Dealing with China’s Turn to the Dark Side

Over the past decade, the communist leaders of the People’s Republic of China have progressively turned to the dark side—from giving the people more leeway to pursue their own, self-chosen purposes to more top-down commands; from tolerant co-operation with the outside world to assertive confrontation. The catalogue of steps in that direction is long: ill-founded claims in the South China Sea where reefs have been concreted over to accommodate military bases; armed clashes with Indian troops in the Himalayas; gross violations of basic human rights in Tibet, Xinjiang and more recently in Inner Mongolia; nullifying the constitutional guarantees to Hong Kong citizens; systematic industrial espionage and corrupt influence-peddling in universities and political, industrial and research organisations; and a growing list of one-sided, WTO-defying conflicts with trading partners. Instead of complying with shared global rules, the Beijing leadership has jettisoned openness and erstwhile foreign-policy caution. The SARS-Cov-2 virus, which spread suddenly from China throughout the world, raised the conflict potential between China and the rest of us, as Chinese exporters initially donated or sold defective protective gear and officials engaged in malicious “wolf warrior” diplomacy.

This essay appears in Quadrant‘s December edition.
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Unsurprisingly, popular opinion about the PRC has turned sharply negative in the West and among China’s neighbours. A survey by the Pew Research Center in August and September 2020 documents this fact (L. Silver, K. Devlin and C. Huang, 2020). Most of the 15,000 telephone interviewees in fourteen countries gave China poor marks. Opinions everywhere have deteriorated massively compared to earlier surveys—most, however, in Australia, the country whose government had the temerity to demand an independent international investigation about the origins of the coronavirus and which has been repeatedly singled out for vexatious trade disruption. But Australia is not alone. Virtually everywhere, the government of China has lost good will. According to the Pew survey, only 19 per cent of respondents still trust President Xi Jinping’s government to make the right decisions, and 78 per cent have little or no trust at all in the PRC leadership. In South Korea and Japan, mistrust has reached extraordinarily high levels.

A surprising result of the Pew survey was that about half of all interviewees overestimated China’s economic strength. They were of the opinion that the PRC now surpasses the United States, Japan and the EU economically. This is patently wrong: Despite impressive growth since Mao’s demise in 1976, real per-capita incomes in the PRC (measured by the World Bank at purchasing power parity in 2019) were only a quarter of average US incomes, and less than one-third of Australian or Taiwanese incomes.

The leaders of the Chinese Communist Party (CCP) obviously no longer care about the loss of soft power and respect in the outside world. One reason may be that the country’s sheer size makes reliance on soft power unimportant. When going head to head with smaller nations such as Australia, China now relies solely on its relative weight. Another reason may be that Xi Jinping’s leadership needs to arouse nationalist sentiments to remain in control domestically. The hawks in the Party, the security apparatus and the military may need to be courted, because the present leadership considers dovish rivals inside the Party, independent intellectuals and erstwhile internationalists a threat to their hold on power. There must be considerable opposition even inside leadership circles, as it is obvious that the new antagonism inflicts considerable self-harm on the economy. It is also obvious that the “Belt and Road initiative” to invest surplus capital abroad and gain influence is not going as well in many countries as was hoped. Stoking tensions with the outside world has always been a fail-safe tactic when a political elite discovers that its hold on power is insecure. It no doubt also plays a role that the Trump administration has opportunistically given up on leading the free world and defending core aspects of the established global order.

In all probability, the main reason for the changes is domestic. China’s population is no longer as easily ruled as it was a generation ago. “The masses” are no longer the docile, poor and poorly informed inhabitants of a backward country. For the long-suffering grandparents, meek conformity was the norm. Getting ahead materially and enjoying the little pleasures of improving living standards took precedence. By contrast, many of the young professionals of today are well educated; they take decent and rising living standards for granted. Many have travelled the world. Many have high expectations, not only as to material comforts, but also individual freedom, justice and a liveable natural environment. They resent—and cleverly circumvent—barriers of access to international information, such as on Google (which is banned in the PRC). They resent the corrupt dealings of local Party officials and think critically about politics. Such socio-political changes are a normal corollary of economic development. Demands for more say in politics and a better protection of basic rights arose during the nineteenth century in Europe. Similar aspirations took hold in most of the East Asian Tiger economies during the 1980s after a generation of economic take-off. Matters typically come to a head when the first exciting rush of economic growth subsides and people perceive that the rulers cannot guarantee an unbroken move up the economic ladder or, indeed, that they hinder it (Kasper, 1994).

