Date: 01/06/2022
Author: Mr. X
For most of the last decade, China’s rise has been spoken of as something inevitable. There’s even been speculation that China will displace the United States of America as the global hegemon. The “Thucydides Trap” – the idea that a (relatively) falling power must war against a rising power – has been the disaster scenario for those worrying about a conflict over Taiwan. China was also seen as the model in terms of how to respond to the COVID-19 outbreak, even though the disease almost certainly started there.
China’s military build up over the last decade has been impressive. American Secretary of State Antony Blinken said in late November that NATO was alarmed by China’s actions. “The members of our alliance remain concerned by the PRC’s coercive policies, by its use of disinformation, by its rapid opaque military buildup, including its cooperation with Russia,” he said.
The Department of Defense issued a publicly available “factsheet” summarizing the conclusions of a recent report that said China “increasingly views the United States as deploying a whole-of-government effort meant to contain the PRC’s rise, which presents obstacles to its national strategy.” “The PRC has clearly stated its ambition to strengthen its ‘strategic deterrent,’ and has continued to accelerate the modernization, diversification, and expansion of its nuclear forces, as well as the development of its space and counterspace capabilities,” it warned. It also suggested that China would increase military pressure “in an attempt to compel Taiwan toward unification.”
However, some funny things happened over the last year. First, just after announcing a “no limits” partnership with China, Russia invaded Ukraine. Rather than the quick victory President Vladimir Putin surely expected, the war has become a conflict of attrition, with the Russians repelled first from Kyiv and then from regional capitals. It is now stubbornly holding a land bridge to Crimea and still fighting for the strategically important city of Bakhmut in the Donbass. Russian territorial gains, even assuming it can win, may be seen as not worth the cost, especially as Russia has essentially been cut off from the Western economy.
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China’s reaction has been revealing. While Iran has been providing Russia with cheap drones that have proven effective in overwhelming Ukrainian air defenses, China has done little. The Chinese leadership seems to have made the same assumptions Russia’s leaders did about a quick victory by Moscow. When the United States warned China that it would face economic sanctions if it backed Russia, China buckled. Beijing has done far less for it’s supposed ally’s cause than Tehran, even as Iran has been dealing with a simmering rebellion within its own borders.
In a political culture obsessed with losing face, China looks weak.
President Xi Jinping has also had to reverse himself on the “zero-COVID” policy. The problem for the Chinese president is that this policy had become almost totally identified with him personally, given his successful consolidation of power over the last two years. Corporate titans have been firmly subordinated to the Chinese Communist Party. (Remember Jack Ma?) President Jinping’s intraparty rivals have been subdued, with former president Hu Jintago contemptuously escorted out of the 20th National Congress. (But don’t worry guys, state media said he was just feeling “unwell.” I’ll bet.) “Xi Jinping Thought” is now taught in Chinese institutions, as Xi Jinping stakes a claim to being the most ideologically significant leader since Mao.
And all these triumphs came just in time for President Jinping to have to retreat from his signature policy amidst the greatest public protests since Tiananmen Square.
While President Donald Trump talked tough on China, it’s under President Joe Biden that the United States has been acting most decisively to check Chinese power. China is being cut out of the world superconductor market, with the Biden Administration imposing tough sanctions and export controls on militarily crucial technology. The White House is hardly being secret about its intensions.
As the Department of Commerce said in October:
The Department of Commerce’s Bureau of Industry and Security (BIS) is implementing a series of targeted updates to its export controls as part of BIS’s ongoing efforts to protect U.S. national security and foreign policy interests. These updates will restrict the People’s Republic of China’s (PRC’s) ability to both purchase and manufacture certain high-end chips used in military applications and build on prior policies, company-specific actions, and less public regulatory, legal, and enforcement actions taken by BIS.
The export controls announced in the two rules today restrict the PRC’s ability to obtain advanced computing chips, develop and maintain supercomputers, and manufacture advanced semiconductors. These items and capabilities are used by the PRC to produce advanced military systems including weapons of mass destruction; improve the speed and accuracy of its military decision making, planning, and logistics, as well as of its autonomous military systems; and commit human rights abuses. Finally, these rules make clear that foreign government actions that prevent BIS from making compliance determinations will impact a company’s access to U.S. technology through addition to the Entity List.
While Congress looks like it’s in chaos right now (as this is written, 11 straight votes have yet to produce a Speaker), it accelerated a delisting threat unless American regulators got more corporate data. Alibaba (BABA) and JD.com (JD) have dutifully handed over their books. “For the first time in history,” said Erica Williams of the Public Company Accounting Board (PCAOB), “we are able to perform full and through inspections and investigations to root out potential problems and hold firms accountable to fix them.”
What we don’t know is what’s really happening with COVID-19 in China. According to CNBC’s Supply Chain Heat Map, factories and ports are finding it hard to operate at full capacity. Some reports indicate as much as a third to one-half of some workforces are infected. It’s important to remember that this is the first time COVID-19 has ripped through the Chinese population on a large scale. Shanghai, Shenzhen, and Qingdao are all facing significant disruptions.
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While data is tightly controlled, there’s some anecdotal evidence that the COVID-19 wave sweeping China is more serious than the government would like to admit. Celebrities including opera singer Chu Lanlan (40), sitcom star Gong Jintang (83), and professor and critic Hu Fuming (87) have rocked Chinese society, sparking discussion about the cost of the pandemic.
China’s abandonment of its zero-COVID policy was probably inevitable, given that its on-again, off-again lockdowns were causing economic chaos and serious supply chain disruptions. However, no public policy choice is simple. Now, China may go through the same economic disruptions as a sick workforce finds it impossible to meet productivity targets. The happy talk about China simply surging back to economic growth is naïve given the way the rosy “Roaring Twenties” predictions about America have played out. The fact is that the world is probably heading for a global recession – and China is in a far worse position than the United States. Weak, diplomatically isoldated, and facing domestic unrest, President Xi Jinping’s government may come to regret its very public consolidation of power. If the situation spirals out of control, everyone in China – and the world – will know exactly who to blame.
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 to bring you news on what those with power are debating, planning, and doing.
