When will we see peak China?

Don’t bet against China. This has been sage advice ever since that country’s careful embrace of capitalism after the death of Mao Zedong in 1976. Failure has been predicted several times, but its growth has been rapid, both in economic and political power. Similar advice pertains to the US economy, at least for better-off Americans, even as its politics disappoints. But nothing is forever, and there will come a point when China’s growth runs out of steam.

Right now there is unmistakable hubris in China’s political class, which frequently touts the superiority of its political system over that of the West – with its response to the covid pandemic being the latest piece of evidence. And yet as 2022 progresses, that will look less convincing. The point here is not that the pandemic started in China and that the initial outbreak was fumbled. That could have happened anywhere, though it is interesting to note that in China the problem arose with weakness and denial at a junior official level, whereas elsewhere the weakness is more likely to be further up the chain. China’s policy is to stamp out the disease before it can get going through very strict lockdowns, and sealing the border. It shows a very impressive degree of political control and resolution from the centre, which other large polities have failed to match. But what next? The first problem is that China’s own vaccines are less effective than those developed in the West, and are not up to the job of being a first line of defence – but the leadership regards the use of vaccines developed elsewhere as a sign of failure. The next problem is that the virus is evolving so that it is becoming more infectious, and thus harder to contain – though less deadly. This means that as the West moves beyond the need for lockdowns and learns to live with the virus, China is faced with an awkward choice. Does it try to keep up its zero-covid strategy, with all the costs that that this brings? Or does it let the virus run its course in China, softened by vaccines and a less dangerous strain? That might make it look as if China’s leadership had made some wrong choices earlier on – even if that is unfair, given that death rates in China are likely to stay very low. We have a demonstration of the strengths and weaknesses of the different political systems. The open, chaotic system of democracy in the West, which includes some important countries in East Asia, is both better at technological development, and more adaptable and resilient when it comes to shaping public policy. Policy failure may be more likely in the West, but its consequences are not as serious – indeed it can be more readily used as a learning experience.

Behind this is the timeless conflict between centralised political control and localised decision-making. The genius of capitalism is that uses markets to facilitate efficient local choices, right down to the individual; markets have proved vastly more effective at processing information than any other system that humanity has devised. The attempts by socialist states to do without markets, and the free capital that is required to make them work properly, notably by the Soviet Union and Maoist China, proved a dismal failure. While these systems did have some notable achievements, they made little progress with the eradication of poverty. The Soviet Union’s attempt to reform and embrace some aspects of capitalist systems ended in complete collapse. China noted this failure and made sure that its own embrace of capitalism was more controlled. The Communist Party developed a hybrid system of central party control alongside highly competitive capitalist markets that has been astonishingly successful. It has been the world’s most striking political and economic success of the last fifty years, and has done more to move the world out of poverty than any other single thing. With economic success has come a stronger political standing, backed by military power, which the country has been increasingly ready to assert.

Now, as a good liberal I need to make an important point here. China’s rise has been good for the human race. A country of over a billion people deserves a high status in the world’s political system. American conservatives are inclined to see China’s rise as a political failure – but that is quite the wrong way to look at it. This is not just because it has benefited so many Chinese people, who can now adopt middle-class lifestyles – but China’s rise has contributed to a much more efficient world economy, whose benefits have been well beyond its borders, and not least in the USA and other countries in the West.

But there is a problem, both for China and the rest of the world. China’s hybrid system of authoritarian capitalism is not sustainable in the long run. China is far from the only country that has followed this path. In the first half of the 20th Century there were Germany and Japan. In both of these rapid economic success led to political tensions that in turn led to militarism and vastly destructive war. In the second half of the century several East Asian countries have followed the authoritarian capitalist path, which too has led to political tension. There seems to be a choice between allowing democracy to take hold, or moving deeper into totalitarianism. South Korea and Taiwan have decisively taken the democratic path. Indonesia, Malaysia and Thailand are struggling with this choice, though not yet on the totalitarian road. Vietnam has so far successfully avoided the crunch, but it is bound to come there. Singapore resists full democracy, while avoiding outright totalitarianism, and is further down the development path than others – but it is just a city-state.

Under its current leader, Xi Jinping, China has opted for decisively for totalitarianism, and is taking Hong Kong with it. What do I mean by totalitarianism? It is a political system where a highly centralised elite, usually with a clear single leader, attempts to control all aspects of life. This includes non-political values and the editing, and rewriting, of history. The concept of objective truth is discarded so that pretty much any statement is valued purely on its political implications. The reach of public policy often takes in the private foibles of the senior leader – in China the government wants to stamp out effeminacy among men, for example. The Chinese Communist elite has decided that any admission that the Party is, or ever has been, mistaken is a political challenge that must be crushed. Hence its difficulties in confronting covid. A change of policy might in fact be a sensible response to new facts about the virus – but, especially given the hubris displayed so far, it also makes it look as if the earlier policy was a mistake. The argument that when the facts change so does the policy is not a comfortable one for authoritarians: when the facts change, so might your legitimacy.

