States of Play with Sam Olsen

Hello and welcome back to What China Wants.

Last week we republished our podcast from a few months ago on the coming Great Split between China and the West over Taiwan, and the economic carnage it will unleash.

Today we delve back into the issues facing the Chinese economy with our previous interview with George Magnus. (If you haven’t heard George speak before then please, please listen to the podcast - his knowledge of China is breathtaking.)

This ties nicely into the Great Split because a country with economic issues now and in the future is likely to be more adventurous abroad, particularly if that adventure leads to the capture of the key ingredients (Taiwanese microchips) that are needed to supply the part of the economy (technology) that Beijing thinks is the answer to most of their prayers.

The main podcast points:

* China’s economy has reached an inflection point – the so-called “end of extrapolation” – and now needs reform to kick on to the next stage of development

* But the renewed assertion by the Communist Party of politics over economics is putting future economic growth at risk

* If China’s economy does continue to splutter then it will have a major affect on the world, particularly commodity prices and those countries that have China as a main or major trading partner

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back next week with more What China Wants.

Many thanks for listening. We will be back next week for more new content.

***

Here is the transcript:

Sam Olsen: Hello, and welcome to the latest episode of What China Wants with Sam Olsen and Stewart Paterson. Today, we're going to be asking a question which is a follow up to one of our earlier podcasts asking whether China's economy is shrinking, which I think Stewart gave a resounding answer, 'Yes'. We’re going to be joined by the eminent economist George Magnus. George is an Associate at the China Centre at Oxford University. He's also an adviser to some asset management companies, but you might know him more from the commentary he regularly puts out with the Financial Times the BBC, and so on. George is also the author of the fantastic book, 'Red Flags: Why Xi's China is in Jeopardy'. We're delighted to have George here, so thank you very much for joining us, George, and welcome.

Even though it was written a few years ago, I suppose we'd be interested to know whether the central thesis that Xi Jinping's China is running into economic problems still holds true, or perhaps even more so in light of the recent issues around COVID, and the increasing geopolitical tension. Stewart?

Stewart Paterson: Well, George, thanks very much indeed, for joining us, and welcome. What I loved about the book, George, is that I think it challenges a fundamental premise of many people's perception of China, in fact, probably many of our policymakers' perceptions of China, and that is that China's further economic rise is a kind of inevitability. Your book argues that this assumption is somewhat questionable, and I would suggest perhaps that recent evidence is rather supportive of your thesis. So, for the benefit of our listeners, perhaps you could just recap some of the main arguments as to why China's economy under Xi is perhaps more vulnerable than many people think.

George Magnus: Sure, and thank you, Stewart and Sam, for having me on your podcast. I think, after an eternity - it seemed like - working for UBS with a particular eye on Asian and other emerging markets during the 1990s and the 2000s, and then, having experienced our own financial crisis in 2008-2009, I think what struck me about China really was the sort of spreadsheet-y view, which is, "Gosh, look what's happened over the last 20 or 30 years. And if we just kind of project on a spreadsheet, so-to-speak, China's dynamism and growth going forward over the next 10, 20, and 30 years, this is what's going to happen." It struck me that for various reasons, having kind of sort of looked at the entrails of the Chinese political economy for some time, and travelled there a lot, that China, round about the time that Xi Jinping came to power, had reached something that I called in the book, 'the end of extrapolation'; in other words, throw your spreadsheets away really, because it's a different ballgame.

The economy is now replete with imbalances, which actually the outgoing Premier Wen Jiabao had already spoken about on two occasions in 2007 and 2011. A new leadership had taken over, who was enamoured with a much more kind of Leninist approach to political thinking and to policy, and I was bothered really, that the pragmatism and openness which really ran through the veins of China's policymakers and its economy, since Deng Xiaoping, were in danger of reversing or being corrected, though in fact, what was really what I thought was beginning to take place that it was going to become a more ideological place, that the state and the party were going to be given more emphasis, and that the sort of politicisation of business in China was going to become eventually a bit more of a problem.

We can get into some of these things. But the red flags themselves were really about issues where I didn't think that China's policymakers had oven-ready solutions and maybe had political difficulties and issues in actually reaching solutions. One of those was the consequences of excessive growth in debt, which really began with the measures that were taken at the time of the financial crisis in 2008-2009. One has to do with its currency management policies. The third had to do with rapid ageing; China's the fastest ageing country on the planet, not the oldest but the fastest ageing. Fourth had to do with whether China would actually get difficulties or find difficulties getting out of the middle-income trap or staying out of the middle-income trap because of difficulties and a stall in its underlying growth of productivity. On top of that China looked like – at least then, when I wrote the book - that it was facing the harshest economic, external environment that it had done since the era of Mao Zedong. So that really brings us kind of up to date. Those were the red flags, and that's why I thought China was more vulnerable than the cheerleaders with the spreadsheets were having us belief.

SP: Yes, and you mentioned the fact that you wrote the book in 2018. Time marches on, and a lot of water has passed under the bridge since 2018. But there's probably a lot more evidence now that's corroborative of your thesis than there is that contradicts it. What would you point to that might cast doubt on it that has happened since publication? And what would you point to most compellingly, that is supportive?

GM: Well, if I'm honest, then I'm going to find it easier to answer the question about what supports the thesis rather than what contradicts it. I suppose I do look over my shoulder quite a lot to see, figuratively speaking, just to listen to and see what other people are saying, and just to check that I'm not drowning in my own kind of rhetoric, so-to-speak. And so there have been moments since 2018, for example, China's management of the pandemic, certainly in 2020, where it's like somebody's giving you a kind of a kick in the ribs. You question your premises, you question your assumptions, you question the way that you think about things. You wonder whether, in fact, you know, China's actually got something that other countries don't have in terms of being able to manage through crises. The two major crises that I wasn't able to predict with any accuracy, of course, were the pandemic and the Russian invasion of Ukraine.

But these have accelerated China's desire to prioritise and to champion self-reliance. They've identified a dozen different technologies, advanced technologies, where they want to be number one in the world, where they want their own producers, their 'national champions', to have 70% market share or more. And at a time, when we are all kind of scratching our heads about what kind of political economy do we actually think works in the kind of economic and political environment that we've been left to deal with in the 2020s, and where the state does play a bigger role, you wonder whether maybe China is actually more ideally suited to that kind of situation. So the role of the government, the role of the state in the economy is something which I do think about a lot and try to keep checking whether I'm going off-piste, or whether I'm still on track.

But against all of that, I would say that, that there's nothing in this sort of observable metrics that has really distracted or detracted me from my core. The demographics are playing out as one would have expected, the productivity is as poor as it has been, the issues that I raised about the renminbi, certainly as far as becoming a global currency is concerned, I don't really see any major breakthroughs there. The debt problems are becoming more acute, as we know, from the last couple of years, particularly with property companies and property developers.

And so I think all of that is kind of playing out pretty much as I thought it might. The government's attitude towards private firms and the recalibration of industrial policy in favour of state enterprises and the role of the party in the economy are definitely things that I was worried about, and there have been many, many more data points that corroborate that view. Plus, of course, the consequences of the pandemic and the war in Ukraine in terms of self-reliance, and China cutting itself off from the world, I think this kind of disengagement phenomenon, which is partly made in China and partly being manufactured, of course, in Washington, Brussels, London, and so on, this is something new, right? China prospered and the rising China was based on its engagement with the rest of the world. Disengagement will have consequences.

SP: Yes, that's a really interesting point, George, because this self- reliance, which seems to be a major plank of dual circulation policy, both sides in this if you want to draw this dichotomy between the West and China - and we can loosely  define the West, it can be defined however you want - but both sides seem to be very alert increasingly alert to their trade dependencies and their level of reliance on each other. China seems to have a much more coherent plan, or seems to be expediting a better plan or taking greater action than the liberal democracies do in terms of trying to immunise themselves from the fallout from economic statecraft, the potential to use economic statecraft to try and inflict harm on one another.

In a way, it seems odd, doesn't it? Given how much China has benefited from the global trading order and investment order as it stands at the moment, to be walking away from it? How do you explain that? Is it fear of Western sanctions? Or does it represent a sort of ideological shift towards sort of self-resilience and part of national aggrandisement? It's sort of a real mercantilist turn that you simply shouldn't be dependent on foreigners for technology or frankly, anything else?

GM: Yes, that's a great question. I think that there is no question that really the sanctions regime implemented against Russia, and which the Chinese are quite anxious about. As far as we know, because there may be a lot of things going on, that we don't know, or that I don't know, and certainly things going on under the radar screen. But major Chinese companies, for example, have not really wanted to put themselves at risk of incurring secondary sanctions by engaging in big commercial transactions with Russian companies. Chinese banks have really stepped away, as far as we can tell, from financing big energy deals with Russian companies.  So as I said, no question that China has been, I think, thrown a curveball as it were, by the implementation of sanctions, coordinated by the West, I mean, the politically defined West rather than geographically defined. And there's a sort of 'no way, José' theme that kind of runs through China's policies here, which is, "we're not going to get caught out by this".

And now it's a moot point as to whether China can insulate itself successfully, in every sector, in electronics, in semiconductors, in finance, for example. I don't have any qualms really about some areas of technology, and of course, electric vehicles, although, you know, most of the kinds of producers are foreign, but in battery manufacturing, in artificial intelligence and surveillance equipment in quantum computing, in lots of different areas, solar panels and green energy, China is in a very good position. But there are a lot of areas where it's not in such a good position, and it still has very, very high dependency on the dollar system on advanced semiconductors and other sophisticated forms of technology.

So why are they doing this? Or why are they exposing themselves to being cut off or having frostier relations with suppliers? You can understand why Americans want to diversify their supply chains, but of course, the Chinese want to de Americanise theirs too or de-Westernise, theirs to some degree. And I think that it's just the question of politics trumping economics, as it often does, particularly at times of stress. And we shouldn't forget, of course, that historically, China has had these waves that go over centuries rather than years. But these waves in which it's opened up to the world, and then closed up, opened up to the world and then closed up.

The perverse thing about this is that as we know, from China in the 1980s, 90s, and 2000s, it was very willing to learn and engage with the rest of the world, and there were massive increases in you know, cultural exchanges, student exchanges, scientists' exchanges, and so on, so forth, amongst other things. And now this has all got a slightly frostier feel about it as China kind of feels like they don't need the West any more, 'we can do things on our own, we don't really need you', or that's what they like to themselves. In some areas it might be true, in other areas it might not be true.

SO: Just on that, Deng Xiaoping was well known for saying that we must learn from the West and interestingly with the history you can go back into the great revivalist movements in the late 19th century and early 20th century and the newly republican era where people did actually look to the West for inspiration and for science and culture etc. And we have had one of those 'golden periods' now, where I suppose the politics took a backseat.

What is interesting is that there still seems to be people in the West who disagree - in fact I was on a call with some very senior individuals earlier today, who insist that in China, economics is still in the driving seat rather than politics because economics is so important to the welfare of the nation. What would you say to people who think that economics is still in the driving seat? Do you think they actually it is fair to say that politics really does trump everything now or do you think that it is more nuanced than that?

GM: Well, I was just thinking about what I would respond to that. I think I would say that from, from my perspective, I don't think they understand Leninists. And I think that there is no question about the Leninist hue of Xi Jinping and his thoughts of 'socialism for a new era', Xi Jinping Thought and so on and so forth, embedded now in the Constitution, not just of the Party, but of the country as well, and which people are being taught at school, often from very young ages, etc.

So this is a political ideological foot forward, and they believe that, obviously, that if they follow the policies of Xi Jinping and Xi Jinping Thought that the economy will deliver the reduction in poverty, which they claim already has been achieved by their definition, plus the construction of a prosperous nation, and indeed, a dominant nation by the middle of the century. They haven't talked very much this year about common prosperity, which was aired and spoken about a lot in 2021. It made a fleeting reference in one or two of the documents presented at the National People's Congress in March of this year, but I think that's been sort of side-tracked in a way because of the economic crisis at home.

I suspect that China will find its way through with, I imagine, Xi Jinping at the helm, still into 2023-2024, and I think that we will hear more about common prosperity policies. But, you know, we can be critical about common prosperity and whether it has any substance or whether it's just a campaign. But actually, the belief in Beijing is that if you get the politics right, the economics will follow. I don't honestly believe that they think about it the other way around. They want prosperity for people, of course, and they know that their greatness and the projection of power in the world depends on their economic heft. But they just have a different kind of perception about how to create that compared with me.

SP: So George, I think that's very interesting, because one of the themes that we've been talking about is the downplaying of economic growth as a source of party legitimacy. One of the reasons for that we think, is precisely what you point out in your book, that the economic model is showing many signs of being broken, it needs an overhaul, and it needs an overhaul by economists, not by politicians. You use in your book the adjective 'brittle', to describe Xi's machine, which many observers would say is, the antithesis of what has gone before, which was pragmatic and flexible, and technocratic excellence was rewarded. Whereas under Xi, it seems more as though being true to the ideology and loyal to the man seems to be more of a prerequisite for promotion than technical excellence, and the past execution of good policy.

