Martin Jacques TED Talk on China’s Economic Rise

This is a great talk and synopsis of Martin’s fabulously well researched book “When China Rules the World” which I reviewed a couple years ago on this blog.  If you’re not up for reading the 500+ page book, this is a good way to get the gist, and it’s updated with some post-financial crisis analysis.

His fundamental argument is against the conventional thought that when a country modernises it also westernises and that we can’t use Western ideas and thoughts to frame China when attempting to make sense of it.

Book Review: Twilight in the Forbidden City

It’s hard to find good books on China.  Most writings on China suffer from the author just not having lived there long enough.  The Chinese culture really can’t be skimmed – you have to marinate in it.  For a long time.  The language barrier can be very real, and while modern China has a feeling of openness and transparency that eminates from the coastal cities and it’s younger working class, the real China lays hidden behing many layers that most foreigners just can’t get through.

Twilight in the Forbidden City was written by a Scottish academic named Reginal Fleming Johnston who was appointed as Imperial Tutor to the last Chinese emperor, Puyi.  Johnston spent thirty-two years in China, from 1898 to 1930, and wrote this incredible account of his time with the Dragon Emperor of the Qing Dynasty, who he tutored for five years from the time the boy was 13.

This is an important book as it provides a very rare glimpse into the very secretive court life of China.  It was written and published prior to the Communist takeover in China and therefore sits squarely in one of the most tumultuous periods of Chinese history, without the benefit of hindsight.  Through it all, Johnston provides remarkable opinions on the issues of the day via his brilliant writing style.

Johnston is often accused of being a monarchist, and to some extent this was true, but his belief in the Chinese monarchy was driven by three main factors: that gross mismanagement by the Empress Dowager had squandered the benefits of a strong monarchy, that millions of lives and untold suffering and chaos could have been prevented had the monarchy remained intact, and his love and respect for his pupil who he believed would someday have the necessary skills to run the country.  In short, Johnston was correct in his assessment that China has always needed a strong central government and would continue to naturally tilt towards whoever or whatever could fill that power vacuum.  In this context, why couldn’t that figurehead be the Emperer in conjunction with a democratically elected parliament or some other such body?

Quite a bit of historical context is provided at the beginning of the book and seeing as how the Chinese Imperial system has ceased to exist for a hundred years, much of it was new to me.  Considerable time is spent on explaining the complex heirarchies within the family and court structures, and the backdrop of facts that he provides is richly interspersed with criticism of the rampant corruption of the Nei Wu Fu or imperial household department.  Johnston has provided what is probably the only Western eye witness account over a period of many years and he does so with discipline and rigor, often bringing into the narrative the necessary context for the reader to truly appreciate the landscape.

The story of the last emperor is ultimately one specific instance of sadness that is personalised for us during one of the most violent and turbulent period of Chinese history. Millions perished during a period of warlords, dueling republics, civil war, and World War II. There’s no escaping this while reading through the book, and even though Johnston’s account ends prior to the Emperor heading to become a puppet ruler for the Japanese, you can sense the foreboading.  Johnston ended up leaving China prior to major Japanese hostilities and moving back to the United Kingdom.  He remained friends with Puyi even after he ascended to the throne of Manchuko which was a controversial statement of loyalty.

Johnston tells us early in his book about the unique bond in Chinese culture between student and teacher, how it is revered above almost all other commitments, and how honored he was to be brought into that relationship.  When he retired to Scotland in 1937, he bought a small island in Loch Craignish, and proceeded to cultivate a Chinese garden.  He flew the flag of Manchuko, the new kingdom of his one-time pupil.  Despite the political difficulties he was communicating by endorsing the puppet state of a British rival, Johnston believed in the character of his student.  He believed in their relationship.  He believed in China more than many Chinese of the time.

Anyone wanting to know more about Chinese history, particular those influences that still reverberate in modern China should read this book.  It’s scolarship, the quality of writing, and the personal investment in the story by the author make it a rare and delighting read, if a bit wistful.

High Speed Passenger Rail for America: Thanks But No Thanks

Most of you know that I really like trains.  Model railroading is a hobby of mine, and I grew up consistently riding trains in China as alternative transport options either didn’t exist or were really unsafe (read: 80’s era Chinese airlines).  We generally travel by train in Europe when we visit.  However, most people are usually surprised that I don’t support any plans for high speed rail in the US and don’t envy the extensive passenger networks that exist overseas.Passenger service requires the presence of several factors which are almost never available in the United States:

  • Relatively short distances (less than 4 hours).
  • High population density.
  • Good local public transport one you’ve reached your destination.
  • High schedule density (a lot of trains providing lots of schedule options).

