Instablity within China
Peter: It was worth the cost. The Sino-Soviet split, when Nixon went to China and brought China into the family of trading nations, brought them into the order, that was totally worth it, even though the Chinese just dumped, dumped, dumped, dumped, dumped, because it put a break in the Communist world and really set the stage for the collapse of the Soviet system. That doesn’t mean it’s always been that way.
In the mid-80s when Gorbachev had come to power and things look like they were pretty calm, we forced the Europeans and the Japanese into the Plaza Accords, which basically forced them to revalue the currencies, driving the currencies up by about 50% versus the US dollar in six months. I mean, that was neo-imperial. What’s going on with the Chinese right now, we’re no longer getting what we perceived as a strategic benefit, and so we’re willing to play hardball with the Chinese.
I would love to think that at some point in the next year or two, there’s going to be a Plaza Accords moment, where the Chinese see the writing on the wall and realize that their economy can’t function without American involvement. I think we’ve already passed that point. I don’t think the Americans are sufficiently interested in maintaining the order any longer. I think to be perfectly blunt, the Chinese have abused the situation and a split is inevitable.
This isn’t decoupling. Decoupling implies that there could be two parallel systems that just don’t deal with each other. The Chinese are absolutely dependent on American market access and American security involvement in the world. Their economy in its current form can’t survive without the United States at all. I think that’s exactly where we’re heading.
Mark: Sure. Well, let’s explore a little bit more, because I think that is another non-mainstream point, where right now there is this fear of rising China. There is this sense, for example, even though they suppressed information about COVID early, subsequently they have appeared to have had a much more effective response than most Western countries. Obviously you have East Asia, Taiwan, South Korea that have also responded effectively. But there is this growing sense with Belt and Road, for example, the US is playing what might be described as a responsive game in Africa, in parts of Southeast Asia.
There is this sense that China is a growing power. Their purchasing parity power is higher than the US. They are beginning to float a deep-water navy. Their population is much higher. They are still able to build. Shenzhen’s subway miles are comparable to New York’s subway miles. There is at least, among part of what might be described as the elite intelligentsia, of this China envy. Why is that wrong?
Peter: Well, there’s a lot to unpack there, because pretty much all of that is wrong. Let’s start with the navy. The Chinese in terms of number of hulls do have a larger navy than we do. In terms of tonnage, there’s something like one-third. About 90% of their ships cannot sail more than 1,000 miles from a home port. They can’t even break out of that first island chain, much less reach American shores, much less patrol the Persian Gulf, much less protect a globe-spanning merchandise and supply chain system.
It is well designed for taking on Taiwan, assuming no one comes to help Taiwan and that’s it. Let’s talk commerce. The Chinese are export-dependent. They absolutely have to have access to consuming markets. Let’s talk tech, the Made in 2025 program that everybody’s been talking about. If you talk to any Chinese bureaucrat behind closed doors where they’re not being recorded, they’ll freely admit that 2025 is the first signpost and they don’t expect to hit technical parity with the West, until at least 2080. They’ve got a lot left to steal and their capacity to generate the tech at home honestly just has not worked out to the direction that they hoped it would.
Let’s talk demographics. Yes, it’s a larger population, but on average it’s already older than the United States population. The one-child policy means that the Chinese have already run out of 25 and 30-year-olds and it’s aging, aging, aging. It’s the third fastest aging society in the world. They are going to get old long before they get rich.
Let’s talk energy. This is a country that imports over 80% of their energy, most from a continent away. In order to import that energy, they’ve got to sail by Taiwan, the Philippines, Vietnam, Singapore, Malaysia, Indonesia and India. Any one of which could easily interrupt all tanker traffic. Don’t even get me started about a military conflict with a real country like Japan or the United States that could just stop all of their commerce without sailing within 3,000 miles of the Chinese shore. This is the biggest paper tiger in human history. It’s going to burn this decade.
Mark: What does that look like when it burns? I’m of two minds; one is that I think a lot of the points you’ve raised are valid. At the same time, there’s this idea of organizational capacity, where the US has lost the will to have big dreams, to have big visions, to be able to execute.
