Need To Know: May 31
Take a look at Chinese actions over the last six weeks, and you might think China is ready to fight the world. China has:
Threatened Canada after a Canadian court decided an extradition hearing against Meng Wanzhou, a top executive of Chinese telecom firm Huawei arrested at the United States’ request, could proceed.
Slapped an 80 percent tariff on Australian barley and suspended 35% of Australian beef imports, after Australia joined calls for investigations into the source of the Covid-19 outbreak.
Threatened the European Union over attempts to document Beijing’s disinformation tactics during the Covid-19 pandemic and calls for investigations into the outbreak
Personally threatened American Congressmen submitting bills to make it possible for Americans to sue China for Covid-19 damages
Sunk at least one Vietnamese fishing boat in the South China Sea while threatening Malaysian survey ships
Told the world to butt out after it imposed a national security law on Hong Kong. That appears to be in violation of treaty commitments China made to Britain at the time of the 1997 handover.
Sent at least 10,000 troops into India’s side of the Galwan Valley where they are engaged in a tense stand-off with Indian forces.
The Chinese seem flush with power.
That’s above the surface. Let’s look at what’s going on below the surface.
This week, for the first time in 26 years, the Chinese Communist Party did not set a GDP growth target. Yes, Covid-19 has the world in a severe recession. But for a dictatorship whose legitimacy with the Chinese people is based on two things:
ending the Century of Humiliation and driving the foreigners out
lifting 500 million people out of poverty
that is hugely significant. And dangerous. If the Communist Party can’t make people richer, they’ll begin to question the legitimacy of the regime.
And, there’s much to question. Even without Covid-19, Xi Jingping has done significant damage to China’s economic position by picking a fight with China’s biggest customer. He probably thought Donald Trump would fold like the other Western politicians China has frankly bought off. But, he hasn’t. Xi may get a gift in November if Joe Biden wins the presidential election. But, he may not.
If not, Xi’s bungling of the American file will have made a lot of Chinese factory owners, and their workers much poorer. And he’ll have nothing for the 350 million Chinese still living on less than five dollars a day. The Chinese economy needs growth of 7% plus a year to create jobs for them. That’s why the GDP growth target matters so much.
The trade deal signed in January commits China to buying $200 billion in American goods it can’t afford. And while it halves American tariff rates on US $120 billion worth of Chinese goods, most of the higher duties - which affect another US $360 billion of Chinese goods - remain in place. If China welches on its commitment to buy those American goods, the tariffs go back in place on all Chinese goods.
Who would that hurt more?
China gets 4 percent of its gross domestic product from exports to the U.S., while the U.S. derived only about 0.6 percent of its GDP from exports to China.
What are China’s alternatives to the U.S.?
Japan: Xi has picked fights with Japan, and the Japanese have started offering their companies subsidies to move supply chains out of China
Germany: an export dependent economy that’s as much a competitor to China as a lucrative market
India: China wary, and too poor to substitute for the U.S.
Russia: an economic basketcase that’s a good source of commodities for China’s factories, but not a substitute buyer of their output
If you combine the GDP of those four countries you get to US $13.5 trillion, which is about 40% smaller than America’s GDP of $22 trillion. Yes, botching the US file is very costly indeed.
Then Xi botched the response to Covid-19. There may be good reasons for China’s lack of transparency — if the virus hatched at the Wuhan Institute of Virology. But had China let international experts into the country in December when the outbreak started, it’s quite possible it would have been contained.
That didn’t happen. Now it’s estimated as many as 150,000 Americans may die, and trillions of dollars in damage has been done to the U.S. economy. At least 40 million people have lost their jobs. Both losses in Europe may be higher. Fury is rising. There are already calls for Beijing to make reparations — a historically loaded word.
Earlier this month, Politico published details of a 57-page Republican party memo, which advised candidates to aggressively target Beijing in their public remarks on the pandemic. That means painting Democrats as “pro-China” if they don’t agree with retaliatory measures.
That will create bipartisan pressure to adopt policies to keep key U.S. industries like medical supplies, pharmaceuticals, and military applied high-tech in America. U.S. government agencies are also looking for ways to push companies in other industries to remove both sourcing and manufacturing from China. Tax incentives and potential re-shoring subsidies are among measures being considered to spur changes. India has created two special economic zones the size of Luxembourg to attract firms leaving China.
China has threatened to weaken its currency against the dollar to counteract the tariffs. But, this is another threat made from a position of weakness.
Letting the yuan weaken would offset some of the pain of tariffs. But, China can’t let it weaken too fast or too far without causing other problems, capital flight chief among them.
Given many global commodities are purchased in dollars, it makes many of China’s imports increasingly expensive.
Then keep in mind, if the U.S. really wants to keep Chinese goods out, there’s nothing to stop increasing the tariffs by another five percent to deal with currency devaluation.
Then there’s the problems Xi inherited that he’s done little to fix. China has a huge number of loans (estimates are 15%) not being repaid. There is more debt held in murky “wealth management products” tied to real estate than held by banks. For too many companies, growth is high, but profits are low or losses are massive (and the books are being cooked. See Luckin Coffee).
Chinese invest whatever they can abroad; if China was a wonderful investment, its own people should be ploughing their money into it. That they put as much as they can into foreign assets like real estate tells you what they think of the Chinese prospectus.
Now let’s consider Xi’s position.
Xi Jinping’s rise to supreme leader was very odd. Unlike Hitler, Lenin, Stalin, Mao, or even Saddam, he did not “shoot his way to the top.” He’s a career bureaucrat picked by the Politburo Standing Committee in 2010.
He’s subsequently been anointed by the party to Mao’s level without having commanded troops or won battles. It’s like recognizing the system was weak, the elite picked a strongman. But, nowhere along the way has Xi proven he’s strong.
He who controls the guns controls any dictatorship. But, what real loyalty to Xi does China’s military have?
Yes, he put many of the current generals into their positions. But, it’s not like they served with Xi or went on a long march with him, as Mao’s military leaders did. Xi’s support appears a mile wide, but it’s an inch deep.
Once he became President, he launched a massive crackdown under the guise of anti-corruption on any competing factions, and arrested 120 high-ranking officials along with 100,000 others. Some of those were in the military.
Their allies and subordinates don’t like Xi.
Last year he made himself ruler for life — ending the 10 year limit China had imposed on its president since the 1990s. That means there’s a group of very powerful and influential people in the Communist Party class below him who may have had aspirations for the top job who now won’t get a chance. They’re not fans, either.
Even high ranking people in the party who appear dependent on Xi for their job are not as solid as you might think. Not those in his immediate clique. But, most others can be bought depending on what they’re offered.
I worked in politics. When grumbling starts about a leader, whispering also begins. Whispering turns to deal making. If I get this job, you will get that job. Soon, everyone starts envisioning themselves moving up. Moving up is why people go into politics.
In Xi’s China, whispering can have dire consequences for you and your family. But, that also means once the whispering starts, the stakes are very, very high. It’s not a parlor game. If the knives come out — they must be used.
Remember: Soviet leader Nikita Khrushchev looked supreme to outsiders until he was ushered into retirement by the Politburo in 1964.
Add it all up, and Xi starts to look like Julius Caesar. Appearing at the height of power, but surrounded by powerful enemies questioning his leadership, and sharpening their knives.
The best counter: try create a suit of armor by getting the Chinese people to rally around the flag with whipped up foreign crises, and the appearance of false strength.
That explains the frantic flailing above the water.