Passenger rail is incredibly expensive to operate by itself even with the presence of those four factors.  The last requirement of sufficient schedule density imposes a lot of constraints on the rail network that aren’t readily apparent to observers too.  As an example, The Wife and I often choose to ride the Amtrak from South Florida to Orlando instead of making the drive.  It’s more expensive at roughly 100 bucks for both of us round trip compared with a tank of gas at 40 bucks, but the 27 dollar toll for the turnpike makes things a little closer.  It’s roughly an hour longer too, but it’s nice to be able to read or watch movies on the train instead of driving.  Most importantly, and what prevents us from using it a lot more is the schedule: you can depart at 9:30 AM from South Florida, or 1:30PM from Orlando, and that’s it.  Compare this to Europe where most cities have an hourly service and you can see the difference.  There are several points in this little anecdote: the schedule, the cost, the need for pickup upon arrival in Orlando (thanks Sara’s family!) and the time all conspire to eliminate huge swaths of potential customers.A more insidious issue: once you’re at sufficient schedule density, you basically invalidate your rail network for freight traffic.  Here’s something you may not have known: the United States has the world’s most efficient railway system (See here, and here: the US enjoys the cheapest freight rates in the world).  This is because it’s entirely freight based which allows the railroads to maximize what trains are really good at: moving huge amount of cargo extremely cheaply and efficiently.  Adding in passenger traffic (particularly dense traffic) with its priority trains would essentially destroy the efficiency we have or require incredibly expensive infrastructure investments.  Even with those investments it’s generally not feasible to run freight and intense passenger service on the same trackage.  Most freight in Europe travels by truck in case you didn’t know.Passenger rail, even where it’s “successful” in Europe and Asia is still a chronic money loser requiring subsidy support.  In a wholly unsurprising development, China’s extensive new (and darling of the media) high speed passenger network is essentially insolvent.  This is the ideal which Friedman and other breathless watchers of China and India have been prescribing for the United States for years.  Says Chinese professor Zhao Jian:

“In China, we will have a debt crisis — a high-speed rail debt crisis,” he said. “I think it is more serious than your subprime mortgage crisis. You can always leave a house or use it. The rail system is there. It’s a burden. You must operate the rail system, and when you operate it, the cost is very high.”

I’d rather have the railroad system the US currently has, thank you very much.  A privately funded, operated, and most importantly, wildly efficient transportation system that’s designed to move big bulky stuff.  As gas prices fluctuate and we continue to import a huge percentage of our manufactured goods, we’re sitting pretty.

Does China’s Autocratic Government Provide an Economic Advantage?

It’s a question you often see timidly asked, in an almost guilty fashion.  Don’t you think, just maybe, setting aside all of its problems and just focusing on the economic question, that China’s government gives it an advantage over our messy democratic republic? Liberals in the United States are often criticized for their breathless infatuation with technology, intelligence, education, and a belief that top-down government inspired projects and policies are the main way to affect lasting and dramatic changes within society.  They point to examples including the Transcontinental Railroad, New Deal’s Tennessee Valley Authority, the Apollo Project,  and the impact that DARPA and other government funding had on the internet.

No one today cheerleads the economic advantages of China’s autocratic government more than Thomas Freidman, author of The World is Flat, and Hot, Flat and Crowded. Reading these books is to experience a breathless optimism that surrounds India, China, and other developing countries as he examines their education systems, massive economic investments in infrastructure, and the desire of their citizens to compete in a global economy.  No country receives quite as much praise as China, however, and the message both implicit and explicit throughout his columns and books is that this is all a product of a single-minded focus from a strong central government that’s dedicated to improving the lives of its citizens.

Are We Losing Our Edge to China?

China watchers (both admiring and fearing) can usually list off the following in quick abandon: China has the world’s second largest and second busiest airport, the fastest train, the fastest computer, the largest dam, and is using most of the world’s concrete (PDF).  There are other impressive economic stats as China is now the world’s largest exporter, makes the most cars, and has the world’s second largest economy.  The Chinese people and Chinese government relish statistics, particularly those that point out how they’re the best, and they have a flair for announcing large projects like the construction and logistical integration of several cities into the world’s largest mega-city that leave foreign observers stunned at the sheer scope of such projects.  If you read the previously linked Telegraph article, you can clearly see in your mind’s eye a vision of editors going back to each number and checking that they have the right number of zeros, all while softly cursing to themselves at the absurd size and scale involved.

