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- We Don’t Understand China (Part 1)
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The West and the US don’t really understand China and in particular we don’t understand the Chinese Communist Party (CCP) and leadership. Americans always think everyone else is like them, and in the case of China we do so at our own peril.
The Chinese Narrative
At a high level China has a fundamentally different historical narrative than we do.
It’s no mistake that the word for China in Chinese is “Zhonggou” which translates as the “Middle Kingdom” or “Central Country.” The Chinese think of themselves as the center of the world economically, philosophically, and politically. It sees itself as the main actor across history and as the central nation that brought wealth, technology, and progress to the world.
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This view faced significant challenges as Europe and then the US grew in wealth and power. That imbalance led to the Century of Humiliation beginning with China’s defeat by Britain in the First Opium War in 1842 and ending as China emerged victorious from the Second World War in 1945.
During this period China was weak and the Western powers dictated terms and imposed unequal treaties. Opium was the fentanyl of its day and when China tried to block Britain’s imports of it, Britain went to war. The result was Chinese defeat and the opium kept flowing. Imagine if the Chinese forcibly prevented us from trying to curb fentanyl addiction. It would leave some scars.
The CCP’s goal is to make sure that the Century of Humiliation was a brief diversion from the long term trend of Chinese preeminence. The key to achieving this goal is for China to lead in advanced technology.
In the mind of China’s leader, President Xi, it was technology that allowed the West to play its brief role as the supreme power and it will be technology that puts it back in its place.
Xi’s Mission
Tanner Greer is one of my favorite scholars tracking China and one of the few that takes China and Xi at their word. Many Western commentators tend to dismiss these grand historical visions as propaganda-something the Chinese say and don’t really believe. But Greer goes deep and looks at what the leaders actually say in speeches and in policy pronouncements.
As he points out, we shouldn’t be surprised that China is currently engaged in a global trade war on a massive scale. Xi has been saying he’s going to do this for years.
In Greer’s view Xi has laid out 5 related goals that are core to his rule:
The overriding goal of the Communist Party of China is to restore China to a position of glory and influence commensurate with its ancestral heritage.
This can only be accomplished by pioneering a technological transformation of the global economy on the scale of the industrial revolution.
The greatest perceived threat to China’s rise is found in the ideological domain—and in a globalized world that domain is a global one.
Chinese leaders imagine they will reshape the global order primarily through economic, not military, tools.
The main exception to this is Taiwan. With Taiwan economic tools have proven ineffective; the possibility of war is very real.
As Americans and even Westerns, we see ourselves as the star of the play. We see Western culture and technology evolving from the depths of the Dark Ages to the Middle Ages to the Renaissance to the Enlightenment to the Industrial Revolution and now on to the post industrial age (which is a bit undefined). To us that is also generally the history of all of the world.
Xi’s mission is to change all that.
The New Marxism
To do this, Xi and the party leaders around him have taken a Marxist focus on materialism and historical determinism and mixed it with a chauvinistic Chinese nationalism. I don’t want to go too deep on communism and Marxism here but there are two key points we need to address to understand China today.
First, Marx focused on material conditions. Your economy (ie what and how you produce) creates the culture, politics, and beliefs. What matters is what gets done in the factory. Everything else flows from that.
Second, Marx believed that history was shaped by unstoppable forces driven by economics and technology. If you studied them scientifically, you could understand what these trends were and prepare for them. You can’t stop the trends but you can take better advantage of them or maybe speed their arrival.
Western scholars and politicians have assumed China would leave behind the communist nonsense once they got rich. They didn’t take the CCP seriously as a communist party. While there was some truth to this in the 2000s and early 2010s, Xi has put an end to the illusion.
In Xi’s view, China must prioritized technological development and become the leader in the next wave of technological change. He sees this next Industrial Revolution as having a similar or even greater impact than the first one which inspired Marx’s writings. This is an all hands on deck task and there is no room for getting soft.