So if that's the sort of direction we're going, does this make you worry about the size of the economic fallout that we might see from China? Because if we look at the global economies since 2009, say the financial crisis, China's accounted for about 40% of the world's growth. And we're all well aware of the fact that macro-economic data out of China has become increasingly politicised and is really just a source of, of national propaganda now in many ways. But how big could the fallout in from China be? And what could be the global ramifications of that, if Xi carries on down the brittle road is at were?

GM: Right. So, just to contextualise the answer and relate it to the previous answer to Sam's question, and also to anchor it in what I said right at the very beginning when I was talking about 'the end of the extrapolation', what I what I mean by that is that China's development model needs a makeover. Because the old one doesn't really work anymore. And we know that doesn't work because property market has been keeling over. You can't keep on investing ever bigger shares of GDP without getting capital misallocation and diminishing returns and growing debt problems.

So we know things have to change. I haven't been there since 2019, probably very, very few people have, and so it's very difficult to keep tabs on this. But my impression certainly is that China's leaders, many of them know that some things have to change, I just don't think they can bring themselves round to doing the kind of changes that I think are necessary. And many of these revolve around the construction of institutions. Institutions play an absolutely critical role in economic development, whether you're poor, whether you're a middle income country, and even for Britain and the United States and Western Europe.

The robustness and inclusive nature of institutions are really what drive economic progress, I would say, because that's how you basically get more bang for your buck in terms of productivity. So the implications of all of this if China cannot change, or it finds it politically difficult to change, which I think is the case, I think the outlook for China over the next 10, 15 years or so, is that it's a low growth economy. It's going to be two and a half, three, three and a half percent per annum, on average. The question is how much disruption accompanies that sort of growth rate? Is it a lot of disruption, or is it minimal disruption? And are the political constructs in China robust enough to be able to manage with minimum disruption?

But a slower-growing Chinese economy has huge implications for the rest of us. We fret every day now about oil and gas and commodity prices and resource prices and rare earth prices and goodness knows what else. But a China that grows at a much slower rate, once the shock impact of the Russian invasion is over, China's impact on global commodity prices will be to depress them basically, if the property market, is as languid or languishing for the next years, as I expect it might.

Supply chains are going to exert a very significant impact on people's perceptions about inflation. On the one hand if supply chains are recalibrated and new opportunities, and new investment outlets are found in say Malaysia or Cambodia, Vietnam, India, and so on, if there are new business opportunities, there are new downward pressures on prices as a consequence of that. On the other hand, of course, disruption to supply chains and the possibility of Yuan depreciation in the future, will have an opposite effect on inflation. So, I don't think it's easy to say categorically a low-growing China will be positive or negative for inflation. Rather, it depends on the context in which this happens. But yes, I mean, for 75 or so countries that have China as its biggest trading partner either in exports or imports or both, then a slower growing market, or a slower growing GDP should we say, will have consequences, and it means it's not obviously great for global growth, or you have to find different markets that are growing more quickly. 

SO: So George, just to finish off, you've given a very eloquent description of how that are indeed some red flags in the Chinese economy. And if I could just summarise, it seems that the end of extrapolation is basically the cause, and because the Chinese economic model needs a different direction, because it got to a certain level of development. But the problem is, is that the politics have really interjected to make sure that those changes in the economy that need to happen to continue with good growth haven't really happened and can't really happen because of the political system they rest upon.

So here's the final question for you. If that is the case, then surely there must be some kind of blowback onto the politics from the economics, if the economics is stuttering because of the politics. But is that blowback strong enough, in your opinion, to put at risk, the regime of Xi Jinping? He's obviously got his party congress this autumn, looking for re-election? And do you think that the economics are bad enough yet, or might be soon, to challenge Xi Jinping on his home turf?

GM: Well, okay, let me be a hostage to Fortune. As people probably know, there's certainly been speculation this year about opposition to Xi Jinping, who has not been able to bask necessarily in the kind of environment he would have wanted, in this run up to the big 20th party congress, whenever it's going to be held later this year. And the pandemic, and particularly the Omicron experience in Shanghai and Beijing and other places obviously played a part in that. And additionally the way that China's support for Russia has also been lots of rhetoric in favour, but it's obviously not really worked out the way they planned. I think that speculation is just, that's all it is, it's speculation. I don't think we have any real basis for believing that there is an orchestrated or planned move to oust him or to elbow him aside.

However, lots of positions have to be filled on the Politburo Standing Committee, and also at various levels in the party hierarchy, and we'll see whether he gets his way with all his nominees or whether there is opposition from the party. These things will become clearer to Sinologists in the fullness of time, but I think the working assumption is that he will still be nominated to have his third term at the party congress. I would say with the economy, the significance of the economy, I think, is changing. So rapid economic growth and high levels of employment always used to be, I think, deemed to be the core of the Communist Party's legitimacy to rule and the leader’s authority within the party. They're still important, not so much GDP growth itself, but actually jobs are really important and jobs are certainly at a bit of a premium right now. But that's a kind of a “watch this space”.

I would add to that, that a rising China is the basis for the way in which Xi Jinping has claimed and staked legitimacy of the Communist Party in China and his role within it, if a rising China is basically back in the melting pot, because it can't grow that quickly or because things don’t work out in the way that they have done in decades gone by, and the rest of the world starts to look at China in a different light from an economic point of view, these things then can become quite important to the position of the General Secretary himself and for those that would be his enemies, that might now be quite frightened to put their heads above the parapet but might not be so frightened in years to come.

SO: George Magnus, thank you very much. That was a fantastic tour de force, not particularly encouraging for those wanting to invest in China I should think.

SP: George, thank you very much for joining us.

GM: And thank you for having me.

Get full access to States of Play by Sam Olsen at samolsen.substack.com/subscribe

Hello and welcome back to What China Wants. As we are away for the next few weeks, and have had so many new listeners recently (hello, everyone) that we thought it would be good to republish what we think are two of our most important podcasts.

Today is the one we did on the Great Split and the economic carnage that will be unleashed by a conflict between China and the West over Taiwan.

What we find amazing is that there seems to be very little preparation being done by either governments or the private sector in the West. “We have no exposure to China or Taiwan” is a common response we get when we talk to CEOs across the country - they do, but they just haven’t thought it through yet. (At our company, Evenstar, we offer wargaming services to help companies with this thought exercise, and thankfully more and more executives are signing up, but it is still a drop in the ocean for what needs to be done.)

Next week we delve back into the issues facing the Chinese economy with our previous interview with George Magnus. (If you haven’t heard George speak before then please, please listen to the podcast - his knowledge of China is breathtaking.)

We will be back at the end of August for more new content. Given the speed of international politics these days the world will probably look a very different place by then.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back next week with more What China Wants.

Many thanks for listening.

***

Here is the transcript:

Stewart Paterson: "If the US and the West impose destructive sanctions on China, like those sanctions against Russia, we must recover Taiwan [...] we must seize TSMC." That was Chen Wenling, the chief economist at the China Centre for International Economic Exchanges.

For those of our audience who don't know, TSMC is the Taiwanese Semiconductor Manufacturing Corporation, and it's the largest foundry operator in the world, and that's a manufacturer of semiconductors. Sam, welcome, hello.

Sam Olsen: Hello Stewart. That was quite a worrying quote you started us off with.

SP: Indeed. Just before we get on to talking about the economic and political ramifications of a Chinese invasion of Taiwan, and the ensuing 'Great Split' between China and much of the rest of the world, I'm sure some of our audience are wondering, particularly in the light of Russia's making a bit of a meal out of its invasion of Ukraine, what sort of form would a Chinese invasion of Taiwan take, in your view? What are their options?

SO: First of all, it's important to note that China is not actually sitting there saying, "we are going to invade in the next few months". They have however said, as we've said a few times in the podcasts already, that they are likely to start planning for reunification of Taiwan, whether peaceful means or not, before 2027, which means that they're certainly looking to do something in the near future. I don't know if any of our audience heard it, but last week there was a leaked audio file from the Guangdong Military Command, talking about how they would be involved in an invasion of Taiwan.

Certainly, even though there isn't any official announcement on this preparation, from the outside China certainly looks like a country that is preparing for war. Politically, it is preparing its population, talking about Taiwan as being an immutable part of the mainland. In fact just a few days ago, at the Shanghai Dialogue in Singapore, the Defence Minister said that anyone that tried to get in the way of China and Taiwan's reunification would feel the full force of the People's Liberation Army.

And militarily, they're certainly looking to get things in the PLA and the PLA Navy up and running to be a match for the Americans, or so they hope.

So, in terms of how that will go, there are three scenarios that I think people look at. Now obviously the third one is an invasion, whether that be an air assault, or a full-on naval invasion. But the first one, before we get there could be a salami slicing of territory.

SP: Yes, well hold on, we might need to just explain that because people tend to think of Taiwan as being one island. But actually, the Republic of China, which we call Taiwan, is made up of an archipelago isn't it? There's one big island, but then there are some small islands that the Republic of China, i.e. Taiwan - not the People's Republic - the Republic control. And those are very small, but some of them are literally a stone's throw from the People's Republic, aren't they?

SO: Exactly. Now, did you know that there is actually an island controlled by Taiwan called Taiping Island in the middle of the Spratlys? And there are approximately four people defending it with no weapons and a large runway. So that's something that could go very easily. There are also some islands, just off the coast of China; in fact that I've sat in Xiamen having afternoon tea, looking at an island belonging to Taiwan, a mere stone's throw away from the coast. So it's very possible for China to go and grab some of those.

I suppose the next question will be why would they want to do that? It'd be a show of force, of course. But what would spark that show of force? Well in 2024 we will have the new elections for president in Taiwan. President Tsai, the current president, is time-barred, so there'll be a new generation coming through. And there is a great fear amongst people we know in Taiwan, that there's the so-called Zelensky-isation of Taiwanese politics where these youngsters don't want the status quo anymore. They want to stick it to China, the big country (like Zelensky stuck it to Russia), and say "Look, the status quo is not working for us anymore. We're sick and tired of being bullied by China, we want to go down the independence route."

And if they did that, then it's highly likely that China would do something meaningful in return, for example, by salami slicing and grabbing some of the islands like Taiping or the Pratas islands or whatever. And at that point, Taiwan would have to make a decision - are we going to fight back, are we going to use our submarines to try to sink some Chinese ships? And if that happened, what are the Americans going to do, etc? This is the least-worst case scenario.

The second scenario is far worse, and that brings in your side, the economic side. Can you guess what the second scenario is, Stewart?

SP: No, go on, you'll have to tell me. I don't know much about military strategy Sam.

SO: It would be a blockade of the island. Okay, so I'm pretty sure that you that's got your economic alarm bells dinging because in January last year, in 2021, China brought in a new law, which in effect allows its coastguard, to use all necessary means to stop and search non-Chinese vessels in any waters that it claims for itself - which, in other words, is the Taiwan Strait and the South China Sea.

So you can easily imagine a situation where the 300 or so ships from the Chinese navy, plus all its coastguard, and its militia, its grey-zone boats that are meant to be fishing boats, but they're not, blockading the island. And anyone that turned out with food, let them in, because China doesn't want to be seen as a humanitarian ogre. But anyone with arms or shipments or anything like that designed to help Taiwan shore up its defences, well just take them and take the ship and move it to Xiamen or Shanghai.

SP: So that's interesting, Sam, because I think even just today, I was reading that the American administration have come out and publicly said that at multiple levels, the Chinese have been telling them that the Taiwan Strait is not international waters, it is a part of China's exclusive economic zone. And therefore, there is no right to freedom of navigation through the time Taiwanese Strait. That's quite alarming, isn't it?

SO: It is, and that plays entirely into the hands of the China lawmakers that made that law. In other words,  whatever they declare to be Chinese waters is their waters, and they basically can blockade it. A blockade might stops arms going to Taiwan and so allowing the island to increase its military capabilities, but also it stops economic stuff coming in from the rest of the world. This also means  China  might want to then stop shipments of Taiwanese semiconductors going anywhere except for China. There are so many economic ramifications from a blockade that I don't even know where to start.

The third scenario, after salami slicing and blockades, is even more dangerous for the world. It is a hot war where China just sends in either an air assault to capture Taipei very quickly, or a huge flotilla of ships. If they've already got a blockade, it's going to be so much harder for the Americans or the Japanese to do anything, because the Allies won't be able to land personnel, and they won't be able to do much to reinforce the Taiwanese military full stop. So once the blockade goes in, I think that then we know that the end game is nearing. And I think that's probably where the economic side really kicks in, wouldn't you agree?