Lets Look at Real Statistics

But for all of the admiration, large projects, and grandiose announcements, Friedman and others tend to forget a simple fact: China and India are still by any standard exceedingly poor.  Equating scale of projects without taking into account relative size is just, well, stupid.  Of course China and India should have the largest of everything – they have the largest populations.  The public works that everyone salivates over are all driven by the monumental sized populations that each country is responsible for.  People forget that China is still the 95th poorest country in the world when ranking by per-capita GDP.  Lest we become guilty of not adjusting for relative purchasing power (in other words, everything’s cheaper in China so you can earn less but still feel richer), when we look at their per capita GDP adjusted by Purchasing Power Parity, China climbs two spots to number 93.  These are imperfect estimates, but are directionally correct, and are prepared every year by the International Monetary Fund.  The United States, by contrast, is in the top ten for both measurements, with none of the countries besting the United States having a population of over fifteen million.

Can We Really Know the Effects of Communism on China?

Note that these bad (both absolutely and relatively speaking) individual economic indicators are despite nearly thirty years of constant economic growth, many of these years being close to ten percent or greater.  Not exactly the picture that tends to be painted, is it?  The point is this – there are two words that accurately describe China’s current economic progress: catch up. Decades of autocratic rule, political unrest, warfare (China was continuously at war from 1927 through 1950) have actually intensely harmed the country and its economic prospects.  In fact, these are often pointed to by outsiders (and even some Chinese) as reasons to why China is currently lou hou or backward.  

However, there is a decent control scenario that we can use to contrast with the current Chinese economy: Taiwan.  Both countries were founded the same year, 1949.  Both had participated in the ravages of civil war.  It can be argued that Taiwan may have left the mainland with some economic advantages: the best and the brightest, and possibly more administrative experience, but that case seems hard to make due to how poorly they had previously run the mainland.  They also left with China’s gold reserves, but the mainland received economic aid from the Soviet Union the first decade of its existence, and if the economic development stats were at all close it might be relevant.  In any event, Taiwan, having always pursued a free market with limited government interventions is today is one of the world’s strongest economies and near the top of the lists we just ran for the United States and China.  In other words, historically, China’s autocratic government has been nothing but a hindrance.

Today we are told, that all has changed.  China’s embrace of new economic policies (and priorities) is the new paradigm: that of the state guiding the economy along long term goals, inspiring its citizens with great public works while simultaneously providing a stimulus to the economy as a kind of dual pronged weapon of economic good.  This is contrasted against the herky-jerky, short sighted, messy and error prone proclivities of democratically elected governments that are so obviously wrong. However, when you really stop to consider this, it’s extremely puzzling.  We’re essentially saying that the element that prevented China’s economic growth for thirty years (a planned economy) is now it’s key advantage when competing globally.  

Keep in mind that when people decry the fact that the free market hasn’t arrived with something, they’re generally pushing an agenda that is economically incompatible with reality.  Friedman and friends are pushing carbon reduction due to a belief in global warming.  Others push social agendas for things like public housing.  Still more push redistribution of wealth for the betterment of the working and lower classes.  While we can debate the merits of these agendas, the reality is that if they were economically viable, someone would have found a way to monetize them. Here’s the general conclusion (to be followed I’m sure by a few more posts on this topic): it’s easy to make double digit gains when you’re in last place.   It’s also easy to cherry pick smart development deals when your whole country is undeveloped or underdeveloped.  In a hyper complex, massive economy like the United States that also happens to be very diverse, this type of top-down management is practically impossible.  China makes their share of stupid investments too, we just tend to not hear about them.

Did China Steal America’s Stealth Technology?

A brief interlude here as I’d like to comment on a great blog post by the folks over at Wired writing for their excellent blog Danger Room.  They have an entry up asking if the recently revealed J-20 stealth fighter incorporates stolen American stealth technology.

The post takes us back 1999 when the Yugoslavian defense forces managed to shoot down a F-117 Stealth fighter, an incredibly lucky event.  According to Wired, there were reports of Chinese agents immediately scouring the country for pieces of the plane, buying them up from farmers who had recovered them.  Several pieces ended up in a Belgrade museum whose curators insist hasn’t seen suspicious activity or visits.  Wired discusses how the technology was already fairly mature, how the F-117 was eventually retired in short order, and how the J-20 doesn’t look very much like the F-117.

Probably not much copying going on here they tell us.

I tend to agree, but for different reasons.  The fighter was shot down at the end of March (the 27th) and a month later, on May 7, the United States accidentally bombed the Chinese embassy in Belgrade.  Most Americans wouldn’t even remember this but almost all Chinese remember and as an expat living in the country at the time, it is impossible to forget.