On Twitter recently, we saw at Elon Musk was considering moving his factory from California and then a California congresswoman tweeted, “F Elon Musk,” except not as politely. He was like, “Okay, message received.” The US has this anti-building culture, while China still builds, still believes in things. Their science fiction is representative of that, because some of the people who are writing it grew in rural abject poverty and have seen China industrialize.
How do you balance what might be called the “general organizational competence?” Then, what are the specific sequences of events that lead to China burning, or at least a plausible sequence to do that?
Peter: Organizational competence is a normal part of the development process. As most countries develop, they go from relative centralization with relatively low regulation to a more diversified governing system that has a higher regulatory burden. I don’t just mean that in terms of business regulation, but cultural constraints. The United States is now a little over two-and-a-half centuries old. We have evolved to the point that we have a much more diversified political system than we used to. Diverse means many voices. Many voices means we don’t always agree and that does keep things in check.
I’m not saying that we couldn’t use a bit of an overhaul here. That would be really useful. I’m just saying that it’s not exactly beyond the pale. It pretty much fits the historical pattern with other countries.
While Han Chinese culture is maybe 3,000-years-old, the Chinese governing system is really only about 40. It took them a while to recover from the Japanese occupation, from the Korean War, from Mao’s tender mercies, and they really only turned into the governing system that we now understand today in the late 70s. Then they only really started to develop in an economic sense after the Mao-Nixon Summit and getting into the global order in 1980.
When you only have one voice, it is really easy to make things happen. It is really easy to build skyscrapers and subways and high-speed trains and those all look great and they’re flashy. I’m not suggesting that they’re not useful, economically, politically, and otherwise. You also make a lot of mistakes, because there are fewer things to stop you from doing things that are just monumentally stupid.
Probably 40% of all the housing units in China right now are unoccupied and they probably always will be. China has far more construction than they need for an economy of their size or urban structure of their situations. I don’t mean to take away from some of the Chinese accomplishments, especially considering the long arc of Chinese history, they’ve been monumental. That doesn’t mean that they’re sustainable.
The real problem we have in China is financial. The Chinese basically confiscate most of the savings for private citizens and force-feed them into projects that achieve national goals, whether it’s full employment, or a great infrastructure system, or it’s a new skyscraper. That sounds good. It generates a lot of economic growth and that’s why the headline numbers will always look great. If it’s not productive growth, if it’s not profitable growth, then all of those loans can never be paid back.
The Chinese today probably have corporate debt, which honestly this is mostly state-run corporations, of about 300% of GDP, which is the highest in the world in absolute and relative terms. They basically run their country on the Enron model of throughput over profitability. That’s great until it’s not. Every country that has ever attempted to follow that path has eventually had a really hard crash, whether it’s Indonesia, or Korea, or Japan.
The difference between China and everyone else is the Chinese have prevented themselves from having a correction. All their inconsistencies have built up decade after decade after decade. When it does go down, I fear it’s going to be absolutely catastrophic. Now to answer your other question, how can this all go wrong? Chinese history is rich with examples of how the whole place can go to shit in a very short period of time. This is a country that has never held together well and it’s a country that has always been vulnerable to threats internal and external.
Foreign invasion is always a fun one. I don’t think it is particularly likely right now. Internal breakdown of some sort is usually the more likely vector for breakdown, some implosion. The Chinese can face that in consumption, they can face that in energy, they can face that in finance, they can face that in government.
If I had to guess, I would expect a hybrid this time around, that we have a financial collapse and a demographic collapse on one hand internally that threatens the power of the party internally. At the same time, there’s some external crisis that inhibits either the export of finished goods to generate income, or the import of the raw materials that are necessary to keep their system going, most notably energy. One could trigger the other very easily and honestly one would almost certainly fold them to the other. If that happens, I would say the most likely outcome is that the southern tier of city states from Shanghai south become de facto independent, just like they have been for the vast, vast majority of Chinese history.
The North drops into a famine-ridden, neo-Maoist tyranny, where it just reverts to a pre-industrial status and half the people die. I know that sounds awful, but honestly when you are as exposed to American kindness as China is and the Americans stop being kind, I honestly don’t see how this even holds together, much less thrives, much less keeps the lights on.