After Mao’s death in 1976, dominant CCP elders—such as Deng Xiaoping, Zhao Ziyang and Jiang Zemin—relaxed controls and facilitated private capitalist initiatives, because they believed that “reform and opening” was the only strategy for the economy to catch up with the East Asian Tigers and the West (Coase-Ning Wang, 2013). The resulting prosperity signalled that the Red Emperors enjoyed the Mandate of Heaven. The rise of an independently minded middle class must have alerted the current leaders that liberalisation and opening to the West was a dangerous path to follow. The Xi Jinping leadership is no doubt also acutely aware of what happened to the Soviet Communist Party’s monopoly once Gorbachev relaxed internal repression and opened the USSR a little to the free world. Inside the CCP, Deng Xiaoping’s “four modernisations” (agriculture, industry, defence, science-and-technology) led to demands for a fifth: democracy. Even high-ranking cadres within the CCP argued for political reforms, most prominently Zhao Ziyang, Premier and Party Secretary during the 1980s. Before his sacking, he publicly advocated parliamentary democracy (Zhao Ziyang, 2009). But political competition for the Party from rivalling political organisations was a step too far both for Deng Xiaoping and the Marxist-trained Xi Jinping generation. The latter had grown up during the incessant turbulence of the Mao years, getting little proper education and acquiring much less knowledge and moral spine than their Deng-era predecessors. Indeed, the Cultural Revolution only taught them what a Chinese friend characterised as follows: “Either you are emperor, or you must fear becoming a prisoner or a slave.”

The Great Disappointment

I admit to sharing the great disappointment of many with the PRC’s turn to the dark side. I was among those who long believed that an economically emergent China would fit more harmoniously into the world community and that the people of China might be able to look forward to a freer future. The eager pursuit of material progress would trump Marxist ideology. I based my hopes and expectations both on personal experiences in China and on socio-economic logic.

When I, together with Professor Jock Anderson of the University of New England, first travelled around China in 1981 on a lecture tour on behalf of the Australian Academy of Social Sciences, we had the opportunity to discuss matters with leading Chinese academics, industrialists and bankers. We not only lectured about “Western economics”, but also had intensive private and personal discussions. Many were face-to-face, confidential and away from the spying “man handlers”, who accompanied us during the official part of the program. Many of the personalities we met had been born between 1900 and 1930 and were still working hard for a more humane society. Never will I forget the earnest private conversations during which these elderly Chinese men and women spoke about the moral anguish, the cultural destruction, the economic losses and the health costs of Mao’s revolutionary campaigns in the 1950s and 1960s. No one was able to name even one benefit of the political pain. Their stern moral commitment to prevent a recurrence of what had happened impressed me.

Never will I forget the visceral pleasure of ordinary folk, of traders and customers in the markets of long-closed Sichuan. Small, newly land-owning farmers were, for example, able to sell their crop of peaches—a perishable fruit that the rigid central-plan economy was not able to handle, so that the fruit were either fed to pigs in the people’s communes or secretly distilled into illicit brandy. Repeatedly, I was happily told that the womenfolk looked attractive again, once they could shed the ill-fitting, olive-green Mao-uniforms and slip into frocks that private market tailors fashioned out of colourful cotton fabric. Never will I forget that baijiu-fuelled dinner conversations, during which top-level financiers and business leaders, when asked why they were still working so hard in their advanced years, expressed the commitment that the Chinese must never again go through the agonies and humiliations they had experienced.

Having grown up in post-war West Germany, I understood the “never again!” commitment of the elders. My family, friends and teachers bore the burdens of the Nazi era and told us about what their generation had inflicted on the rest of Europe and above all on Europe’s Jews. Not that they dwelt ceaselessly on that guilt, but they told us of their commitment to never allow such atrocities to happen again. I recall conversations in which some people criticised Adenauer for travelling to Israel and offering material restitution to Holocaust victims and collective material compensation to Israel, including the supply of arms. These critics met with moral outrage and were shouted down as “old Nazis”. Against such teenage memories, the Chinese elders I met in the early 1980s made me optimistic about the future of China.

The evident economic progress and the gradual relaxation of the people in interacting with foreigners, which I witnessed during repeated subsequent visits, made my benign view of the future more and more plausible. People were able to move out of dreary collective accommodation under surveillance by some misanthropic, spying block warden into private apartments. They exchanged heavy black bicycles for private motor cars. While traffic congestion in the cities increased, vast networks of cross-country roads and motorways were built. Foreign visitors can now use the sleek and expediently managed trains as freely as one can hop on a French TGV. The domestic flight network has been expanded with amazing speed; it is easy and cheap to use. The Chinese enjoy their new mobility with relish. Many have also visited foreign countries. I remember my astonishment two decades ago during a visit to Taiwan, when I saw that more than half the departures flew to mainland cities. To the casual foreign visitor, ordinary Chinese people appear to live a fairly free life. For a long time, most private businesses and local governments seemed to act, by and large, on the principle of self-interest, trusting that “the Heaven is high and the emperor far away”. And where had a communist country ever attracted so many voluntary immigrants as the huge young expat community of boomtown Shanghai?

