China: Two important policies to contemplate.

There is little doubt that the United States and China are in a strategic rivalry. While it is possible this rivalry could end in an armed conflict, that seems increasingly unlikely as China plans instead to become the world’s largest economy and, thus, “the” world power.

When one looks at the accomplishments of China over a remarkably short span of time it is difficult to state that their goal is illogical. More than 250 million Chinese have been moved from subsistence farming into urban middle-class lifestyles in less than two generations. Shenzen alone went from a population of 30,000 in 1979 to a current population exceeding 10,000,000. Indeed, sixteen Chinese cities have a population over ten million. The US has only two metropolitan urban centers of comparable size.

[Source: China Plays It Cool, by John Mauldin (Mr. Mauldin is reporting Gavekal Dragonomics research)]

How is it that a Communist country like China has made such headway? Many Americans think that the Chinese are actually capitalists like the United States. But the Chinese are indeed Communists, however, they are a different brand than Soviet communism or even Western European types of socialism. As well, it is very different brand of communism from what Mao envisioned as “communism.”

Chines communism, in its current form, looks something like capitalism, but it is more about mercantilism (see below) and empire-building. China is unlikely to transition to American-style free enterprise.

Mercantilism is a belief in the benefits of profitable trading. It follows the economic theory that trade generates wealth and is stimulated by the accumulation of profitable balances, which the government encourages by means of protectionism. These definitions show us exactly what China has been doing. They espouse positive trade balances and protectionist trading strategies. The US, on the other hand has, well… drawn the short end of that stick.

The US and China are both rivals and partners. Our economies have become intertwined and likely to become more so with the passage of time. Thus, armed conflicts are less likely than economic battles.

The Chinese have a strategy about which all Americans should be aware. They are pushing two big economic programs, neither of which it considers negotiable. Just as the US has strategic priorities so does China and they are unlikely to be dissuaded from their priorities.

The first is “Made in China 2025.” This is a grand industrial policy with multiple goals:

  • Improve manufacturing productivity
  • Build up technology-intensive sectors
  • Gain 70% self-sufficiency in key materials and components

It is not my contention that there is anything wrong with this policy. Indeed, many economically advanced nations have similar priorities, including the United States.

However China’s approach is somewhat more sinister. [Directly from the Mauldin article] “The government, state-owned enterprises and private businesses are all giving Made in China 2025 truly massive funding. Research & development spending was US$232 billion in 2016 alone. Ominously, a new government commission, founded just last year, is overseeing the “integration” of this technology development with possible military use. And let’s make no mistake, this “funding,” whether equity, loans, or grants, ultimately comes from the state or at the urging of the state.”

The second initiative is called China’s Belt & Road Initiative. China seeks to physically connect itself with the Eurasian continent. The project is truly massive in scope and is a multi-decade vision.

China understands that the United States Navy controls the seas. This means that the US could interdict Chinese trade quite easily. How does one circumvent that possibly without an arms race? Easy – trade over land instead of by sea.

[Directly from the Mauldin article] “One Belt, One Road is the answer. It will link the Eurasian land mass into a giant trading bloc with Europe at one end and China at the other. The project will open land routes the US cannot interdict, thereby letting China take what it feels is its rightful place of leadership.”

The roads run all the way from the east coast of China to Spain. Marco Polo would have loved that! Indeed, the Chinese appear to be using Marco Polo’s play book. Like the US interstate highway system, this is an undertaking to be admired regardless of your personal opinions about China.

Personally I prefer an economic conflict over a military conflict – although we are more likely to prevail in the latter. The former is “up for grabs,” as the saying goes. I wouldn’t bet against China looking in its rearview mirror at the US economy.

Roy Filly


About Roy Filly

Please read my first blog in which I describe myself and my goals.
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