There are only three important questions in financial markets right now. In fact, one could argue that these are the most serious questions confronting humanity today. If you don’t have an informed sense of the distribution of possible futures that flow from them, you risk being wiped out. Perhaps both financially and physically.
It sounds alarming but anyone who understands the situation knows that there are truly catastrophic, low probability possibilities that include global kinetic conflict.
The first question is who is China’s brilliant leader for life, Xi Jinping? It sounds simple, but in an incredibly opaque, one party – and increasingly one person – political system designed to maximise the Communist Party of China’s (CPC) control while minimising information leakages, it is devilishly difficult for even “deep” China watchers to obtain durable insights. As one expert remarks, “they are much better at keeping secrets than we are”.
A second pressing question is how Xi and the CPC will respond to the inevitability of increasingly vitriolic attacks emanating from Washington as we head into the November 2020 election. Embedded within this is a subsidiary question regarding the nature of America’s strategy in the defining great power conflict of the 21st century under both a capricious President Donald Trump and his successors.
The third core question is how Xi and his heirs, if there are any, manage a complex array of threats deriving from the biggest challenge China has faced since it decoupled from the Soviet Union in the 1970s and agreed to embrace the Western rules-based trading and financial system.
It is demonstrably (and ironically) capitalism, and China’s rise as the world’s manufacturing supply chain, which has allowed the Middle Kingdom to generate enormous wealth by exporting cheap goods to the West on the back of low-cost labour and plentiful state subsidies.
This has in turn lifted masses out of poverty and the nation out of geopolitical obscurity. Sadly this success has also accelerated China’s ability to systematically exploit capitalism’s vulnerabilities, foremost of which is the assumption that all trading partners respect the rule of law, property rights, and the ethics of an open trading system that relies on these axioms and a belief in mutual gains from exchange.
While the West understood that there were risks that an authoritarian, one-party political state would cheat and undermine the system, it was intellectually vainglorious enough to think that the unprecedented prosperity bequeathed on China by that system would be sufficient to convince it to reform and eventually embrace it as most developed countries have done.
The 1-in-100 year shock wrought by COVID-19 has served as a dramatic catalyst for seismic shifts in the capitalist world’s approach to dealing with the CPC that were already gathering pace. After decades of hoping the CPC would reform, the advent of Xi’s reign in 2012 has coincided with a realisation that this was not going to happen.
Many naively presumed Xi would be a liberalising steward on the CPC’s path towards open society. In practice, he has been the opposite. Most China analysts characterise Xi as a hardline socialist ideologue who seeks inspiration for his own leadership from the writings of Lenin and Stalin.
Today, the CPC’s propaganda is that China’s 5000 year term as the global superpower – where it had the dominant military, culture and technology – was interrupted by “the century of humiliation” between 1839 and 1949 in which China was disemboweled by the West, Russia and Japan.
Xi passionately believes in “the eventual demise of capitalism and the ultimate victory of socialism”. China watcher Tanner Greer explains that Xi argues that the CPC “is tasked with ‘building a socialism that is superior to capitalism’ [and] whose economic and technological prowess will give it ‘the dominant position’ in world affairs”. “And though Xi asserts that this is inevitable, [he warns] ‘the road will be tortuous’”.
The end game is “socialism with Chinese characteristics” with the main risk to Xi’s project being the “hedonism” and “self-interest” among corrupted younger generations, who “are not prepared to make the sort of sacrifices their parents and grandparents did for China’s revolutionary cause” and who “might begin to believe ‘false arguments that we should abandon socialism’ altogether”.
Crucially for the capitalist world, this imputed intent has been
married with fierce action under Xi’s term, dramatically shifting China from “biding and hiding” to removing the mask to reveal an unalloyed commitment to securing global military, economic and political superiority through any means possible.
This has included construction of the world’s second most powerful army, navy and airforce and an extraordinary array of militarised artificial islands in the South China Sea despite Xi’s promise to President Barack Obama that he would never weaponise them.
Asian century paradigm is now dead
The CPC’s perceived deceptions surrounding the COVID-19 outbreak, which has cost hundreds of thousands of lives globally, have galvanised an emerging coalition, encompassing most democracies, that believe Xi has no interest in supporting the capitalist order. In his own words, Xi aspires to replace it with Chinese socialism, which he says is “bound to win”.
