JOURNAL: When China Derails

Here's some blue sky thinking on a new topic. Enjoy.

One of the most important tests of the stability of the new globally connected system is going to be China. The conventional wisdom sees China as a threat due to its rapidly growing economic and military strength. The real threat, as laid out in the "The Dark Side of China's Rise" by Minxin Pei in this month's Foreign Policy magazine, is that China is an dynamically unstable system that is in deep decay. He accurately and with detail describes a China that is rapidly growing but is almost bereft of social, health, environmental, security, and trust systems that dampen the impact of critical shocks.

So, what happens when China's high performance, globally connected capitalist economy which is flying at dangerously high speeds hits the inevitable speed bump? The answer is: it will derail (hollow out and fragment). The chaos it will produce in SE Asia is the real threat we have to deal with. Predicting the black swan that kicks off the death spiral is impossible, but as we have seen in other export-oriented Asian economies the shock will likely be economic. At that point, the dream of upward ascent and rising expectations, reinforced by global media, will be seen as a lie.

In anticipation of this, the Chinese government is following the lead of many other nations by radically improving the capabilities of its paramilitary force for domestic security (to the tune of one million men). However, this many not be enough. Global guerrilla theory indicates that the endemic corruption will combine with the same forces of anti-state guerrilla action we have seen in other places in an attempt to disconnect portions of China from the central government. With nearly half of the population in urban locations, a heavy dependence on centralized infrastructure, and rampant connectivity to the global environment (despite efforts of the government to limit it), China is ripe for this. Faced with non-state foes that feed off of economic distress and can disrupt centralized mechanisms of control at will, China's government will quickly hollow out. With nearly zero trust in the government already, the burden of pushing people to their primary loyalties will be easy to meet. This is going to be interesting to watch.

Comments

[Marcello]

"The real way to deter China is through system disruption."

That would not be a good strategy for the USA.America greatest strenght lays in its conventional military forces geared towards state vs state warfare.A good strategy should emphasize such strenght.Focusing on systemic sabotage might encourage the enemy to to take in consideration those means to a even greater extent it is already doing (I would bet that the chinese military leadership is doing some thought on these issues anyway)and the USA has a lot to lose from a well planned sabotage campaign. It is far better risking to lose a few destroyers.
Taiwan on the other hand, being the weaker party,has a strong incentive to resort to asymmetric warfare.
The USA should focus on defending itself from an eventual systemic sabotage campaign from China and should not plan offensive operations against them.

[Paul Denlinger]

"The real way to disrupt China is through system disruption." The problem with this strategy is that it does not think through what the end game is, and how it may hurt the US and US interests.

This is the same thinking which got the US into its mess in Iraq, which was based on the statement "We need to remove Saddam Hussein". Yes, Saddam Hussein is a bad character, but what is the end game, and how will the US position itself in the end? If you do not think these things through, you are bound to fail, creating even more misery for America and US interests.

So you disrupt the Chinese system. How does that help the US, which is now deeply interlinked on the global economic level with China? And how does that help Chinese? Colin Powell mentioned the Pottery Barn principle with regard to Iraq to President Bush: "You break it, you own it." I would say that the same principle would apply to US interests in China.

This discussion reveals a fundamental ignorance of the Chinese situation, and how systems in China are interlinked. Of course, if your background is military operations, it is easy to think that all issues can only be solved by military or special ops means. When the only tool yoy have is a hammer, every problem looks like a nail!

Chinese have long known that there is one principle when fighting any foreign invaders, such as Japan. That is to make the war long. Exchange time for lives and land; eventually the foreign invader will give up. China has 1.3 billion people, and people are willing to make that trade. Remember, China fought against Japan for eight years in WWII, four years before the US joined in 1941.

Everyone who fights the US knows that the US cannot fight long wars because domestic opinion will turn against it. That was true in Vietnam, and now it is true in Iraq.

Taiwan cannot act against China because it is fundamentally fractured, much more than China's. It is much easier for China to fracture Taiwan's society through peaceful means than through military means. In fact, it doesn't need to do anything, because Chen's policies have contributed to the continuing fracture of the island's political and social system through their own domestic policies. Now, Taiwan businesses are abandoning the Taiwan market to invest in China. The only thing sustaining Taiwan is support from right-wing elements (neoconservatives) in the Bush administration; when the Bush admin ends in 2008, that support will be gone too. It is a ripe fruit, all it needs to do is wait for it to fall from the tree.