The Chinese went crazy.

Immediately, demonstrations erupted across the country, but particularly in Beijing, Chengdu, and Guanzhou whose cities had consulates or embassies.  American personnel, including ambassador James Sasser, were trapped inside the Beijing embassy.  Rioters attempted to burn down both the Chengdu and Guanzhou consulates.  The United States and NATO immediately released an apology and circulated the fact that they were attempting to hit a Yugoslavian warehouse nearby that looked similar, but bizarrely, these apologies were not allowed to be immediately rebroadcast in China.

This was China.  You don’t get to demonstrate or riot without the government allowing it to happen.  There were reports of students being bussed in by the government to the US embassy to let loose their anger.  It was declared to be unsafe for Americans to be out in public, the first time this had ever happened nationwide for US Nationals since China reopened in 1980.  International schools and companies closed.  We were told to stay inside and not go out for any reason.

For Americans living in China, it was an incredibly surprising incident, and I managed to get involved in one of the scariest situations I’ve experienced overseas by ignoring the warning and venturing out to see what was going on.  While most of the world is annoyed by America today, in the late nineties, particularly in Asia, Americans were extremely popular.  Everyone in China loved Clinton, his policies, our economy, everything.  It was almost inconceivable that Americans could be bothered out in the streets of China.

Some pundits explained the riots by saying the Chinese government was concerned that repressing the students would cause them to get out of control, but this doesn’t jive with how China normally views demonstrations. The crux of the issue was that China was ultimately convinced that the bombing was not intentional.  But why would the US bomb an embassy?  What could we hope to gain?

In the aftermath, strange facts emerged.  George Tenet testified that the Belgrade strike was the only one of that war directed by the CIA.  I heard from two different American personnel involved in the military that it wasn’t an accident, and these rumors are still prevalent today.  Another source testified that CIA maps correctly identified the Chinese embassy, which seemed to debunk the flawed cartography defense that was the official US explanation of the incident.  An in-depth investigation conduced by Danish Newspaper Politiken and the UK Observer turned up even more inconsistencies.  And there was still China jumping up and down that it wasn’t an accident for no apparent reason.

Eventually, the link seemed to become clear: China had been gathering stealth fighter pieces, boxing them up, and were preparing to send them back for analysis.  The United States’ message to China was clear: welcome to the NFL, and don’t mess with our technology in our warzone. As I said earlier, I agree with Wired that China never got those stealth parts, just for different reasons.

China’s Impending Military Might: A Cause for Concern?

It’s been a terrifying couple of months for Americans.  Always suspicious of China’s intentions, things have reached a fever pitch in the last few weeks after grainy pictures surfaced from Chinese bloggers that the Chinese air force was building a stealth fighter.  Shortly after the rumors came out, we had videos of the mysterious plane taking off.  What some experts had thought would be years away from production was here.  Now.  Ruining Christmas, and just in time for New Years.This came right on the heels of an announcement from China that they were building an aircraft carrier that is part of Beijing’s plan to “build itself up as a maritime power.”  Yikes!

I enjoy hyperbole, and I’m obviously writing in a bit of a sarcastic tone, but it’s been unbelievable to witness the collective meltdown that the American news media is having over China.  Hu Jintao’s recent visit is gasoline on the fire, and we have pundits accusing China of stealing our technology, all-but declaring war against other countries, and kicking off an arms race with the United States.

The People’s Liberation Army Navy (PLAN)

However, these feelings simply don’t correspond with the facts.  Lets talk about the carrier for a minute.  For a little context, you can see a list of all known semi-active aircraft carriers in the world, broken down by country here.  The list is as follows:

  • Brazil (1)
  • France (1)
  • India (1)
  • Italy (2)
  • Russia (1)
  • Spain (2)
  • Thailand (1)
  • United Kingdom (1)
  • United States (11)

It’s important to note that all eleven of the US carriers are in fact supercarriers, which at 70,000 tons, and considerably larger than the 40,000 ton carriers that some countries have, with the vast majority of the carriers operated by other nations falling into the 20,000 ton light carrier class.  In other words, all US carriers are almost four times larger than competing offerings.Carriers are important to the American objectives of being able to project power.

