...what happens in China will affect us economically, there is no replacement for our mineral exports to China, let us not kid ourselves, especially when we have squandered decades in not diversifying our economy beyond 'digging and exporting'; we have a big talent of niche specialised skills to capitalise on but going backwards looking into solar panels manufacturing which we can't beat the Chinese on costs.
The Current Picture of What Is Happening in China
I will describe this in terms of what I see as the five big forces that drive the changing world order and tend to evolve in big cycles. They are: how well the economic system works, how well the internal order works within countries, and how well the world order works between countries, along with acts of nature and technology.
There are big debt and economic problems that are depressing economic activity, prices, and psychology. Domestically, it is a very difficult time for China financially because many people are suffering the negative wealth effects of falling a) real estate prices, b) equity and other asset prices, c) employment, and d) employee compensation. Also, there are debt and financial problems that exist in many companies and many local governments that are drags, which, if not properly dealt with, will have bad consequences for a long time. These things have contributed to the mood having become more dour.
How should these problems be dealt with? To me, as a macroeconomic thinker who approaches such debt and economic problems more like a doctor than an ideologue, the leadership needs to have a debt restructuring, which it should do via engineering a beautiful deleveraging (see my book Principles for Navigating Big Debt Crises) or it will have a “lost decade” like Japan’s.
While many people think policy makers should ease monetary policy to create more credit, I think they correctly view creating more credit and debt like giving an alcoholic a drink to help ease withdrawal problems. I believe that they should engineer both 1) a deleveraging (which is deflationary, depressing, and will reduce the debt burden) and 2) an easing of monetary policy (which is inflationary, stimulative, and will ease the debt burden) so that the deflationary ways of reducing debt and the inflationary ways of doing it balance. This is what I mean by a “beautiful deleveraging.” In my opinion, this should have been done two years ago and if not done will probably lead to a lost decade. I think some of the economic leaders, especially those who did this under Zhu Rongji, understand how to do this, but it is very difficult and politically dangerous to do because it engineers big changes in wealth, which is politically challenging, especially during a difficult time because people squawk. In my opinion, if the leadership doesn’t execute a beautiful deleveraging, China will have a Japanese-style lost decade with Marxist characteristics.
The aging population issue is a heavy weight for those who are old, for their children, and for the government’s finances and social issues. The average age of retirement is 53 and the average age of death is 84, so people without incomes have to be taken care of for 31 years on average. This is made more difficult because the previous one-child policy means that one person has to take care of two parents. This has been a depressant in the mood and the financial situation. While the retirement age should be raised and a social support system including old-age care should be improved, neither is happening at an adequate pace. That is mostly because people don’t want their retirement ages to rise so doing that is politically untenable and because the government bureaucracy is moving very slowly, especially now that most government officials are reluctant to take bold actions because those can be politically disruptive (as they were in other countries, most notably France) and people squawk, so it takes courage. Also, with the workforce declining and old people getting ill and passing away, this is burdensome and depressing. Once again, this is likely to remain a burden unless the government deals with it in a more forceful way.
2. The internal wealth gap and the resulting conflict over wealth and values are intensifying, which is fear-inducing. The internal wealth gap has led to the government’s push for common prosperity and government-directed, seemingly arbitrary rather than rule-based actions. These moves appear to some people to be anti-capitalist, while to others they are simply the government’s messages to people to stay out of politics and do what the leadership wants them to do to help society. In any case, it’s fear-inducing and oppressive, especially for the capitalist elites. On a recent trip to China, my Chinese friends reminded me that throughout Chinese history, it’s typically been the case that you can’t be rich and be a government official. The merchant-capitalist who sought financial gain was traditionally assumed to be dangerously greedy and easily corruptible, and not allowed to be in government. It wasn’t until 2002 that these merchant-capitalists were allowed to become Communist Party members. That was during the reformist period. Now it is no longer as “glorious to be rich.” As is increasingly the case around the world but more so in China, there is a greater inclination to think that the rich are selfish and corrupt. Purging and rooting out corruption is also going on in most areas, perhaps most notably in the military. In other words, it’s a time of big policing and strict enforcing of what should be done and how people should behave that has become threatening to some.
With the pendulum now swinging in the more legalistic, autocratic, communist direction, naturally people are asking how far it will go, which leads people to probably exaggerate the possibilities. My study of Chinese history (and my studies of similar histories in analogous periods) has put in my mind, which are also in some others’ minds, the memories of anti-rightist-capitalist campaigns that led to the persecutions of such people, the confiscations of wealth, the shutting down of stock markets, the enforcing of strict foreign exchange controls, the restrictions against leaving China, and the questions about whether that is where China is headed. People remember the civil war and the changes after 1949. The elites who are experiencing these pains to a greater degree are more concerned. It appears that the “elites” are most concerned and least supportive of Xi, while many who feel Xi is trying to take care of them from being exploited by the elites are strongly supportive of him. It appears that Xi and the leadership think that most of those people who are discontented are spoiled and unappreciative of how much better off they are than they were not long ago and that they need to toughen up, get disciplined, and get in line with the program to help others. This has contributed to the mood becoming more dour and pessimistic.
