Cracks in the Great Wall

China isn't as strong as it appears.

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China as an Enemy

“China is neither an ally or a friend -- they want to beat us and own our country.” Donald Trump tweeted this on September 21, 2011 well before he ran for president. At the time of this tweet, Trump was a minority in sounding the alarm for the threat that China posed to the United States.

Three years prior, China hosted the 2008 Summer Olympics in an event that was seen by many to indicate their entrance into the world order. A year later, Mitt Romney, the Republican nominee for President, said that Russia was America’s “number one geopolitical foe.” A decade later and it’s amazing how things have changed.

Now, there isn’t much of a debate anymore about whether China is a hostile power to the United States. It is clear that they are with many people now asking the question whether the United States and China are in a “new cold war.” China is no longer considered an emerging country moving away from communism and towards a more liberal society. They are viewed as a totalitarian regime that is committing mass genocide, responsible for a global pandemic, stripping rights away from its citizens (see Hong Kong), and practicing predatory lending with a desire to invade Taiwan.

It isn’t just China’s image that has made the world change its behavior towards the Asian country. It has made its imperialistic intentions clear while taking actionable steps that showcase its hostility to freedom. It has continued to build up its military, fly jets into Taiwanese airspace, take aggressive and provocative actions in the South China Sea, and expand its overseas presence (for specifics here is the Pentagon’s 2021 report on China).

All the while, China has continued its path to economic superpower. With the world’s largest population and second largest economy, companies have been falling over themselves to appease the Chinese government in order to gain access to its enormous market. From Hollywood to the NBA, the potential economic gain from China has encouraged a form of self-censorship in order not to offend the Chinese Communist Party (CCP).

China has looked to expand this economic power by establishing the Belt and Road Initiative (BRI), an infrastructure program designed to establish a “modern-day silk road.” By lending to poor countries at attractive interest rates, many speculate that China is looking to seize assets from those countries when they are unable to repay the loan. This was seemingly what happened in Sri Lanka in 2017 when a state-owned Chinese company took position of a port built with BRI funding.

Not to mention, the global shutdown for COVID made it abundantly obvious how many American corporations are reliant on supply chains in China. Then, throw in China’s nuclear weapons and it’s not hard to see why so many Americans are concerned about China.

With all of that said, I think China has significant vulnerabilities that can’t be overlooked and are going to be extremely difficult for China to address.

Demographics

As I mentioned before, it is no secret that the Chinese economy is one of the most important economies in the world. In terms of total size, it is the second largest in the world behind only the United States. This is largely due to the sheer size of China’s population with more than 1.4 billion people, the largest in the world.

A high population means more people that can produce goods and services and a larger market of people that pay for those goods and services. The chart shows China’s growth rate from 1955-1975 and as you can see, it was growing at an increasingly high rate (in spite of Mao Zedong’s best efforts to the contrary).

In 1979, the Chinese government, out of concern for overpopulation, instituted the notorious one-child policy. This short-sighted (not to mention unethical) policy had the desired effects of slowing population growth evident by the chart below.

China’s population growth peaked around 1970 and has steadily declined for the last 5 decades. The population has still been growing but at an ever slowing rate, reaching its lowest point in decades in 2021 at a measly 0.34%. It is almost certain that China will reach its maximum population within the next couple of years if it hasn’t already.

While many other countries are facing this demographic reality as well, China is unique in that it doesn’t have a particularly efficient economy. In terms of GDP per capita, China ranks 77th in the world with $17,192 being produced by each citizen. This puts it behind countries such as Mauritius, Croatia, and Lithuania that aren’t particularly well-known as economic powerhouses. While GDP per capita isn’t a perfect measure, it’s clear that taking away China’s sheer size and its economy is middling at best.

As the population declines, China’s population is also getting older. China’s median age has gone from 21.5 years old in 1978 to 38.4 years old in 2021 making it older than the United States. This trend will only continue meaning China’s prime working cohort is shrinking, leading to a less productive workforce AKA lower GDP per capita.

Population decline is never a boon for a country’s economy, and the Western world will probably face a similar predicament, but the inefficient nature of the Chinese economy means a population decline and old age will be significantly more detrimental.

Politics

Another component that will weaken China is its move towards centralization of power. While China has never been free enough to be considered a capitalist or democratic society, it’s recent economic growth largely took place as market-oriented reforms were instituted. As companies and private citizens got wealthier, the Chinese government’s authoritative nature was in part muted. Since Xi Jinping has risen in the ranks of the CCP to become the leader of China though, he has jarringly reinforced a more authoritarian model.

