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Chapter 1
A World on Edge
As the world passes through the second decade of the twenty-first century, we find ourselves in the midst of a global financial crisis that threatens the way of life of virtually the entire civilized world. From the United States to Europe, Russia, Eastern Europe, and Japan to South America, India, and the Middle East, and yes, even to China itself, most of the world’s 7 billion people face a global economic crisis—perhaps even a global depression—that appears to have no rational ending in sight.
I say rational because the current course being pursued by the world’s central banks shows no real potential for solving the crisis of debt and economic contraction that every major developed economy faces today. The policy of quantitative easing that every major economy, including China, is following—though temporarily helpful to some segments of the economy like the banks, stock markets, and corporate coffers—ultimately only adds more debt to an already debt-choked international financial system that sees productivity falling and is based upon a currency, the U.S. dollar, which itself is rapidly fading in value if not validity.
Consequently, the world finds itself at a crossroads. The current-but-broken international financial system, founded upon the vitality of the U.S. economy and a gold-backed U.S. dollar and held together by the imposition and enforcement of a set of rules by U.S. economic and military dominance, no longer works as it once did. The last pretensions of a gold-backed dollar disappeared in 1971 and the U.S. national debt and deficit spending have both been on a constant increase since then and are well beyond the point of anyone believing that such debts will ever be paid back. The global financial crisis at hand is perhaps the final symptom of this dysfunctional system before it crashes altogether. This now inadequate system, like an aging man, is full of frailties and weaknesses and is but a shadow of its former self, with a sclerotic capital system that is unsustainable and clogged with so much aggregation of debt that it can no longer be supported by falling productivity or the spent energies of 50 years of debt-fueled consumption.
One of the problems the world faces lies not just in where to go from here, but how to get there. At the same time, as the worst financial crisis the world has seen since the Great Depression continues to unfold (the 2008 credit crisis is neither solved nor cured, but is only being managed with massive amounts of new credit), military relationships and trade relations are being formed and re-imagined at this writing, which, to any careful student of history, ought to sound alarm bells loud, clear, and urgent.1 The result of the last global financial crisis, the Great Depression, was the global conflict that became known as World War II. However, given our sophisticated and deadly technological age, large-scale and protracted warfare, particularly on the scale of a global conflict, is utterly irrational; and yet that is the direction in which much of the world seems to be headed in an unmistakable and disturbing hurry.
What Is the Proper Context in Which to Assess China Today?
Viewing China through the prism of the current global financial crisis is tempting and facile; with over a trillion dollars in reserves and deep trading relationships with both the United States and the Eurozone, as well as with Russia and Japan, China seems to be the nation least vulnerable to the negative effects of the financial crisis. But the dynamic of the global financial crisis is not the complete or only context in which to view China and its place and position in the world; as we’ll see, it is truly not the most important either.
China’s economic strength, whatever it is or may turn out to be, is a function of many factors, as are its military capabilities and diplomatic influence. Not least among those factors are the internal arrangements of China. By that, I mean the manner in which Chinese society is organized, the reliability and stability of its domestic economic and political structures, and how key economic and political decisions are made and carried out. Perhaps most crucial of all are the nature, history, and track record of just who makes the big decisions for China and why.
From that point of view, the global financial crisis is an external threat to China’s economic viability, but so are the deep flaws and recurrent weaknesses in China’s political economy that are being revealed in part by the financial crisis, and in part by China’s exposure to the world as never before. The difference today is that China no longer exists in a state of autarky as it did for virtually the first three decades after the revolution. In fact, how China chose to engage in the global economy and arrange its economic footing—going forward from communism to a distorted form of state capitalism—is also a function of its Communist Party decision-making process and, as we shall see, is truly a fundamental and growing weakness in China’s current economy.
Again, China certainly seems to be better positioned and more agile than either Europe or America in weathering the effects of the financial crisis. But is that really the case? How will China fare as the Eurozone slips into deeper levels of recession and Cyprus-style financial meltdown in 2013 and beyond?
There are essentially three schools of thought on how China will fare in the near future in the midst of the global economic crisis in which the world now finds itself. One view is that China will continue to weather the financial storm relatively well, given its level of economic development, the size of its internal market, its high level of liquid reserves, and other seemingly favorable facts and statistics on its economy. This may indeed prove to be the case, as those are certainly strong factors working in China’s favor. Given that the Eurozone—the major economic trading bloc on the Eurasian continent—is on the edge of financial collapse, and that mass violence in the periphery nations of Greece, Portugal, Spain, and Italy threatens the legitimacy of governments and the stability of Europe itself, China, by comparison, looks to be in a much stronger position to weather the financial storm.
Is this true though? The crisis in the Eurozone has yet to reach its final stages, but China is looked to as the biggest source of market-rescuing capital for the Eurozone.2 China, however, has yet to fulfill the role that some in the Eurozone fervently wish that it would. A very good question is, “Why haven’t they?”
