Enter the Red Dragon

Until recently paper lanterns, green tea, blue and white plates, soft looking hair, and a wall visible from space were about the extent most of us knew or cared about the scrotum shaped country dangling under the arse end of Russia. For five hundred years a vast area between the Middle East and the Pacific has been conspicuously absent from the world stage, unknown but also uninteresting, dormant like some forgotten volcano.

It wasn’t extinct though, and like a volcano is want to do, it recently erupted with spectacular velocity. Its old people spew forth in coaches beyond count, engulfing culture in the capital cities of the world’s great nations. And its next generation make up half of international applications to the world’s best universities, superheated work ethics at the ready. A thick sulphurous cloud now hangs over geopolitics, and its presence casts a shadowy question mark on the future. What do these mysterious people want? And, more importantly, what are they likely to get?

China’s current strength is one of two bookends in its history. A head start in technology and military strength throughout the Ming dynasty was squandered by the series of poor rulers that followed, leaving the East resolutely in the dust of Feudal Europe and the New World. Its foreign policy oscillated between exploration and isolationism; an Emperor pursued ship building and trade, only to be scuttled and remanded by his successor’s mistrust of the outside world. For so very long Confucianism reigned, closing the doors tight. China continued to evolve but slowly and strangely like the marsupials of Australasia; it was a kangaroo when the rest of the world was populated by deer.

Unlike other populous but diffident nations it was too big and strong in sheer manpower terms to suffer the European Empires of the 18th and 19th centuries, but by this point it lacked the technology and ambition to carve its own.  Gunboats in the harbour at Hong Kong were about the extent of outside influence 25 years either side of the Victorians, and whilst western apathy for trade never quite set in, it remained utterly unassailable. Even into the 20th century little changed. With communism came the Peoples Republic and an even greater impediment to productivity and inclusion. Not only was China still a minor player in terms of trade, content with agriculture, producing rice, rice and more rice, but under Maoism even domestic consumption was branded decadent and therefore not engaged in. Poor China, poor poor China.

And this was certainly not a feature common to Asia: The Japanese, South Korean’s and Taiwanese all showed unbelievable growth and development over the same late period. Strange but effective oriental firms came to dominate, especially in high technology and affordable automotives. Japan in particular emulated and improved on Western models of government, society and business. A streak of piss next to most countries (about comparable to Britain in land mass, but with way more mountains) by the late 60’s it was number two in GDP terms, a mantle it has only recently lost. Yet in the thick of it, the big red lump snoozed on.

It seems now that the lethargy was a ruse. The Chinese government realised that its neighbours were laughing at them and this acted as a catalyst for a purpose seldom seen. Far sooner than the Russians, the Peoples Republic realised that to be taken seriously it would have to adopt the capitalist model for growth, whilst retaining the less financially inhibitive trappings of communism.  It realised that with the right planning it was possible to have dogmatic socialism without necessarily retarding the economy -The kangaroo finally decided hopping about was a bit silly after all, but it would keep the thing that made it what it was: the pouch. By the 80’s either through astonishing foresight or something more accidental, the economic equivalent of the tortoise and the hare began to fade into focus. What China had done, however it had come to do it, was to find itself with a great deal of chips that nobody at the UN/G6/World Bank poker tables had realised it had.

It made the cheap stuff, the things people saw as disposable. It did the jobs the western sensibilities saw as pointless, demeaning even. Prosperity was concomitant: China moved from fields to factories and the West hung up its overalls to enter offices, a step ahead many felt.  But the Peoples Republic knew the value of volume and the ramifications of the longstanding joke surrounding ‘Made in China’ are finally sinking in. There is a contract in the minds of much of the world which defines China’s role in these three words. It is a workshop and we are happy to let it be, but only as long as it mobilises its monumental labour force, leverages low wages and disregards environmental standards to provide things at a reduced cost.  Implied in the contract is a sense of superiority and dismissal, a sense that all this is only conveniently tolerated, China knows its place as serf.

And it has, until recently, largely danced to that drum.  Up to 2005 China’s currency the Renminbi was artificially depreciated to keep the price of its exports low, out competing western based firms through cost leadership. And it continues to depreciate it whenever it feels trade slowing.  With the exception of a few anti-dumping cases, the West was largely complicit because so many western companies had already outsourced their operations to its coastal industrial base. As far as they were concerned there was no competitive edge if they all made the same savings, but it would be difficult to produce elsewhere if your competitor made in China.

As a result China now has the vast majority of the world’s capacity and tooling but worse than this is that they have little interest in respecting intellectual property rights. With so many western companies’ factories inside China, this means droves of knock off’s made with the same blueprints as their originals. Not imitations, copies. So much so in fact, counterfeits are an accepted part of many companies’ balance sheets, literally written off as an accepted cost of production. And with all the world producing there, all but gone are the country specific advantages of an Italian suit, German car or British. . .

