WHO CAN TAME CHINA – PART III

 15,791 total views,  4 views today

“To understand is to perceive patterns.”
― Isaiah Berlin

China’s meteoric rise has made people around the world, sit up and take notice of it. Countries are either jealous, scared or both at the same time. China has achieved all this in a record period of time. However, everything is not as smooth and calm as it seems. There are underlying fault lines and pitfalls in the Chinese utopian world and other nations are warming up to exploit those. There are issues of debt (internal and external), non-performing loans, and artificial currency rates. There are accusations of intellectual property (IP) thefts, hacking, bullying of corporates, supporting rogue nations, and interference in the matters of other countries/institutions. China also has issues of inequality, human rights violations, an over-strong central leadership, and extended overreach in economic expansion. But above all of this is its economic dependence on exports, and this aspect of its economy could become its number one nemesis. Is it just a situation of ‘Curate’s Egg’ or the experts are overreacting to the challenge thrown by the Chinese hegemonic regime.

CLOAK AND DAGGER COUNTRY

China joined the World Trade Organization (WTO) on 11 December 2001. Two Basic Principles of the WTO are: ‘Fair Trade Practices’ and ‘Transparency’. On paper, China accepted all such conditions. It agreed that foreign investors would be able to own up to 40 percent of shares of commercial banks in China, and up to 48 percent of telecommunication firms, however, the reality is far from this. The United States and the West, in its exuberance to open up such a huge market for its products, turned a blind eye to all such unfulfilled requirements. The US exports to China zoomed from measly $16.19 billion in 2000 to $91.91 billion in 2010 (source: statista.com). The US investment in China also saw a jump from $11.14 billion in 2000 to $59.0 billion in 2010. China became ‘The World’s Factory’, and its share in exports rose from 2% of the world market share, in 1998 to 10.4% by 2010. A Minotaur was being created and it was ready to gorge itself on the world market.

THE UNMANAGEABLE JUGGERNAUT

In the 1990s, the Chinese banks were ‘feeling their oats’ and in that temerity, to please the political masters, they went on a monetary binge. Loans were sanctioned without due diligence. The situation became so bad by the late 90s, that non-performing loans (NPL) in the Chinese banking system had reached an alarming level of 40% (5% is considered healthy, from the global perspective). To control the situation, the Chinese banking reforms were started in 2003, and China Development Bank subsumed the NPL and magically brought this ratio down to 3%. But by 2010 again local governments were strapped with a debt of 10.7 trillion yuan, which was nearly 30% of the Chinese GDP (as per Chinese national audit). This critical situation was again corrected by the government agencies in their special opaque way. So we see a pattern wherein the government and its agencies step in from time to time and adjust the figures. Li Keqiang, who is a Chinese politician and one of the leading figures behind China’s Financial and Economic Affairs, once allegedly told the U.S. ambassador in one of the meetings, that China’s GDP data are basically manufactured, confirming this widely held suspicion. The artificial economic numbers can also be confirmed by the local government offices, however, the task is bit complex. The officials of cities and corporations in China are given a number of quantifiable goals to achieve every year. Their progress and promotions depend on surpassing those goals. Now achieving all those goals is difficult in many cases, so the officials make use of an old Chinese adage very effectively: “Numbers make officials, so officials make-up numbers”.

One aspect of the Chinese economy is that, they are unable to hide their debt burden. The Chinese national debt has reached a worrisome level. According to Bloomberg, China’s total debt in 2008 was about 141 percent of its gross domestic product (GDP). By mid-2017 that number had risen to 256 percent. This number is equal to the Debt to GDP ratio of advanced economies of the USA, UK or Japan. The problem here is that China is a mid-income country with GDP per capita of just $15,400—barely a quarter of the U.S. level, which is an unsustainable model. Even, the governor of the People’s Bank of China, Zhou Xiaochuan, has sounded the alarm over this, but it is to no avail.