If there is a problem in China, it is the social wealth gap between the countryside and the cities. At its worst, this could degenerate into a version of the period when China was ruled by different regional warlords, which took place in the 20s and 30s of the previous century. However, when you consider the control the party exercises through the party and military apparatus, it is not possible for this to happen now. If anything, Hu Jintao has tightened his control through the party apparatus during the past three years of his rule.

If you would like to read a much more knowledgeable posting about China's current situation, which does not fall into a military remedy, when in fact there isn't any, please visit http://delong.typepad.com/sdj/2006/03/economics_and_i.html

[jon]

I wouldn't count too much on the party being able to hold things together, nor on one man being able to hold the party together. In the USSR the party seemed to be in firm control of the country until the Berlin Wall came down.
I think the bigger problem for the communist party is the risisng expectations in the cities.
When people are dirt poor, and being abused by the more powerful they demand security. When they have the security they demand economic improvements. When their economy has improved enough, they start to demand real freedoms. Speech, religion, assembly, and all that other good first amendment stuff. The growing middle class in the cities is the most important population to the Chinese gov't right now. They are the ones that are responsible for much of the boom, whether as managers, entrepreneurs, or more recently consumers. If they feel they haven't had more freedom they are likely to complain and do it poudly and publicly. This time however, the Chinese gov't won't be able to violently supress a major uprising in one of it's major international cities. I think this will happen sometime around the Beijing Olympics. The last thing the gov't would want then is a major black eye when they are about to launch the most important event in the last thirty years for China.

[John Robb]

The problem with high performance systems is that when they derail, it's not business as usual. All the usual "smart" analysis of personalities, policy focus, funding levels, etc. becomes irrelevant in the face of larger, chaotic trends.

[tim fong]

John,

I've been kicking this one around with my friends for quite some time as well. Even if China "breaks up" again, there is no guarantee a populist, democratic China wouldn't be even more agressive than the current state.

I understand that your position is that the state is weakening, per van Creveld. However even if China were to break up into a loose federation (and some people would argue that it's _always_ been loosely controlled) there's nothing to stop those federations together as _Han Chinese_ from making moves against Taiwan, or to protect ethnic Chinese interests in South East Asia.

People may default to primary loyalties, as you put it of clan/region/religion etc but the complicating factor here is the primary loyalty of Han to other Han, on the mainland or elsewhere. It's complicated by the fact that Han dominate the CCP and the elite, which makes "nationalism" appear to be state directed when in fact it is ethnically directed. Even if the state goes away, the ethnic nationalism won't.

[John Robb]

Tim, you don't see ANY primary loyalty around which non-state economics and warfare can converge upon? If there isn't any built in interest, one can be manufactured. Gangs are manufactured primary loyalty. How about the fists of righteous harmony?

[Larry]

System disruption? Any US direct action is likely to strengthen Chinese nationalism and give the Communist party something to work with. However, the Communists can only push nationalism button so many times until it eventually breaks.

There has already attempts at system disruption: peasant protests and the occasional bombing. I'd also like to add the possible radicalization of Muslim central Asian minorities. The Communists may find keeping a lid on this discontent will be impossible when the black swan event occurs, especially with the tens of millions of unmarried, unemployed/under-employed young men.

And as for the ethnic Han majority, just what are the "primary loyalties of clan and region"?

[tim fong]

John,
You really cracked me up with the last line of your reply. Good stuff. I guess you've been reading Escherick =)

Oh I agree with you there are plenty of primary loyalties that can bring down the party and the currently constituted government. Had a long argument with a friend about this just the other day, since he thinks I'm "too much theory" in my analysis of the situation. Gangs, "benevolent associations," martial arts schools and university cohorts are very powerful bonding agents. Maybe martial arts, aren't so strong anymore on the mainland, in terms of creating a primary loyalty. That's by design of course.

It wouldn't be ahistorical either, since gangs/family networks were at the root of the end of imperial rule.

I guess what I'm saying is that I can see gangs etc taking control (to the extent they are not _already_ in control) at the provincial level, yet still see the disparate regions have an overall policy based on Han ethnic nationalism. Maybe not towards each other (in the sense of co-operating to accomplish domestic tasks) but defintely against outsiders, especially Japan and the non-Asian powers (USA, Europe , etc).

In a broader sense (not to go all post modern but...if the shoe fits) the Han ethnic nationalist identy is manufactured. No one gave a damn before about anything other than family and friends. It was a conscious effort during the Republican era to manufacture a sense of national identity, specifically around the idea of overcoming the "sick man of Asia" archetype that was quite prevalent. This is the origin of, well, among other things, efforts to centralize martial arts teaching. Have you seen Fists of Fury? The "Jingwu" school depicted in the film is an example of that effort.