Just as a little ™ or © in the corner of a label offers little protection for a single company, the World Trade Organisation has met similar challenges in combating Chinese petulance on a national level. As an example consider the movie industry, the great homogenizer, a smoothie maker to cultural difference. China saw the dollar sign glint in the eyes of the Hollywood executives when they recognised a billion people with rising wages, appliances and not much home grown entertainment. The Peoples Republic gave this short shrift though. Appealing to the appellate body of the General Agreement on Tariffs and Trade  (GATT, article XX(a) ‘the public morals exception’) they objected to the deleterious effects outside films could have on the Chinese ‘moral character’ and embargoed, ignoring the helpless consternations of Spielberg and Co. It was the international trade equivalent of sticking your tongue between your bottom teeth and lip. Free trade is fine when it is favourable, if the rules don’t suit you don’t heed them.

And the same hardball approach applies similarly to more Euclidian things than design or culture. Indeed the staple of modern China’s own companies (not those owned by foreign firms) is beneficiation and conversion of raw materials. This is the real bicep of modern Chinese industry. Unlike the products of Western minds, who could still ultimately turn off the idea tap and begin producing domestically again, raw materials can’t be thought up. And China has extraordinary reserves of most of the major hard commodities: metals, coal, oil and gas, woodland, water. A huge land mass and hardly touched by the years of agricultural primacy. On top of this it is no secret that the Peoples Republic is buying in everything it doesn’t have. Mountains in Gambia and whole tracts of Brazilian rainforest are bought by a central government with an exceptional amount of credit. There is a port a few miles from Rio de Janeiro called the Superporto do Acu which was built specifically for the transport of pieces of a continent, shipping it across the Pacific for processing, stockpiling and selling.

And it isn’t just the bulk items either. Even the less well known resources  (with made up comic book Sounding names like Germanium, Tellurium, Indium, Rhenium), the things found in small amounts in burgeoning ‘green’ technologies, aerospace and electronics, are gradually being monopolised. In the past few years government agencies around the globe have identified a revised list of strategically important minerals (strategic for prosperity and even national security), and recent estimates put China’s share of world production of many of the small volume ones at over 85%. The demand for these materials will far outstrip supply in the immediate future and many are difficult or impossible to engineer out of dependence. Resource nationalism is a term used to describe the jealous hoarding of domestic resources but this is surely resource internationalism, and it carries the unmistakeable hallmarks of long term planning and imperialist agenda.

China doesn’t just have the greatest share of important global resources though, it also has a very strong footing in the medium that all these things get their value from: money. In a world of buckled household belts and animus creditors, China finds itself almost uniquely (among the significant players) with a fat wallet. It has very low debt,  an even lower debt/GDP ratio and these at a time when it is running an enormous surplus. In fact its main concern has been paring down its economy so that it doesn’t overheat through demand-pull hyperinflation – Basically tripping over piles of cash before it has enough stuff to buy.

In this too it has been clever. Rather than let the money sit idle the government created ‘sovereign wealth funds’ and bought things elsewhere, removing it from the domestic pool and encouraging citizen saving (hence the low private debt). Beyond the Gambian mountains and rainforests, it bought debt. Bonds to be precise, and a huge chunk of them American.  Currently China has more than 3 trillion dollars in international reserves. So great is this reality, some have even gone as far as to suggest that it makes more sense, given the pallor of the American economy,  that the reserve currency itself (the one that everyone else uses as an intermediary between their own, the $) might soon swap to the Chinese RMB.

And this is really the crux of it – that China might displace the US is nursemaid to the fear. Estimates about its overtaking in gross terms range from 2016-2050, but almost all agree that it will happen.  How this would upset half a century of hegemony. The world has enjoyed an unprecedented level of (relative) social and military stability under the guardianship of Team America: World Police. We have had to put up with America’s belligerence and its own bullying foreign policy, but it didn’t pick on the people even a quarter as tall and so it suited us.

The shape a new world order might take is much more worrying to our love of liberty. Conjured images are of rows of grey boiler suits, English takeaway on a Friday night, barbaric birth control and an overly enthusiastic police force.  And chiefly it is this policing which drives the fear deeper, the absence of the rule of law on the world stage and a sense of justice we might find peculiar. Despite Chinese cameraphilia in other countries, in Tiananmen Square the wrong photo could still land you in Jail. China is seen as exotic but reticent, smoke stacks and antiquated moral values, not the future but a counterfactual, a bamboo version of the past.