Mark: That’s a somewhat depressing perspective.
Peter: Remember, the Chinese agricultural system uses five times the inputs of the global average. They don’t have good farmland. The only reason it works is they apply a bottomless supply of inputs, like fertilizer and pesticides, all of which are made from imported materials. China’s dependent on the world, not the other way around.
Mark: Let’s get into this, because I think this is one of your other major theses, that geography is somewhat deterministic in terms of outcomes. What is Chinese geography and, beyond being a net energy and food importer, what other important characteristics of Chinese geography are there that has shaped its direction in the past and will in the future? And then more generally, how does geography play out in Europe and US?
Peter: When you’re looking at food, or raw materials, or energy, or whatever it happens to be, China is typically the largest importer of pretty much everything. There are some exceptions, there are some things where the Chinese excel at processing, and so they do play a supplier role to the world. For the most part, they’re an absorber. The geography really is the problem. The biggest problem is strategic, the first island chain from Japan down to Singapore, the Chinese have never been able to punch through that and interact with the world in a corporate manner ever within their entire history with the exception of during the American-led order when the Americans put everyone on the same side.
That is the factor that has changed, is that the Americans have neutralized the geographic factor that most heavily has constrained Chinese development since the dawn of the Han ethnicity 3,500 years ago. All the Americans have to do if they want to destroy China is go home and geography will take care of the rest.
Within China itself, the North China Plain is where the majority of the Chinese live. That’s where the Han ethnicity originated, the center of their power, but it’s not like the American Midwest. The soils are thinner, they’re not as fertile, and they don’t have a river transport system. Moving things by water is about 1/12 the cost of moving them by land, and so American farmers can tap the greater Mississippi system to shuttle stuff around very cheaply.
The Yellow River not only is not navigable, it’s both drought and flood prone. You have very few average years. If you have a flood year, it tends to overthrow its banks. The last time it did that, it killed about a 100,000 people. If you have a drought, that’s not useful for much at all. If your homeland is both drought and flood prone, it’s difficult to have continuity there.
Most of Chinese governance until 20 years ago was focused on managing the water system, because if you couldn’t manage the water system, you couldn’t irrigate, you couldn’t farm, you couldn’t have a population. At multiple periods in Chinese history, you’d have some disruptor that would come in, whether it was an internal warlord, or an external power, and they’d smash the waterworks. That would just shatter Chinese civilization for 30 years and they’d have to start over completely.
I’d argue that the Chinese really didn’t get the Yellow River tamed until this century. Beyond that, this is the good part of China up north. If you move south of there, you’ll hit a series of highlands and mountains and you’ll get to the Yangtze Valley. The Yangtze is a little bit like the Mississippi in that it’s navigable 2,000 miles inland, but it’s broken up by a series of mountain chunks and cliffs that make it difficult for the entire zone to integrate with one another. There are no huge chunks of flat land, except for the very, very bottom and at the very, very top.
Those two areas, Sichuan at the top and Shanghai at the bottom, are world-class geographies and cities and economic zones. They’ve always existed somewhat apart from Beijing in the north. These areas actually do have a degree of continuity and economic success independent of being part of China, which is something that drives the northerners absolutely batty.
Then if you move further south, you start getting into the subtropical zone, a much more rugged terrain and those southern city states, Fujian south to Hong Kong, have basically existed on their own throughout almost all of Chinese history. Through at least the last 1,400 years of Chinese history, they’ve traditionally gotten the bulk of their food stuffs not from northern China, but from trading partners in the wider world.
These are the areas that can be very economically successful, but by linking with non-Chinese entities. So what happens is you have a political-military system in the north that is, to be blunt, despotic, because it has to be in order to mobilize the population to manage the land. You get a more mercantile, industrial culture in the center, which is successful when it’s not part of northern China. And your southern city-states can really only function, can really only eat, if they deal with outsiders.
The further south you go, the more economically viable the territory, but the less likely it wants to be part of Han China. Of course, when you’re in a situation like you are today when the northerners are calling all the shots, they’re worried about separatism, because they should be.
