Fad­ing force

China is in de­cline, and the UK should not be in­tim­i­dated over Huawei

The Daily Telegraph - Business - - Front Page - Am­brose Evans-Pritchard

The ledger is bru­tally clear. Xi Jin­ping’s regime has no al­lies of global eco­nomic weight or cred­i­bil­ity. Some 53 coun­tries backed China’s treat­ment of Hong Kong in the UN Hu­man Rights Coun­cil, a body now un­der the thumb of Bei­jing. They make up just 4pc of the world’s GDP. Most are au­thor­i­tar­ian statelets locked into the neo-colo­nial in­fras­truc­ture nexus of China’s “belt and road” ini­tia­tive.

The only G20 mem­ber to have lined up on China’s side was Mo­ham­mad bin Sal­man’s Saudi Ara­bia, a strug­gling mid­dle in­come au­toc­racy run­ning out of places to sell its oil.

The list of­fers a re­veal­ing view of the strate­gic or­der emerg­ing in the early 2020s. The rich Western and Asian democ­ra­cies, which still con­trol the in­ter­na­tional eco­nomic sys­tem, are co­a­lesc­ing into a united front. China is start­ing to pay the ex­or­bi­tant price for its wolf war­rior diplo­macy. Xi has given us a nasty fore­taste of what the world will be like if the Com­mu­nist Party ever at­tains global mas­tery. This week he went so far as to ex­tend ex­tra-ter­ri­to­rial ju­ris­dic­tion of the Ar­ti­cle 34 sedi­tion law in Hong Kong to any­body, any­where in the world. Prof Don­ald Clarke, from Ge­orge Washington Univer­sity, says the in­tent is sim­ply “to put the fear of God into all China crit­ics the world over”.

Yet China is not a suf­fi­ciently de­vel­oped eco­nomic and tech­no­log­i­cal su­per­power to pull this off. One is tempted to say that Xi has jumped the gun, ex­cept that there is no such thing as a lin­ear path to Chi­nese supremacy. Mod­ern post-Mao China has in a sense peaked and is now in in­cip­i­ent de­cline.

The “sec­ond de­riv­a­tive” was al­ready turn­ing as far back as 2007. That was the year when the all-con­quer­ing Chi­nese econ­omy, armed with a sup­pressed cur­rency, racked up a mer­can­tilist cur­rent ac­count sur­plus of 10pc of GDP and $4 tril­lion

(£3.2 tril­lion) of foreign re­serves, a weak­ness that some mis­took for strength. Its vo­ra­cious in­dus­trial ex­pan­sion was driv­ing a com­mod­ity su­per-cy­cle, ab­sorb­ing half the world’s iron ore out­put.

But then China made its great mis­take. Com­mu­nist Party strate­gists falsely con­cluded that the Lehman cri­sis had per­ma­nently wounded the US and dis­cred­ited free-mar­ket lib­er­al­ism. It tempted the polit­buro into cling­ing too long to a growth model past its sell-by date, plagued by re­liance on Lenin­ist state cap­i­tal­ism and the pro­duc­tiv­ity-killing, sta­te­owned en­ti­ties.

Pre­mier Li Ke­qiang warned against this mis­cal­cu­la­tion eight years ago in a re­port by his brain trust, the Devel­op­ment Re­search Coun­cil. It said the low-hang­ing fruit of state-driven in­dus­tri­al­i­sa­tion was largely ex­hausted and that catch-up growth driven by im­ported know-how had hit the lim­its.

It con­cluded that Bei­jing would have to em­brace plu­ral­ism and re­lax its suf­fo­cat­ing grip on society if it was to reach the tech fron­tier where the air is thin­ner. De­lay would con­sign China to a mid­dle in­come trap that had en­snared Latin Amer­ica or North Africa.

Li Ke­qiang was right. China’s to­tal fac­tor pro­duc­tiv­ity growth has col­lapsed from an av­er­age rate of 2.8pc in the early 2000s (ac­cord­ing to the World Bank) to just 0.7pc over the last decade. China is longer on the “con­ver­gence” tra­jec­tory carved out by Ja­pan and then Korea as they reached take-off and vaulted into the elite tier. It risks stalling long be­fore it is rich.