The years from the early 1980s to Xi Jinping generation’s takeover are now referred to in China as the “golden years”. Of course, there were cases of corrupt taking of private property by officials. Outspoken political activism was discouraged (Coase-Ning, 1993). But even the cruel crackdown after the Tiananmen pro-democracy demonstrations during that heart-wrenching June of 1989 looked after a while like a passing interruption. It all inspired an optimistic mood among the Chinese people I met and most foreign observers as well.

Economic logic also inspired optimism. Greater economic freedom, competition and openness to the world always favour material progress. The search for useful new knowledge is made possible by individual property rights. Competitive market rivalry ceaselessly stimulates the testing of knowledge by instigating product innovation (developing new products and improving on existing models) and process innovation (helping to reduce costs). In China, these institutions and mechanisms produced unprecedented material results, partly thanks to a long inventive tradition and the competitive and guilt-free material streak of the people—no hang-ups about original sin!

Deng’s government opened the country to the world by imitating the successful export-orientation of the East Asian Tigers in the 1960s. The new openness gave an enormous boost to the economic take-off in the 1980s. What mattered much more than the exploitation of comparative advantages by specialisation, which has dominated economic textbooks since David Ricardo who wrote about foreign trade 200 years ago, were the dynamic gains from direct foreign investment. Foreign capitalists brought in new technical knowledge, trained Chinese workers and managers in new skills, engendered more productive work attitudes and opened direct access to global markets. In 1981, when I visited pseudo-privatised Chinese factories that produced cheap goods for foreign markets, the managers still had to cope with the need to get through the curtain of separate foreign-trade organisations and struggle with atrocious domestic transport. I remember the despair of the directors of a technically impressive glassware plant near Chongqing, who were puzzled by reports that a certain Mr David Jones in Sydney was reportedly buying so much of their output. They had no way of finding out what Mr Jones really wanted to buy and what he paid. Such obstacles to information flows were soon wiped away, yielding great gains in quality and profit all around. More and more regions of China joined the rush to become “the workbench of the world”.

Over the past four decades, China’s real per-capita incomes have grown at about four times the world average. This growth was of course disruptive in many places and industries. Eventually, it had to slow down, step by step. Predictably, cumulative industrial progress required more domestic R&D, and rising wage levels eroded competitive advantages. The challenge now was to remove political controls and regulations to reduce the transaction costs of doing business. But an entrenched bureaucracy and official corruption raised these costs. As a consequence, the economy began to stutter and a “middle-income trap” developed. Reckless Keynesian demand stimulus disguised the problems for a time.

In comparable historic situations, political elites had often made concessions by giving producers and citizens greater economic, civil and political liberties—in the Renaissance, for example, Italian rulers had allowed liberties to become formally entrenched. The same happened in trading centres north of the Alps. Europe’s industrial revolution led to more citizen rights, and East Asia’s post-war growth wiped away autocrats from Seoul to Taipei and Jakarta. Was it naive to expect something similar to happen, if not centrally in Beijing, then at least in the more outward-oriented provinces?

The Re-Politicisation of Economic Life

It was not to be! The reassertion of repressive collectivism began after 2010 with explicit Party directives against “Western values”. Leading liberal economists—such as the eminent nonagenarian Mao Yushi and his colleagues at the private Unirule Institute of Economics, founded in 1993, who argued for a market economy and constitutional democracy—all of a sudden found themselves in difficulties. Eventually, the Unirule Institute and other economic rationalists were silenced. I felt a whiff of the icy new wind when the top managers of the eminent Chinese publishing house, which had promoted the translation of a free-market economics textbook, of which I had been the lead author, cancelled the publication of the greatly rewritten second edition, although they had already prepared the page proofs of the Chinese version ready for printing (Kasper et al., 1998, 2000, 2012).

