In this post, I want to outline my personal mental map on China that I use in processing current developments as well as in helping my friends and clients in the decisions they need to make on the country. These include foreign investors and corporations wanting to build their own China strategy and also Chinese corporations that are going international that I interact with. So much of the rhetoric about China is mired in false first premises that it is really difficult to be helpful in a neutral and professional way.
Yes, China has several important problems it needs to work through, but they are not what its detractors say, and neither are they trivial that we should ignore them. Whether we like China or not, as an economic and geo-political entity, it is established as one of the major forces in the world that we cannot ignore. There are opportunities in that formidable economy and there are huge risks that must be discussed transparently, but always in context.
As a preamble, in setting out my own credentials on the topic, I need to point out that in whatever I have say about China, I have skin in the game. I have a deep and enduring engagement with China and Chinese people as a whole. Although I am not ethnic Chinese myself, China is personal to me. Chinese people have been a part of my life, starting from when I was born. In Malaysia where I was born, the interracial relationships between the Chinese and the other ethnic groups that constitute the country are real and deep. I have Chinese people in my family, I grew up with Chinese family, friends, neighbours, church-mates, childhood school friends and eventually University mates and partners who are very much a part of my life. So, when I talk about Chinese people, I do not refer to them in abstraction.
In adulthood, I started the China office of my The Asian Banker business in 2000. Therefore, I also have a more than 24-year experience in building a real business in China. I started first in Shanghai and then moved to Beijing on the advice of Jiang Jianqing, the then chairman of ICBC Bank. Although he was Shanghainese, he advised me that in banking, it was important to be closer to the policymakers, regulators and the big four banks in Beijing. It was advice I took to my benefit. He eventually became a dear friend who also wrote the foreword to the Chinese edition of my first book.
I eventually developed a long line of friends and peers in China’s financial system that has only grown and matured over time. The wonder of my own life was to have had a front seat view and an engagement with the personalities who defined the breathtaking rise of China’s modern-day economy. I have also had an enduring interest in Chinese culture and history, having travelled extensively and visited many parts of the country. When I discuss China, I discuss my own journey. So when I discuss China’s shortcomings or call its bluff, I do not do it as an outsider.
I need to point all these painstakingly to pre-empt both detractors and sympathizers who might take one part or any of my views as being biased one way or another. With this personal background out of the way, I want to say that I am not a fan of superlatives on either side of the spectrum – I find those who dismiss China off-handedly without even visiting the country as deeply offensive as those who blindly praise China and give it an open-cheque without discussing its feet of clay. With these as a prelude, I want to list a few areas that would give the reader where I stand on the issues.
1 On the future economic trajectory of China
I spent most of the early 2000s conflicted between Western dismissal of China’s rapid rise and the actual mechanism by which the country was able to engineer the fastest, deepest growth in the GDP of any country in history. Anyone reading The Economist magazine or The Financial Times to this day would be expecting China’s economy to implode every three months, but over a 14-year period to about 2014, I saw only sustained growth. So clearly it must have been doing something right and we must make it our business to understand it correctly.
Only when I better understood the mechanics by which China continued to grow despite its detractors that I began to understand the roles that the state, the private sector and the global capital markets that were all favourable to China at the time, played in accelerating sustained growth. The policymakers used all the economic tools at the disposal of any country – the creation of debt, the investment in infrastructure, the education of an entire generation and social security – while at the same time benefitting from the sheer energy of a hardworking and ambitious population.
When the state started to intervene in the capital market and interfering in private enterprise since 2014, I did not criticise it outright, but studied state-sponsored economies in the past, including that of Japan, Korea, Germany and even the Austro-Hungarian empire to see how far governments are able to take such policies. The mechanics of state-sponsored growth in economies throughout history have shown that despite the decline in access to global capital, China will still be able to grow sustainably for the foreseeable future, albeit without the superlative access to US capital that it once enjoyed. The compounding of organic growth alone can be substantial in the next 10 years or so, although I do believe that China needed its GDP to grow at above six percent per annum to be able to mask the massive debt it was accumulating. GDP growth is now below that figure, which means that it will be finding it difficult to recycle the debt that has been accumulated in the system. Also, without the access to US capital it once had that saw the rise of Ali Baba, Baidu and other giant internet corporations, future growth will be organic rather than compounded.
The bigger question though is where the state will direct that growth. Germany in the 1930s, despite hyperinflation, was able to build a formidable military complex that it then used to great disaster. Japan’s lost years since the late 1990s were spent keeping recession at bay by keeping wages steady and domestic consumption high, enabling the state to raise debt to extremely high levels never seen before in the economy of any country in the world. But over time, currency devaluation caught up with Japan and with it, a string of unintended consequences.
Quite clearly, China will be investing in leading edge technologies to climb into a developed nation status in per capita GDP terms. But such commitments to breakthrough technologies have to be accompanied by real productivity gains, which has been missing all through China’s rise, with its attendant bankruptcies of uncompetitive state-owned enterprises. China can’t have its cake and eat it, and it has to walk in the same direction as the West did. We already see signs of these in entire provinces like Jilin, where traditional automobile manufacturing companies have gone under quietly, resulting in job losses and upheavels in entire communities not unlike that of the rust belt in the US.
