Samizdata

In recent years much of the narrative is that China is rising, the US and the West as a whole are declining, and that there is not a lot we can do to arrest that switch, even if it would be desirable to do so, blah-blah-blah. Liberal democracy is on the retreat, authortarianism is the new hotness, so get ready for Social Credit, compulsory school Mandarin lessons and the rest of it. Now it is true that we seem to be well capable of gutting defences of liberty on our own without Chinese influence anyway, but it does nevertheless matter, in my view, if China’s rise continues in the way it has. Well, it is possible that things aren’t going to be quite so straightforward:

Check out this article from US think tanker Thomas J. Duesterberg, in the Wall Street Journal. As it is paywalled, I am going to publish a few paragraphs:

In December real-estate developers China Evergrande and Kaisa joined several other overleveraged firms in bankruptcy, exposing hundreds of billions in yuan- and dollar-denominated debt to default. Real estate represents around 30% of the Chinese economy, nearly twice the levels that led to the financial crisis of 2008-09 in the U.S., Spain and England.

I have been covering the Evergrande saga in my day job. Let’s just say that anyone who remembers the Japanese real estate meltdown will recognise the danger signs.

The real-estate industry has been key to keeping annual growth above 6%. Yet a debt bubble has inflated by 20% annually between 2014 and 2018. Originally intended to accommodate rapid urbanization for the industrial economy, the urban property market is now overbuilt. Some 90% of urban households own their own properties and enough vacant units are available to accommodate 10 years of urban immigrants. Sales and prices have tumbled this year, and overleveraged builders and creditors are suffering the consequences.

It seems the Dr Evil bloke at the helm is not as smart as he’s made out.

Mr. Xi is privileging the less productive and less innovative components of the Chinese economy while enhancing control, limiting financing and punishing entrepreneurial leaders in many leading industries. This isn’t a recipe for maintaining strong economic growth. Despite the frequent assertions that China is catching up or moving ahead of the West in technology industries, it has a long way to go to achieve the self-sufficiency and global leadership it seeks. U.S. sanctions on advanced semiconductors, for instance, have gutted Huawei’s ability to make its own 5G phones. China’s semiconductor industry is 10 years behind world leaders, according to a recent German study.

In short, it is difficult to escape the conclusion that China’s economy is systematically weakening and that Mr. Xi’s new priorities offer little hope for a quick turnaround. The U.S. and its allies could further compound Mr. Xi’s challenges by vigorous enforcement of trade laws, limiting Chinese access to technology and financing from the West, and imposing sanctions against China’s brutal human-rights abuses in Xinjiang and in countries in the developing world that it is trying to exploit through its Belt and Road Initiative. A good example of such exploitation is the atrocious mining conditions for key battery components cobalt and lithium in Africa and South America.

A major slowdown or acute financial crisis in China would certainly have a negative impact on the global economy. But U.S. and allied policy makers do have tools that could both influence the direction of the Chinese economy and help repair some of the accumulated damage to their economies from Chinese mercantilism. A first step is to undermine the narrative of a relentless, unstoppable economic advance under Mr. Xi’s leadership.

That of course would mean efforts to counter China’s thefts of Western IP, and for Western governments to limit Chinese access to Western finance and tech. That isn’t easy. Of course, a big slowdown/recession in China will hit the West, given the web of capital and trade relations. And for what it is worth, I still think the world is far better off with a prosperous China than the horrors of Mao in the 50s and 60s. But it is plain that China’s current behaviour (Hong Kong, South China Sea incursions, treatment of various groups, IP thefts, clashes with India, etc) mean that the regime in Beijing needs a very big kick. Maybe we will see this happen in the next year or so.