political unity,its relative immunity from foreign threats, its ability import energy from acontinent away, its ability to tap global markets to supply it with raw materialsand markets to dump its products in, its ability to access the world beyond theFirst Island Chain – is possible without the global Order. And the global Orderis not possible without America. No other country – no other coalition ofcountries – has the naval power to guarantee commercial shipments on the highseas. No commercial shipments, no trade. No trade, no export-led economies. Noexport-led economies…no China. It isn’t so much that the Americanshave always had the ability to destroy China in a day (although theyhave), but instead that it is only the Americans that could createthe economic and strategic environment that has enabled China to survive aslong as it has. Whether or not the proximate cause for the Chinese collapse ishomegrown or imported from Washington is largely irrelevant to the uncaringwinds of history, the point is that Xi believes the day is almost here. Global consumption patterns haveturned. China’s trade relations have turned. America’s politics have turned.And now, with the American-Chinese breach galloping into full view, Xi feels hehas little choice but to prepare for the day everyone in the top ranks of theCCP always knew was coming: The day that China’s entire economic structure andstrategic position crumbles. A full political lockdown is the only possiblesurvival mechanism. So the “solution” is as dramatic as it is impactful:
Spawn so much international outcry that China experiences anationalist reaction against everyone who is angry at China. Convincethe Chinese population that nationalism is a suitable substitute for economicgrowth and security. And then use that nationalism to combat the inevitabledomestic political firestorm when China doesn’t simply tank, but implodes.
. Problem is, China’s cruise-missile-heavy, short-range navy is utterly incapable of protecting China’s global supply chains, making China’s export-led economic model questionable at best.