And like soy sauce in the wound, with this fear comes anger, but of exactly the kind felt falling over in public. Impotence and regret for the stupidity of shipping out capacity, at the weakness of the current fiscal position, and at the short-sightedness of it all. Even when the big organisations started to see the tortoise in the dust they were divided and unsure, and the bumbling response has only hardened the Chinese resolve for whatever it is they want. Cooperation and capitulation have been hastily swapped for containment and protectionism, only to swap back on short notice, and all in fear, headlights to the deer.

But is the fear justified? Does China have a nefarious purpose? Is the rest of the world painted into a corner? Is the future written in Mandarin?

I don’t think so.  China will continue to grow, it may even overtake the US for a short while, but this is not quite the revolution it is billed.  This is China right sizing, just as the other big territories embracing capitalism are. It is like a flattened sapling returning to upright, where it naturally should be, rather than turning into a giant Venus-fly-trap overnight.

Understandably the fear is in the swiftness. But remember that it’s communism through the instruments of capitalist productivity – A potent mixture of central planning and free market wealth, and this was always going to be fast, especially for one so big and so far behind. When China builds something, whole cities spring up in anticipation or cause. But also remember rearmament under the Third Reich? I predict something equally short-lived and equally ineffectual to the zeitgeist, except hopefully without the war at the end.

In the often quoted GDP terms (a shoddy indicator of overall wealth in anything less than 50 year frames incidentally) China is indeed number 2, but at 7 trillion this is less than half US output and less than a quarter of the Euro zone and US combined (the West). And the rate is slowing; the curve fulfilling its econometric prophecy. Many of those sudden cities are only inhabited by ghosts in hardhats.

Plus Communism is still retarding China. Whilst central planning is economically spectacular in the short term it is entrepreneurialism, that which put America where it is, which produces superpowers. And entrepreneurs have law and competition as preconditions because there is little incentive to create a dynamic company which can be repossessed, and it’s hard to compete in a state monopoly. To say nothing of intellectual property malfeasance.

Internally it faces unrest too. The ugly reality of the one child policy for China’s ambitions is beginning to show signs of materialising.  Whilst the Peoples Republic has little regard for welfare, the working population will soon be overwhelmingly burdened by the retired, a healthy 12% becoming fully a third over the next 20-30 years. With next to no state provision this could usher in a return to the famine of 1958. And China will struggle to politically posture with such a humanitarian crisis at home because a space program and abject poverty are uneasy bedfellows.

Equally, just as the labour of a billion people can provide huge power to a state, so that many voices make for a deafening chorus. As wages and education increase, serf will become middle class and liberty, the rule of law and welfare for the elderly will be demanded. And these are expensive things as we have seen in the previous. The Peoples Republic will face some very tough realities as a consequence of its hasty ambition and single-mindedness and, in this sense at least, the fear should not be of but for China.

Perhaps most importantly though is the error in the prevailing assumption that the West is washed up. Europe is not a vagrant loitering in the doorways of the carved stone buildings that mark its age, and America does not yet push a trolley full of cans under the eaves of its great interstates. It is still true that the West produces many of the good things in life, and China still operates largely at the low end of the value chain making the nuts and bolts. Human rather than mechanical input is still the lord of profit, and plagiarism will only get the Chinese so far. Sure the steel needs to be there if there is to be a designer Scandinavian kitchen, but if China doesn’t make it someone else will. Brazil, Russia or India can (and to some extent probably will) swell to meet any supply which China curtails, leaving at worst a short lived price hike. Until the word Chinese stops being a pejorative when applied to a kitchen, car, or any other product, wealth will remain distributed much as it has.

Put simply, even with the prospects of home grown consumption that a 7th of the world population represents, in order to grow, it will need the custom of the rest of the world. Nowhere more so than in currency terms: If the Euro were to fail or the dollar default, China would really struggle. Its exposure to foreign investments is incredibly high, with Euro uncertainty already playing havoc with Chinese returns. The value of the dollar is even more crucial as it is effectively the value of the money in their wallet, and a fat wallet full of pennies is about as useful as an empty one.

In conclusion then: Mt China is active, and it has power and the recklessness of someone with something to prove. It will occupy an increasingly prominent position on the world stage as the traditional Asian powers consolidate, Europe squabbles, and the US shrinks its sphere of influence. But it is not to be feared, nor should we maintain our aloof economic, political or social positions. China should be embraced for its youthful vigour and helped through the transitions it will make to modern adulthood. It is the classic case of youth versus experience and China and the West could both do with a bit of what the other has. According to the Chinese Zodiac twenty twelve is indeed the year of the dragon, but keep in mind that the dragon is only one of 12 signs, and sooner or later it will also be a rat,  monkey, cockrel and sheep, none of which are very scary.

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