No one knows how far the pendulum will swing back toward the more Maoist/Marxist ways of doing things. The absence of clear communication from the leadership about the motivations behind their actions and where they are headed is leading to greater amounts of imaginary speculation than there would be if there were clearer communication. The impediment is that communicating more directly is not the Chinese leadership’s traditional way of doing things, which, as China goes back toward the more traditional ways of doing things, is understandable. China’s new premier Li Qiang’s decision to discontinue press conferences for the first time in 30 years is consistent with the move to lesser clarity rather than greater clarity at this time of greater risk.
3. The great-power conflict between China and the US is having a big negative effect. It is causing foreign investors and businesses and domestic investors and businesses to want to diversify or leave China and to fear being discriminated against globally for being friendly to China. In trade and capital flows, a cat-and-mouse game has developed that has led companies and people to move to neutral countries and to try to appear to be non-Chinese or not Chinese sympathizers, so much so that the Chinese are having problems getting other countries and companies to accept them being there and/or investing in them. For example, Chinese businesses setting up Mexican companies and exporting to the US to get around tariffs on Chinese goods is leading the US to explore moving to look through the entities to identify the beneficial owners to catch and punish these entities. The TikTok identity pursuit game is the most attention-getting example. Even in the industries and world markets that China has become very competitive in—most obviously electric vehicles, batteries, green energy (solar and wind) products, chips, artificial intelligence, quantum computing, space, etc.—there are geopolitical conflicts that blend with economic conflicts, so they are increasingly run by governments. The not-too-long-ago old days of free and open markets and the idea that government interference in them is bad are gone for the foreseeable future. This will affect China because it has excess capacity and will be accused of dumping, leading to big tariff increases as protectionism and nationalism come back into fashion as they did in the 1930s. The Chinese economic model is based on gaining an increasing share of world manufacturing output, which has a good chance of not happening because countries that in the past have imported Chinese goods are more likely to prevent them with rising tariffs.
In addition to economic clashes with the West, there are cultural clashes. They were described to me by a Chinese leader as mutual cultural ignorance with evolutionary change. He explained that 1) the Anglo-European culture extended by Great Britain passing dominance to the US is having problems accepting the rise of China and its Chinese-Asian culture, 2) there are failures of the two sides to understand and accept the different approaches, and 3) Western culture is more zero-sum than win-win and more inclined to slip into lose-lose wars. I agree with his assessment and find it tragic. It is certainly the case that the Chinese fight wars differently. Think about the “art of war”—fighting to win by focusing on the “pressure points” that can weaken or hurt the other side without even being seen. For example, if one were conjecturing how the Chinese might play the existing geopolitical situation if the conflict rises, because the US is overextended in two wars, the Chinese might think about where there could be a third front—like a war in Asia, something like a conflict with the Philippines or North Korea, that would put the two sides in the US election in the awkward position of having to step into a third conflict (which would be unpopular in the US) or not appear strong enough. Almost all leaders on both sides believe that the other side is working to destroy the other and are working to be able to destroy the other. They are in an intensifying prisoner’s dilemma. To be clear, I don’t believe that either side wants to provoke the other side, and I do believe that greater understanding of and respect for the other’s culture are required. But more than that, each should ask the other, “What are your greatest existential fears?” and work with the other side to figure out what can be done to alleviate them. Without that, the odds of some sort of a devastating war within the next 10 years are high and people are positioning themselves with that possibility in mind, which itself is very damaging.
4. Climate and climate-related issues are big, threatening, and top-of-mind. They extend from having droughts, floods, and pandemics to not having enough clean water. They will probably cost a lot and hurt a lot.
5. While technology development has always been a critical defining force and while it is well known that whoever wins the technology war wins the economic, geopolitical, and military wars, this has never been truer than now, and China and the US are the leaders and big adversaries. Throughout the history of war, the desired path has been to secretively build the technology that is strong enough so that showing it to the opposition will make the opposition become submissive. Watch the movie Oppenheimer for a refresher. That is certainly going on. There are many technologies that both China and the US are putting huge amounts of talent and resources into using their different approaches, one more top-down, government-directed and one more bottom-up, corporate/capitalist—some of which we know about (e.g., chips, AI, quantum computing, outer space, cyber, batteries, clean energy, electric vehicles, robotics, etc.), some of which China is in the lead on, and some of which the US is in the lead on, and none of which we can anticipate exactly how it will transpire in the future. I won’t digress into looking into these because it would take too long, and now is the time to step back up to look at the big picture.
It is understandable why President Xi believes that there is a 100-year storm on the horizon. That assessment seems right to me. At the same time, I am not certain of anything other than that I am trying to be as objective and helpful as possible in bringing about understanding.
China is an enigma that I am trying to make less enigmatic. I have been very lucky to see up close for nearly 40 years what has happened in China, the United States, and China-US relations, all of which I care about deeply. And I have found it all intensely interesting and important to watch.
It seems that we all have been affected by the supposed Chinese curse “May you live in interesting times.”