We come to a basic problem with authoritarian systems. They rely heavily on an elite of no more than a few hundred people, personally known to each other. Beyond this it is impossible to trust people completely. And the further they follow the totalitarian path, the greater this reliance becomes. There is simply a limit to the amount of information that such a small elite can process. The public health authorities in Wuhan, where the covid outbreak started, were not able to take clear, independent decisions, but felt that their duty was to suppress information about anything that looked bad. China has worked hard to make its elite work efficiently, including by leveraging it with technology. The country is placing heavy hopes on the use of Artificial Intelligence (AI). Singapore’s ruling elite is doing much the same thing with some success – but it is one thing to manage a city state, and another a country of one billion people. For China’s ruling elite the problems are mounting. Here are a few of them.

The first problem is demographics. Thanks both to Mao’s one-child policy, and to the normal dynamics of economic development, the ratio of working-age people to older people is in the process of rapid decline. The overall population of the country is starting to fall. For all the country’s economic advances, a Western-style system of welfare has not been developed. This will require a radical reshaping of the Chinese economy with high economic productivity increasingly focused on domestic needs – and, surely, a greater dependence on imports.

Then there is financial management. China’s system of finance is many-layered and complex. The Western socialist idea of a centralised system of state finance with a large national debt has not been followed – doubtless because the economy too large and complex for that to work. Vast amounts of money have been invested, notably in property development, financed by a complex system of finance, involving public and private agencies. Restrictions on banks have led to complex work-arounds. There is a huge dependency on high property values, which reaches well into local government finance, where funds depend more on property development gains than taxes. The whole system bears a strong resemblance to the financial system in the West before the Great Financial Crisis of 2007-09. Western commentators are quite sanguine about this, assuming that the vast political power available to China’s central government will allow them to manage any fall-out better than Western governments did. Only up to a point.

Even in the area of global politics China faces a problem. Much as they crow at the retreat of the West in such places as Afghanistan, they have little ability to fill the vacuum. The West’s retreat is followed by collapse, vacuum and, in many places, war, and not by a beneficent China restoring order. China has nothing to match the West’s proclamation of liberal values and a rules-based order. It simply denigrates them, while boasting about its own political system, which is pretty much impossible for any other country to replicate, except Vietnam, perhaps. It is notably un-ideological in its international dealings. That is very attractive to regimes who tire of being lectured by Westerners – but it has a dark side. China has no compunction about bullying if it does not like what any country is doing – Canada, Australia, South Korea and, currently, Lithuania are all victims. Suddenly a rules-based order and a bit of lecturing start to look more attractive. China’s weak international position was especially conspicuous at the recent COP-26 climate conference. The country showed almost no leadership, in spite of the fact that most countries are becoming much more concerned about climate change. Those countries get a more constructive response from the West. And China is the world’s biggest producer of carbon emissions, so it should have something important so say.

These problems are clear. Another important issue is more ambiguous. Will the increasing control of the Communist elite mean the loss technical innovation? At the moment the Party is bearing down on privately-controlled businesses, which have been the source of much of this. But totalitarian regimes can be good at innovation, especially in highly focused areas, such as military technology. China has set some major priority areas, which will doubtless receive generous funding. All the same, innovation and creativity flourish more in a less directed environment. Much of China’s investment is sure to disappoint. AI, in particular, is a much much trickier thing than those with directive minds allow. Driverless cars have been around the corner for many years now, for example.

So, as China confronts these problems, what is likely to happen? The biggest fear is that, like Germany and Japan a century ago, it channels its frustration into military aggression, and starts off a war that it cannot stop. There are some signs of this, but the world is a very different place. The world trading system, which has China at its heart, is liable to weaken as China tries to become more self-sufficient, both for political reasons, and to manage its changing domestic priorities. How this plays out in the wider world is hard to judge. It could be a boon for other developing world countries, who may take China’s place as exporters. It could hurt the American economy, which has benefited so much China’s boom – but then again, betting against such a dynamic and adaptable system is not wise.

My guess is that China will be enveloped by a slow-moving financial crisis. Communist power will succeed in slowing it down, but that will prolong rather than solve it. This will impact investment, development and growth across the country, and undermine the Party’s prestige. Eventually Mr Xi will be replaced, perhaps as his next term ends in five years’ time, and this would be cue for another change in direction. The world will become a very different place.

2 thoughts on “When will we see peak China?”

  1. China’s switch towards totalitarianism is an interesting point. I don’t think totalitarianism and empire go together as happy bedfellows. The Russian and Ottoman empires were anything but totalitarian; and the Nazis hit trouble when they tried to brainwash Belarusians. I think China will run into increasing problems with its neighbours, some of whom are quite powerful. Pity we can’t just stand back!

    1. The Chinese are making a serious attempt to absorb/crush minorities in Xinjiang and Tibet, but history would suggest that this is doomed in the long run. It is hard to see a set of Chinese values that do just apply to Chinese people and their unique place in the world.

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