2. Geopolitics
There is a lot to discuss on this front. I do not subscribe the Thucydides’ Trap as a paradigm in formulating China’s relationship with the US. The idea of the Thucydides Trap comes with a back-handed compliment, that your country or corporation has reached a level of achievement that is now a threat to us, whether it is true or not. To say or believe that the reason the US dislikes China is because “you are going to overtake the US” is exactly the mindset that the US wants China to have of itself when China does not have the luxury of thinking in that way in the first place.
The Western mind is very good at introducing insidious paradigms that results in self-fulfilling prophesies, when the competitor ends up behaving exactly as the West said they would. They did this to Vladimir Putin, extending NATO’s borders right to the doorstep of Russia, only to have him do exactly what they said he would do, even if he was merely acting out his predictable response to their instigation. He was already the belligerent to his neighbouring countries, but by denying him the buffer with themselves, the West allowed him to act out his insecurities.
The original Thucydides Trap was about nations at war with each other and about land grabs and a zero-sum game – one winner and one loser. The US-China issue was never about a land grab. In fact, the numbers suggest that the two countries are conjoint twins in economic terms who feed off each other – one absorbs the costs of production while the other provides the capital – and both flourished because of the other. This requires a very different paradigm that can even be very competitive, but not one that leads to war.
The subtext of the Thucydides Trap is that only a war can resolve the issues even when the issues are entirely economic. Taiwan is just a perfect excuse, it could be any other, because the West knows how to instigate China’s exact insecurities. But China swallowed the narrative hook-line-and-sinker because it liked the idea of being praised as a future power. It was caught in its own fiction of becoming the strongest country in the world. For this hubris, I blame the instigation of pseudo-intellectuals like Martin Jacques and Kishore Mabubani and others who describe everything about China in superlatives when they can’t even bear to live in this country, ignoring the fact that rich Chinese are emigrating in large numbers because they have genuine concerns.
By doing so, China is walking right into the paradigm that the US has prepared for it. This is also how the very competitive Americans mobilises its own intelligentsia to deal with a perceived threat and neutralize it. They have done it so many times in the past, their own corporations do it to each other. it is a wonder that China wears the Thucydides Trap idea as a badge of honour because it wants to believe what it is told, not realizing it is acting out the narrative like a script.
3. On the Communist Party of China
As foreigners, it is not for us to make a judgment call on the legitimacy of any government of any country, without appreciating first how they came into power. Every country has its own unique story and circumstances. If the people of the country accept their government, it is not our business to intimidate it. In the case of China, that validity came with the fact that the CCP finally succeeded in uniting the country, when none of the other forces in the country were able to, and facilitated the largest GDP growth story in history.
But we also need to remember that the legitimacy it enjoys today came after several decades of deadly and disastrous mistakes and experiments. No other country should go through what the Chinese people went through during the Cultural Revolution. Every single princeling in China has a dark story to tell from the period. But it was from the ashes of the Cultural Revolution that a new generation of young people arose who were determined that their country will never go through such a cursed period ever again. In as much as the current economic success is formidable, it is a relatively short period in that 100-year history of the CCP, and more importantly, it is still a work-in-progress. The work is not done yet.
Economic success also brings with it new demands of its own – a highly educated and mobile population, a confident young generation – for which new governance structures such as the rule of law, the separation of powers and the integrity of the individual will have to be put in place. China is today losing precious time because soon the CCP is going to be tested vigorously by an impatient population. China has not put in place the institutional structures for the future and the only way it is going to discover just how weak its social structures are when there is another large economic downturn or leadership crisis.
To judge the CCP’s leadership on rhetoric or political ideology is wholly irrelevant. To dismiss the CCP just because it is communist is the same as extolling liberal democracies which suffer issues of their own. The CCP has succeeded in establishing a sustainable economic model that rivals that of western democracies, after the communists in many other countries failed miserably before, and there is a lot to learn from their decisions. There is plenty of literature on how China made the best economic choices for itself as it was transitioning from a planned and centralised into a market economy that are instructive to all other nation states that need to make the same decisions for themselves. Here I highly recommend the work of Isabella Weber who researched and told the story of how China avoided the pitfalls of the “big bang” approach that was popular in its approach and took a dual-track approach to building a market economy (whom I have also talked to on my youtube channel).
The CCP likes to call itself as communism with Chinese characteristics, which may be true, but every country should have their own versions of either communism or capitalism to deal with their specific realities. Having said all these, we do need to take stock of the institutional deficiencies that exists in China today that will become an issue in the future. If within the “communism with Chinese characteristics” these institutional reforms can be constructed, then I will say that it will strengthen and further legitimize the CCP for an even longer period. But this does not seem to be happening anytime soon.
All the references to historical China in legitimizing its rule are hubris. There is nothing ancient about the CCP, although the party tries to use cultural and historical premises to justify why it is the only legitimate option to rule the country. It is a modern creation of a country that has been wanting to consciously dispose of its dynastic past since the 1890s, and it is still a work in progress. Because it so desperately wants to take credit for all that is successful about China today, the CCP is also setting itself up to be blamed for everything that will go wrong in the future.