SP: Well, if Taiwan were blockaded, or the Mainland were able to determine what came in and what came out, then if they wanted to cause a lot of disruption to the rest of the world they certainly could.

I think it's quite interesting to note, we often use Xi Jinping quotes. Usually, when they pertain to economics it's about self-sufficiency, resilience, and national power. I will give you a quote from Michael Boskin, from 1992. And he, for those of us who need reminding, was the chairman of the Council of Economic Advisers at the White House, so the presidential advisor on the economy. He famously quipped, "potato chips, computer chips, what's the difference?" In other words, what he was saying was that there was no need for the United States to have an industrial policy whatsoever. American companies would make what they were good at making and America would buy from the rest of the world what needed to be bought from the rest of the world.

Then we contrast that with China's mercantilist approach to industrial policy, where in fact in China, the government is spending more now on industrial subsidies than it does on defence. In other words, China is putting a lot of money into ensuring that it is as self-sufficient as can be in the key ingredients into its economy. And obviously, semiconductors are one area where they've come up short.

It's worth noting here that semiconductors are not fungible things, you're comparing apples and pears here. But Taiwan accounts for almost two thirds of foundry-made semiconductors by value in the world. And its total semiconductor revenue accounts for about a quarter of the world's revenue. Now the big difference there is that of course a lot of semiconductor revenue goes to people who designs semiconductors and hold the patents on them, but they don't actually make them. And TSMC is by far and away the leading semiconductor manufacturer of low geometry production. So in other words, the most efficient and cutting edge of the foundry-made semiconductors. The idea that the People's Republic of China would be able to control what came in and what went out of Taiwan would leave basically the rest of the world semiconductor industry, or electronics industry rather hostage to the whims of the PRC.

SO: Okay, so what happens? Let's just talk about the worst-case scenario, and that there is an embargo, and they tend to allow chips to go out anywhere except for China. What happens to the rest of the world? What happens to the UK, what happens to the US and their economies? Do they just grind to a halt?

SP: Well, there would be chronic shortages of everything that involves semiconductors, and obviously a lot involves semiconductors. And so the prices of semiconductors - they've been strong anyway but I'd imagine they would go through the roof. And what we are seeing in all Western countries really is a very belated effort to push back against Michael Boskin's ethos of potato chips and computer chips being fungible by an attempt to create an entire ecosystem in the manufacturing, design, production, etc, of semiconductors that is not dependent on the People's Republic, or the Republic of China, Taiwan. But this takes time, and semiconductor manufacturing tends to evolve in generations, as you move through geometries. And inevitably, the companies that were leading-edge in the previous generation tend to have the cash flows to invest and be leading-edge in the next generation. And that is a model that TSMC have been particularly good at perpetuating.

It would be devastating for the global economy, in my view, if Taiwanese semiconductors were cut off from the rest of the world. What we would be compelled to do would be effectively to turn a blind eye to everything that was China was doing, because we would be then forced to effectively import from China or import products from China. And obviously, one would imagine that they would make the sale of those products conditional on us accepting the fait accompli on the future of Taiwan.

SO: I saw a report which said that America would take five years or so plus $30 billion to get to the stage where Taiwanese semiconductor industry is right now. That's an awful lot of money, and also has no guarantee of success. The Europeans are trying to build up their own industry, but again, lots of people are saying that that's not going to happen. At the end of the day, I think you're right, how could there be any other option but to rely on Chinese exports of semiconductors if they control the island?

But if they did invade Taiwan, then it wouldn't just be about the semiconductor industry? Surely there'd be other economic issues stemming from that? What about all the sanctions and the counter-sanctions laws that China's got now? Surely there would be some kind of push-back by the West in the form of economic sanctions, since we don't really want to fight them directly? And then the counter-sanctions law come in, and then what happens then? Do all our assets and all Western assets in China get frozen, or stolen, or appropriated whatever word you want to use? What's the scenario there?

SP: Yes, well, I mean, it's very hard to say, isn't it, how far this economic warfare would go? Because if it was a fait accompli, that China had control over a large part of the global semiconductor industry, we would find ourselves as a free world trying to push back against China in a similar kind of position to the one that Germany has found itself in through its dependency on Russian gas, where they're saying, well, we'd love to have an embargo on the gas, but not yet because we can't afford it. And your five-year timeframe for America to ramp up the right amount of volume in semiconductor manufacturing to offset the losses from Taiwan is interesting, because it puts a kind of window doesn't it, in which China will perhaps feel that it can operate without Western repercussions?

But I think the points I would make with regards to China's importance to the global economy is that China now commands close to 30% of global manufacturing, across a large range of industries. It's not just toys anymore. It's capital goods, electronic machinery, electrical machinery, where they have a high degree of dominance.

Their core vulnerabilities are obviously in hydrocarbons and to some extent, food. And obviously when one looks around the world at the big food exporters, they tend to be fairly closely Western-aligned. The United States itself is a huge net exporter of food. Canada, Australia, are big exporters, Brazil is more non-aligned, perhaps more neutral in this. But then, of course, we must remember that the European Union has spent the best part of 40 years trying to encourage its farmers not to produce food through the Common Agricultural Policy, and therefore there is a huge amount of latent capacity in the European economy to ramp up food production, one would hope. So, from the food side, I would argue that the aligned Western powers actually hold the upper hand in that regard. But the kind of economic dislocation that would be associated with…

SO: Sorry to interrupt you there, but you were just talking about food security. Well, surely one of the benefits of the 'Great Schism' between Russia and the West is the fact that Russia is now in China's court, and China has access to all Russia's food. So that makes them less vulnerable, surely moving forward?

SP: Oh, yes, it's a good point. And of course, particularly, if when you talk about Russia, if one were to assume that part of Ukraine was subsumed into Russia, or that Ukraine's ability to export out of Ukraine was limited, because the Russians were occupying or controlling the Black Sea or the Sea of Azov and making it hard to get wheat and grains out, so that would be true. But China still has these dependencies on food, so it doesn't get them off the hook there.

SO:  Okay. So what about Western assets being seized in China, as some people were saying that that's what the counter-sanctions laws lead to? But what about the other way around? If there was this 'Great Split', what action will be taken against Chinese companies working in the West? Do you think that we would do tit-for-tat and basically stop them working in the UK and Australia, etc? Or do you think that because of the threat that China has over semiconductor supply, and other parts of the world economy, that actually it's more likely we'll just leave everyone alone, and it'd be a lot of hot air like there has been with Russia?

SP: Yes, I mean, it's a great point. I think that Russia probably provides the model, in terms of the way the West would want to pursue things. And of course, it doesn't have to be assets being sequestrated; they can be frozen until such time as the economic warfare ceases, which presupposes that ultimately, the West would triumph in such an eventuality. And I think we would, because when you look at the balance of economic power, as successful as China has been, the economic dimension to its national power is not as great as one might imagine. When you know what you're doing and measuring the economic power and the resilience of a country to withstand a sustained economic shock, per capita GDP in China is only about $10,000 in nominal terms, and so there are a lot of people who are still very close to the breadline, as it were. So the speed with which unrest, disillusionment with the state of affairs could spread in China, I think, should not be underestimated.

What we're sort of concluding on the economic side is that it pivots around a few things. When the need arises, how far down the road are we of replicating Taiwan’s semiconductor supply, which depends on the timing of this event, how quickly we pursue that. And clearly, I would argue that one of the policy ramifications of this discussion is that the West needs to pursue self-sufficiency in semiconductors as a point of urgency or it will find itself in emasculated when it comes to pushing back against any Chinese attempt to militarily take Taiwan or to blockade Taiwan.

And so, I think that's really the hinge point; that will depend on whether it's China or the US that has the ability to prevail in the economic dimension. But Sam, what about the political dimension? Surely one of the ramifications of the Great Split would be that a lot of the multilateral organisations that we're used to overseeing the global commons and sort of establishing global norms will become dysfunctional if we're in this standoff between China and the United States and the other permanent members of the Security Council?

SO: Yes, you raise a very good point. And just before I answer that, I think it's important to note that the five years you mentioned about the hinge point on whether China or America has the upper hand when it comes to semiconductors, which is such a crucial part of the economy - that five years between now and 2027 is also the period of the National People's Congress time limit as well. So the next time that Xi Jinping will be bringing everyone together, in 2027, he wants Taiwan's question to have been resolved. I think that we have two very good reasons why the 2027 timeframe is very much the one that people should be thinking about.

But in terms of where we go after - the political fallout - it could be incredible. If people remember their history, the League of Nations fell apart when you had the Italian bloody adventure in Ethiopia, and also Japan as well and the failure to agree about rearmament. And it was an awful time in the 30s, when the countries did start to pull apart from the multilateral organisation that had been put together at the end of the First World War. And I think that such a move on Taiwan would really put those pressures back into the international environment. First of all, the United Nations Security Council would be completely broken. You'd have China and Russia on one side, Britain, America, and hopefully France on the other, and, everyone else will fill in-between. Therefore you would have the most important global body paralysed, and China's been putting an awful lot of effort into winning the hearts and wallets of the United Nations over the last decade or so, getting its people put into the top positions in lots of different bodies. And that means that China is a much better operator at the UN level.

And if we have in 2024, an isolationist - a unilateralist - back into the White House, whether it's Trump or someone else on that side of politics, it's very easy to say, "Okay, well, the United Nations is not working for us, America is not going to be part of it anymore, because we think it's just a tool for China." And at that point, you do start to see the great fissures across the world re-emerging. But it's not only that people keep saying that, if Russia wins in Ukraine, it will be emboldened to capture back other former Soviet Union Territories - Moldova, Baltic states, perhaps parts of Central Asia. But if China wins in Taiwan, it may feel that it's able to offer a better source of legitimacy for the CCPs rule by winning back territories. Remember that the Qing Empire was far bigger than China today, by a quarter or a third, if I remember rightly. And there are at least 10 different territorial disputes that China has around his borders.

So I think that if China won and Taiwan and basically got rid of American power from that part of the world, it would signal the end of American hegemony in Asia simply because all of its security guarantees will be null and void if it's unable to keep Taiwan out of China's reach, especially after Biden, in recent months has jettisoned at least verbally the position of strategic ambiguity. At the end of the day, Taiwan will play a massively important role in determining who leads at least Asia if not the world, America or China. And that's not good for politics, let alone economics.

SP: So the conclusion we seem to be drawing here is that if the West doesn't get its act together, and put itself in a position where it can act freely, free from fear of being sanctioned, and being cut off from Taiwan's semiconductor supplies, then we will basically be impotent in the face of a Chinese invasion of Taiwan. That in itself, will probably lead to Chinese hegemony over Southeast Asia, and indeed, the Asia Pacific, and probably the multilateral order.

SO: And economically dominant because they will control the technology supply chain until the West can get its own act in order. And I think that's a really important thing that companies and governments need to do. And at the risk of not sounding too alarmist. One of the things that you and I do at Evenstar is to help companies prepare, using wargaming analysis, how they would react to some of the economic scenarios you've so eloquently set out. But I think that if we don't start preparing now, within these next five years, then I think that a lot of difficulties will be faced by the West, but by China as well.

SP: Indeed. Thank you very much, Sam.

SO: Well, we'll be back next week for more What China Wants topics. We haven't actually decided what we're going to talk about next week, but I'm sure we will find something in the next few days. But thanks for your upbeat assessment of the economic future Stewart.

SP: And thank you, Sam

Get full access to States of Play by Sam Olsen at samolsen.substack.com/subscribe

Hello and welcome to Episode 13 of the What China Wants podcast.

When the world thinks of China, it thinks of the flashy, prosperous East and South coasts - Shanghai, Beijing, Shenzhen. But the majority of Chinese live a very different life, stuck in poor rural areas with limited access to education, healthcare, and jobs.

Is this bulk of humanity, numbering 1/9 of the world’s population, a drag on the country that will disrupt the country’s development? Or is it an eminently solvable problem?

To discuss this we are joined by one of the foremost developmental economists on China, Scott Rozelle from Standford University, and the author of the incredible book Invisible China. (I can honestly say it is one of the most eye-opening books I’ve ever read on the People’s Republic, and I’ve read a few.)

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back next week with more What China Wants.

Many thanks for listening.

***

Here is the transcript:

Sam Olsen: "As of 2015, fully 70% of working age adults in China were high-school dropouts. This leaves China's population less educated than the population of any other middle income country, and even worse off than that of many poor countries."

That, as I'm sure you'd agree Stewart, is a staggering statistic to start off the latest episode of What China Wants with Sam Olsen and Stewart Paterson, and it is something which should be of chronic interest to Beijing, if they're trying to keep their country on the straight and narrow path of development.

Joining us today is the author of these words, Scott Rozelle from the University of Stanford in America and one of the world's leading experts on the development of China. Welcome, Scott.

