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Four somewhat random items caught my attention recently.
Item #1. A snippet from a conversation with Michael Dell
“It's kind of frosty, Andy,” Dell tells me in an interview. “The relationship is a little bit frosty at the moment.”
The relationship in question being that of China with the United States, particularly in the tech sector. The billionaire founder and CEO of his eponymous tech company went on to speak passionately about how “an incredible nation, like China, [was] deterministically investing in these strategic industries, and the U.S. [was] doing absolutely nothing” and how he hopes the latter point is changing.
Item #2. A move by Cathie Wood
The FT reported that Wood, the ultra high-profile CEO of Ark Invest, had cooled on China:
“We have not eliminated our positions but we have reduced our positioning in China dramatically and we have swapped some of our holders, which became losers, into companies that we know are courting the government with ‘common prosperity’,” said Wood.
Item #3. A scary talk resonates with a group of swells
Earlier this week, I’m in the ballroom of an exclusive New York City Club for a lunch lecture by writer and provocateur Gordon Chang, who’s doing what he does best, scare the bejesus out of us about China.
I can’t tell you verbatim what Chang said as it was off the record, but I can report that it pretty much matched what he’s been saying elsewhere recently. Such as what he told Sinclair Broadcasting in a recent interview: “The Biden administration should understand that China’s challenge to the United States is comprehensive, it’s malicious, that China intends to overthrow our government." Chang told Fox News that China put out a bounty to kill Americans in Afghanistan and “took steps to deliberately release the coronavirus from their own country...”
I wasn’t particularly surprised by what Chang said, as he’s been spouting these kinds of opinions for decades. Indeed, his most famous book, “The Coming Collapse of China,” came out 20 years ago. (Presumably the coming collapse is still coming.) No, what struck me was the response of the 100 or so people in attendance, mostly sophisticates of one sort or another who, some actually mouth agape, hung on Chang’s every word as if it were the gospel.
Reading the room, Chang’s notion that the Chinese are about to cross the Hudson or the Potomac or the Delaware and take over America seemed entirely plausible. While I’m not at all in that camp, part of me understands why some Americans might feel that way right now.
The fact is, news out of China these days is unsettling.
Big trouble at the highly leveraged Chinese real estate giant Evergrande hangs over the global financial markets. Meanwhile, a massive power supply crunch is reducing economic growth and threatening global supply chains.
Even more significant are moves by Chinese President Xi Jinping who has been asserting control over his country in ways that we in the United States, (as well as many China experts), never anticipated. Xi is clamping down on what he perceives to be "excesses," which we would consider unthinkable, surprising even to many Chinese. Xi is moving China center stage, moving America off its status quo. None of this is easy for us to digest.
Changes in China are pronounced and highly visible. Xi has been squelching China’s giant tech companies (such as Tencent, Alibaba, and ByteDance), consolidating the electric vehicle market, scotching IPOs by Chinese companies on U.S. exchanges or takeovers of Chinese companies by U.S. businesses, reducing video game consumption, barring tutoring companies from making profits, and even smacking down Alibaba founder Jack Ma, the once highly visible personification of pro-Western Chinese capitalism. A myriad of other Chinese companies are being pressured by Xi’s government, as well.
Key here is that the Chinese tech companies in particular “control the one thing the Chinese government always wished to control — that’s information,” says William C. Kirby, professor of China studies at Harvard University. Xi wants that. And it's noteworthy too, says Jay Ritter, former president of the Financial Management Association and a professor of finance at the University of Florida’s Warrington College of Business, how during this crackdown, “the Chinese stock market hasn’t dropped very much whereas Chinese stocks listed in the U.S. have dropped by a lot.”
Xi Jinping has also been pressuring major Chinese companies to donate billions of yuan to philanthropy, as part of his “common prosperity” plan. (We call that wealth redistribution.) That is also very much at the core of his thinking.
The Chinese president is making it very clear that 1) he is in charge and 2) he has a different vision than that of his immediate predecessors. To wit: China is moving into uncharted territory — and President Xi, who three years ago was able to remove the 10-year limit on his term as president and could conceivably be in charge for life — will be the one steering the course.
What all this means for China is one question, but I’m interested in another: What does all this mean for the United States? That the Chinese economy was going to become really big, (likely to be bigger than ours), we all saw it coming a mile away. But we didn’t envision on what terms this would occur, and what it would all mean for us. Now that picture is becoming clear.