China Keeps Investing
For years, economists like Michael Pettis and others have been assuming that China would stop subsidizing wasteful infrastructure and industrial projects and shift more of their economy to serving consumer needs and providing social services to their people. This is the typical development process pursued by countries like the Soviet Union, Japan, South Korea, and Germany.
Eventually you have to share some of that wealth with your own people through better wages, social programs, etc. Each of these countries have had issues with making this transition but none have resisted the process as extensively as China.
As you can see from the chart below, the share of Gross Domestic Product (GDP) devoted to investment is at over 40%. That means for every dollar or Yuan of GDP, China recycles 40 cents of it back into businesses in the form of capital expenditures and similar investments. This is incredibly high.
With 40 cents going to investment that leaves only 60 cents for government spending, consumption (people buying stuff), and net exports combined. And China kept increasing this percentage even as it became the second largest economy in the world.
In contrast, developed countries like the US, Germany, and Japan devote 20-25% of their GDP to investment. China can keep investing at this level only by suppressing wages in China, keeping government spending on social welfare low, and preventing people from spending money on themselves.
Xi doesn’t do social programs. As one writer summarized from remarks made by Xi during a secret leadership meeting in 2021:
Authorities should not make promises that they can’t meet, and avoid “excessive guarantees” that could make the country fall into the trap of “welfarism.” The term in China usually refers to a tolerance of the “lazy,” and the belief that westerners are dissuaded from working given the amount of social welfare support they receive.
“This rejection of welfarism is a wake-up call to observers who maintain that Xi’s goal is to have a socialist welfare state,” said (Henry) Gao. “That has never been on the agenda and will not be on the agenda. The first priority is always to achieve the goals of the state, such as the great rejuvenation of China.”
Xi’s Plan
The fundamental shift Xi has made is in rightly recognizing that much of this investment was being wasted. After decades of building infrastructure and apartments, China had way more of both than it needed. Ghost towns of empty apartment blocks are common (20% of all housing is unoccupied) and there were bullet trains to nowhere, everywhere.
Rather than reduce investment and increase social spending or consumption, Xi opted to redirect. Starting with the Made in China 2025 plan but increasingly since the pandemic, China has been subsidizing key advanced manufacturing sectors including solar panels, batteries, semi-conductors, robotics, electric vehicles, etc.
Xi’s plan is to take the wasted resources from the construction and infrastructure sectors and put them to work in advanced manufacturing. This might even work in a smaller economy but in the world’s second largest it’s going to be a problem. The only conceivable way to redirect that much investment is to massively overproduce.
That’s exactly what’s happening in sector after sector. Firms in countries with smaller economies, smaller investment shares, few trade protections, and fewer subsidies are toast. Xi’s goal is to wipe out these competitors and to own the vast majority of advanced production in China. This will finally right the wrongs of China’s Century of Humiliation and achieve the materialist vision of Marx all in one fell swoop.
I see the appeal of the vision for Xi but in the end it makes no sense. All Xi will accomplish is to impoverish everyone. Sure China will be at the top of the heap but who’s going to buy all the stuff China makes if every other economy has massive unemployment and no wealth? What good are 8 billion EVs if you only have 1 billion drivers?
Ultimately, Xi’s vision is a dystopian nightmare and we should fear it. Free traders in the US tend to dismiss such concerns but I don’t think they understand Xi and China’s ideology and goals. He will keep doubling down until he invests his way to dominance or die trying. The Chinese people are just tools to use in the fight.
Western responses haven’t been effective because those who take China seriously as a threat focus more on the military side rather than the economic side. As Greer pointed out, China will fight for Taiwan and that dominates the discourse here in the US but it doesn’t seem like China is much of a military threat beyond that. At least for now. We need to expand the aperture and start looking more at the total threat China poses to the US and the world.
In Part Two of this post, I’ll explore some options for a US response and explore how likely Xi’s plan is to work.
Keep learning,
Alan
P.S.
1 Of course China is a nation of 1.4 billion people and there is substantial diversity of thought but for our purposes we are going to look at the dominate thought of its current elites and in particular those around President Xi.
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