Scott Rozelle: Thanks, Sam. Thanks, Stuart, it's always good to have the interaction with you looking forward to it.

SO: To start off, I just want to mention that this quote comes from your book, 'Invisible China'. What do you mean by 'Invisible China'?

SR: Well, 'Invisible China' is the China that we don't see. It's not the Beijing, Shenzhen or Shanghai, that is on the news, or that people go visit, that the businessman visits or the tourist visits. One out of nine people in the world are rural Chinese; that means that they have an identification card that says, 'I was born in a rural area', and it means that's, that's where they're going to live their life in terms of social welfare, education, health. They can move and migrate to work, but they have this entire set of access to the social services that are inferior than somebody from urban China.

Stewart Paterson: Actually, Scott, can I just pick up on that? So what sort of proportion of what we call 'rural Chinese', as they are designated as such, actually now live in rural areas? We seem to have three demographics here; we have 'urban Chinese', 'rural Chinese' and 'rural Chinese who are living in urban areas'.

SR: Exactly, and China actually has two different sets of census data. One is, on the day, they took the 2020 census and the 2010 census, 'where did you live?' and today, about 50-60% of Chinese, of 1.4 billion people, are living in urban areas, and 40% are still out in the rural areas. But when you look at the 'hukou', or the 'residency', it's the exact opposite - 60% are rural - which means that there are probably 250-300 million migrants and then their families sometimes if they are able to bring them with them.

So with these migrants, they are from a rural area, but they are living in urban areas. They're like a guest, though, as they can't live there and take their kids to public school there. They cannot get public health services there, and so they are like second-class citizens, although they are supplying the labour for manufacturing, construction services, etc.

SP: Scott, looking at that, what sort of traits mark them out as different from the urban population in terms of socio-economic metrics? Sam, in the introduction mentioned education, perhaps we could go into that a little bit? But presumably, also, there's a big income difference as well, and maybe even life expectancy and that kind of thing.

SR: Yes, so certainly education is where the biggest difference lies. If we look at the whole labour force, that's everybody aged between 18 and 65. It's what Sam said, that China only has 30% of its total labour force of about 800 million people, that have ever been to one day of high school. Only about 10-15% of rural people have ever been in high school in this whole labour force. The elderly in the labour force, those aged 50-65, they almost never went to high school. Younger kids are going more often, but much, much less than in urban areas. And when you look at college, a small fraction of rural people, about 10%, have ever been to a day of college while it's probably around 50-60% of urban people that have been so it's a huge difference.

There is a great set of papers now by Terry Sicular, who is an economist up at Western Ontario University, and her colleagues, that looks at the income side of things. On the one hand, she says 'look at China, it has the fastest growing middle-income population in the world'. It has 350 million people and there are more middle-income people in China than there are people in the US, but they're almost all urban. So, using an international definition of middle-income, this rural population is 90% low-income.

Even the Premier of China says, "We have 600 million people, and half of our population lives on $5 a day or less, and that's low. 900 million live on $10 a day or less, and they're almost all rural, there are very, very few low income, urban people. So it's two different worlds out there, and the reason why we don't know this is that they're invisible. They work in the factories, they work in the construction towers, they then go home and live in the alleys and in the basements when they're in the urban areas, or they live out in these villages that are just, you know, off the track. When you go from Beijing to Shanghai, you fly there, or you take the high-speed rail, you don't even see this part of China.

SP: So Scott, this is obviously not part of the narrative that the Communist Party likes to promote, or publicise in terms of their achievements. And the Party do make a big song and dance about the poverty reduction achievements over the last 40 years or so. It's indisputable that in urban areas, certainly, China has had something of a miraculous growth trajectory, and a lot of the damage that the Party did prior to reform has been undone in the urban areas, and in aggregate, China now enjoys sort of middle-income status as it were. After its economic miracle, it's average in a global context.

But concerning the degree to which the rural population have been left behind, as you've just articulated, how do the rural population interpret their circumstances relative to the urban population? Who do they blame for it? And are they even aware of the huge gulf that exists between them and the urban population? Because it sounds to me like politically, it's quite a volatile set of circumstances to tolerate.

SR: Yes, I think this is at the heart of the question, and it's what is changing too. First of all, you can't take anything away from China, they have grown, and they have got rid of poverty, most of it, anyway. As I said, they have now moved from poverty to low-income.

But to your question, I think the work by my colleague, Marty Whyte, who is a Professor Emeritus from Harvard. He's a sociologist, and for 20 years from the 1990s to 2010 or so, Marty would go and say, "Do you know that China's unequal?". He would be asking these people at the bottom in the spectrum, and they would say, "Yes", because they are washing the windows of the Mercedes Benz, of the urban guy, right? He says, "of course, I know". Well, he says, "Well, what do you think about that?" And what Marty said is that for at least 20 or 30 years from the 80s, to through the early 2010's, people would say, "I know it is unequal. But I'm better off than my parents were, when they were this old. I'm better off 10 years ago to now." And then they'd say, "and I think I'm going to be better off 10 years from now". So that kept the glue together as inequality rose.

The problem is I have a set of papers now called 'The emergence of polarisation', and what we see now is the change of access to the foreign labour market, which was new in the 80s and 90s, and then the rising wages, which was for the first 15 years of the 2000s. Now we start seeing it reversing, and what is happening is manufacturing is falling and construction, labour is falling. Everybody is getting dumped into the service sector, and guess what, it's an informal service sector. They are not covered by labour laws completely, they don't have access to social services. And of course, if you have a billion people who are low-income, they don't consume services. And so what we're getting is we're getting this supply of people into the informal labour service sector, but the demand isn't growing fast enough so wages fall.

That's what's been happening over the last five years, we start to see the wages, at least the growth rate of these wages fall. It is now regularly below a falling level of GDP growth, and I don't see what is going to turn that around. They are starting to tell us this. In fact, in Marty's last survey before 2019, the people in this lower income tier said "I'm worried about the future", just for the first time. "What am I going to do?" So I think that we may be at this turning point when a large share of this population is going to start saying, "do I want to keep plugged into the system and go along with it or do I want to try to go against it?" And that's what we're on the edge of, I think.

SO: So Scott, I suppose one of the things that Stewart and I have been speaking about amongst ourselves, but also with people like George Magnus, is the fact that China's economic model is changing, it has to change, because we're now getting to the end of the huge development process that they've been going through. People are being laid off from the infrastructure projects, which are now coming to an end, and huge amounts of building, this happened over the last 50 years is now coming to an end.

So a lot of these people are going to struggle, especially if they don't have the proper education, which again, is at the centre, I think, of the hypothesis that you make in Invisible China. These people are not well educated, and they are going to find it very difficult to help China move up the value chain. In fact, I seem to remember from previous conversations, that you were saying that evidence of the fact that China is changing its economic model is that people - men in particular - are moving back to villages, which have been empty of young men for generations, because they have all been going off to the city to earn a crust. So what does this changing economic profile, coupled with lower education and problems in rural China mean for social issues and the development of China as a whole?

SR: Well, I think, first of all, we should note we haven't been there in three years, and these are three years when the unemployment or underemployment has only been made worse by COVID, and by some of the policies that, you know, that the government has followed. We see that the newspapers in China are full of reporting the rise in unemployment of young urban people. Guess what, no rural person is unemployed, zero. That is because every one of them has land, and as soon as they lose their job in a factory or lose their job in a construction site, they're a farmer again. Of course, they have never farmed, and their income is very, very low on that farm. And so I know that from our surveys, right after the early time to COVID, is that there were tens of millions of families that had lost their job or they were still working, but their wages were much lower.

I think about what is going to happen with those guys. Well, there are a couple of scenarios. I think most of them are going to tighten their belt, work as hard as they can, try to make it. But I think there's going to be a subset of them that we talked about last time, Sam was who think "I don't have a wife, I don't have a family, and I'm poor." They can get to a point where they think "what do I lose from going into the informal sector?" We call it the organised crime sector or the dark-side sector, and I think that we're going to see more and more of that.

On the other hand, China has invested a lot into facial surveillance technology and into building a big police force, so I think that they know that that's coming. I think that this is going to be something we should watch really closely over the next 5-10 years. It's an important question that that's going to determine a lot for China, I think it's going to determine, whether China can keep itself on this even keel, or is it going to go down more? Or can it miraculously recover and keep 5-6% growth?

SP: Scott, maybe we can come back to that in a minute, but I just wanted to pick up on something you said about land ownership and the rural population and the kind of safety net that potentially that provides, or at least, a safety net from being categorised officially as being unemployed. Presumably, as China's urbanisation has run its course, the geographical definition of an urban area has changed as the cities have grown to subsume large parts of what was previously countryside. I wanted to just ask you about two factors in that.

One is, when we talk about an urban population, i.e. having an urban registration, has the area in which being born into an urban area changed to take account of rural areas that have been subsumed into urban districts? That was my first question. My second question, which is linked to that is presumably a lot of former rural members of the population do not have land because it was bought by the property developers, stolen by the property developers or the local governments for residential development. I was wondering how much of a source of discontent that was?

SR: Yes, I would say three things to that, I'll try to go through them quickly. First of all, is land really a safety net? I think it's a safety net. I think it's a real, real, real low safety net. So we did a survey at a factory, with a lot of people working at it. We surveyed 20,000 people. These were young workers, mostly between 15 and 30 years old. We asked them "what are you going to be doing 10 years from now?" 10% said, 'I'm still going to work in the factory'. 1% said, 'I can go get a white collar job'. 1%. For reference, in South Korea and Taiwan, when the factories shut down, and they moved their factories to China, the population all had high school or higher levels of education, even the workers did, and they moved into white collar jobs. But only 1% of this rural labour force said 'I can move into that' 88% said, 'I'm going to go and be in the informal labour service sector'. They basically said, 'I want to work for myself', gè tǐ hù (个体户), self employed. If you add all those things up, right, only 1% said, 'I'm going to go back and farm'.

We then asked them, 'Why aren't you going to go farm?' These are 15-30 year olds; about 90% said, 'I've never farmed one day in my life. I don't know how to farm', that's number one. The second response was 'I make more money in three weeks than my dad makes in an entire year on that farm. Do you think I'm going go back and work hard for three weeks of wages?' They said 'no way'. So that's what I'm talking about. This is a very, very low safety net. The second set of questions was about this Peri urban area, so people who have lost their land. It was a big issue in the 90s and early 2000s. In fact, since that time, when they take land away from farmers, they do not want to have big protests or anything, so they actually do give them a lot. They build apartment buildings and often give them two apartments. So they lose their land, but they have two apartments. They live in one, and they rent the other one out.

I always say, 'hey, they have become an urban person'. But what we find is, the way they raise their kids, the way they manage their health, the way they eat, the way they raise their babies, is that you can say 'I can take the boy out of the country, but I can't take the country out of the boy.' They're basically rural people with urban residencies, that live in urban areas, but they still act like rural people. Now, I think that after a generation or so they're going to be changing but this first generation really are urbanised rural people who are still rural people. And I think that the problems that come with them are going to show up.

And by the way, lots of people say, 'Oh, wow, so many people have got their land taken away from them'. China's only lost 2-3% of its farmland to urbanisation over the past 15 years. 98%, the rest of the land, is still out there. A small fraction will continue to be developed, but most of it will be farmland forever. And so I'm sure these guys in the middle of Henan and Anhui and Sichuan, they would love somebody to go buy their land from them, but nobody's going to buy it.

SO: So Scott, much as we're enjoying this conversation, and it's quite an academic conversation in many ways, but we have a lot of policymakers and business people listening to this, who wants to know more about China. The question that they will be asking is, why should we in the West care about the Invisible China and about the people that haven't got an education that are living in sort of, quite poor areas? Does that make any difference to China's economic prospects? Does it make any difference to Chinese policy regarding their movements overseas and their actions overseas?

SR: Well, I think that it makes all the difference in the world in terms of growth. What Invisible China says is, the probability of China basically stagnating or collapsing or just not growing fast anymore is very, very high. One of the reasons, there are other reasons, but one of the reasons is because of this very large, unemployable in a high-income, high-skilled economy, part of their labour force. The question is, you know, what do you do? What do you do with 500-600 million people that have never had one day of high school education? How do you move them up to a high-income country? Either, you have to give them massive social welfare payments to keep them from causing social problems. China has big fiscal problems now, especially as they're trying to maintain their military, they're doing Belt and Road, they're trying to go to the moon. At the same time they have this gigantic, you know, rural population that's income is falling. And it's going to do two things. I think there is absolutely going to be a rise of huge social problems, including crime, and that's going to divert resources from other places to try to manage that. It's also going to discourage investment.