Current US war doctrine assumes air superiority as a prerequisite for military success, and when you’re separated from everyone else by two oceans, you’ve got to be able to move planes around in order to move troops around to win wars. Carriers are astronomically expensive to operate, build, and deploy.  It should be noted that of the list of carrier wielding countries, a couple have trouble keeping them deployed (most notably Thailand).  Due to the challenging nature of conducting carrier operations, consistent deployment patterns are a must.  It takes years for navies and countries to get to the point where they’ve got enough in-house experience to operate a carrier effectively, and it takes even longer to be able to do it in combat, under pressure.

China’s plans for a carrier are interwoven with its plans to develop a blue water navy (one capability of operating beyond territorial waters).  Only Russia, France, the UK and US are considered to have blue water navies.  Ironically, China is very familiar with the efficacy of carriers as Qingdao, one of its main naval bases, (under German control at the time) was involved in the first naval-launched air raid during World War One when Japanese planes flew in and bombarded the German command post.

In the current context, it is almost laughable (a feeling shared by the Navy’s top officer) that the US should feel even remotely threatened by China’s current and future naval plans (there are plans for China to develop a nuclear carrier by 2020, compared to the conventional ship currently under construction).  If we’re afraid of China why not be scared or India, Italy, or Thailand?

It’s no mystery that China’s sabre rattling whenever Taiwan pisses them off is just that: sabre rattling.  The US typically moves a carrier group into the Taiwan straight and that’s that.  China has no ability to invade Taiwan, mainly due to its lack of a credible Navy.  The PLA’s main attempt to advance against Taiwan forces as a spearhead towards island invasion operations in 1949 was crushed in part by a lack of troop landing vessels and this lesson has certainly stuck with PLA leadership.

The Stealth Fighter – Credible Threat?

The stealth fighter or bomber or whatever it actually will end up being is also in the category of “who cares”.  Its engine, like most of China’s engines, is produced by Russia, which means a vulnerable and non-domestic supply chain during wartime.  It’s large and can’t super-cruise, which means it’s short range.  This narrows its effective targets to Taiwan and maybe India, which are essentially China’s main military and geopolitical priorities.  A more realistic perspective would be to put both the carrier and stealth fighter into the “interesting research project” category.

Chinese Defense Spending

Finally, lets look at the defense spending of both countries.  The United States spends over 600 billion dollars per year on its military (this doesn’t include wartime expenses for our adventures in Iraq and Afghanistan).  China spends 98 billion per year.  The United States spends more than twice as much as a percentage of its GDP than China does.  Amazingly, America spends forty percent of the entire world’s defense expenditures.  We’re spending more than the next seventeen highest spending countries combined.  It’s an astronomical amount of money compared to China.

Relative economic costs don’t factor in as much when you consider that premier weapons are almost uniformly constructed from parts or materials found outside of China.Lets close this entry with a hypothetical.  As my buddy Erik put it, if China were operating carriers off our coast, and flying a spy plane loaded with surveillance gear seventy miles off of Hawaii, Alaska, or even California, we would freak out. As in, absolutely lose it.  Probably declare war or nuke something, just to show how serious we are.  And yet, this is exactly what the United State did to China off the coast of Hainan island in 2001.  The United States routinely sails carrier groups and other naval units into the Straight of Taiwan, which is only one hundred and twenty miles wide.  If China routinely sailed battle groups into the Gulf of Mexico to underscore ongoing political objectives, we would freak out.

Is America’s obsession with China and its military little more than a national reluctance to accept the idea that for the rest of history, we may not retain number one status in all areas?  Are we really completely bought into the idea of global manifest destiny maintained by an indomitable military force?  Considering that we spend ten times as much as China and seem to relish the idea that we can do what we want, where we want, when we want, I’d say that maybe we’re just going to have to wake up and accept the fact that there’s room for the most populous country in the world to have a carrier.  Does this mean we fall asleep and not spend on our national defense?  Of course not.  But it does mean we can learn a thing or two and face facts. China spent many centuries as the world’s most advanced civilization.  The United States has spent fifty years there, and could easily spend fifty more, at least from a military perspective.  Already reports have surfaced that simply retrofitting F-15 Eagles with upgraded electronics gear will help our military easily defeat China’s first stealth offering.

The Bottom Line

Just as the Soviets faced off with the United States when designing units, tactics, and weapons systems, expect the same pattern to emerge between China and the United States.  Is this cause for alarm?  No, but it is cause for vigilance and realistic assessment of the situation.  Panic, hyperbole, and a crazed commentary on these issues helps nobody.

Update Feb 4, 2011

As originally mentioned above, our behavior towards China is nothing new and in fact continues a history of imposing double standards when military conduct is concerned.  The Cuban Missile Crisis is a great example of this: the U.S. puts 100 Thor ICBMs in Turkey that are capable of striking Moscow in 1958, then almost goes to war over the Soviets placing a similar arsenal close to American territory.  Right or wrong, good strategy or bad, we consistently insist on the implementation of a double standard in military matters.