If you want to get a good idea about Xi Jinping’s game plan, I highly recommend this recent article from the Wall Street Journal. The piece is striking because it suggests in no uncertain terms Xi’s modus operandi and his goals. Written by the Journal’s chief China correspondent, Lingling Wei, the article notes that Xi is “trying to roll back China’s decades long evolution toward Western-style capitalism and put the country on a different path entirely…”
“In Mr. Xi’s opinion, private capital now has been allowed to run amok, menacing the party’s legitimacy, officials familiar with his priorities say...he is trying forcefully to get China back to the vision of Mao Zedong, who saw capitalism as a transitory phase on the road to socialism.
Mr. Xi isn’t planning to eradicate market forces... But he appears to want a state in which the party does more to steer flows of money, sets tighter parameters for entrepreneurs and investors and their ability to make profits, and exercises even more control over the economy than now. In essence, this suggests that he aims to rewrite the rules of business in what could someday be the world’s biggest economy.”
This is big stuff. And surprising to those who figured that Xi’s increasing bluster over the past half decade or so was mostly about countering Donald Trump. With Trump gone, the wishful thinking crowd thought Xi would be back to the continuum of Westernization first instilled by Deng Xiaoping some 40 years ago. Instead, Xi is changing direction, shifting away from Deng and back to Mao.
Imagine then a decade hence, where China is the biggest economy in the world, with this man with this mindset at the helm. For those of you who think that it won’t matter so much for us, because Xi is all about shaping China into a separate, parallel universe from the U.S. and the rest of the West, I say, be careful with that. While I do see some validity in this notion of a bifurcated world — especially in the tech sector writ large, (separate search, shopping, data, social media, etc.) — as China becomes bigger and bigger, it becomes almost impossible to imagine the implications of changes in its economy not impacting us more and more, ironically even as we are less connected intentionally.
If China’s economy slows for example, it will impact the global economy, decoupled or not. “The classic line was when America sneezes, the rest of the world catches a cold,” says Rory Green, the head of China and Asia research at TS Lombard. “Increasingly it’s the same for China.”
Evergrande is a perfect example. It operates in China and yet it is seen as perhaps being another systemic, Lehman Brothers threat to the global markets, and indeed fears of its collapse sent U.S. stocks reeling late last month. (Ironic perhaps that "The Lehman Trilogy" is opening on Broadway this month. I’m sure the producers appreciate the publicity.)
What will happen with Evergrande ultimately? “Beijing must step in,” says Green of TS Lombard. “The failure to do so would cause a drop in household prices and destroy middle-class life in China, and cause legitimacy and security risk. Xi is going for the third term. It’s the most important event, probably in the last 10 years at least. He wants a stable economy, no financial crisis.”
“The government will probably go in and orchestrate some kind of orderly bankruptcy, like Hainan Airlines and Anbang Insurance Company,” adds Yan Liang, a professor of economics at Willamette University who focuses on China.
Another facet of the Evergrande saga is in this story in The New York Times that suggests the company is a metaphor for the rise and fall of a period in China’s economic history that is now over: “The property giant’s success mirrored the country’s transformation from an agrarian economy to one that embraced capitalism. Its struggles offer a glimpse of a new financial future.”
Remember too that the Chinese real estate market has long been viewed as a ticking time bomb by high-profile short seller Jim Chanos and others. Why did China’s command and control government allow Evergrande to reach this point? Perhaps it's because investing in real estate is such a massive play in China where the stock market is much smaller. In China everyone from poor families to billionaires views real estate much more of an investment than we do in the U.S.
Speaking of Chinese billionaires, this Washington Post article flags another change in perspective by the leadership in China. We like to think that Deng said “to get rich is glorious,” (though it’s pretty clear he never actually uttered those words.) Still, it was kind of his point. Today in China? Not so glorious to be so rich.
If Xi wants to make his economy more fair, who are we to argue? Isn’t everyone from Donald Trump to Elizabeth Warren always talking about doing that here? As for reining in our tech giants, ditto, right? Aren’t we always complaining about how FAAMG (Facebook, Apple, Amazon, Microsoft, and Google) are too powerful?
Xi has reason to want to change.
“China has very little redistribution in its system. Its final outcome is a more capitalistic outcome than you find in the U.S. or Western Europe,” says David Dollar, a senior fellow at the Brookings Institution who served as the U.S. Treasury’s economic and financial emissary to China under the Obama administration.
