Date: 10/21/2021
Author: Mr. X
The People’s Republic of China has arguably benefitted more than any other country since the COVID-19 pandemic began. While Western countries have fallen into division, China appears stronger than ever.
According to the British Centre for Economics and Business Research, China will become the world’s strongest economy by 2028, five years earlier than initially projected. This is supposedly because China handled the pandemic more skillfully than the United States.
Americans are also having a crisis of confidence in their own institutions. A poll from the Council on Global Affairs found that a plurality of Americans already think China is stronger than the United States.
The way American corporations deal with the two nations also reflects a major difference. American corporations, with few exceptions, regard their American identity is almost incidental to the way they do business. The very idea that American companies should be “patriotic” sounds ridiculous, almost offensive.
Nonetheless, these same companies show their bellies when it comes to appeasing Beijing. Apple [AAPL] recently removed the Yahoo News app from its web store, as the Chinese Communist Party continued its drive to control news and information. Nike [NKE] took a bold political stand in the United States, defending athletes it sponsors who decline to stand for the American national anthem. However, in China, Nike, spooked by a Chinese campaign against the company, declared that “we are a brand of China and for China.” Google has been accused of working with the Chinese military but refusing to work with the American military when it comes to Artificial Intelligence. Many other companies have also self-censored, making sure that Taiwan is not referred to as an independent country in any corporate documents.
The narrative of Chinese dominance and American decline took hold very early in the Biden Administration. In the very first summit between the new Administration and the Chinese government, President Xi Jinping’s foreign policy aide Yang Jiechi lectured the United States for more than 15 minutes on its failings. The message was clear – we are equal to you now.
Still, China has some serious problems and internal contradictions within its market. As I wrote a few days ago, China has undertaken a massive campaign to make sure the government has total control over pop culture. American CEOs can treat the American government with something akin to indifference, almost contempt. In contrast, Chinese corporate titans have been forced to bend the knee to their government. Once high flying corporate leaders lack Jack Ma have been firmly reminded about who is in charge.
China is also attempting to reorient youth culture from video games and “effeminate” fashion to nationalism and war. “The Battle at Lake Changjin,” a movie about a Chinese defeat of the United States during the Korean War, is already set to become the country’s highest grossing movie of all time. It’s quite a contrast to what is being promoted in the West.
All that said, China is facing some serious problems on three fronts. We may see a test of China’s “real” economy and political strength far earlier than many expect.
First, there is the lingering problem of the Evergrande Group’s debt crisis. The company is one of the largest property developers in the country, and its 30 day “grace period” after it failed to repay a bond is about to run out. As this is written, it has secured an extension on repaying one of the bonds, but that merely kicks the can down the road. Evergrande’s more systematic plan for a solution, which would have seen the company sell a controlling stake in the country to a competitor, collapsed earlier this week.
It’s also not just Evergrande. Sinic Holdings reported that it would not be able to pay one of its offshore bonds. China Properties Group defaulted last week. Fantasia Holdings, another developer, couldn’t make one of its bond payments earlier this month.
China’s central bank has said that the fallout from Evergrande will be “controllable.” We will see.
The second problem is whether China’s economic growth is really as spectacular as it appears. In the last quarter, China only grew by 4.9%, compared to 7.9% last quarter. That figure is also from the Chinese government, which might have every reason to present the brightest possible picture. China is facing a power shortage that is resulting in rolling brownouts. The government is working to increase coal production to solve the problem, but energy shortages will impose a further burden on the Chinese economy. Manufacturing and construction have both slowed amid critical raw material shortages.
Finally, there’s the foreign policy question. China’s military is very impressive and its growing alliance with Russia secures much of its border on the mainland. However, it is precisely because China is growing so belligerent that once quiet nations in Asia are moving to counter it. The new alliance between the United States, the United Kingdom, and Australia may have temporarily infuriated France, but it shows that China will not have total freedom of action. The Philippines, which once toyed with leaving the American-led bloc, evidently feels secure enough to threaten China. Japan, a strategic non-factor for decades, is now building up its own military.
For all its threats, it’s also doubtful China has the capability to take Taiwan by force right now. Of course, that’s never been China’s explicit policy. China is committed to peaceful “re-unification.” Yet if Taiwan does make an explicit declaration of independence or crosses some other red line, China has painted itself into a corner. It would need to respond lest it look weak. Meanwhile, for the first time, a majority of Americans say force should be used to defend the island in the face of a Chinese invasion.
Over the next few weeks, we will get answers on the true state of China’s real estate market. All indications are that this is something bigger than one company. Even if China can overcome this challenge, larger problems within the economy are going to reduce the rate of economic growth that its people (and the world) have come to expect. The Chinese government’s legitimacy largely depends on its ability to keep developing high rates of economic growth. Absent that, it must rely on nationalism… but at the cost of turning regional powers against it and possibly endangering trade relationships.
The “Thucydides Trap,” in which a rising power (China) will war with a falling power (America) remains a real threat to world peace. Yet the real danger might not be that China is growing at a blistering pace. Instead, the Chinese government is facing real threats to its economic program. To preserve its power and image, it may be forced into confrontation sooner than it would like. For the sake of world peace and prosperity, let’s hope the real-estate crisis in China is really “controllable.”
For myself, I doubt it.
Mr. X is an investment analyst working in the Washington DC area who specializes in the intersection of business and public policy. After fifteen years working in politics, he writes on a classified basis for RogueInvesting.com three times a week to bring you news on what those with power are debating, planning, and doing.