China vs. the United States: What about all this debt?

It’s almost impossible to mention China in a conversation now without hearing about them owning a large portion of our debt.  Based on my own unscientific and anecdotal perception (I asked a bunch of people), most would answer that China owns “most” or “close to half” of our debt, and I’m commonly asked “when I think that Mao Zedong will be on the hundred dollar bill.”Before we begin, I’d like to make clear that I am a fiscal conservative.  I believe the US should not routinely run a deficit, particularly a large one.  I live in a state (Florida) with a balanced budget provision in our constitution and even though it’s ignored from time to time, I think it would be a good thing to have nationally, and I believe it to be extremely unwise to routinely run deficit spending.

One of the best resources for understanding the national debt is, unsurprisingly, the US Treasury.  You can read up to date reports on outstanding debt and its holders here.  Wikipedia has a slightly outdated but directionally graphical correct representation of this data here.  From this, we can see that somewhere around 30% of all US Treasuries are held by foreign and international interests.  The rest are held by insurance companies, other investors, pension funds, mutual funds, and the government itself (mostly the Social Security trust fund).Already, this is probably not the picture you expected.  Less than a third of all US debt held by foreigners.  The treasury helpfully breaks this down further here, listing each country by holdings and the dates of the holdings.  Of that debt, China is indeed the leading holder at roughly 20.8% (as of July 2010), but Japan is right behind at 20.2%, then the United Kingdom at 9.2%, then oil exporters (5.5%), Brazil (4.0%), Hong Kong (3.3%), Russia (3.2%), and Republic of China or Taiwan at 3.2%.

After just a few minutes of basic research, we’ve learned that China has roughly 6% of our national debt under its ownership, and of the rest of the countries on that list, Japan, the UK, Taiwan, and Brazil would be counted in the friendly-to-America column, or at least in the “choose America over China” column.  It can be argued that Hong Kong is essentially China, but it still doesn’t change the general picture at all.China, along with other countries, just doesn’t own that much of America’s national debt.  In fact, I’d say in light of all the political rhetoric, 6% is a shockingly small amount.

Still, lets say that the nightmare scenario happens, things went sour with China, and they wanted to begin flexing their muscle, using our debt against us as a weapon.  What would their options be?

  • They could sell their holdings.  This would immediately depress the value of treasuries and probably cause some amount of alarm.  However, were China to begin selling their nearly 800 billion in treasury bills, the market for these bills would rapidly cause their existing holdings to plunge in value.  In other words, by selling, they’d screw themselves fairly quickly, and they’d be forced to take that money and place it somewhere else.  Where?  The EU has proven recently to be a less than stellar investment.  Their own domestic market wouldn’t be able to absorb a nearly trillion dollar capital injection without being inflationary.  Not to mention that the Fed could simply step in like they did with TARP and buy up the 800 billion dollars that China would sell, at rock bottom prices.  Our allies could also mobilize considerable buying pressure so that their own holdings wouldn’t devalue.  At the end of it all, China would probably lose the most from this maneuver.
  • They could unpeg their currency to the US Dollar. China today artificially keeps their currency pegged at an unfavorable exchange rate (to them) in order for their products to remain cheaper for Americans.  Unbelievably, most of the current US diplomatic effort on economic issues is centered around trying to get China to remove this peg, thus making things more expensive for Americans.  Derogatory terms like “dumping” are used to describe China’s gift of subsidized products to millions of Americans.  By demanding that China unpeg its currency, we’re basically saying “remove your artificial subsidy on goods that middle and lower class Americans predominantly buy, and that will help us.”  Smarter people than I have written on this elsewhere numerous times.
  • Are there other options here? I’m trying to think of them, but the reality is this – Chinese businesses are flush with dollars.  There’s a reason almost all of the countries that are major holders of US debt are manufacturing or commodities export driven (China, Taiwan, Brazil, Oil Nations, and Japan).  They receive dollars for their products, and need to buy materials to make their products.  These materials can and do often come from other economies, so it’s advantageous to use the world’s reserve currency to procure these materials.  Notice how India is absent from the list – they’re a knowledge exporter (mostly services and knowledge work like software), and therefore most of their income is paid in wages to individuals who then spend the cash within their own economy, not paid to other economies to procure raw materials.