I see no indications that the anti-foreign (specifically anti-Japanese and their allies) sentiment has diminished at all in young Chinese people (from the mainland). It doesn't always make economic sense if it causes a war does it? Yet people still go. I'm not convinced that wars are predicated on economic good sense by individual actors.

I'm not arguing for a military solution to the problem (i.e. buildup the blue water navy etc), and neithe am I arguing the Barnett point (look! they're harmless! they're nice hard working dedicated intellectuals!). There's probably another way forward, but I'm not sure it's one that the United States is ready to take.

[Adam]

John,

It does occur to me that China falling over tomorrow morning is not going to be good news for the US.

Chinese people, though not rich, are some of the most active savers on the planet and most of that saving goes over to the US at the moment. In 2004 most(perhaps as much as 99%) US debt was foreign serviced, mainly from Japan, Britain and China. Ten years China wouldn't have been on the top 3 list.

So, anyway, lets assume that China goes twitchy. The first thing that happens is that a lot of that invested money in the US goes home - they need the money more than they need US investments. Thats a lot of money to have sucked out of an economy all at once. The US, given its perilous debt situation, would have real issues handling the problem. At the very least volatility (read: collapse) in the exchange rate and stock market would be issues. And as selling stuff to the US is the basis for most export economies right now that'd have real Global impact. The free-fall collapse of the Asian economies in 1998 still has political ramifications today.

Anyway looking at the article there are some things there that are - at the least - highly arguable. In my view the writer is excessively naive and coming at the quetion from a specifically American viewpoint.

We'll start with the most obvious fact: generally political systems work the way they do because the people at the top benefit from the way they work.

Firstly the Chinese government is, as far as we can tell, strong enough to enforce its will. Tiananmen Square showed that no real dissent will be allowed, the Chinese lost nothing by it and found Western investors quite happy to continue doing business with them afterwards. Even the author has to admit that the Chinese police are well funded and technically adept. There is, lets face it, no sign that Western investors will pull out even if the Chinese government decide to beat people to death publically. I'd say that this fact alone makes them pretty secure; no matter what they do as long as things remain stable the Western investors will continue to give the Chinese money.

Interestingly I could say that many of the things that the writer says about Chinese political systems could equally apply to the US, or for that matter most nations. Vast patronage systems? Crony capitalism? It may be nice to believe in a happy land of equal opportunity but on planet Earth - or at least the City of London - you dance with the people that bring you. Its who you know, not what you know.

As for the comment about economic growth and unperforming loans I'd note that both Japan and the US managed it in the past decade or so (Japans real estate boom and the dot-com boom). If you bet wide, you can win or lose a lot.

The author misinterprets something else being said. They say that corrupt officials confessing to a loss of faith in Communism as a cause of their corruption will cause further loss of faith in Communism. An alternative - and far more plausible - theory would be that the state is forcing people to confess to a loss of faith in communism as only evil people lose faith in Communism, good people do not. Why would the Chinese state force people to confess to things that would harm the state? Its as if every criminal in the US confessed to their crime as a loss of faith in Jesus. Would churches collapse? Of course not ; only good people go to church and have faith in Jesus, whilst criminals have lost faith. Such confessions would tend to increase the appearance of moral rectitude among people by going to church. Or, in this case, supporting the Communist party. The rise of the extreme-Christian right in the US despite no end of scandals shows that this works.

Another area that the author touch on is that wealth inequality has increased. Probably it has, thats the basis of capitalism for you. Wealth inequality has massively increased in the US and the UK in the past 2 decades and theres no sign that either government is going to collapse. I'd also note that in 1922 the top US 1% controlled around 36% of the wealth, which if figures were available for, say, 1880 would put the Chinese around there. http://www.columbia.edu/~wk2110/bin/estate-NBER.pdf

As for economic growth producing political pluralism as a natural product... really? How many political parties does the US have? Two? Arguably four or five? I have no idea why people connect a first generation middle class to political change. Generally the middle classes support whoever is going to keep the place steady as most middle class people want to know that tomorrow is going to look exactly like today (except with of course some whizzier bits that won't change anything). Its the radical kids that might have different ideas because its the second generation that ask awkward political questions. Bin Laden, second generation upper middle class, is one of them so it may be that we should start worrying about 2030 or so.

[John Robb]

Hmm. Remember the x article?
http://www.historyguide.org/europe/kennan.html

In it, Kennan focused on sources of contradiction within the Soviet Union, which as we know, eventually resulted in its collapse. There are some mightly contradictions in China too (although I have no wish to see it collapse).

[John Robb]

Question: If China wasn't at risk of derailing, why would the government be working hard on a one million plus strong paramilitary force for domestic security?