The United States was the largest trading partner of China, with $635.4 billion in total (two way) goods trade during 2017. Goods exports totaled $129.9 billion; goods imports totaled $505.5 billion. The U.S. goods trade deficit with China was $375.6 billion in 2017. The U.S. has been warning China about this unacceptable imbalance, but without any concrete steps. The Chinese economy is export-oriented and President Trump has taken the bull by the horns. As of today US-China duo are involved in an all out trade war, adding to China’s existing problems. The U.S. administration has recently levied tariffs of 10 percent on $250 billion of Chinese products and this rate is set to increase to 25 percent by year-end. Beijing has found one way to take much of the sting out of U.S. tariffs. It has let its currency slide by about 9 percent against the dollar, making its own exports that much cheaper and largely offsetting the impact of U.S. duties. The U.S. has not responded to this till now, however they can lower interest rates, print more dollars, sell dollars or buy yuan to bring down dollar’s value, hurting China further. The United States knows that China has very less leg-room left to explore its options. Further devaluation of the yuan has its own limits and downsides, and China is well aware of that. China’s mega-rich want to escape this threat. They are investing in U.S. dollars and Treasurys as a safe haven investment. The wealthiest 2.1 million families control between $2 trillion and $4 trillion in stocks, bonds, and real estate. The Chinese leaders must be careful in further devaluing the yuan, to prevent more capital flight. At the same time, it can’t keep the yuan’s value too high either. This will slow the economy too much and trigger capital flight just the same. So China is in a ‘catch 22’ situation. Is it going to be a currency war in addition to the trade war, only time would tell.

A COUNTRY OF SPIES

“One does not establish a dictatorship in order to safeguard a revolution, one makes the revolution in order to establish the dictatorship” – ‘1984’ – George Orwell 

In addition to monetary issues, China has ethical issues to resolve. If these issues are not resolved, they are going to bite back at China. Let us take the strange case of Ruopeng Liu. Ruopeng is dubbed as Elon Musk of China. Like Musk, he’s working on sending people into space, and has already sent them flying. He’s the man behind jet-powered surfboards, and is a multi-billionaire at just the age of 35 years. However, all this success has a dark side to it.  Lou is guilty of stealing the intellectual property of most of his product offerings in China. He has a criminal case pending in the U.S. courts for stealing designs of a famous American scientist, Dr. David Smith of Duke University. Dr Smith is one of the world’s leading experts on something called “metamaterials”. Metamaterials, he explains, are “some weird material that doesn’t exist in nature” and is used to make things disappear. Dr. Smith’s invisibility cloak is not like Harry Potter’s famous version as it does not hide things from the human eye, but it does make them invisible to microwave signals, which could have significant role in military applications. Liu had come to the U.S.  twelve years ago with the express intent of studying at Smith’s lab. He became Smith’s protégé and using that subterfuge he stole data and designs. Today an advanced version of Dr. Smith’s invisibility cloak is proudly displayed in the lobby of his company’s headquarters in Shenzhen, China. Some observers believe that he was actually on a mission from the Chinese government.

When a Chinese national goes abroad he has two goals. The primary goal of personal progression and the secondary goal of his government’s requirements. The primary goal cannot be achieved if the secondary has not been fulfilled. There are numerous such stories wherein Chinese students, research scholars and scientists, businessmen, diplomats, military personnel and even tourists have gone on a spy missions. Target abroad  could be governmental, institutional or commercial. Intellectual Property (IP) theft is the way of Chinese business and military life.

‘Loot a burning house’ is one of the 36 Stratagems of the Chinese philosophy. Chinese companies apply this in their day to day business regularly. Once the stolen IP has reached the desired destination, the Chinese use it openly without having any qualms about it. They flood the market with the cheap copies of the fake product. By the time the affected parties take up the issue with their own respective governments, the damage is already done. Price of the product would plummet, shares of the affected company tank, and at that opportune moment the Chinese company, accused of stealing the IP, moves in and buys out the original company at great discount. Of course very soon the legal case is dropped since the plaintiff and the defendant are the same. The case in particular is of the Segway, the self-balancing scooter company of the U.S. and Ninebot, a startup of China and a defendant. Ninebot stole the original designs and provided the same product to customers at a fraction of the original cost. Segway went to court, but finally had to sell out to Ninebot due to financial compultions and difficult business conditions. Segway’s years of R&D, hard work and millions of dollars had gone down the drain. Other famous cases are American Superconductor Corporation (AMSC) vs Sinovel of China, Dupont’s titanium dioxide formula theft case, Motorola and Sun Kaisens (a Chinese telecom company) case, Dupont and Monsanto Vs Chinese conglomerate DBN (Kings Nower Seed), T-Mobile (U.S.) and Huawei (China) IP theft case, Cisco Systems and Huwei IP stealing case, Avago and Skyworks IP theft by CLIFBA of China. The list of Chinese thefts is endless and the cases are mind-boggling.