Another view on China’s fortunes going forward (arguably less ideal, but perhaps more realistic than the first) is that China will continue to suffer some of the effects of the global financial downturn, but will prove to be flexible, agile, and smart enough to come through the next few years relatively well compared to Europe and the United States. This viewpoint toward China is still in the same orbit as the first view, but with a more or less bumpier ride built into the assumption. But still, it has China emerging from the crisis in a relatively more favorable position than it was in before the crisis.
Is this a realistic outcome for China? Is China, among the major economies of the world, truly best positioned to endure the financial crisis that threatens capital flows, investment, productivity, and consumption levels the world over? That is the implicit assumption underlying this viewpoint of China.
More precisely put are the facets of China’s economy—its manufacturing base, domestic market, and technology sector—deeply embedded, nimble, diverse, and innovative enough to react to and overcome the challenges to which other highly developed economies such as the Eurozone, Japan, and the United States are struggling to adapt? This is an even more difficult question to answer in the affirmative when one considers the past history of decision making by China’s leadership, its political culture, and its economic frailties that are now coming to the fore, and for which China has no immediate answer or cure.
This question, of course, leads us to a third view, one that is still shared by only a minority of observers. And yet, increasingly, it seems to be the most correct and likely view—that, in a nutshell, China is headed for another disastrous chapter in its history of disasters brought about by its communist leadership’s decision-making process and inherent incompetence.
Although it may sound like political ax grinding between capitalism and communism, it is not. Rather, it is an acknowledgment that China’s leadership has created an economic monster that is so distorted in its foundations and its execution as to render it incapable of reacting quickly enough or in the ways necessary to avoid a massive collapse of the system altogether in the face of rising internal crises which threaten China as much as, if not more than the global financial crisis threatens the Eurozone or the United States.
That more pessimistic view is also shared herein. It is not a wish or a hope, but simply an assessment of the conditions within the Chinese economy, population, and various policies that appear to conspire in their aggregate to cause a reckoning of sorts, which will not only be quite difficult for China to overcome, but poses real doubts about whether or not the China we see today will be recognizable in the next few years. More than its distorted economy, however, it is China’s distorted political system that will be the country’s undoing. China’s Communist Party leadership and the political culture surrounding it are posed to catalyze the latest version of calamity that the Party leadership has brought to China since it took power over six decades ago.
China’s Historical Context
A brief look into China’s modern history provides useful insights into not only who drives China’s policies, but also how and why they are driven as they are. It will also help illuminate the great flaws and resultant weaknesses and failures of modern China’s financial and economic system and of its political culture, as well as the great and terrible implications and causations that it imposes not only on the Chinese people, but also on the very land and natural environs of the part of the planet that China inhabits.
Historical context is a wise place to begin to understand China, because nations, like people, are shaped by their pasts and their worldviews are influenced by what they have experienced. Understanding the past of a country can therefore help us in understanding, at least to some degree, its view of itself and of the outside world. That context, in turn, can help us to understand China’s worldview, its perception of the current U.S.-dominated financial system, and how they view their role in the world going forward.
A full and in-depth history of China is beyond the scope of this book. However, a brief look at some salient points of China’s experience in the twentieth century, leading up to and including the communist revolution and the main crises that followed the revolution, is helpful in understanding the major thrusts of China’s experience as a nation in the twenty-first century. The discussion that follows, therefore, is useful in providing a context for viewing some of the more impactful of China’s recent historical influences, but it is by no means intended as an exhaustive account.
China’s Place in the World
Throughout antiquity, China’s name for itself was the “Middle Kingdom” because it was located in what they considered to be the middle of the known world. There has been, however, no shortage of cultural perception throughout China’s history that allowed it to regard itself as the most important country, and most advanced culture, in the world. This was true for centuries. Those nations and cultures outside the Middle Kingdom were, by definition, inferior and viewed as barbaric, lesser peoples from whom nothing useful could be learned. This was true for a time. But such a combination of conceit and insularity did not help China in developing itself beyond the agrarian stage, while Western European nations began to rapidly industrialize from the seventeenth century onward.
About 100 years ago, in 1912, the Republic of China was founded, ending over 2,000 years of imperial dynastic rule. The last of the dynasties, the Qing Dynasty, which was also known as the Manchu Dynasty, ruled China from 1644 to 1912. The republican government that was established in its place was far from stable or effective, but events within China and outside it hardly gave it a chance to succeed. By the early twentieth century, feuding warlords, divided interests, and meddling foreign powers repeatedly beset the Republic of China. Continuous sources of internal strife such as shifting allegiances and political missteps, as well as external influences such as the invasion of Manchuria by Japan all contributed to an ineffective leadership of China during this time.
In 1928, there was a loose unification in China under the Chinese Nationalist Party, also known as the Kuomintang, but this did not last, as rifts developed between it, the Chinese Communist Party, and competing warlords. This made industrialization and modernization progress, which China was striving to achieve, more difficult; it came to a halt altogether once the Japanese invaded China in 1936. From that time until 1945, China was involved in a war of resistance against Japanese aggression and occupation as the Japanese sought natural resources and territory for its imperial expansion plans.
At the end of the Second World War in 1945, with the Japanese driven out of China, the civ...
