The Dangerous Allure of China in a Post Covid World
Workers clean up signboards outside a retail center in Wuhan in central China's Hubei province on Saturday, Jan. 16, 2021. China eked out 2.3% economic growth in 2020, likely becoming the only major economy to expand as shops and factories reopened relatively early from a shutdown to fight the coronavirus while the United States, Japan and Europe struggled with disease flare-ups. (AP Photo/Ng Han Guan)
Workers clean up signboards outside a retail center in Wuhan in central China's Hubei province on Saturday, Jan. 16, 2021. China eked out 2.3% economic growth in 2020, likely becoming the only major economy to expand as shops and factories reopened relatively early from a shutdown to fight the coronavirus while the United States, Japan and Europe struggled with disease flare-ups. (AP Photo/Ng Han Guan)

Least Bad Economy

Little over a year ago this column (EN 796 / JP 815) when looking forward to the coming decade saw difficult years ahead for China.  Slowing economic growth, growing state and private sector defaults after years of uncontrolled credit expansion, a much tougher geopolitical environment following China’s aggressive policies in the South China Sea, a political crackdown on Hong Kong and the continuing crimes against humanity in Xinjiang, were only some of the problems Xi Jinping’s China faced.  And there being little hope of addressing them without significant political and economic change in the country.  Yet today, even after being the first country to suffer an outbreak of Covid-19 China was able to record, official growth number of 2.3% for 2020.  That far outpaces any of the developed world countries and China continues to have its recurring Covid outbreaks largely under control.  At first glance perhaps China’s decade won’t be so bad afterall.  But a reassessment is far too premature.

Yet look at the state of much of the developed world.  The US, continental Europe and the UK are largely seeing the virus spread out of control.  The economic outlook is decidedly mixed with the already significant economic divides within the societies only likely to be exacerbated due to Covid.  One extreme sees many being unable to work from home, savings are being used up to make ends meet as traditional job opportunities disappear and children go underfed and under educated, (two problems which will have multi-decade impacts).  At the other extreme, financial companies have had bumper years with increased volatility, many if not most employees have been able to work from home, just as productively as from the office but without all the wasted commuting time and daily hassle.  Their access to high performance broadband has meant minimal impact on schooling for their children and the logistics efficiency of Amazon has made them go without few creature comforts.  Instead, this group is saving more and is a well of pent-up demand for travel and entertainment once there is sufficient vaccine roll out across many of their countries.  That economic divide will likely cause a legacy of socio-economic problems which governments will need to throw money at and will serve as a drag on economic growth.  For the US it is far too early to see if President Biden can bridge some of the divisions of the Trump era, and for the EU if truth be told it has still to fully recover from the Global Financial Crisis of 2008.  For it to now climb back from the Covid hole will require a drastic revision of its economic policy.

For an emerging market overview, just look at the non-China BRIC economies, Brazil, India and Russia.  Brazil is suffering dreadfully from the pandemic, India isn’t much better and perhaps the only reason it doesn’t look so bad is because the quality of data and recording of deaths and cases is so poor, as for Russia it has just seen an explosion of protests over the weekend in support of Alexei Navalny and against Vladimir Putin whose government has run out of new ideas and is something between a mixture of a mafia state and a kleptocracy, if not both.

The Allure

In such a world then China perhaps doesn’t look so bad after all.  But before reviewing China’s ongoing problems two lessons from history may be of some value.

“We must get this straight once and for all: There is no such thing as having purely economic relations with the totalitarian states. Every business deal with them carries with it political, military, social, propaganda implications.”

Douglas Miller

Who is Douglas Miller?  He served as the Commercial Attaché in the American Embassy in Berlin from 1925 to 1939.  In 1941 he published a booked called You Can’t Do Business with Hitler.  It was his informed, by direct experience, response to those in the US who argued that the US could sit out the second world war and just continue to do business with a Nazi-dominated world.  As we look back in history as informed observers to talk of Hitler and the Nazis is to immediately conjure up images of death camps and the Holocaust, but Miller was writing before that was known and in effect and writing to an audience that was still many months away from joining the fight against Hitler.  Germany was a prosperous growing country full of important and able companies, why would companies not want to be doing business there.