Put differently, COVID-19 has convinced previously conflicted countries that the CPC is no longer a trustworthy counterparty. It has therefore precipitated a new ideological "cold war" with the West in which Xi claims to have learnt from the mistakes made by the Soviet Union.
This marks a radical change in attitudes compared to the optimism that abounded at the time of Xi’s ascension. In 2012, the Commonwealth Treasury published its “Asian Century White Paper”, commissioned by Prime Minister Julia Gillard. “Whatever else this century brings, it will bring Asia’s rise,” Gillard claimed in the forward. “The transformation of the Asian region into the economic powerhouse of the world is not only unstoppable, it is gathering pace.”
In 2013, one of Australia’s leading strategic thinkers, Professor Hugh White, published America’s “China Choice” in which he argued that the US should cede its role as the benign global hegemon and share power with the Middle Kingdom as we graduated into “the Asian century”.
In contrast to other countries like Iran, Russia, and Venezuela, China does not have a back-up plan in the form of a rich commodities export base.
The Asian century paradigm is now dead and buried because the capitalist world has concluded that there can be no divisibility between economic and national security. This will mean that all critical (democratic) supply chains shift out of China, one way or another.
Supply chain focus
More broadly, it means that any serious company that relies on the rule of law and respect of commercial contracts and property rights will look for alternative supply-chain sources.
That is, countries prepared to compete on their own merits, which believe in the idea of gains from trade and have no interest in cheating, stealing, running foreign interference operations, and/or threatening neighbours, peers and trading partners with economic and/or military intimidation.
This thus represents an existential crisis for the CCP because its longevity and legitimacy have been predicated on the idea that the party (not capitalism) is responsible for revolutionising living standards for all its people with the quid pro quo being the sacrifice of freedom of thought and action.
In contrast to other countries like Iran, Russia, and Venezuela, China does not have a back-up plan in the form of a rich commodities export base. It is exclusively dependent on generating wealth through exports of entirely fungible (ie, replaceable) goods and services. That is, it depends on the rest of the world’s willingness to use China as its supply chain, which it is no longer prepared to do.
Here Xi is the first to admit China cannot compete with open democracies’ innovation and ingenuity, which he has repeatedly expressed concern about. He also faces a demographic catastrophe whereby the seven Chinese workers supporting every retiree today will shrink to just two labourers within thirty years.
Global industrial decoupling from China combined with the absence of natural resources and an ageing population threaten to be the tipping points that unwind its enormous imbalances, fuelled by pervasive state-funded leverage that has severely distorted capital allocation decisions. The China bears may belatedly have their day in the sun.
The game has accordingly shifted to China’s (or Xi’s) choice. There are three options. The first is dropping the bully boy program and once again hiding and biding, pretending to play by the rules of the capitalist system until China is truly in a position of unassailable power and can have its way with the world, unleashing socialism upon it. This is a plausible possibility in the near-term, although perhaps unlikely under a hardline and ideological president like Xi.
A second option is to discard the socialist ideal altogether, accept China’s current business model is flawed, and embrace the reality that the best operating system available to it is probably the Singaporean approach of soft authoritarianism coupled with limited democracy that preserves a one-party political state.
A final path is the belligerent Leninist conclusion that these struggles solidify the CPC’s internal control and constituency, and are a natural evolution on the road to socialism. In this scenario, Xi seeks to continue to divide and conquer the flawed western democracies, exploiting President Trump’s desire to divorce himself from allies and multilateral organisations. Strategic overreach, which has been the defining characteristic of Xi’s term, remains the order of the day.
The risk with this path, and any system controlled by a single person, is the likelihood of miscalculations, which are hard to predict. This could include war between the US and China over Taiwan and kinetic conflicts in the Indo-Pacific.
Ignoring the lessons of history and the CPC’s mistakes since 2012, and assuming that ideology provides the perfect panacea, will almost certainly result in the regression of China back to yet another middling, authoritarian power in the mould of Russia, albeit without the latter's natural resource advantages.
This brings us back to our original question: who is Xi Jinping and what does he really want to achieve? For the world's sake, we hope he makes the right decisions.