Or as Kirby of Harvard notes: “China has become one of the most unequal places on Earth in income terms. If we take Mr. Xi at face value, says he’s a socialist and he wants to bring about a socialism with Chinese characteristics in China, then it’s high time and long overdue that the Chinese government and Chinese communist party begin to care about those at the bottom end of the economic and social ladder.”
Maybe we thought we would change China. Shape it in our image. Americans often think that way when it comes to foreign policy. "Nation building" we call it. To be generous, let’s just say sometimes it works, sometimes it doesn’t.
Here’s what Politico’s Washington-based China correspondent, Phelim Kine, had to say this week:
“There was very much an underlying belief or hope back in the 1990s in the President Clinton era that helping to integrate China into the global economic system would, osmosis-like, help to spur positive changes in China’s one-party authoritarian system. In December 2001 the U.S. granted China Permanent Normal Trading Relations and that same month China entered the WTO.
Twenty years later we can clearly see the economic and financial fruits of that opening — China has the world’s second largest economy, millions have been lifted out of poverty, China now boasts more billionaires than the U.S — but China’s authoritarian system is stronger than ever. The CCP has skillfully guided and exploited the opening of its economy to ensure that it gained maximum financial and economic advantage without ceding any political ground.”
So we helped China and its leaders say thank you very much and go on their merry way. It was naive to expect anything else.
Another change is that the media rhetoric in China unassailably has taken a more anti-U.S. tone. Some is way over the top, mirroring the hyperbole here in the U.S. about China. Taiwan, that decades-long thorn, is coming more and more to the fore. Why is that? Hard to say, but agitating about it certainly fits in with Xi’s masterplan.
How far would China and the U.S. go here? Impossible to predict, but I would guess neither side would commit combat over Taiwan. One very important point to reinforce is that China is so opaque and our understanding is so limited (remember there are fewer and fewer U.S. journalists there, so who the hell knows). Bottom line: The amount of misinformation back and forth now, intentional or otherwise, is alarming.
One of the most difficult things for human beings to process is slow change. Until recently I was concerned about China taking advantage of the outdated economic relationship with the U.S. (Meaning China was behaving like it was a small developing country and therefore we should overlook its transgressions when it came to, say, taking our intellectual property.)
Now though, I’m focusing on the fact that Xi Jinping is creating a new economic model to rival our own. China under Xi Jinping is changing into a very different beast than from what it was a decade ago. Not just bigger, but different. Just to give you an idea, who in the U.S. had ever heard of Huawei 10 years ago? I remember it vaguely, when as then editor of Fortune magazine, the company made the Fortune Global 500, (No. 397!)
There could be opportunities for America in this coming world order. If our system remains a beacon, presumably young Chinese entrepreneurs would move to the U.S. And Kirby from Harvard notes that “Chinese direct investment in the U.S. has fallen 80% over the last five years” and should be rebooted. A stronger China might bring us closer to Europe and the rest of EMEA (Europe, Middle East, and Africa). But to take advantage of this, our country will need to step up and not succumb to our darker nationalistic side.
But more importantly, we will have to learn to adapt to this new form of China, for better or for worse. Just as China had to accept America in one super power era, we now need to accept a two super-power world. There will be challenges but opportunities, too.
By the way, it would be a mistake to interpret the Chinese economic pendulum swinging too far, meaning that Xi and China are now completely rejecting capitalism, wealth creation and (the good things about) the U.S. economic and social model. They are not.
“Some interpret it as a return to socialism, but I don't see that happening,” says Liang of Willamette University. “You can see other policies the government has put forth like establishing another stock market in Beijing for small- and medium-sized companies, continuing to open financial markets, this is more like economic populism, trying to balance power between the big guys and little guys, capitalists versus the working class."
“To some extent, both countries are working on their own economy with their own plans. Biden has criticized China's political system and so on, but he is seeing the importance of some ingredients of China's success, like infrastructure investments, and like the government’s heavy support for technological development. We’ve seen recently all these efforts on the part of the U.S. government to promote infrastructure and technological development.”
China is charting its own path. We should keep and hone our own path too of course, but we must be informed to a degree by what China is doing.
Which brings me to the last random item, which I saw just yesterday.
Item #4. A New York Times headline.
“House Delays Vote on Infrastructure Bill as Democrats Feud.”
For better and for worse, that’s something you will never see in China.
This article was featured in a Saturday edition of the Morning Brief on October 2, 2021. Get the Morning Brief sent directly to your inbox every Monday to Friday by 6:30 a.m. ET. Subscribe
Andy Serwer is editor-in-chief of Yahoo Finance. Follow him on Twitter: @serwer