In September 2020, an increasingly paranoid Party leadership upped the ante by imposing new controls on China’s burgeoning free enterprise under the heading of “United Front Work” (CPC, Central Committee, 2020). It makes for bone-chilling reading, even if the language tries to be diplomatic. The message is that private firms enjoy too much economic freedom yet have been remiss in fulfilling responsibilities towards the Fatherland and the Party. Private enterprise had contributed about 60 per cent of economic growth and 90 per cent of job creation since 1980, but that is now considered not enough. Xi Jinping and the Party now stipulate loyalty and patriotism and demand obedience to political directives. The dependency on international supply chains is to be reduced and a higher degree of national self-sufficiency is to be pursued. Party cells, now already entrenched in 90 per cent of private firms, must henceforth take an active role in entrepreneurial decisions to hire and invest. This looks like a return to the confusing situation pre-Deng Xiaoping, when industry was run by two conflictive leaderships: the technical/commercial doers and the parasitic/supervisory Party guardians. Now, commercial activity is again exposed to direct and unpredictable politicking.

How that will affect the driving forces behind China’s hitherto amazing economic development must be of concern to any student of economic history. The re-politicisation of business will no doubt weaken incentives and the profit-driven but risky search for new knowledge. Because the dividing line between private enterprise and political direction is blurred, the new United Front policy is also likely to lead to more conflicts with Western governments. Huawei is just the beginning.

How Not to Alienate Valuable Allies

The spreading antagonism between China and the West is regrettable, because the fronts get polarised and more costly conflict becomes more likely. Above all, the many Chinese—living around the world and in China—who disagree with the new Party line and want to live the life of material comfort, liberty and security that we value, are likely to suffer from racial discrimination. Some Australians of Chinese descent already meet with general distrust: Are they technical spies and covert agents of influence? Do they pose the threat of subverting political organisations, universities and social groupings? Can we continue depending on essential imports from China? Can we confidently develop mines, farms and other production facilities which will supply China’s markets? Can we allow Chinese enterprises—whether private or public—to invest in Australia?

Undifferentiated distrust may satisfy base protectionist-mercantilist instincts. But that is not only wrong and unjust, it is counterproductive. Those who see the dark influence of the CCP behind every Chinese-looking face, ensure that we lose knowledgeable allies in the incipient tug of war. Many Chinese have migrated to Australia because they treasure our values and institutions. Many within China cling to their good will towards the West, but may be driven by our antagonism into the arms of the hardliners. No one is immune to the poison of facile nationalism here, as much as there. Above all, the Chinese in Hong Kong and Taiwan, who have good reason to be scared of Beijing, deserve our sympathy and support.

Therefore, we must find it in our heart to forgo facile racial identity classification and try to cultivate all potential allies in the contest with the Marxist totalitarians. Therefore, we ought to acknowledge that there is much to respect and admire in Chinese civilisation and attitudes to learning, working, saving and sharing. We should remain curious about and open to Chinese art, science, philosophy, social thought and economic development. And we should guard against disguising our ignorance by professing Western cultural chauvinism.

I would even go so far as to acknowledge amazing achievements under China’s communist leaders. Enormous structural changes in the economy, rapid urbanisation and an unprecedented need to acquire productive skills have been mastered without intolerable insecurity, political turmoil, a disruptive rise in inequality and deteriorating health standards. Most of the reduction in the number of world’s extremely poor has been achieved in China. Most of these outcomes are of course due to the moral traditions and the disciplined, benevolent actions of ordinary people. But much is also due to the institutional framework and the policies that the Beijing government has provided.

Containing the Exposure to China Risks

All mature Western economies and much of the rest of the world now depend on economic two-way links with an easily provoked China. The global interdependency is the result of the pursuit of efficiency. Present living standards around the world are unimaginable without the current advanced degree of international specialisation. Undoing this interwoven world economy would not only be costly; it is practically impossible. We now rely on highly specialised, differentiated goods and services, for which no substitutes can be easily found. International trade no longer resembles conditions in the nineteenth century (or simplistic assumptions in most economics textbooks). Exchange no longer deals with cloth or wine. For example, no national economy can nowadays produce a motor car on its own. Brand names may still proclaim a car’s national identity, but under the bonnet are bits and pieces imported from dozens of widely dispersed locations.

Commentators who now demand national self-sufficiency have little idea of how many different product lines modern life depends on. Your average supermarket probably carries more than 10,000 product lines in its inventory; not only different products, but competing brands, different sizes, colours and packaging. Literally millions of different bits and pieces have to be assembled to produce a modern jetliner. No small or medium national economy could ever afford to hold a complete inventory of spares to secure autarky in repair and maintenance. When I now hear demands for self-reliance in defence support, I cannot help but remember what I once saw in Melbourne’s government aircraft factories: strike-prone workers opened crates of imported componentry and read instructions on how to put the red nut on the red bolt and insert the blue spring in the blue compartment. That had nothing to do with training essential industrial knowledge and maintaining an essential skills base. It was fake manufacturing, which did not add one iota to the nation’s defence preparedness. It only nurtured a political illusion which some “experts” are now eager to revive by exploiting the China threat. Will a costly South Australian submarine facility, for example, make a substantial contribution to our independence?