The second thing is, is if China wants to try to depend on its own economy for growth, their policy is dual-circulation economy, the 900 million people living on $10 a day are not a source of growth, and they don't have the education to become high-income over time. I think if they don't go into crime, they're going to go into the informal sector. And just like Mexico, just like Brazil, just like Colombia, just like South Africa, the rise of this informal sector actually becomes an anchor on the formal sector. It competes against them, it pulls them down, and I think that that's the real danger that China is facing. How does a no-growth or a negative-growth China, how do they act internationally? That's not my field. But you could look at what happens when the Russian economy doesn't grow for a long time, look what happens in Ukraine. That's why I think people should at least worry about that. What can we do about it? It's a tough issue.

SP: Scott, just very quickly, one last question here. Xi Jinping and the hierarchy of the party must be well aware of these social problems. How much of a priority is it for them? We have come to expect things to be prioritised as and when they pose an existential threat to the Party's power. Are we at a stage now where rural policy is being elevated through the to-do list? And what might we expect Xi Jinping to do about it?

SR: Well, I think that they do recognise there is this problem. Sometimes I don't think they realise the real root of the problem. So they create more vocational high schools to get more kids in high school. But since the kids didn't have very good elementary school education, and there's very low quality preschool education, there's no 0-3 year old parental training. So you're raising a whole generation of 'farm boys' who do not have the cognitive ability to go into the high skill, or even academic high school or above where you need computers and science and math and language abilities. That's where they have to start, so number one.

Number two is they say, let's use urbanisation as a mechanism. I think that's one thing they've been saying. And of course, they want Beijing for Beijingers, and Shanghai for Shanghaiers. So they're going to create, they're going to take county seats. I don't know if you've seen this new policy but what they're talking about is getting rid of this hukou for small cities, for cities under 3 million people. Basically what they want people to do is to go back to the small cities in the middle of the countryside. I often say is, China has 2,000 counties. We have 2,000 counties in the US too. What one of China's plans for urbanisation is to take those 2,000 county seats and turn them into 200,000 person cities. So they want 2,000 200,000 person cities, but who's gonna live in them? China has 300 million people that are middle-income. They live in Shanghai, Shenzhen, Beijing and Guangzhou, right? You're going to populate these 2,000 county seats with 200,000, low income people. Well, you are not going to do manufacturing out there. You're not going to be doing a construction after a while. They aren't going to consume services so I think you're making 2,000 basically slums over time.

So they say we're going to use urbanisation. We're going to expand high school, but they don't get at the roots of the problem. And I think that that's really what it's going to come down to. And as we've seen with so many of these middle-income countries, they grow, grow, grow from poverty to middle-income, and then they stagnate. But we've never had a country as big as China stagnate. We've never had a country with this big of an army is China. And I think it's going to be a real challenge for the world.

SO: Well, Scott, thank you so much for a tour de force of the issues surrounding Invisible China as your book title indicates, really good to hear. And I must say that of all the books I have read on China and the challenges that they face, yours really stands out as being perhaps the most apocalyptic simply because of the scale of things. I just hope it doesn't end up that way.

SR: Yes, well I wrote this because I want to bring this to the attention of people. I don't want China failing. I want them to participate fairly with transparency right in the international order, because I think a steadily growing fairly open China is great for the world and it's great for China, and it's great for Asia, but that's not the way we're going.

SO: No, sadly, not.

SP: Scott Rozelle, thank you very much indeed.

Get full access to States of Play by Sam Olsen at samolsen.substack.com/subscribe

Hello and welcome to Episode 12 of the What China Wants podcast.

The UK has had a long and - at times - difficult relationship with China. But in 2015 past issues were put to bed when David Cameron, ably assisted by his Chancellor, George Osborn, declared that the relatinship between the two countries was now entering a new Golden Age. To seal the deal, and to secure billions of pounds of investment, Cameron invited Xi for a state visit, the highlight of which (for the newspaper photographers at least) was a visit to an Oxfordshire pub.

It al looks very different today. Relations are at a low, and the Conservative Party candidates for the next Prime Minister are trying to outcompete each other on how tough they would be on China.

To explore the evolving relationship between China and the UK we have with us today Sam Hogg, the author of the highly popular newsletter Beijing to Britain.

Our main points from today’s episode:

* Anglo-Chinese political relations have been hit by a number of issues in recent years, including the crackdown in Hong Kong and the revelations about the treatment of Uighurs in Xinjiang.

* These have led to British politicians taking a much harder and bipartisan stance on China - a stance not helped by Beijing sanctioning a number of MPs.

* In terms of economic exchange, this is actually increasing, but the politicisation of investment (on both sides) is a threat to this.

* With attitudes in the UK political scene hardening towards China , the coming years will likely challenge the countries’ relationship even more.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back next week with more What China Wants.

Many thanks for listening.

***

Here is a transcript of the episode:

Sam Olsen: Hello and welcome to episode 12 of the What China Wants podcast with me, Sam Olsen, and Stewart Paterson. I am going to start today with a quote, not from Xi Jinping for a change, but a quote from the Financial Times from September 2015. "George Osborne arrived in Beijing on Sunday to proclaim the advent of a golden decade in Sino-British relations, strengthening his role as a leading advocate of China. The main purpose of Mr. Osborne's mission is to persuade China that no economy in the West is as open to Chinese investment as the UK, as witnessed by Mr. Osborne's offer to China to take a big stake in Britain's nuclear power revival."

This harks back to, as they said, the golden era of the Cameron time when Xi Jinping drank beer in an Oxfordshire pub, and the leaders of the two countries cooed into each other's ears about how the future together was rosy. But it has become a bit sour since then, as Stewart and I have often spoken about over the last few months. The question is why and how this has shifted, and today, we're joined by an expert in Anglo-Chinese relations, Sam Hogg from the Beijing to Britain newsletter, who will hopefully be able to give a bit of illustration as to what on earth went wrong. Welcome, Sam.

Sam Hogg: Thank you so much, Sam. Thanks Stewart.

SO: You'll see that by saying things have gone wrong, I am sort of taking away your answer from the first question, which is, what are British-Chinese relations now? And are they as bad as people might think?

SH: That's a great question. I think British-Chinese political relations are not particularly strong, they are quite strained. But the economic relationship is still pretty strong. I think for the sake of this will focus on the former because it's what everyone discusses really in the context of UK-China relations. As you will have seen, we've got two candidates to become prime minister, and we'll come on to that more at length. But the fact that both candidates have been forced effectively to have a China's strategy speaks to the fact that China is front of mind for many conservative voters, and for Conservative MPs too.

Stewart Paterson: Just to pick up on the point you yourself made, which is that there's perhaps a dichotomy between political relations and other spheres of interaction with China. Do you think that the cooling of relations is confined to the political sphere? Because clearly, things such as the Chinese Foreign Anti-Sanctions law, the change in the governance structures in Hong Kong, I mean, these must be having a detrimental impact on UK corporate relations with China, one would have thought. And clearly we're seeing a lot in the news about the deterioration in relations between UK academic institutions and China, to name but two other spheres of interaction between the two countries.

As the politics has gone south, you are alluding to the fact you don’t think the economic relationship is in so much trouble. Perhaps you could elaborate on that?

SH: So, again, that's a great point. I think trade between the two countries is pretty strong, but the political conversation knocks onto other things. The example you raise there, academia, has been under intense scrutiny for the last two years, a series of stories about different Chinese firms working with British universities, and business as a whole, about British businesses being sold to Chinese enterprises.

They have both been in a political narrative now for enough time that the government has tabled legislation to deal with both these things. So in the case of the former, higher education, you have the Higher Education Bill, which will have an amendment, seeking to inject some transparency around foreign entities funding university projects. And in the case of the latter, you have, of course, the National Security Investment Act, which seeks to limit not just Chinese investment, but foreign investment into national assets of importance. So although it starts in Westminster it often spills over into business and into academia and actually into society at large as well.

SP: It's interesting that you are very much putting Westminster first here and being politics led. Some people would argue that Chinese behaviour towards our academic institutions and the asymmetry in our trade relationship, and the way some British companies have been treated in China, that it was very much actually the deterioration in the economics and other dimensions in the relationship to which Westminster has responded. And in fact, Westminster has responded slowly and arguably, very behind the curve. Who knows what history might show, but it could be that our politicians have woken up to the China threat just as the China threat starts to diminish if some of what we're hearing out of the Chinese economy comes to fruition. What would you say to that?

SH: I think it is a fair point, although in my experience, having worked in parliament for a while, there are three or four key moments that changed the era from being the Golden Age into our current, whatever fancy term you want to use to describe the UK China relations as is. I'm quite fond of, although it's meant for the US China one, Kevin Rudd's 'Decade of Living Dangerously'.

I think one of the key changes was Hong Kong, watching how Hong Kong authorities clamped down, if you want to use that term, on Hong Kong democracy activist and introduced the National Security Law too. And then, it's really hard to overemphasise how important journalism and leaks and data around Xinjiang was for setting the tone in many British politicians minds around where China is headed or where China under President Xi is headed. Those two things are really important. And then on the ground in the UK, Huawei obviously was a conversation that took place over a series of years here. That was one of the first times you saw a big backbench conservative rebellion build up around a China-related issue post golden era.

So I do take your point. I think, again, in my personal experience, the mind of an MP is on 1,001 things at once, and so they can't really apply the nuance in the sense that you've raised there. They look at these things as quite episodic, and it's only now that we have seen more of these episodes tied together that it feels like there's a really big kickback against China, if you will.

SO: So do you think that politicians in this country, and in the West, generally, but especially in the UK, have a good understanding of China? And if so, which are the ones who you think we should be listening to when it comes to their comments about British-Chinese relations, or indeed, just what's happening in China itself?

SH: A genuinely million-dollar question, and one of my favourite ones. I think they know a fair bit about how China presents itself on the global stage, although less than five of them would be able to read or speak Mandarin. Also British politicians, MPs this is, don't hire foreign affairs-minded staff. That's not how it works in Parliament. So you don't bring in a China specialist. You bring in a team that assembles stuff around your case work. And if you sit on a committee like the Foreign Affairs Committee, you then have access to very useful briefings which are done confidentially most of the time, but also a chance to interview expert witnesses in that sense.

I think the ones I would listen to in that regard are people like Tom Tugendhat, who is the youngest Chair of the Foreign Affairs Committee and recently ran to be Conservative leader and therefore Prime Minister, and also co-founded the China Research Group in 2020. I would put Mark Logan in there who used to work as a foreign diplomat in China, Catherine West, who is Labour's Shadow Minister for Asia, and Richard Graham, who chairs the China All Party Parliamentary Group. Then in the Lord's we have a fair number of people including Lord Patten, the last governor of Hong Kong who obviously brings a wealth of expertise.

So I think the majority of them probably are not that well equipped to discuss the more complex parts of how the PRC internal stuff works. But in terms of understanding where China stands on the global stage, they definitely view it through a Western lens, but it's not at the same place where it was three years ago. There are more groups now that have evolved to help brief MPs on these quite difficult issues.

SP: It's good to hear, Sam, that some MPs, a handful at least, in your view, have a good understanding of China. But we've just had this incident with Christine Lee, who, for our listeners' benefit if they're not aware, has been accused of influencing parliamentarians or trying to purchase influence or parliamentarians using CCP resources.

To what extent do you think the United Front and other CCP organisations have been trying to dictate the narrative as it were, to our parliamentarians? And what level of success do you think they've had in terms of presenting what China wants us to believe about them to our legislators?

SO: Before you answer that, it's interesting, because Stewart and I have spoken about this before, but recently, I was having a meeting with a very senior civil servant in the UK. He poured scorn on the idea that China had indeed tried to infiltrate British political society.

There's obviously not a joined-up view on this. I don't know what you're about to say, but it would be good for you to explain a little to our listeners about what both sides of the same you know, those who say that there are moved by China to free trade and those who say that it actually this is just over-egging the pudding, what's your thoughts?

SH: So I think it's again a great question, in terms of how much influence and interference do we see aimed at MPs. I think there are interference and influence operations taking place, although they're usually not the ones that are discussed as publicly as something like the Christine Lee case.

To give you an example, one side that would put forward the view that interference is taking place would point to the endless emails you get, which has 'MP's first name MP's last name @gmail.com'. And they send these emails to MPs trying to phish out details around often not that sensitive things, but just as a sort of phishing operation. That's definitely an element that we see quite a lot, and you hear about it reported every now and then too.

In terms of the Christine Lee one, it was a very interesting case wherein she's not been charged. As far as I'm aware, she still operates as a free citizen in the UK. It was quite divisive among some of the older China guard, if you will, who saw what she was doing as not that far from lobbying. You have loads of people from many different nationalities knocking about parliament.