If you were to obtain a large sum of money (in the billions or trillions of dollars), you’re going to need to make decisions regarding the investment of that money using long term, macro-level criterion.  Government stability comes into play, geopolitics becomes important, and all of a sudden in addition to a rate of return, you’re faced with the difficult decision of who do you trust with your money – but on a national scale.  If you’re China and you’re looking around the world to invest your US dollars, you can choose Europe, a handful of economies in SouthEast Asia that are just as invested in the US as you and are competitors to yourself, Africa, or South America.  The world just got a whole lot smaller.  In that context, the US is by far the most stable recipient for your investment, and its markets are also the driver for your current economic success.Deng Xiaoping, the former leader of China and the architect of China’s reforms that shifted the country to free-market capitalism, is famous for his quote that China should stick to its economic policies for one hundred years.  China is thirty years in and has already taken enormously expensive steps (subsidizing exports by pegging to the US dollars for example) to ensure stability and continued growth.  Reasons for this are also steeped in history, as we’ll in see future posts.

Sure, China is investing more in Europe, as the recent debt offerings from Spain and Portugal illustrate, but the broader context here is that a global economic downturn hurts China just as much or more than any other economy.  Their domestic markets aren’t big enough or sophisticated enough to sop up the spare manufacturing capacity that would be created by a global downturn.  China’s economic interests are driven by political and historical goals that go unseen by Western economic analysts.

The analogy to this situation is simple:  as a construction company, you build a house, then rent it to a tenant who can also beat you up.  You sell furnishings to him too.  You’ve invested a lot in the home that you build, and all of a sudden, your tenant starts having trouble paying you back.  Unfortunately, the house is so big and lavish that there’s nobody else who can afford it, or if they were to buy it, you’d have to sell at a steep or near-total loss.  What do you do?  You follow the wisdom that banks who own their own mortgages follow: you do what you can to work out a payment plan and look to keep the tenant in the house, while not humiliating him in the process.  This way, both of you make it through hard times, and you can sell him a nicer house when he’s back on his feet in a few years and is looking to upgrade.

China is not about to jeopardize its future by focusing on short term issues and America needs to stop wringing its hands over non-issues.  The problem isn’t China’s holdings (or any other foreign entity’s holdings) of our national debt, the problem is the national debt: it’s us.  It feels a lot better to fear monger, but at the end of the day, we’re the problem.

China vs. the United States

Yesterday I was at the dentist, getting my teeth cleaned, and watching CNN for roughly an hour.  They spent almost the entire time (they did interrupt to let us know that Regis was retiring, sigh) discussing Hu Jintao’s visit to the US, how the Chinese economy is the second largest, and what the goals of the visit would be for both parties.  It was painful, and not because my teeth were getting poked.  The media, most members of the US Congress, and I’d say most of these groups in addition to normal Americans spend significant time talking about China in very abstract, basic, and historically ignorant terms.Here are some statements that are a commonly made with regards to China that I believe most China observers would take issue with, but are accepted as fact by most Americans:

  • China owns most of our debt, and therefore owns America, and therefore will begin to (if not already) influence the United States in ways we aren’t comfortable with, and in ways which would be imposible if they didn’t own so much of America’s debt.
  • China’s military power is a deep concern for both the United States and the West at large, and certainly a threat to East and Southeast Asia.
  • China’s autocratic government coupled with their capitalist economy affords them tremendous advantages to exert political and economic will towards being “the best” in ways the US and the West can’t muster.
  • China must demonstrate that it’s willing to behave responsibly towards the rest of the world and engage at the level of statesmanship that the West has long demonstrated.
  • China’s economic growth will continue unabated for the foreseeable future, and there is essentially almost no risk of a derailment.

There are a few more but these seem to be the ones that most people focus on, and simply put, the feeling is that maybe not now, but in the next twenty to thirty years, the following scenario could play out: China is big, they own our country, they could wreck our economy (either by wielding our debt against us or demolishing our superiority in competition), then kick our butts in a war.I’ve tried not to make these straw men arguments, and over the next few days/weeks I’ll deal with each and provide some counterpoint to each.