[Cardenio]

They have a moslem problem that's probably what the paramilitary is about. ( A paramilitary of a million isn't near enough to control any other domestic situation )

China going to primary loyalites is what WE try and prevent. ( They're all Chinese see, they're not going to fragment ) I think the real 'China problem' is ' How do WE get rich off of this ? '

[John Robb]

No, they are for broad-based domestic security. They are also difficult to control:

http://www.washingtonpost.com/wp-dyn/content/article/2005/12/08/AR2005120802203.html

The sustained volleys of gunfire, unprecedented in a wave of peasant uprisings over the last two years in China, killed between 10 and 20 villagers and injured more, according to the residents. The count was uncertain, they said, because a number of villagers could not be located after the confrontations.

The tough response by black-clad riot troops and People's Armed Police in camouflage fatigues deviated sharply from previous government tactics against the spreading unrest in Chinese villages and industrial suburbs.

[Boghie]

Getting my tinfoil hat out...

Is there a possibility that economic forces were used in a peaceful conflict with Japan in the 90's?

Remember the commentary that Japan was purchasing America, was outstripping our production, was competing us into oblivion, was too important to challenge because of the debt load it held over our head. Many of the same arguments noted above stating that the impending collapse of China's economy would destroy its polity and recall assets back from the United States were made in the 80's regarding Japan. Pat Buchanan ran a presidential campaign on such constructs.

Would you pull money out of U.S. backed securities or U.S. multinational Fortune 500 companies to reinvest into a collapsing state? Japanese investors who ‘bought on the bubble’ did have to ‘fire sale’ speculative real-estate in the early 90’s. And, their economy is only now reviving.

The interesting element of China is this: Is the vast majority of the U.S. debt load controlled by the government of China or by investors and individuals? The answer to that may inform us of how a political and economic collapse in China affects our polity and economy.

Regardless, I think you are largely correct. China, like the Soviet Union, North Korea, Iran, Syria, Saudi Arabia, etc. are hollow entities and will collapse spectacularly. I think your previous post ‘Big Bang’ plays an enormous role in these interesting times.

At least we will have something to talk to our grand children about!!!

[g510]

Another hypothesis that hasn't been addressed in Pei's article or here so far: A weakening Chinese government reacts by making a show of force either domestically or internationally, in an attempt to prop itself up. A variation of this would be, real weakness in the system coexists with decadent power at the top, and the latter succumbs to the temptations of hubris, leading to some kind of grand gesture that has the side-effect of magnifying instabilities.

Adam makes an interesting point, raising the issue of private Chinese savings invested in the US, being brought home to China during a crisis. This could have economic consequences in the US as serious as if the Chinese government itself decided to act (e.g. by stopping purchases of US debt instruments). If I understand Adam correctly, the idea is that purely private, individual, market-driven forces could bring about the same result as a deliberately hostile policy action, and there is no way the central Chinese government could control this even if it wanted to.

IMHO this scenario deserves further investigation. What we have here is a scenario where the decentralized actions of millions of individuals (Chinese holders of US savings and investment accounts) can have an impact on a nation-state (the US) that is equivalent to the impact of a hostile policy by another nation state (China's government). If it were a coordinated action or undertaken with the deliberate goal of harming the US, it might fall within the scope of 4GW theory.

This is an interesting idea: that the unchecked actions of markets can produce effects similar to those of deliberate attacks. It suggests a continuum that runs from "innocent" acts with harmful side-effects, through deliberate terrorism aimed at systempunkts. Somewhere along that spectrum are acts undertaken for "innocent" self-interested ends, whose destructive side-effects are significant and fully understood in advance. The key question is: at what point do acts of the latter type cross the threshold from "innocent enough" to "culpable"? That is, at what point does pure self-interest become indistinguishable from terrorism?

[John Robb]

One correction, I think the Chinese investment in US bonds is from government foreign reserves and not private savings.

However, that's an interesting question g510. It is possible for mobs of self-interested people to vote through their investments (activitst capital?) in a unfavorable outcome for a target state or company. It's an interesting idea for a fund. One that uses modern financial techniquest to actively damage companies and states (rather than merely investing in alternatives). The upshot is that it could be profitable.

[dan]

I suppose that George Soros, who forced sterling out of the ERM, would be a good example of this.

[Stephen]

I think the most probable outcome from groups of individuals using 'activist capital' against a nation state will be to eventually moderate states borrowing so damn much. That would be a good thing IMO.