But in terms of the younger, more active, I would say, MPs, and a lot of activists in this space in general, they do think that there is a strong interference operation going on. How effective is it? I mean, look at the debate around China, if China's goal is to have an incredibly poisonous political relationship, then they are smashing it out of the park, but I suspect it is not the stated aim of the United Front in the UK.

SO: So Sam, I suppose one of the things that we haven't spoken about is your own background. We've spoken a lot about the politics of Westminster, maybe you could tell us a little bit about how you came to be interested in China and your political interests?

SH: Sure. I spent ten very happy years living between Hong Kong and Scotland, that was throughout school and university. After that I was working in London for a strategic advisory company, and I wanted to get involved in working in British politics with a China-facing role. The position didn't exist, and so I thought I need to find a couple of MPs who are speaking about China and see if I can lend a hand at some level there. My former boss, Nusrat Ghani MP was a Conservative backbench MP, and she sat on this business committee, the business select committee. And they were under her leadership having a report and inquiry into supply chains in Xinjiang. So I applied to work for her was incredibly fortunate to be accepted in and spent a year working on a number of issues from supply chains and forced labour through to declaring genocide via parliament.

SP: She's been sanctioned, hasn't she?

SH: That's exactly right. On my fourth or fifth week, my MP was sanctioned. I woke up at about 4:30 in the morning, in a fever dream as my phone was buzzing from one of my friends who is a journalist saying, "Have you seen the news?" I thought 'nothing good happens at 4:30 in the morning after the age of 21'. The nightmare swept over, and then here we are.

Her being sanctioned sort of set the tone. And actually, I should have referenced that another moment which unified political thinking in Westminster around China being quite hostile is when they sanctioned British MPs, because all of a sudden, MPs, even if they had no China interest before, came together around their fellow colleagues. And this was seen as an attack on democracy as well. Hence why you had all that language from those MPs, saying they wear it as a badge of honour, that they wouldn't be cowed into submission.

That was my background. And throughout that time, and just beforehand, I had started writing a weekly briefing on UK-China news, just aggregating it anonymously, which I did throughout my time there, just pulling stuff in the public domain into a sort of succinct format, which didn't really exist before. And post leaving, it's been my full-time job, I'm very fortunate.

SO: And you were just mentioning about the sanctioning being an important part in the downward spiral. But to what extent do you think that personal antipathy towards China from the MPs who have been caught up in this has a dampening effect on Chinese relations? Or do you think actually that we should be thinking about their professional stances rather than any personal side that they might have?

SH: So I think I'll answer that slightly generally. My personal view is that I would like MPs and politicians and sort of spokespeople on both sides to act with a slightly higher level of decorum, because I think it's easy to view China as a monolith, and to think that President Xi has oversight of every single minuscule bit and pieces going on. Even today, again, we'll come on to that later on, but the fact that Rishi Sunak, one of the potential candidates for prime minister, has declared that China will be the biggest threat for the UK, that language lacks complexity to actually talk about what his perceived issue is, which is the CCP rather than China as a country.

On the flip side, it does not help MPs come to a more 'complex or nuanced view', if they are facing wolf warrior diplomacy on Twitter, and a Chinese Embassy here that constantly puts out quite bizarre press releases. So, being sanctioned is obviously a very personal thing, and I don't suspect most people who are sanctioned look at their sanctioner and think 'perfect, this is going to improve my relationship with you', and that's unfortunately what we saw.

Also, if I could add one more thing, at the beginning of the sort of end of the golden era, it didn't take a huge amount of experience to have a view on what you wanted the UK's relationship with China to look like. Therefore you had lots of people coming in offering a view. Now, because the people who have been working in this space have been there for a bit longer, if you're a new MP and you pipe up saying something that's a bit out of place, people might say to you, "well, that's a bit unusual. That's a bit odd." But back then it was a bit more of a free for all.

SP: We refer to the 'golden ersa’, primarily because that's what Cameron called it rather than because it was necessarily a golden era. Looking back on that period, what is there to point to suggest that it was a golden era? Chinese FDI into this country was miniscule compared to our main trading partners, certainly compared to what China could have put into this country. Trade with China has grown obviously, quite fast, but it's been very asymmetric in terms of the growth, i.e. they export to us, our exports to them are pretty subdued I think we export to them a little bit less than we do to Switzerland, but more than we do to Ireland or the other way around. It's not exactly driving the UK economy. So is the golden era misnamed?

SH: That is a genuinely great question. I think the level of political dialogue between the two countries would make it, in the mind of politicians in the UK, a golden era. You had President Xi's state visit here, as Sam mentioned earlier on, they had a pint of beer together, some fish and chips as well. President Xi visited Manchester City's football stadium, took a selfie with Aguero and David Cameron. You had George Osborne, the then-Chancellor visited China. He took with him a series of Northern business leaders to Xinjiang where they talked about how they were going to grow connections between China and the northern powerhouse and northern companies.

It just felt at the time as of this was it; the UK was going to present itself as China's Western partner, and that was the direction of travel. And as late as 2019, you have then-Chancellor Philip Hammond giving a speech about how the UK can work with China's Belt and Road Initiative, so that momentum kept on going for a couple of years.

SP: Looking at Parliament now, is it possible to stereotype the different political parties' approach to China? Is there a discernible difference in the driving motivations between the Conservative Party, the Labour Party and the Lib Dems? And actually the regional parties as well, the Scottish nationalists, etc, in their approach to China, or is it much more a sort of cross-party consensus with a few dissenting voices around the edges, which are equally likely to come from right or left?

SH: Yes, so it's much more, as you say, a cross-party consensus. To give you one example, genocide in Xinjiang, for example. That is the Labour Party's official view right now that that's taking place. That's the Liberal Democrats' party official view that was taking place, and Conservative backbenchers, by and large, were the ones that helped push that motion through Parliament. So you don't see a huge amount of change on those sort of things.  Approaches to stuff like the steel industry may have a slight variation from Labour. But by and large, the view is how the integrated review set out China, as a systemic challenge to the UK, a systemic competitor, but one that we also need to pursue some sort of economic relationship with.

The difficulty with Labour obviously, is that they've not been in power for almost half my life. So it's really hard to tell what their China policy would be beyond what they talk about. And as the leader of the opposition, you can have quite ambitious views that can change quite rapidly when you come into power. But there is not one party that's pushing for closer UK-China relationship or a hark back to the golden era.

SP: Within the parliament, though, China does have its friends, right, its supporters or if not, its friends, those who are prepared to lobby quite hard for the deepening of commercial relationships irrespective of genocide or what have you. What would be the typical characteristics of people who are prepared to slightly go out on a limb to argue for deeper commercial engagement with China?

SH: So I think this is a minority of parliamentarians and peers, but they would typically present the real polity case, which is that 'China is the world's second largest economy, we cannot simply decouple'. The more extreme of them may say that actually talking about a genocide taking place with no follow through, is actually not helping anyone on the ground. Some of them might point to the fact that they believe the Hong Kong protesters were misled by British parliamentarians to think they could effectively march and secure their own democracy, and that was never going to happen.

But those are not popular views. And those are not views you would ever see really voiced in the chamber anymore during debates on China. They don't exist at a level that I would be able to provide any real insight onto, I'm afraid.

SO: So we've spoken a lot about what Britain thinks of China. But what does China think of Britain? You must come up with a lot of interesting insights into this in your writings.

SH: So this is actually one of the things that I'm looking to try and expand in the Beijing to Britain offering is a sort of view from Beijing. As you may or may not know I actually don't speak Mandarin. So that's why Beijing to Britain right now reflects how the UK discusses China. As a result I have to get my information around how China discusses the UK through friends who do speak Mandarin and bits that are sent in.

But one of the recurring themes here is that people believe the Global Times speaks for the state. And you can see the Global Times' recent coverage of Rishi Sunak, Liz Truss, Tom Tugendhat and Penny Mordaunt when they were in the final four or five. Also Kemi Badenoch too, but not so much. They view Rishi Sunak as the pragmatic continuation candidate almost, and they have a litany of phrases to describe Liz Truss who they are not very fond of at all

SO: Come on, give us some, because I think our listeners would like to hear the outbursts.

SH: Okay, so there's an article that was the other day about Liz Truss being a disastrous PM for Britain. It says "As Foreign Secretary Trust has made herself known through an appeal to extreme nationalism, overboard, ideological chauvinism and unnecessary hawkishness. Former Australian Prime Minister Paul Keating famously described her as 'demented'." That's a classic, here's another great one. "Truss has clearly mastered an art of failing upwards in advancing her career through an appeal to overboard popular sentiment, and was selected by an equally opportunistic and chaotic Boris Johnson government, not of course for her competence and skill set, but through the sheer fact she said things that people wanted to hear, having made her name as Minister for State by grotesquely exaggerating Britain's post-Brexit trade gains, and successfully glossing over the country's grim economic outlook." And then to conclude, "It goes without saying that a Liz Truss leadership would constitute nothing less than a colossal disaster for the UK, and there is absolutely nothing beyond her unhinged rhetoric, which would suggest she is even remotely qualified for the role of Prime Minister."

SP: So Sam, I wonder if the Chinese, or at least the Global Times, which of course doesn't speak for all Chinese at all, but I wonder if the Global Times still has this view of Rishi Sunak after today's tweets, because I saw in my LinkedIn feed, that he's come out with a pretty stern set of policies towards China.

SO: Including shutting off the Confucius Institutes, I mean, that's not going to go down well, in Beijing!

SP: Yes, shutting those and pointing out that the UK channel their money through them in terms of Mandarin education, effectively, therefore giving the Communist Party of China a monopoly of teaching British people Mandarin. I don't know whether that's true or not, I think it is, but we'll research that one. Looking at the two candidates, is there much to choose between them, do you think, in terms of their approach to China relations?

SH: So the two candidates have had to both come up with a Chinese strategy. Liz Truss, who still is the Foreign Secretary has her own approach to China, which she calls the 'Network of Liberty' strategy, and that involves working with like-minded partners throughout the region, throughout the world to counter economic coercion, Chinese misdemeanours in this sort of region.

Until about 24 hours ago, Rishi Sunak had nothing really on record to show what you might term as anti-Chinese Communist Party policies at all. He had given a speech at Mansion House last year where he complained about the lack of nuance in the discussion around China, and how we're going to need to engage with China as an economic partner in the world. So there's a lot of distance between where Liz Truss and Rishi Sunak historically have sat on China. Now, in the last 24 hours, if you were to be teleported into today, and this was your first look at both candidates, you might think 'wow, they both have quite an aggressive anti-CCP stance'.

The Confucius Institutes ban is something that's been kicking about parliament for a couple of months actually, and was first strapped in via an amendment to one of the bills passing through Parliament by an MP called Alicia Kearns. It's quite shocking to see it made an actual policy statement within about eight weeks. And again, one of the reasons he's chosen Confucius Institutes is because Liz Truss in 2014 welcomed Confucius Institutes into the UK as part of her role. And so it's a useful prodding point to say, you know, you've flip-flopped on being a Lib Dem you'll flip-flopped on voting for Remain not Brexit. And now you're flip-flopping on another significant China issue, which is Confucius Institutes. How much that holds water is anyone's guess. It will be really interesting to see how it plays out during tonight's debate and in future hustings, if anyone has had the dial move to thinking that Sunak is a anti-Chinese Communist Party candidate.

SO: Well, a key challenge between now and the next five years or so is going to be how the new British Prime Minister deals with China in a constructive way or an aggressive way, depending on your point of view. And that obviously sets the tone for a lot of what happens economically as well. But what do you think is going to be the biggest challenges over the next few years, but from both sides?

SH: I think from the Chinese side looking to the UK, one of the big challenges will be understanding how parliamentary democracy works properly. So, separating the views from Parliament and Government, understanding how actual political campaigns work in the sense of, I might pledge 'x', 'y', 'z', and then come into power and only implement 'z'. So it's about managing the risks properly there and understanding the context of when they were made.

From the UK side, both candidates have put themselves in a fairly difficult position because Liz Truss allegedly told MPs two weeks ago that she would declare publicly that genocide is taking place in Xinjiang if she became prime minister, which in turn triggers a series of legal obligations from the United Kingdom to act to prevent genocide. And Rishi Sunak has obviously made these significant claims around Confucius Institutes and shutting them down, but has offered no real policy behind how we would seek to build our Mandarin proficiency in this country, which is pretty poor as is.

So they're both going to have a busy calendar week when they arrive to begin with. And on top of that, as well, they'll have to deal with the calling or passing on of Newport Wafer Fab. So it's going to be a pretty hectic first month, and that I imagine will continue for two years until the next election.

SP: Sam, thank you very much indeed for joining us. It's a fascinating insight into Anglo-Chinese relations, past, present, and maybe a glimpse into what they might hold in the future. And for all our listeners, Beijing to Britain is available. Sam, you write a lot on Twitter, but is there a website that they can go to? To follow your blog?