4. China in the league of nations
China already provides leadership in many areas and has made its own benefits available to the rest of the world – in manufacturing, climate change, infrastructure building, peace keeping and others. I happen to think that China’s leadership in manufacturing is deeply ingrained in the Han people since the Tang dynasty when the porcelain manufacturing industry was first established. It was sold globally even then as seen in the composition of Chinese ships that have sunk in various places in Southeast Asia. It’s in the DNA of Chinese civilisation that the West cannot even imagine taking away. The leadership it now plays in manufacturing enables many countries around the world to afford goods and infrastructure services they would be able to afford if not for the rise of China.
Also, Chinese technology companies provide alternative business models to that of the West, especially that of the US, especially in the digital platform industry where US players have focused on generating income through addiction while Chinese platforms monetise around ecosystems. I am especially glad about this alternative model that exist today because of China, as otherwise we will have no alternatives presented to us and we would all be still imagining that the best ideas come from the US only.
But as China becomes more international, we will have to watch how China builds its own version of the international corporation, where the focus is not on the rejuvenation of the Han people, but the development of all mankind. We have to watch how the Han people build a certain self-confidence to work alongside other people from anywhere in the world who are as good or better than them. There are areas, such as in microchip technology, where the Americans dominate by plugging themselves into a global supply chain. The Chinese are so bent on being self-sufficient that they are not spending any time at all learning about all the other countries where the breakthroughs are coming from.
Right now, China has only completed chapter one of its rise, and it did so by keeping its domestic market essentially closed to foreign competition and participation except where the foreigners introduce elements that they can learn from. The Chinese like to say that their corporations are highly competitive but forget to mention that they are highly competitive mostly amongst themselves in their domestic market. China has the advantage of critical mass – of customers, of capital – that no other country except the US has and even more.
So, when it exports, it is able to do so from a much more industrialised base. When they go abroad, they are able to dominate either because of price or of a domestic critical mass. The Japanese and Koreans had this advantage in the automobile sector and the Chinese have been able to extend these in the digital platforms sector. But as China opens up further and competes more broadly, it’s corporations will be faced with new challenges that will force it to incorporate talents from around the world. Japanese banks and Korean tech companies today have many more non-native senior executives as they did in the past. But this is a journey that these countries that are rising dramatically will have to go through. Except that playing the nationalistic card does not do them any good for the long term.
5. For the foreigner interested in China.
The foreigner is interested in China for one or several reasons. Some buy from China, and here the country has proven to be a game changer, making many manufactured goods affordable to customers around the world. Some sell to China. Here lessons from the automobile industry are instructive. There was a time when Chinese automobile manufacturers simply could not match the engineering talent and quality of the German manufacturers who were invited to set up their plants in China. Then came EVs and now it is the German manufacturers that have had the game changed on them. Similarly in high-speed railway, wind turbines and others.
It is here that the foreigner will need to take a view on what it will take to succeed in China. Everything depends on bringing a value that the Chinese do not have themselves. Some of these values are intangible, such as in precision engineering from Switzerland. Others are cultural, like European fashion brands and yoga teachers from India. For most other things, the Chinese learn and then absorb the skills such that the foreigner is eventually made irrelevant. But with a dramatically falling and ageing population, it is not inconceivable that the Chinese will become more cosmopolitan in the future, where the foreigner work alongside with them, like we see in Japan these days.
For those who want to be more engaged with China, the questions to ask are not whether the economy will hold out or if China will overtake the US to become the dominant economy of the world. These are perfunctory. Neither here nor there. They feed the egos of those who either want China to fail or succeed to suit their own imaginations. There is no value in these speculations. Also, the real story will be one of a country that will have many more ups and downs to come, and none of these undermine the essence of this country.
There are far more practical questions to ask. Where will the leadership be taking the country? China especially is susceptible to the oversized role of individual personalities that sits over and above the constitution and the body politic The country’s body politic has not settled into a pattern yet. Despite its very turbulent politics, the US plays to a pattern between conservatives and liberals much more predictably as it charts its course. As China’s economy matures, it is discovering that it can develop further by opening up more equitably to the rest of the world. It has found that it has to import as much as it exports to the countries with which it enjoys massive trade balances. That it has to allow foreign players into its domestic economy to report better productivity gains. That its own capital has to be deployed in the rest of the world in search for better yields, and so on. This opens up considerable opportunities for foreigners who are contemplating their respective strategies over many years.
So, with these preliminary thoughts I outline how I apply my mind to the issues that China faces today. I am not blindsided by ideology, in fact it is a red herring, if we assess any country by its fundamental economic numbers, we will find that they are at odds with ideologies, even for the US in tackling its fiscal debt, rising wages, homelessness and climate change agendas. China’s rise is neither a straightforward success story nor a tale of impending collapse. It is a complex narrative of resilience, adaptation, and ambition. To understand China, one must look beyond ideological biases and assess the country through its economic fundamentals, historical context, and evolving social structures. This balanced approach enables a more nuanced understanding of a nation that will remain a central player on the global stage for decades to come.