Within their own country, the Chinese government does the job of threatening and cajoling. Technology transfer to the local partner is the first demand to be met by any corporation desirous of doing business in China. Stealing of the IP is matter of routine thereafter. Recent plan of Google’s to substantially expand its currently minimal role in the Chinese market—through the potential launch of a censored search engine code-named Dragonfly—has provoked uproar in the United States. Google has quietly removed “Don’t be evil” from the text of its corporate code of conduct. All that just to be in the good books of Chinese leadership. German car maker Mercedes-Benz was made to apologise to the Chinese government for “hurting the feelings” of the people of China for quoting the Dalai Lama on Instagram in one of its advertisements. A Taiwanese cafe, Gourmet Master Co.’s stock plunged, wiping out $120 million and another cafe chain, 85 Degrees Celsius was stunned by all food delivery apps in China, over Taiwan President Tsai Ing-wen’s visit in the US for a cup of coffee. It is just about anyone’s guess, how and why these so-called powerful corporations are conducting their businesses in such miasmic and threatening environment.

BRI : CHINA’S OVER-REACH 

Business threat levels and short shifting in China’s sphere of influence would go up as time progresses. This is just a preparatory period. To reach out to the outer world unhindered China has embarked on an ambitious program to meet its energy requirements. This also nullifies expected embargo by enemy forces in case of hostilities break out. The project is called Belt and Road Initiative (BRI) or One Belt One Road (OBOR). This is a pet infrastructure project of Chinese Premier Xi Jinping launched in 2013, spanning Eurasia and parts of Africa .

This initiative solves multiple purposes for China. In peacetime, it would be used to improve connectivity & commerce and in the wartime its purpose is obvious. However, the best part of the project is that host countries are taking the loan from China at commercial rates. The condition for giving loan is that the project would be be undertaken by Chinese companies using Chinese manpower. So China earns interest on its investment and provides employment to its workers at the expense of the host country. Experts have already sounded warning bells for the involved countries, since this project is going to benefit only China. All the countries involved have a huge trade deficit with China so the trade would generally flow in one direction. If China was truthful in its commitment then it would have developed industries along the routes, making the project mutually beneficial. But alas that is not the case. It seems the following countries had not heard the phrase “Beware of Greeks bearing gifts”, or else they wouldn’t have fallen for the Chinese debt trap and a new kind of colonialism : Montenegro ($865 million), Djibouti ($1.1 billion), Kyrgyzstan ($1.2 billion), Papua New Guinea ($498 million), Samoa ($181 million), Fiji ($496 million), Laos ($838 million), Maldives ($968 million) and Pakistan ($41 billion). None of these countries have wherewithal about how they are going to pay back this loan. Sri Lanka has already handed over the Hambantota Port on 99 years lease to China after failing to pay back to Chinese, and Malaysia has smartly withdrawn from the OBOR project. As per Jonathan E. Hillman of CSIS, the project could cost anything between $1-8 trillion. Only time would tell if China has overplayed its hand or this move takes it closer to being a generalissimo in every sense.

 

HOBBESIAN CHINESE MINDSET WOULD MEET ITS MATCH

“We are conditioned so effectively to play artificial roles that we mistake them for our true nature” – Jean–Jacques

Inequality in China is increasing at every level. People in Xinjiang and Tibet are losing their habitats to Chinese aggression, and millions of them are either missing or living in Chinese concentration camps called ‘Re-education Centers’ (it is surprising that not even a single Muslim nation has raised its voice against it). The ruling Communist Party claims that  Xinjiang and Tibet have been part of China since ancient times. Xinjiang was only officially named and placed under central government control after being conquered by the Qing Dynasty in the 1800s. The predominately Muslim Uyghurs, who are ethnically distinct from the country’s majority ethnic group, the Han Chinese, form the majority in Xinjiang, where they account for just under half of the total population. This, however, is changing fast. According to government data, in 1953 Han Chinese accounted for just 6% of Xinjiang’s total population of 4.87 million, while Uyghurs made up 75%. By the year 2000 the Han Chinese population had grown to 40%, while Uyghurs had fallen to 45% of the total population of 18.46 million. Similar is the fate of Tibet. Most historians agree that Tibet’s assimilation into China was established during the Yuan dynasty (1271-1368). The next two dynasties of the Ming and the Qing never directly ruled Tibet. In 1950 Chinese red army illegally occupied Tibet and made it China’s lebensraum.