SH: There is, it’s at www.beijingtobritain.com

SP: Brilliant, thank you very much.

SO: Great Sam, thanks. Very nice to talk to you.

SH: Thanks for having me.

SO: And we'll be back with more What China Wants next week.

Get full access to States of Play by Sam Olsen at samolsen.substack.com/subscribe

Hello and welcome to Episode 11 of the What China Wants podcast.

One of the most important differences between China and the West is its language, and of course its script. That it is so impenetrable to most people outside of East Asia is unfortunate because together they say so much about the history of China and its place in the world today.

The story of the Chinese language and how it is written down (and has been for millennia) is fascinating. Here to discuss it all in our latest What China Wants podcast is Mandarin enthusiast and the author of the Slow Chinese newsletter, Andrew Methven.

Our main points from today’s episode:

* The Chinese language is old - really old - and so provides a level of continuity with the past that doesn’t quite exist anywhere else

* Many of the idioms in use today are thousands of years old but have been repurposed - online shopping events are described using terminology from ancient wars

* Yet the language and its script has been modernised in recent times for political reasons

* We explore whether the lack of study about China in the West is down to the nature of the language

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back next week with more What China Wants.

Many thanks for listening.

***

Here is the transcript of the recording:

Sam Olsen: Hello, and welcome back to What China Wants with me, Sam Olsen, and Stewart Paterson. Today, we are doing something slightly different. Rather than looking at the geo-politics or the geo-economics of China, we're going back to something that we originally started doing with What China Wants a couple of years ago, looking more at the culture of China.

If you read my stuff before, then you'll know how obsessed I am with all things Chinese, whether it's music, or literature, or whatever. But all of that is based on the Chinese language. And admittedly, I never really got around to perfecting my Mandarin. Stewart, are you cognizant of Chinese?

Stewart Paterson: Not a word, Sam, I try and master English, and I'm not that good at that.

SO: So I think what will be useful if you wanted to look at the Chinese language would be to have someone who actually knew what they were talking about. And thankfully, today, we are joined by such a person in Andrew Methven. Welcome, Andrew.

Andrew Methven: Thanks Sam, thanks Stewart, it's great to be here. Thanks for having me.

SO: And you write a weekly newsletter, which I think probably started about the same time as our really called 'Slow Chinese', which is really good reading, if you want to know a bit more about the Chinese language. What is your connection with Chinese, and how did you get involved in it?

AM: I guess like many people that ended up taking a China-based career, it was not a particularly orthodox way to go. I first went there in 2002 travelling, so I took the train from the UK and eventually made my way to China, and then stayed there, initially for around a year backpacked around the West of the country. And when I did that, I started to learn Chinese self-taught.

And then after that, after a year out of China, I decided I wanted to go back to Asia. So I then based myself in Taiwan, for overall around three years. When I was there, I decided that I wanted to learn Chinese and then focused on that. I then came back to the UK and then took a Master's in Linguistics and Translation, a few years after having gone to China in the first place. So kind of self taught in terms of the language, but then did a little bit of formal study at the end,

SP: Andrew, so one of the things that one can't help noticing, when you listen to Xi Jinping, or for that matter, most Chinese actually is that they are incredibly proud of the antiquity of their civilisation, and obviously, their language is a large part of that. Under the Communist Party, it almost seems to have become a sort of totem of national power, the continuity antiquity of Chinese civilisation and what it has given the world.

Can I just start by asking, how old is the Chinese language? And is the sort of ancient Chinese language recognisable as being the same language that is spoken today in China?

AM: So before I answer the question Stewart, I'll just qualify that there are not a genuine expert in terms of the evolution of the Chinese language as a linguist, but just from my own observation, and reading and learning about it. So if you read any speech by Xi Jinping or others, about Chinese civilisation, they'll normally say it's been around for 5000 years. So that then goes all the way back to I think, even deeper in history than the first dynasty of China, which was the Xia dynasty. So we're talking like 2000 BC type time, in terms of the language.

There's no written records of anything that deep in Chinese history, and the first proto-Chinese writing that there is, is called 'oracle bones' and in Chinese as jiǎgǔ wén. And so these are very early Chinese characters that are carved into bones, whether they're animal bones or tortoise shells.

And to your point about, are they recognisable? Well, actually, they kind of are, amazingly, so if you were to look up any Chinese character in the dictionary or online today, you're normally given a graphic representation of how that character has evolved over the years to what it is now. Often, you can see how it evolved from its early oracle bone design to what it is now. So a good example is characters like the one for mountain 'shān', or people 'rén'. These can all be traced back to the oracle bone, original characters, and we're talking around 1000 BC, so still very, very old, although not quite 5000 years.

SO: On that, Andrew, just to be clear, for the listeners, we're not talking about the whole of modern day China though, this is very localised, right? And it's something that originated in a certain place as well as a certain time?

AM: Yes, so again, my limited understanding is that going back that far into the depths of Chinese history, this was a relatively small region of what is now China, focused around the fertile plains of the Yellow River in the Yangtze River. But over the centuries, obviously, that has gradually expanded as the Chinese empire expanded and contracted over the centuries. So yes, I think the original part, in fact, the oracle bones themselves, have only been discovered in a very small geographical part of China. And so there's a lot of inference that goes into the understanding of them as well, as far as I know.

SP: So if we fast forward the Communist Party, I believe I'm right in saying introduced a sort of simplified version of Mandarin. What was the sort of rationale behind that? And how does it differ from traditional Chinese?

AM: So I think first of all, it's probably helpful to just cover a few definitions. So Mandarin is the word that in the West, that is the English term for the common language that's spoken in China now, which in Chinese is called Pǔtōnghuà. So like the kind of standard language or the common language that everyone speaks, so that's Mandarin, and that's spoken. Whereas the characters, obviously, are the written form. There's only one form of written language, so wherever you are in China, no matter what dialect, or language you speak, you can still read the characters.

And so your question there, Stewart is about how the characters have been simplified, but the language itself, how it's spoken. Obviously, it evolves. But it's still pretty much as it was, whereas the characters, since the founding of the People's Republic, the Communist Party gradually started to want to simplify the characters as a way to improve and increase literacy across the country. However, the simplification of the characters had been starting way before that. And if you think of it almost as a shorthand, if you're a market seller of vegetables, or something in a late Qing Dynasty market, you're probably not going to use the really complex character to write on your vegetables.

So I think way before the CCP, came into power in China, there was already examples of simplification of the written characters, and also how, for example, the Romanization of the way that we all learn Chinese now through pīnyīn, brought in during the 1950s. But there were earlier versions of how the language was learned as well, which came in at the start of the 20th century, obviously, that predated the CCP.

SO: Well, actually it's funny you say that because I remember from my sort of history that in the early 1900s, at the same time as the Chinese revolution, there was also an aspiring revolution in writing, because weren't some people saying in China, they actually wanted to replace the Chinese script, totally and replace it with Western script to make it easier?

AM: Yes, again, I think that's an idea that the Communist Party played with or explored during that process of wanting to simplify the characters and also come up with a system which is now the pīnyīn system. But I think for most of Chinese history, as I understand it, Mandarin Chinese or Pǔtōnghuà was not the national language or the language that was spoken mostly across the country.

Actually, that's only really been the case since the early 1900s. And there was a very famous linguist who I'm just starting to learn about now called Wang Li, who was alive during the latter part of the Qing Dynasty. And it was actually people like that, that started to drive the move towards standardising the language, and it just so happened that Mandarin won, but it could have been another language, it could have been a southern dialect. And actually, during earlier dynasties, non-Mandarin dialects were the language that was spoken by most people.

SP: Andrew, I mean, what I'd like to ask is, in terms of oral communication, what's the degree of understandability, as it were, between the various dialects across China? So if someone only spoke their local dialect, so Cantonese, for example, and they were trying to speak to someone in the north in their dialect, is that possible without resorting to Mandarin?

AM: My experience of the dialects, again, this is just my anecdotal view, is that in certain parts of China where a non-Mandarin dialect is prevalent, so for example, in Yunnan or Sichuan, you can kind of understand most of what they're saying, even though it's a different language. It just sounds like a very heavily accented, but quite similar language. Whereas Cantonese, for example, or Shanghainese or Minanhua, which they speak in the east, you can't understand those, it's like the difference between French and English. And so it varies across the country, but generally, they're pretty distinct languages, although you with some of them, there's a broader overlap, so you can kind of get the gist.

SO: And in terms of the Pǔtōnghuà and the simplified characters, where does Taiwan fit in with this? Because, am I right in thinking that Taiwan is still use older, more complicated characters?

AM: Yes, that's correct. So just going back to the standardisation of the language. Mandarin Chinese, as I understand it, began to become more widely spoken at the turn of the 20th century. So before the Nationalists had come into power, and before the People's Republic was founded. There was already a move at that time to standardise the language to what is now Mandarin. But as I understand it, under the Nationalist government, that didn't go too well, and in fact, it was seen as almost blasphemous that you would try to want to do something such as simplify the characters or standardise the language.

And at that time, the standard language was called Guóyǔ. And that's still what they call the standard Mandarin in Taiwan. So in Taiwan, you learn Guóyǔ, which is standard Chinese, whereas in mainland is called Pǔtōnghuà. And Pǔtōnghuà was the name given to the language by the Communists after they came into power. But it was already a process happening in terms of the spoken language. In the written language, the characters in Taiwan are the characters that you would have learned three 400 years ago. So they're still the traditional or in Chinese, the complex characters. And likewise, in Hong Kong, Macau, probably in Singapore as well, places like that, you would see the traditional characters written, and you learn the traditional characters. So in those small pockets, they still write and use the complex characters.

SP: And presumably does that apply to things like calligraphy and art generally, that the traditional older characters are used?

AM: Yes, again, I'm not really a calligraphy expert, but my observation is that actually, they're kind of interchangeable. So in a really fluid piece of calligraphy, you might actually get something that looks even not like the simplified character is something that's even more simple, an abstract than the simplified character. Whereas on other examples, you would have something that's very clearly wanting to look like the complex version of the character, so I think there's far more artistic licence for interpretation.

SO: There's a far closer relationship between people's sentimentality, and writing in Chinese than there is between people in the West and the Roman script, right? Because obviously, calligraphy is such an art form, that people specialise in it, but you don't really get that in the UK, or America or France, or whatever. So how important is the actual shape of the characters and the writing for the soul of the Chinese people?

AM: Well, I think just the written form of the language is a really crucial part of obviously learning the language, but also gaining a deeper understanding into China and Chinese culture and history and how people think. And that's because - unlike in western languages, you can take English, for example, to access information about, let's say, you know, the Roman Empire, or the Greek Empire, or even during the Anglo Saxon part of English history, that's all in a different language. And so therefore, you have to understand that language to access that level of understanding and context. Whereas in Chinese, the characters that you're reading now, and the expressions that you read, and then use now in spoken language, some of them are thousands of years old, they still basically mean the same thing.

SO: Yes we've spoken about this before, and you told me some of the amazing old idioms still used today, we were racking our brains and trying to work out the oldest English idioms. And the one I mentioned to you was about being buried 'six feet under'. That's one of the few Anglo-Saxon idioms that is still around today. But you're saying many exist today, which are way older than the Anglo-Saxon period, and in Chinese history.

AM: I think pretty much any idiom that you would use in spoken contemporary Chinese language today, will have a history lineage, of anything from several 100 years to 2,000 or 3,000 years. So for example, Confucius ('Kǒng Fūzǐ') who was alive during the Zhou dynasty. We’re talking, 2,000 plus years ago, so many of the things that he talked about, and was written about by his students is still in use today in sayings that you would read in a newspaper article, or you would use in a business meeting today in China. So it's a lot more relevant. There's a much greater connection through the language between China and Chinese people now and the deep past.

SP: Andrew you came across one the other day when Xi was talking to the BRICS summit. For the listeners who aren't aware, BRICS is the sort of loose grouping of countries initially it was Brazil, Russia, India, and China, South Africa as a sort of potential geopolitical grouping of what we might call the global south.

AM: Yes, often in speeches by Xi Jinping, either at the start of it or the end of it, he will then use a Chinese expression which is normally like a colloquial phrase, or an idiom or something or a poem. So for example, during his speech at the BRICS conference, second or third line, he said, "liè huǒ yàn zhēn jīn, jiān nán mó yì zhì." The direct translation is 'fire is the test of gold'. So you can only find true gold if you heat it really hot, and then you can decide whether it's pure or not.

And that actually means something along the lines of 'you know who your friends are during times of adversity', which is fine, but it was interesting, the bit that probably didn't come across in the speech, which all the Chinese audience would have got, but probably none of the non-Chinese audience would understand, which is the word for BRICS, as in the BRICS countries, in Chinese is 'jīn zhuān guójiā'. So golden BRIC countries, and therefore, that phrase was selected, because the point is that BRICS countries are true friends during these times of adversity, but obviously, it wasn't translated in that way, and therefore, it probably wasn't understood.