Country Driving – A Journey Through China from Farm to Factory


I first heard about Peter Hessler’s book “Oracle Bones” from my mom.  She was reading through it and enjoying it immensely, and she recommended it profusely.  I promptly ignored her for a year, until I managed to read a corroborating review from somewhere.  I picked up both of his books at the time, “River Town” and “Oracle Bones”, and the more I read of them, the more I was both annoyed and delighted.  Delighted because the books are some of the best  from a foreign author regarding modern China, and annoyed because I had always dreamed of someday writing a book about my experiences, and I realized that Hessler had, well, written the book I wanted to write.  So much for that (and sorry mom!).I should note that before reading Hessler, I had almost zero interest in the travel literature genre, but he helped interest me in several other books by the likes of Paul Theroux (Riding the Iron Rooster) and even several Chinese authors such as Ma Jian or Gao Xingjian.Hessler also writes for the New Yorker, and while I was in Beijing for the 2008 Olympics, he wrote a great piece for that magazine that reminded me why I enjoy his perspective so much.  I was therefore very excited when I got an email (again from my mom) telling me about his newest book, “Country Driving”, which again focuses on modern China and it’s rapid industrialization.While “River Town” was set in the mid to late nineties, and “Oracle Bones” in the early 2000s, “Country Driving” is set in a span from roughly 2002 through 2008.  It’s divided into three sections, one details his trip by car along the Great Wall, one focuses on rural living in a town outside of Beijing, and the last takes place in a booming Special Economic Zone in Southern China.Hessler is unique among most journalists covering China in that he speaks fluent Chinese (this was essentially a matter of survival while spending two years as one of two foreigners in a Chinese city), and that he both appreciates the context of China (history, literature, politics) and the people.  Culturally, there is much that can be mocked about China, and many foreigners focus on these nits that differentiate China from the West to their own detriment, and one of the things I like most about Hessler’s writing is he manages to poke fun at some of the more amusing aspects while still maintaining a deep respect for the country and its people.  He also manages to not romanticize China’s poverty or lament it’s rapid modernization like many foreign observers tend to do, instead, he strikes an engaging balance of description, context, humor and human interest.For a glimpse into China’s complexities from a richly personal point of view, I recommend any of Hessler’s books.  To appreciate how rapid China’s rise has been since the mid nineties, read all three in order.  There is no other author today who writes as well or as thoughtfully about China.

The North Korean State of Mind


The Wife and I watched a 2004 documentary over the weekend titled “A State of Mind” that was incredibly enthralling.  I’ve never been to North Korea, but I’ve known many South Koreans, and I’ve seen a few collections of photographs from various travelers that have managed to make it to the country over the last ten years, and I’m always interested in any kind of media that manages to claw it’s way out of that country.One reason for my intrigue is that the pictures I’ve seen are the closest to my memories of what it looked like when I arrived in China in 1984.  China was just a few years into it’s experiment of opening to the West, and it’s very difficult to describe what it was like to see a thoroughly communist country wading tepidly into the waters of capitalism.”A State of Mind” follows two young North Korean gymnasts through their training regimen to participate in the “Mass Games” which are held more or less every year to demonstrate the power of the North Korean state, the singular mind of its people, and the Communist ideal of the group overpowering the individual.  These games are elaborate gymnastic, visual, and auditory productions designed to shock and awe the North Korean population to even higher levels of devotion to “The General”, Kim Il-Sung.I previously mentioned how the wholesale lifting of hundreds of millions of Chinese out of poverty has to be one of the greatest miracles in history, and nowhere is this point driven home more than the contrast between China and the North Korea of today.  North Korea has barely progressed since 1950, while China is challenging for world economic supremacy.  South Korea, likewise is a beacon of economic progress, and it’s all eerily driven home by the gymnasts and their families who confess to the camera that performing for the Great Leader is and will always be the highlight of their life.  Electricity blackouts, food shortages, and the lack of any progress over the last fifty years are all the fault of the Imperialist Americans.  North Korea has truly succeeded in a total religious education of its population on the virtues of communism, and it’s almost like you’re watching a farcical episode of Monty Python mocking the heady days of communism in the 50s and 60s when you see otherwise intelligent, driven people in total worship of their deranged leader.The ultimate shame is that the North Korean people, like the Chinese, Burmese, Vietnamese, a host of nations in Africa, South America, and Central Asia, are completely stifled.  But nowhere is it as bad as North Korea, and as someone who remembers the flood of refugees flooding North China during the late nineties as millions starved, I was left with a genuine feeling of total frustration.  This film is important to remind people that it’s all been tried and failed before, right down to the 1984-esque state radio in every North Korean kitchen that broadcasts propaganda and cannot be turned off.  While it’s easy to criticize the evils of capitalism, and decry abuses of greed, it’s hard to see a corollary anywhere in world history where capitalism has produced a wasteland of human potential.Communism works, and it works well.  It is the greatest engine of equality the world has ever seen as it swiftly ensures that everyone is equally poor.  Watch this film for the cautionary tale that it is, and watch it to be amazed at the talent and devotion of the North Korean people.