Treatment of ethnic Han Chinese is no different from minorities, if they do not tow the official line.  Ordinary Chinese subjects have traded their freedom for jobs and money. But China’s high-profile billionaire businessmen and officials who got exposed to the free world and international organizations are voicing their dissent and keep disappearing at regular intervals. The latest case is of Meng Hongwei, the former Interpol president. He seems to have been detained under a new form of custody called “liuzhi”. Liuzhi, or “retention in custody”, is used by the National Supervisory Commission (NSC). The detainees can be denied access to legal counsel or families for as long as six months under liuzhi. China is also using social credit system (shehui xinyong) to snoop down on its citizens. Alibaba’s Sesame Credit program and other such platforms are being used to collect data on the local population.

Apotheosis of Xi Jinping rising him to sibylline stature has made Xi bolder. His opponents are fearful of him and his associates are careful. In addition to Mao Zedong’s ideology, latest addition of ‘Xi Thought’, on the hoof, into the Chinese university  curriculum is another assault on the freedom of domestic education. Could this ‘Yes Man’ coterie be adding to the downfall of China, nobody dare state that in that country.

TREPIDATION OF THE NATIONS

Africa is being dubbed as second continent of China. China is pushing its way though Africa. Millions of Chinese have inundated the continent, and they are flooding it with Chinese replicas of locally produced goods. Chinese companies are bribing local dictators and disregarding aspirations of local populace. They have destroyed the ecological and environmental set up of Africa in its greed for raw material and minerals.

Even the United Nations have not been spared. Beijing is bribing U.N. officials to push through its foreign policy agenda internationally. It is meddling in the affairs of Australia and New Zealand’s domestic politics, donating million of dollars to the political parties who are ready to further Chinese agenda. China is even infiltrating local churches, to increase its area of influence. It is throttling the voice of western universities and institutions with donations and threat. Confucius Centers on foreign university  campuses have been tasked to spread Chinese propaganda.

The whole situation reeks of Western dualism and hypocrisy. Had it been any other country in the place of China, accused of such acts, the west would have called for sanctions on the regime. Here is a country which has been openly supporting rogue nations like N Korea and Pakistan. It is supplying them with missile and nuclear technology. It has been accused of IP thefts and industrial sabotage. It has been the largest producer of the counterfeit goods. It has forcefully occupied Tibet and Xinjiang, and suppressing its minorities. But with western eyes all is fine and the business going on as usual.

So who would tame China? The U.S., Russia, India, Japan or ASEAN. Russia has a lot to lose commercially, so it is ruled out. Japan has financial muscle power but has only defensive armed forces. Nations of ASEAN are too small to take on China. The United States is too far away and has its own constraints in the fast-changing geopolitics of the world. India would still take 20 years or so to reach where China is today. So it is possible only by a group of like-minded countries who have already come together in the recent times. They are about to start nibbling at the open wounds of this Leviathan. China has started this dirty game and now it would get paid back. Industrial and military espionage would increase against China. Its populace would be bombarded with mementic warfare. OBOR routes through Xinjiang, Balochistan and Jammu and Kashmir would be open to exploitation. And last but not the least, it’s export-oriented economy and currency would come under severe strain as the quartet of the U.S., India, Japan, and Australia start to work on  this beyond the pale behavior. China has taken the concept of ‘Pax Sinica’ too literally. If experts are correct and Thucydides had a prophecy, the next twenty years would be a very testing period for everyone on this planet, and the next generation has to watch out for ‘casus belli’ from China.

Bibliography:

1. ‘Red Capitalism’ – Carl E. Walter

2. ‘China’s Great Wall of Debt’ – Dinny McMohan

3. ‘Currency Wars’ – James Rickards

4. ‘Asia’s Cauldron’ – Robert D. Kaplan

5. ‘The Hundred Year Marathon’ – Michael Pillsbury

6. ‘Chaos Under Heaven’ – Gordon Thomas

7. ‘Ghost Cities of China’ – Wade Shepard

8. ‘China Belt and Road Initiative’ – Sean Miner, Simeon Djankov

9. ‘China’s Second Continent’ – Howard W. French

10. ‘China’s Superbank’ – Henry Sanderson, Michael Forsythe

11. The Wall Street Journal, Forbes, Fortune, Foreign-Policy, Yahoo Japan, The Economist, South China Morning Post, Council on Foreign Relations