Capitalism with Jinping Characteristics
The second major recent development is the rise of Xi Jinping. After the chaos of Mao Zedong and the rejection of Maoism by Deng Xiaoping, China settled into a low-key and orderly process of governance. The key was consensus. There would be a leader, but the leader would build consensus inside the Politburo, continue the economic growth started under Deng Xiaoping, and avoid high-profile blunders and confrontations.
Each leader would serve two consecutive five-year terms, with the successor clearly identified during the second term so that there would be an uneventful transition. This pattern was followed by Jiang Zemin (1993–2003), Hu Jintao (2003–13), and initially, by Xi Jinping (2013–?).
Now, Xi Jinping has broken the mould. Through a series of Party Congresses and other forums, he has elevated himself to a place comparable to Mao Zedong in the pantheon of the Communist Party, enshrined ‘Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era’ (习近平新时代中国特色社会主义思想), and made it clear that he will remain in office beyond the customary expiration of his term in 2023. In effect, Xi is ‘president for life’ and the new Mao.
This change in leadership and governance has resulted in profound changes in policy. Xi actively attacks big tech and media firms inside China. He has pushed to delist Chinese companies from Nasdaq and NYSE and move those listings to the Hong Kong Stock Exchange. He has crushed the last traces of democratic process and free speech in Hong Kong. Most dangerously, he has threatened to take Taiwan by force.
The war for Taiwan?
A Chinese invasion of Taiwan would be the most disruptive geoeconomic event possible, equivalent to an invasion of Japan or Western Europe, and just short of nuclear war. The outcome would be highly uncertain.
The biggest variable would be whether the US would come to the military defence of Taiwan. The US Seventh Fleet could interdict Chinese amphibious forces in the Strait of Taiwan, suppress Chinese air power, and otherwise assist Taiwan in repelling an invasion with anti-missile defences, drones, electronic warfare, and intelligence.
At the same time, China could attack US vessels with cruise missiles, launch its own electronic warfare — including attacks on critical infrastructure in the US, such as power grids and wireless communications networks — and push forward with its amphibious invasion.
Escalation would involve financial warfare, an embargo on energy imports to China, and a shutdown of a large percentage of the world’s semiconductor industry. China no doubt covets control of Taiwan’s semiconductor capacity, including its high-end technology and five nanometre production facilities. This opens the possibility that Taiwan would destroy its own semiconductor fabs and labs before the Chinese could occupy them, in a 21st century version of a scorched-earth retreat.
China might also deem it in its interests to invade Japan to consolidate its East Asian hegemony. Such an invasion would certainly involve the US — and likely Australia, the Philippines, and India. It could be tantamount to a Third World War. The outcome of such a war would be highly uncertain. The only certainty is that it would be a political and economic disaster for the world, especially for the belligerents.
The myth of China’s superiority
Will it happen? The case against such a war is basically in the scenarios described above. Events would likely escalate and spin out of control. Gains are possible for China, especially if the US doesn’t come to the aid of Taiwan. Still, the risks are too high, and the costs are too great. Instead of an invasion, China could continue its rhetoric and its military readiness but otherwise bide its time.
The case for a war also comes down to time. Casual observers of China’s growth and technology are impressed with stories of how China will soon surpass the US in total GDP, how China will dominate the future of AI, nanotechnology, and quantum computing, and how China’s military strength will be able to defeat the antiquated US Navy assets in the Western Pacific.
The reality is quite the opposite. China’s growth has been overstated for years and is slowing dramatically. Its technology edge is eroding now that the US and others have curtailed high-tech exports to China and strengthened intellectual property protections. China’s army has not fought a major war in almost a century; it’s completely untested in combat.
China is also buried in unpayable debt, which is now defaulting in a cascade, starting with the real estate sector. There is also a demographic disaster unfolding that may cut the Chinese population in half in the next 50 years, at the same time as the remaining population is rapidly ageing. This age factor is highly correlated with dementia, Alzheimer’s disease, and Parkinson’s disease. Of course, Chinese industry and the civilian population are utterly dependent on imported coal, oil, and natural gas, which can all be interdicted.
In my next edition, I’ll look more into the myth of Chinese superiority and what this means for your investments during these strange geoeconomic times.
Strategist, The Daily Reckoning Australia
This content was originally published by Jim Rickards’ Strategic Intelligence Australia, a financial advisory newsletter designed to help you protect your wealth and potentially profit from unseen world events. Learn more here.