The Huawei saga has ex­posed just how much the coun­try still lags, a sur­prise to some who have bought into the me­dia nar­ra­tive of Chi­nese hi-tech as­cen­dancy. China is not yet ca­pa­ble of mak­ing the ad­vanced semi­con­duc­tor chips used for telecom­mu­ni­ca­tions or pro­gram­mable FPGA cir­cuits.

It has yet to crack the ma­te­ri­als science re­quired to make the lat­est mi­cro­scopic chips and lacks the critical raw ma­te­rial needed to sus­tain its am­bi­tions for global dom­i­nance of G5 mo­bile and the com­ing “in­ter­net of things”. The US con­trols the world’s semi­con­duc­tor ecosys­tem, work­ing tightly with Ja­pan, Korea and Tai­wan.

All Washington had to do in May was to flick its fin­gers and Tai­wan’s TSMC in­stantly cut off chip sup­plies to Huawei, doom­ing the com­pany’s G5 global quest at a stroke. Bri­tain does not have the op­tion of stick­ing with Huawei even if it wants to do so. The US Congress is not go­ing to al­low an arm of the Chi­nese state – serv­ing Xi’s doc­trine of civil-mil­i­tary fu­sion – to ac­quire global con­trol over a key tech­no­log­i­cal choke point.

China’s econ­omy looks stronger than it re­ally is be­cause out­put has been flat­tered by the il­lu­sion of a sys­temic credit bub­ble. This has pushed the pub­lic-pri­vate debt ra­tio to 330pc, lead­ing to a for­est of ma­l­in­vest­ments and an ever-di­min­ish­ing macroe­co­nomic re­turn on loans. State con­trol over the bank­ing sys­tem prob­a­bly en­sures that this will not end in a Min­sky mo­ment or a clas­si­cal fi­nan­cial cri­sis. It will end in­stead in stag­na­tion.

China is now in trou­ble. It needs un­fet­tered global ac­cess for its com­pa­nies to reach the critical break-through achieved by Ja­pan and Korea. It is in­stead be­ing shut out by one coun­try af­ter another as they re­spond to provo­ca­tions. India banned TikTok and 58 other Chi­nese apps last week, os­ten­si­bly on se­cu­rity grounds. The US has frozen out China Mo­bile.

Xi Jin­ping is ob­vi­ously not go­ing to back down over Hong Kong but the cost of es­ca­lat­ing com­mer­cial con­flict is no longer neg­li­gi­ble for China. Puni­tive ac­tion against Aus­tralia and Canada has been a dis­as­ter for Bei­jing’s global cred­i­bil­ity. Lash­ing out at Bri­tish in­ter­ests would com­pound the dam­age. Each episode ac­cel­er­ates the creation of a con­tain­ment al­liance, soon to be led with much greater state­craft by a mul­ti­lat­eral pres­i­dent Bi­den.

“If we make China an en­emy, China will be­come an en­emy,” says Liu Xiaom­ing, China’s am­bas­sador in Lon­don, play­ing on the theme of the Thucy­dides Trap. This his­tor­i­cal anal­ogy pur­ports to show that con­flict be­comes in­evitable when a sta­tus quo power (Sparta) tries to hold down the rise of a ri­val (Athens).

It is a use­ful no­tion for Bei­jing, in­duc­ing paral­y­sis in the West. But it has no rel­e­vance to the cur­rent great power clash. China is not ris­ing any longer. It is age­ing more quickly than the West. The re­serve army of mi­grant work­ers from the vil­lages has dried up. The work force is al­ready con­tract­ing and will shrink by 200 mil­lion over the next 30 years in a spec­tac­u­lar de­mo­graphic col­lapse.

The proper Bri­tish re­sponse as it de­cides what to do about Huawei, Hong Kong and China’s es­ca­lat­ing threats is surely po­lite but in­flex­i­ble re­sis­tance, in the knowl­edge that Xi’s hand is weaker than he lets on.

If the democ­ra­cies bide their time and hold to­gether, China will even­tu­ally set­tle down and ac­cept that it too is a grey­ing sta­tus quo na­tion and per­haps even that its bid for global supremacy is go­ing nowhere.

Newspapers in English

Newspapers from UK

© PressReader. All rights reserved.