This is glaringly obvious in the case of the Uyghur Muslims in the Western Chinese province of Xinjiang. At an unfathomable scale, the Chinese government has sought to systematically eradicate the Uyghur people and culture. In scenes reminiscent of the Holocaust, Uyghurs have been round up and put into “reeducation” camps that echo the concentration camps of Nazi Germany. Intense surveillance of Uyghurs has been implemented to ensure the “success” of this genocide.

The authoritative move of China has also been noticeable on a smaller scale such as the case of Jack Ma. Ma founded Alibaba, considered to be China’s Amazon, and Ant Group, a company like Paypal, which made him one of the world’s richest people. In a 2020 speech, Ma criticized Chinese regulators and unleashed the fury of the Chinese government. His attempt to take Ant Group public was stopped and intense regulations into his companies ensued. Ma was also missing from the public eye for months and has maintained a relatively low profile ever since.

In maybe the most publicly visible case, China’s response to COVID has exemplified its authoritarian tendencies. After initially downplaying and misleading about the virus, the Chinese government has not been helpful in the attempt by international groups to figure out the origin of the virus. It has also sought to eradicate the disease by maintaining a zero-COVID policy, which has led to the shutdowns at a scale unfathomable in the United States; shutdowns that have continued as recently as a month or so ago as in Shanghai.

China’s response to COVID in particular has opened the eyes of many American companies to the risks of operating in China. In response, they have started to reduce their exposure to China by moving their supply chains out of the country.

A recent piece from Bloomberg demonstrated just how significant this reallocation of resources is. According to the piece, American CEOs have been using buzzwords such as “onshoring, reshoring, or nearshoring” at significantly higher rates (up over 1000% from pre-pandemic periods) in their earnings call. Also, new manufacturing facilities in the US has risen to over 116% in the past year. Finally Bloomberg writes, “More than 90% of those [C-Suite Executives] surveyed said they either were in the process of moving production out of China or had plans to do so.”

This hasn’t been because of any tariffs or protectionist measure put in place by the United States government, but the recalculation by companies of the increasingly difficult business environment in China. Manufacturing makes up around a quarter of China’s GDP, so the continuation of this trend, one that companies can’t reverse overnight even if they wanted to, could be pretty damaging to the Chinese economy.

[This newsletter is long enough, so just insert on your own my obligatory rant that the United States should build free trade partnerships with countries in Southeastern Asia to encourage this process more.]

Finally, the nature of authoritarian regimes does not bode well for the long-term success of China. It is tempting to think that this authoritarian move makes China more powerful, but I believe the opposite is the case. As Kevin Williamson of National Review has written, authoritarian regimes may appear “strong,” but the more apt description is that they are brittle. They can put a lot of attention and resources into implementing policy, but the lack of freedom inevitably leads to miscalculations and an inability to adjust when things don’t go as planned.

There has been no better example of this than Russia’s miscalculation of the Ukrainian response to its invasion. Putin believed that Ukraine would fall within a few days because of 1) the power of the Russian army and/or 2) the unpopularity of the Ukrainian government. This obviously was not the case, and it’s remarkable that Putin so badly miscalculated; however, it makes all the sense in the world.

Who within the Russian government was going to tell Putin anything that he didn’t want to hear? What army general was going to admit that his unit was weak and unprepared? What intelligence official was going to say that the Ukrainian people were resolute in their resistance to Russian rule? Nobody. In an authoritarian regime, doing so can, and probably will, get you killed.

The same goes for China. While China isn’t attempting to invade a neighboring country (at least not yet), they are trying run an increasingly centralized economy and society. Because of the knowledge problem that I have talked about before, centralized entities can’t possibly have enough information to make the best decisions either economically or socially. Over time, it is inevitable that China will misallocate resources, overreach domestically, and make strategic military errors.

None of this means that the United States doesn’t need to worry at all about China. Just like the Soviet Union, China will be around for a long time in spite of the structural problems working against it. Also like the Cold War, the United States must remain vigilant; we must maintain our dominant military might and economic strength. These cracks in the Great Wall of China shouldn’t lead to American complacency but to American resoluteness in the sureness of the inevitable victory of American liberty.

God Bless,

Hunter Burnett