China Capitulates

August 21, 2023

China slumps. Its currency falters, as does its trade, stock markets, real estate prices, foreign investment, tech sector, and economic growth rates. Youth unemployment, at 21 percent, is so depressing that Beijing stopped updating figures last month. China won’t collapse, but may slip into stagflation or deflation mostly due to self-inflicted causes: Excessive Covid lockdowns, a colossal real estate bubble, and its damaging association with Putin whose Ruble is now rubble, as is his reputation. However, China’s single biggest mistake has been to wage economic war against the United States, a war it could never win because America’s firepower is unmatched. Congress and U.S. Treasury Secretary Janet Yellen have unleashed counter-offensives such as the CHIPS and Science Act, the Stop China’s IP Theft Act, and stock market investment restrictions. But because the world needs two healthy, friendly superpowers, Yellen held out an olive branch this spring and China grabbed it. The two now hold high-level “peace” talks, and, most importantly, China has made moves to dissociate itself from Putin. And last week President Biden held a summit with Japan and South Korea that punctuated the need for everyone to behave, economically and militarily.

Economic warrior, Janet Yellen

China is an economic miracle that lost its way due to poor geopolitical judgment. In 1979, its leader, Deng Xiaoping lifted the country out of poverty by adopting private enterprise and reaching out to Washington. China’s GDP per capita leaped from $404 to $11,560 by 2022 and the country has become a state-of-the-art digital economy with broadband load speeds twice the West’s; automated factories, warehouses, ports and mines; more engineering graduates than the rest of the world combined, and social stability. China achieved this with America’s cooperation and by copying Japan’s model: Provide cheap labor, create good trading relationships, and upgrade to value-added manufacturing for export. (But it also indulged in the theft of intellectual property from Western firms and unacceptable trade practices, such as subsidies and corruption.)

The difference is that Japan played by the rules and never veered away from its relationship with America while China hooked onto the delusional Putin and his anti-American rhetoric and paranoia. Japan continues to prosper but China cannot until it disavows Russia and Putin and his expansionist, imperialism. Beijing had no idea Putin would invade and has stayed out of the war. Even so, it has incurred the wrath of its American and European customers that are disinclined to deal with Russia’s Chinese avowed ally.

The big question is why would an otherwise smart, ambitious, educated, capitalistic, successful China declare war against its principal customers/competitors and team up instead with Moscow, which is a nothing more than a “gas station with nukes”? The reasons are rooted in history. Diplomat and historian Henry Kissinger observed in his 2011 book “On China” that Chinese foreign policy is about defence, not offence. For decades the country was overrun, brutalized, partially occupied, and exploited by all of Europe’s colonial powers — an era referred to by Chinese as the “Century of Humiliation”. And Russia was its most formidable enemy. In 1858, Russia stole most of its Manchurian province and in 1945 most of Mongolia, then in 1969 China fought Moscow for seven months to regain territory stolen on its northern border. And Russia continued its aggressions in East Asia and attempted to take over South Korea in 1950 and South Vietnam in the 1960s, triggering massive wars that involved Western nations. It still supports the troublesome “pygmy kingdom” of North Korea and its nuclear weapons.

Kissinger explained that China’s response to continuous Russo-Soviet threats was to find an ally who could help counterbalance its power. That is why the Chinese government sought a rapprochement with the United States which resulted in President Richard Nixon's official visit to China in 1972. This led to capitalism but also allowed Beijing to play off one superpower against the other to protect itself. Unfortunately, instead of playing off America and Russia to protect itself, it has now alienated the US and Europe and become dependent on its old foe, a predatory and venal Russia.

Fortunately, Yellen’s “peace initiative” has yielded some positive results. In a landmark April 20 speech, she stated that “the world is big enough for both of us” — a phrase that echoed President Xi Jinping’s message last year at his summit with Biden. She added that America does not want to “decouple” its economy from China’s, and pointed out that “a full separation of our economies would be disastrous for both countries. It would be destabilizing for the rest of the world.” Her goal was to compete fairly and work together “on areas of shared challenges for the two nations and the world.” These stated aspirations has resulted in high-level bilateral talks aimed at removing irritants and levelling the playing field.

“Big Enough for Both” G20 meet in 2022

Significantly, Xi has further distanced himself from Russia. In late July, he abruptly removed his aggressive, pro-Moscow foreign minister and replaced him with a moderate aimed at helping end the war in Ukraine. In March, China announced a three-way diplomatic deal with Saudi Arabia and Iran, aimed at securing energy supplies should Russia fall apart. On August 1, China announced more trade bans against Russia, including one prohibiting the export of all long-distance drones that “could be used for military purposes against Ukraine”. On August 5 and 6, China attended Saudi Arabia’s conference with Ukraine and 40 other nations to stop Russia’s war even though Russia was not invited. “Chinese diplomats at a summit to discuss a potential resolution to the conflict in Jeddah, Saudi Arabia last weekend were keen to show that `China is not Russia’”, noted the Financial Times.

Business and political leaders in China have also been alarmed at the rise of India as the West’s preferred foreign investment destination. Since Russia’s invasion. India has signed huge trade deals and announced major industrial projects with Western countries and nations that now shun China. This month, Italy withdrew from China’s Belt and Road Initiative, marking another major strategic shift away from China. Beijing is also concerned about the QUAD military alliance, created by India along with Japan, the US, and Australia that is designed to monitor and limit China’s military and shipping hegemony in Asia.

The only good news for President Xi these days is that Biden has announced he plans to meet soon to cement a new, bilateral win-win arrangement. This is important to the rest of the global economy too. As the African proverb warns “when elephants fight it is the grass that suffers”. China, chastened, is reinventing both its business model and foreign policy posture. And it too has learned from an old English proverb: If you lie down with dogs, you will wake up with fleas or, this case, be decoupled from the global economy.