[Dylan]

These ideas of capital flow causing harm are overblown. When we see financial crashes occuring the outflow is more symptom than cause - fear of future economic weakness causes foreign investors to dump their assets, no one else wants them, the price plunges, everyone else realizes the weakness (and overreacts), and the downward plunge begins.

The odds of this happening to the U.S. simply because the Chinese decide to "punish" us are very remote. If they do, some smart American/European/non-Chinese Asian investors will be happy to clean up by buying these still good assets at a slight discount and earning the profits the Chinese give up for political reasons. Only if the outflow reflects real economic weakness will anything else happen. Incidentally, we've already seen this scenario in the last several years, as hudnreds of billions of Arab money have been pulled out of the U.S. and invested at home and in Europe. Gee, shame about the ensuing U.S. crash, and Europe truly is enjoying the milk and honey at our experience, aren't they? On the other hand, at least the Arab stockmarkets have exceeded NASDAQ '99 levels of bubbly froth.

The supposed "leverage" created by the Chinese state-held U.S. debt is also overblown. Who had leverage over who when Trump declared bankruptcy years ago and had to bargain with his banks to restructure? If it really turns to economic warfare (no quotes) we hold the stronger card in this game of mutual destruction - cancel the Chinese debt and make it clear that enemies that lend us money and then take hostile action will not be repaid. But thanks for the free money! The real worst case scenario is that China quits buying and our interest rates rise (a bigger problem if we really do cancel Chinese debt and set a precedent that private lenders may fear will not be limited to future Chinas), which is not much fun but hardly the end of the world. And if China stops buying, its currency peg becomes much harder to keep, weakening its favorable balance of trade.

[tim fong]

Great back and forth here. Two blogs that people might find interesting:

http://chinadigitaltimes.net (run by Xiao Qiang in Berkeley)

http://www.glutter.org (Run by Yan Sham-Shackleton artist/pro-democracy activist based in HK)

[Cardenio]

I saw someone talking about this ' activist capital ' idea a while ago. ( Captial replacing fielding a military, making it in a sense fifth generation warfare ) It wasn't happening, but, this guy said ( this was in the early 90s ) ' everything's going to be connected into this kind of interweb ... '

So, now where does this take us ? When everyting is really, really globalized and connected, then your capital and groups of capital can make sort of ' pustch ' attempts vs. states, corporatations, maybe even Bill Gates ( heh ! ) Fun.

[TM Lutas]

Here's a scenario for you, why wouldn't the rich coastland simple request admission into the ROC if Beijing goes off the rails? I'm sure they would be accepted and they would instantly inherit a powerful ally in the US and a stable political system to go along with their vibrant economy. If Beijing goes off the rails, why wouldn't the globally connected (economic connectivity) simply buy themselves a new political locomotive? Given Taiwanese investment trends, in many cases the powers that be would be very familiar with and already plugged into that political infrastructure with decades of old friendship built up already.

The ICBM missiles that the PRC currently possesses seem to be located either in or very near the coastal region that would be most likely to swap loyalties in the case of breakdown. If the impoverished interior has only short to medium range nuclear forces, the US actually makes out quite well, though its SE Asian trading partners have much more reason to worry.

[name]

if china is going to go down the drain, i hope that this will happen strictly *after* i've had the opportunity of traveling there and pigging it thru all manner of delicious chinese foods.

i am sure that such a thing will not happen any time soon. the people reaping the profits from the current configuration will never permit that. ever.

[fallenguru]

I read most of the comments and the articles. Very erudite, or mostly. One thing I have not noticed here is three fold; and it starts with Tiannamen. The 'revolution' as it was, was not entirely futile as the Communist regime all but gave the option of blood in the streets and 'revolution', or a path toward freer market that enriched many individuals. Many, if not all, chose the latter. The Sino Dynastic Regime currently in place made this bargain and it has been an uneasy truce as they have produced double digits growth. However, this engine is fed by whatever is at hand, their environment is collapsing, sixteen of the top twenty polluted cities in the world are there, water shortages, lack of arable land, etc, they have dampened the ardor of the peasants-where most of the Chinese revolutions have started, by making a bargain of jobs for power. As land is being gobbled up to feed the ever burgeoning Terra Urbana there is an increasing number of displaced, displeased peasants. The number of government recognized 'protests' has been increasing 15% or more each year, I think, if I remember correctly it included 3 million in 05.

I think the raping of what is left in China has begun, it is not 'growth' industries anymore but a plunder of 'give me now'. China is desperately trying to maintain growth, and this willingness has lead them to pacts with Sudan, etc. They are powerful, but they are vulnarable. Their pact demands this growth, but we all know it cannot be maintained. And as more, and more individuals demand jobs, western lifestyles, the pressure mounts.