How did China become so mighty?

Image via Debating Europe

When I was a schoolboy in the 1940s, I felt sorry for the poor Chinese.

I was taught they were doomed to famine because their enormous population—400 million—exceeded the carrying capacity of the land.

The saying was that if the Chinese marched four abreast past a given point, they would march forever, because by the time the first 400 million had passed, there would be another 400 million behind them.

All this was too bad, because the Chinese were a highly civilized people and in some ways very wise.  For example, they paid their doctors when they were well and not when they were sick.  But, so I was taught, they were hopelessly behind the times.

Now China has a billion more people than it had then.  While some of them, especially the rural villagers, are poor by European and North American standards, none are in danger of starvation anytime soon.

The fertility rate of Chinese women is below the replacement rate, so the imaginary columns of marching Chinese would end at some point.

And much more importantly, the Chinese in many ways have replaced us Americans as pace-setters for world progress.  Charts in my previous post show some benchmarks of Chinese progress

The Chinese are the world’s top manufacturing nation and top exporting nationTheir technology is highly advanced.

During the past 20 years in particular, the USA has been struggling with self-created problems–military overstretch, governmental paralysis, racial conflict, while the Chinese have gone from strength to strength.

China’s rise does not, in and of itself, threaten American independence and prosperity.  The reason we Americans should be concerned is that China’s rulers reject America’s professed ideas of democracy, free-market economics and human rights, and yet are moving ahead while we Americans are falling behind.

China’s mercantilism

Click to enlarge.

China’s economic takeoff began shortly after the death of Mao Zedong, when the government shifted from a centrally-planned economy of state socialism to be loosely-guided economy of capitalist mercantilism.

Mercantilists do not believe in unrestricted free enterprise and they especially do not believe in unrestricted free trade.  Instead they believe in supporting industry by means of infrastructure improvements, protective tariffs and other subsidies.

This was the policy of Alexander Hamilton in the USA, of Friedrich List in Germany and of Deng Xiaopeng in China. 

It has been the policy of many countries, not always successfully.  But the Chinese made it work.

American companies were allowed to operate in China, using Chinese labor and gaining access to the huge Chinese market.  But they were subject to certain conditions.  They had to employ Chinese workers—not just blue-collar workers, but engineers and managers.  They had to allow some Chinese ownership.

And, most importantly, they had to transfer technological know-how to the Chinese.

Other countries besides the Chinese set conditions for entering their markets.  When I reported on business for my local newspaper, I was told by Kodak and Xerox managers that these companies had branch plants in Mexico because the Mexican government would not allow them to see film or copies in Mexico unless there was a certain amount of ”value added” in that country.

China represents an extreme and the USA represents another extreme. 

The Chinese government wants foreign investment to add to that country’s industrial base.  The U.S. government doesn’t care.  About 98 percent of foreign direct investment in the United States consists of purchase of existing assets, not investment in new capacity.

In China, private companies are allowed to operate by permission, but it is understood that they exist to advance the government’s policiesEven foreign companies are expected to support the Chinese government’s goals.

In the USA, government mostly operates within the limits set by corporate business.  In China, it is the other way around.

The risk of the Chinese policy is that they can sink a lot of money into projects that never really take off.  But they have had huge successes—for example, Huwei, the manufacturer of 5G telephone equipment, one of the world’s most advanced technologies. 

It was started in 1987 by a hard-driving entrepreneur named Ren Zengfei, an Army veteran, based on a $5,600 loan.

Its original business was reselling telephone switches made in Hong Kong.  Now it is a global company with an estimated $107 billion in revenue (in 2018) and 188,000 employees (in 2019) selling the world’s most advanced telephone technology—5G, for fifth generation.  The significance of this, according to Foreign Policy magazine, is huge:

5G will offer hugely faster data speeds than today’s mobile technology, which is important for consumers. But 5G will also be the technology that ensures artificial intelligence functions seamlessly, that driver-less cars don’t crash, that machines in automated factories can communicate flawlessly in real time around the world, and that nearly every device on earth will be wired together.