The other example worth mentioned before reflecting more on Miller’s insight, comes from a documentary over 20 years old.  In 1999 the History channel broadcast Yanks for Stalin.  It looked at the American companies, and workers, many of them blue collar workers which saw Stalin’s Russia in the 1930s as an antidote to depression era America.  Here was hope for the working man, state planning offering jobs for all while America could offer only soup kitchens.  The PBS website hosts a lengthy transcript of an interview with Stephen Kotkin a highly respected American historian of Russia and biographer of Stalin.  The interview is worth reading in full not only for the history of the period but how so many of the issues faced then in the 1930s, and actually in the 1920s, but on a smaller scale, sound remarkably like the same issues that foreign companies have had over the years in China.  Breach of contract, theft of IP, abuse of workers, bureaucracy and distrust of outsiders were all common complaints and features of the interaction.  Kotkin does note that it is clear that many of the corporate executives did appreciate the risks they were taking when investing in Russia and they showed few qualms about Soviet measures to get the job done by any means.  The allure of a profits and beating out other competitor companies certainly took precedent over workers’ rights, social concerns and even IP theft.  While many workers felt they had no choice given the desperate situation at home the companies did at least enter voluntarily, they didn’t need to invest but the nature of the hard-nosed businessman executive revels in the challenge and risk.  With the benefit of hindsight, it is clear that Soviet Russia provided no solutions for Americans nor Russians.

Perhaps then as a post-Covid world takes shape in the coming months and years the allure of China will grow in comparison to other markets, just as the Soviet Union offer a different economic model in the 1930s.  Of course, the comparison is limited because China is already the largest trading partner for most countries in the world and home to trillions of dollars of foreign investment over the past decades.  But this is where Miller’s insight is so apposite.  All economic deals, at whatever size, comes with strings attached when dealing with totalitarian countries.  That is because the nature of totalitarian countries means that all and every sector of the economy and society can be put at the disposal of the state when the state demands it or can be used as a tool of state policy.  That is what makes them totalitarian.  It is this insight of Miller’s, made 80 years ago which is still relevant today.  (Think of the debate around Huawei in relation to Miller’s insight, Huawei’s ownership is incidental to whether dealing with it intersects with the Chinese state).  It is particularly relevant for China now because of the direction of the country under Xi Jinping.  He has deliberated looked to use economic relations serve political ends with scant regard for business norms.  This has clearly been demonstrated over the past year.  The most obvious cases are the “mask diplomacy” in Europe where China sought to extract political leverage to supply medical PPE equipment even though the deals were purely commercial and not Chinese state directed aid shipments.  The other case is the ongoing bullying of Australia which has seen many of its exports to China boycotted until Australia “corrects” its political position on what China deems to be anti-China actions.

By referencing Miller’s quotation, it is not to imply that today’s China under Xi is equivalent to Germany under Hitler.  China’s camp system in Xinjiang is not comparable to the death camps and mass killing which took so many lives but China has forced countries to extradite Uyghurs back to China only for them to disappear from view.  It is the economic leverage which China welds which allows such actions.

It is a pity that the EU failed to heed Miller’s insight when it rushed to sign the Comprehensive Agreement on Investment in the dying days of 2020.  The Merkel driven push to sign the deal before her term as President of the EU ended totally ignored the non-economic impacts of the deal.  Instead, it compartmentalized narrow economic benefits which seemed wholly out of place given the shift in attitudes towards China in the past year.