Mercantilist-protectionist arguments may still inspire politicians, bureaucrats and journalists. But they would come with unimaginable costs. Can anyone imagine the consequences of a tariff and quota wall such as the one that stood between Australian and world markets in the 1950s? Let us not forget the productivity losses that the steep US tariffs of the Roosevelt era, Hitler’s autarky regime in Germany and the preference distortions in the Commonwealth inflicted. These fads turned the sharp 1929 recession into the Great Depression of the 1930s. Nor must we take the tremendous gains from the enlightened liberal economic order of the post-war era for granted.

Reducing risks of political disruption by decoupling from an unfriendly China will demand judicious, selective choices. Beijing’s political drift to the dark side now requires governments and businesses to screen trade flows from and to the PRC: With regard to which industries and product categories do we not have to fear harm to long-term security? With regard to which industries and product categories are fears justified? Where this is likely, can costly adjustments be made? This is an extremely problematic type of analysis. It not only requires hard-to-obtain technical and commercial knowledge, but relevant information is also easily distorted by opportunistic rent-seekers. Nevertheless, it seems urgent for Australians to tackle these issues.

A first attempt to separate safe products and activities from those where exposure to the arbitrary or exploitative politics of Beijing spells danger has been recently undertaken for the European Union by a US think-tank. The study was financed by the German Bertelsmann Stiftung, but conducted by the independent, New York-based Rhodium Group that has developed great analytic strengths about Chinese economic affairs (Bartsch-Laudien, 2020). The Rhodium/Bertelsmann study identified areas where economic exchanges are problematic for long-term security, but also concluded that a complete uncoupling from the Chinese economy would make no sense. The main purpose of the undertaking was to deal with growing emotional alarm in Europe by promoting objective information and transparency.

The study looked critically at 615 branches and product categories and identified 408 of these as “green”—unproblematic. These “green sectors” cover 56 per cent of EU exports to China and 83 per cent of imports from China. Among them are components for motor cars, luxury goods and food products. Exposure to political disruption by Beijing was highlighted on the EU export side in the aerospace, pharmaceutical and machine industries, partly because of possible military uses by China. On the side of EU imports, risks were found mainly with Chinese communications equipment, such as from Huawei. While the study speaks of trade flows as bearing limited risks for European security, direct investments were considered much more problematic. Software development, gas-industry infrastructures and the trade in securities should not be exposed to participation by China-based operators. Research in automotive and pharmaceutical firms was identified as an undue exposure to the risks of “technology draining”. Numerous high-tech businesses in Europe have in recent times received injections of Chinese capital coupled with promises that no European jobs would be lost, only to discover that research and development divisions were soon shifted to China, so that European production capacities were drained of the lifeblood of innovation.

The study concludes that investment applications from China in these critical areas need to be tightly screened, that strict EU product standards have to be enforced and that public procurement must be tightly scrutinised for exposure to risk. The Australian government has already adopted similar measures, for example with regard to land acquisition by Chinese investors. The Rhodium/Bertelsmann study adds that foreign investors from free-market economies should not be treated any differently from present practice. The study advocates open public discussion of the issues and demands clear guidelines to avoid growing bureaucratic interference in the European economy.

The European study can serve as a model for relevant data collection and sober, objective analysis in Australia. Clearly, the study is not detailed enough to guide actual policy, not least because of gaps in detailed data. Australian policy-makers should, however, begin to collect relevant data and gather intelligence on political involvement in Chinese businesses. We also must not lose sight of the fact that not all Chinese companies are obedient stooges of Beijing masters despite the new United Front policy.

International trade and investment, which have been assessed under purely economic criteria since 1945, because the decision-makers were non-political and engaged in the private pursuit of profit, are now burdened by additional security concerns. The arrival of the Chinese giant on the world scene and its relapse into arbitrary and opportunistic power-plays regrettably make some fundamental rethinking unavoidable. Observers who have grown up over the past seven decades with the open economic order and the blessings of globalisation, may be dismayed and dread the costs. But we have to be realistic and not lose sight of security. Alas, the future ain’t what it used to be.

Wolfgang Kasper, an emeritus Professor of Economics, held the UNSW’s foundation Chair in Economics in the Faculty of Military Studies at Royal Military College, Duntroon, and subsequently in the UNSW University College, Australian Defence Force Academy in Canberra. In the March 2020 issue of Quadrant, he wrote “Understanding and Misunderstanding China”.

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