5G will be, simply put, the central nervous system of the 21st-century economy—and if Huawei continues its rise, then Beijing, not Washington, could be best placed to dominate it.

Source: Foreign Policy

This is an outstanding entrepreneurial achievement, but Ren was helped by many factors—the cost advantage of working in China, government backing, protection from foreign competitors and a huge domestic market.  Also, Huwei has been sued many times by American and other Western companies for alleged intellectual property theft.

The U.S. government has in effect banned new Huwei 5G equipment installations in the United States and tried to get foreign governments to do the same.  The argument is that Huwei equipment is a security risk; the company will work with Chinese intelligence agencies to spy on its customers.

While the U.S. government is trying to prevent the growth of Huwei, I am not aware of national strategy for actually catching up, comparable to the U.S. response to Sputnik.

The New Silk Roads

Some American construction companies do work in the off season that they know is going to be unprofitable, on the theory that it is better to keep its crews employed and bring in some revenue, than to be completely idle.

The Chinese government appears to have the same idea for China’s economy as a whole.  China has enormous productive capacity, and its government thinks it better to use it, no matter how, than let it stay idle.  For example, China has built many new cities that now stand empty, waiting to serve a new generation.

China also finances construction projects based on a similar philosophy.  It tells foreign governments that it will build anything they think they need—highways, airports, football stadiums, whatever—and lend them the money at low interest rates to pay for it, provided that they hire Chinese companies and Chinese workers to do the job.

If everything works out, it is a win-win situation.  If not, Chinese business and Chinese workers have been helped, and China holds IOUs to cover its cost.

China extends its global power by the promise of material benefits and by activities that build up its power. 

The U.S. tries to maintain its global power by threats of economic sanctions and by maintaining a military establishment that drains its power.

One of China’s most ambitious projects is its One Belt One Road initiative, also known as the New Silk Roads.

Click to enlarge.

China plans to build a network of railroads, highways and oil and gas pipelines across the interior of Eurasia, following the routes of ancient camel caravans that connected China with the Middle East and the Mediterranean world.

If successful, China will have brought about the economic integration of a vast region including Central Asia, Russia,  Europe and parts of the Middle East, with itself at the hub.

Unlike sea routes, the New Silk Roads will be secure from the possibility of blockade by U.S. naval forces. 

The U.S. government has unintentionally helped China’s project by trying to cut off Russia and Iran from trade with Europe and North America.  Russia, with its nuclear weapons, and Iran have been pushed into an alliance that greatly strengthens China.

Problems ahead for China

Image via Global Times

Nothing is certain in this world, and there are many ways things could go wrong for China.

There’s no guarantee that China’s investments, including the One Belt One Road initiative, will pay off.  China’s ability to ignore short-range profitability considerations may be setting it up for a bigger failure.

China is vulnerable to environmental disaster.  China’s Three Gorges Dam, upstream on the Yangtze River from Wuhan and Shanghai is said to be the world’s largest electric power project and the world’s largest flood control dam.

But last year heavy rains threatened to cause floodwaters to overflow the dam, jeopardizing 400 million lives and a large fraction of the world’s manufacturing capacity.  The danger was averted, but it hasn’t gone away.

The fertility rate in China (as in the U.S. and many other countries) is below the replacement rate.  This means the proportion of old people will grow and the proportion of working-age people will shrink.  This could limit economic growth.

China has serious problems with overall pollution, with corruption, with labor unrest and with intellectual discontent.

Will the Chinese be able to cope with all these problems?  I wouldn’t bet against them.

LINKS

China’s Rise, America’s Fall by Ron Unz for The American Conservative (2012)

The New China Syndrome: American business meets its new master by Barry C. Lynn for Harper’s Magazine (2015)

A Dolorous Imbalance: America Makes Aircraft Carriers, China Makes Money by Fred Reed.

Dispatches from the New Cold War by Fred Reed.

5G is the Internet’s Future, But the U.S. Is Falling Behind by Charlie Campbell for Time.

Image via Deutsche Welle.

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