The Hoped-for Reality

As for China’s 2020 a few things need be remembered, the headline growth figure mask a significant rise in unemployment especially amongst migrant workers who are simply not counted in the official unemployment numbers, nor have any of the problems cited above been solved.  In fact, many of them have only grown over the past year or so.  SOE, State Owned Enterprises, have defaulted in record numbers in 2020, the introduction of the Hong Kong National Security Law has been well chronicled in this column and only in the past few weeks have we seen the US Government state clearly that China is committing genocide against the Uyghur minority in Xinjiang.  None of that indicates a comfortable decade for China.  Even its Covid success may fade, it continues to clamp down hard on even the smallest outbreak of cases, not fearing to harshly lock-down tens of millions of people and more impressively test millions within a few days but that leads to its own problems.  China has closed it borders to the world, how then does it re-open with the world?  It can’t open for fear of an outbreak, a situation made more complicated by the faster transmission of the new variants.  It will take years to vaccinate 1.4 billion people, and in the absence of widespread cases many would prefer not to be vaccinated at all.   Its own vaccines are of limited efficacy so it would appear, and it has started a very foolish line of argument that “Western” vaccines from Pfizer-BioNtech and Moderna, which show the greatest efficacy are not safe.  China may find itself closed off to the world until well after many other countries have re-opened.

If the domestic China story remains challenging, then the change of leadership in the US doesn’t look like its going to make China’s life any easier either.  Gone are the bombastic and at times racist ravings of Trump but in their place is going to be a much more coordinated, measured, and likely a more effective policy when it comes to China.  President Biden has not rescinded any of the Trump actions against China and likely won’t do so soon, his administration has also acknowledged that China is perpetrating genocide against the Uyghurs.  China may benefit from Biden’s attention being focused on the domestic Covid situation in the immediate term, but the broad bi-partisan support for a tougher line with China remains.

As this column has repeated many times.  There is no way that China can be ignored, it is too large and economy, too active a global player, too many connections into every country on the globe to ignore.  Engagement with China is inevitably, and at times will be essential when it comes to comes to issues of global commons such as climate change and protection of the oceans.  But Miller’s insight should be remembered: “There is no such thing as having purely economic relations with the totalitarian states.”  For too long corporates and countries have engaged with China is the naïve or cynical belief that economic issues can be neatly dealt as if there is no spill over cost.  China has illustrated that is untrue time and time again.  The global business elite has been found wanting and has failed to defend, let alone promote standards and values which are taken for granted in the developed and free world.  It is long overdue that that approach changed.

フレイザー・ハウイー(Howie, Fraser)|アナリスト。ケンブリッジ大学で物理を専攻し、北京語言文化大学で中国語を学んだのち、20年以上にわたりアジア株を中心に取引と分析、執筆活動を行う。この間、香港、北京、シンガポールでベアリングス銀行、バンカース・トラスト、モルガン・スタンレー、中国国際金融(CICC)に勤務。2003年から2012年まではフランス系証券会社のCLSAアジア・パシフィック・マーケッツ(シンガポール)で上場派生商品と疑似ストックオプション担当の代表取締役を務めた。「エコノミスト」誌2011年ブック・オブ・ザ・イヤーを受賞し、ブルームバーグのビジネス書トップ10に選ばれた“Red Capitalism : The Fragile Financial Foundations of China's Extraordinary Rise”(赤い資本主義:中国の並外れた成長と脆弱な金融基盤)をはじめ、3冊の共著書がある。「ウォール・ストリート・ジャーナル」、「フォーリン・ポリシー」、「チャイナ・エコノミック・クォータリー」、「日経アジアレビュー」に定期的に寄稿するほか、CNBC、ブルームバーグ、BBCにコメンテーターとして頻繫に登場している。 // Fraser Howie is co-author of three books on the Chinese financial system, Red Capitalism: The Fragile Financial Foundations of China’s Extraordinary Rise (named a Book of the Year 2011 by The Economist magazine and one of the top ten business books of the year by Bloomberg), Privatizing China: Inside China’s Stock Markets and “To Get Rich is Glorious” China’s Stock Market in the ‘80s and ‘90s. He studied Natural Sciences (Physics) at Cambridge University and Chinese at Beijing Language and Culture University and for over twenty years has been trading, analyzing and writing about Asian stock markets. During that time he has worked in Hong Kong Beijing and Singapore. He has worked for Baring Securities, Bankers Trust, Morgan Stanley, CICC and from 2003 to 2012 he worked at CLSA as a Managing Director in the Listed Derivatives and Synthetic Equity department. His work has been published in the Wall Street Journal, Foreign Policy, China Economic Quarterly and the Nikkei Asian Review, and is a regular commentator on CNBC, Bloomberg and the BBC.