Those kinds of things come up a lot where there is a deep cultural reference. Obviously, in this case, it's linked to a modern evolution of the language, 'jīn zhuān guójiā', golden BRIC countries, but often it's you need the cultural context and the background and an understanding of where that phrase or expression has come from to really understand it.

SO: Didn't you also mention about some of the idioms around 618, which I found absolutely fascinating. So just be clear, 618 is this shopping phenomenon that happens every year. And it really brought home to me when you're describing some of the things being said around it, just how old the language is, when we've got such a modern phenomenon being described in ways that would have been around 2,000 or 3,000 years.

AM: This is just one of many examples that I've come across over the last nearly two years of writing this weekly blog that I do. Take a really modern contemporary scenario, like livestream e-commerce in China. So something that is so representative of modern China now, but would not necessarily work outside of China. So livestream ecommerce. I just looked at how this was being discussed by people that were in the livestream rooms buying stuff and how the media was talking about it. Often, it's the case that when you look at the language that's used in these scenarios, there's links back to the past.

In this particular case of the Shopping Festival, which happens in the first half of June every year, it's the second largest of China's two main online shopping festivals. The two themes that came out of the language were actually nothing to do with shopping. So they were warfare, and agriculture. This is interesting to me, because actually, it just shows that first of all the connection with the past that's so important and relevant in the Chinese language, which you don't necessarily get in English, let's say. But then also, that actually, for the majority of its history, China has been an agricultural society, and at various stages, through its long history, there have been times of war and instability and conflict. The idioms and these colloquial phrases are the remnants of this history and this way of life, and they've travelled through time, literally and they're still used today. And they can still mean something quite similar, but in just a really different and very contemporary Chinese ways.

So taking, for example, the word for bargain hunter in Chinese or like trying to get a good bargain is 'hāo yángmáo', which means 'to pluck sheep's wool', or 'to pluck lamb's wool', and for some reason, I don't know why, that means 'to grab a good bargain'. And then there's a whole load of other words around that which mean bargain hunter, you know, bargain hunting blogger, and they all use the word for sheep's wool.

There are other phrases around that where for example, the phrase in Chinese for you get what you pay for, is 'yáng máo chū zài yáng shēn shàng' which means 'sheep's wool is on a sheep's back'. In other words, even if you think you're getting a good deal, you're only getting what you paid for in the first place. So I just thought that was interesting that throughout the overall language around shopping, there's this really strong theme of agriculture. And it's the same in other parts of society too. So for example, in the working world, the word for working people, obviously, there's a number of different phrases that you would use, the most obvious one is 'dǎgōng rén', so 'the working person'. There's also a colloquial word, which is 'shèchù rén'. The direct translation is 'livestock'. But it's come to mean 'the working masses'.

Going back to the shopping thing. Warfare was another big one. So if you're a bargain hunter, and you've been fighting for the bargain that you want to in the livestream room, and you didn't get it, one of the expressions that I read that was used quite a lot was this word called 'bài běi'. And this one was new to me. So 'failure North' is the direct translation. And then I read into it, and in ancient Chinese, the word for North, 'běi' also meant retreat, as in retreat from a battlefield. So this phrase, which is used in terms of retreating from a in a really aggressive bargain hunter kind of bunfight to get the best whatever handbag at the best price actually, the phrase that was used to describe that feeling was something that dates back to the Han Dynasty 1800 years ago, describing the retreat of a Chinese general and his army in defeat from a battlefield.

I just think to me, the imagery is so potent, and interesting. What's also interesting is that everyone in China that learns Chinese knows all those stories. You learn the Chinese characters, they're learned through writing them and repeating them, you learn idioms, and you learn them through stories. So every idiom has a backstory, therefore, the depth of understanding of not only the language, but the historical context and the cultural meaning and all these different stories everyone knows them. So if you say something, everyone understands where that's come from, and from a language learner point of view, on one hand, it's a huge challenge. Because obviously, as a foreigner learning Chinese, you don't have any of that background so you have to go through that pain. But then at the same time, it's also really motivating because the more you learn the background to the language, the more you gain in terms of understanding Chinese culture and history and the way that people think.

SO: I must say, when I started to learn Chinese in my late teens, that was one of the things that I enjoyed, because it's like learning Latin as a schoolboy, having to learn about Julius Caesar and his campaigns. And then when you start learning Chinese, you're reading about all the old stories. I found absolutely fascinating. It's incredible, actually, that more people don't learn about Chinese history in the West, because there's so much of it. You can never get bored of learning about all the battles and the court intrigue and the eunuchs and everyone. It's a story that keeps on giving.

But why do you think that we don't learn more about Chinese history? Is it because of the language? Do you think actually the whole thing is impenetrable to the west? Because of the different script? Because it's so different in terms of linguistic differences? Is that a real barrier to us learning about China?

AM: Well, I think on one hand, probably now is the best time ever in history to learn any language, because you've got technology as a tool to help do that. So on one hand, if anything, now is the easiest time ever to learn any language, including Chinese. But I think the challenge is, it's just so distant geographically, and also culturally as well, that it's quite hard.

I mean, you could say, for example, in the context of the UK, you could say, well, the education system hasn't really got it right, in terms of allowing for people to learn about the Chinese language at a young age. But then my question would be, "well, it's quite a big ask as well, because why is that relevant?" My kids, for example, you know, they're 8, 11 and 12, I would love them to learn Chinese. But it's really hard even for me to teach them because it's a big effort to persuade someone to learn this language that's really hard to do, and has no relevance to anything right now, but in 10 or 20 years, time is going to be crucial for people to know, because in order to understand China, and where it's going, I think it's critical to understand the language.

But I think that just how distant it is, it is very inaccessible as a language to learn, I think, and therefore, my feeling is that it will continue to be quite niche. And therefore people like me, that are quite focused on learning the language will probably remain a small minority, I think, certainly for the next five to 10 years, which I think is a shame, because beyond relevance to where the world is going at the moment, it's actually just really interesting, you know, at times inspiring and a worthwhile experience to do. But I think there's not the motivation there, and the systems there. But also, I think the tools aren't there either. It's not taught in schools. And I go back to the point I just made, which is, but why should it be?

So I think there's a real contradiction. I think maybe more could be done at the university level. I didn't start learning Chinese until I was 23, I think, 24. Maybe that's the answer, but I think something needs to be done to make it more accessible to people. I'm British, so in countries like the UK, but anywhere really, that has a significant interaction with China, I think it's really important.

SO: Andrew, thanks very much indeed for joining us. At the age of 52, I think I've probably left it too late. But it’s been an absolutely fascinating discussion. And hopefully, we'll have you back on again shortly.

AM: Thanks for having me. It's really been a fun discussion.

SO: Yes, and if you do want to learn a bit more Chinese, then 'Slow Chinese' is the name of your newsletter, right?

AM: Yes, so if you just Google 'Slow Chinese', it should come up or you could Google 'Andrew Methven Slow Chinese'. It's published weekly, it's aimed at a more advanced level of learner but it's presented in a way hopefully that means even if you don't read any Chinese, you can still pick up a few interesting facts or surreal and pointless facts about the language and culture - anything from plucking sheep's wool to losing a battle 2,000 years ago.

SO: Thanks so much, and we'll be back next week with more What China Wants, goodbye.

Get full access to States of Play by Sam Olsen at samolsen.substack.com/subscribe

Hello and welcome to Episode 10 of the What China Wants podcast.

There aren’t many in the West who understand China’s politics, and with good reason: it is a byzantine system set in a Marxist framework hidden behind a difficult language. But what the Chinese Communist Party does is increasingly impactful on us all, especially the fallout from their big political get-togethers.

These don’t come bigger than the National Congresses, and the 20th is due this autumn. There are so many questions to ask, like will Xi Jinping be renominated for the top job? Will the Party move even more aggressively against the private sector? Will the hawks win the balance of the Politburo?

Here to discuss it all is friend of the show Alex Neill, a long-standing Sinologist.

Our main points from today’s episode:

* The 20th Party Congress this autumn is the key get together of the Communist Party. Its main job is to elect the Central Committee, which then elects the Standing Committee - the most powerful decision-making body.

* It is held behind closed doors and we won’t know the results until the new appointees walk out from behind a curtain.

* Xi Jinping is likely to retain power and to ensure that the new committees are stuffed with his loyalists.

* The make-up of the new committees will determine the direction of China and its relationship with the outside world for the next five years.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back next week with a cultural podcast all about the Chinese language.

Many thanks for listening.

***

Here is the transcript of the recording:

Stewart Paterson: "All work of the Party's news and public opinion media must reflect the will of the Party, mirror the views of the Party, preserve the authority of the Party, preserve the unity of the Party, and achieve love of the Party, protection of the Party and acting for the Party, and must maintain a high level of uniformity with the Party in ideology, politics and action.”

Thus says Xi Jinping, who is, of course, the President of China and Chairman of the Party. Welcome to What China Wants. I'm joined by Sam Olsen, and by Alex Neill who rejoins us, and the subject of today's broadcast in the light of the lack of clear reporting out of China as to what the internal machinations of the Communist Party are, the purpose of today's podcast is to try and shine some light on that. And to that end, welcome, Alex.

Alex Neill: Morning, Stewart, very good to be back with the podcast.

SP: Well, thank you for joining us and for taking the time. Clearly, there is a distinct lack of information coming out of China. But we are in the run up now to the Party Congress in November, which assumes more significance than normal. Perhaps Alex, we could just start by you informing the audience as to what exactly happens in November and why it is so important.

AN: Well, thanks very much, Stewart. The 20th Party Congress is an important gathering for the Central Committee of the Chinese Communist Party, not only because it's the 20th Party Congress (so there'll be a level of celebration in that regard). But it's also a really momentous occasion for the overhaul and a big leadership change within the Party. And thirdly, it's Xi Jinping's opportunity, potentially, to secure a third term as leader of the Communist Party and as the supreme leader of China. So those three elements really make for quite a momentous event coming up, and there's a huge amount of speculation about how the line-up might look for the new Politburo Standing Committee.

But if things follow the pattern, there will be a Seventh Party Plenum, which is a sort of annual stocktake of the party's achievements over the course of the year, and also an opportunity to plan a roadmap for the quasi-legislature in China, the National People's Congress, and also the National People's Consultative Congress, the quasi-upper house, if you want to think of it in that way, and they will create a roadmap for the next five years. It'll be incumbent upon Xi if he is to secure a third term to really instil all of his policy planning, his propaganda and his vision for the governance of China into that Party Congress, and then for that to be mapped out and imprinted as a blueprint in the two meetings, as they're called, in March next year. So that's the National People's Congress, and the People's Political Consultative Congress as well.

Sam Olsen: So Alex, just to clarify for those who might not be so sure about the internal workings, there's quite a lot of terminology there. We have Congress' obviously, in the West. In America, the Republican National Congress, and the Democrat one and we have the Conservative Party convention and Labour Party convention in the UK. They're not like that; this is actually a bringing together of government to make decisions, as well as having sort of a flag-waving celebratory side, right?

AN: Well, there is a flag waving celebratory side, but first and foremost, this is an internal party affair. So there is very little public scrutiny, or at least reporting of it while it's going on. After the Congress, there will be a report of the Congress which maps out what was discussed. But no, I wouldn't say this is a government type meeting. This is definitely an internal party affair. It's a closed door affair, and there's a lot of secrecy surrounding its progress and the discourse that goes on so we'll only know actually, what's happened at the 20th Party Congress when the Congress report is released, and also when we see the members of the Communist Party Politburo Standing Committee.

I know there's a lot of jargon here but the Standing Committee of the Politburo is the core leadership of the party. At the moment, it's seven standing committee members, it could be more, it could be fewer than that. But the most remarkable thing about this Congress is that there's this sort of mystifying but tantalising moment, when the new leaders of the Standing Committee reveal themselves from behind a red curtain and walk onto a stage and wave at the Central Committee, the gathered delegates of the Congress. It's quite a remarkable event really to watch.

SP: That's interesting, Alex, because one of the things that the apologists for authoritarianism often throw at democracies is "well, you know, we have at least a degree of certainty, and consistency in policymaking and personnel. And that stability allows long term planning, etc." What you're really saying is that at this juncture we have no idea who those seven people will be, or even if they will be seven.

AN: There's plenty of speculation about what the Standing Committee composition might appear to be. But you're right, we will not know literally until these leaders step out from behind the curtain. And that's what's quite remarkable by comparison to Western democratic processes. But this process has been going on for some time, and it involves a whole range of steps, in particular, provincial party committees and municipal party committees, the party committees in the big urban centres of China, they propose their delegates for the Congress. I think it was back last month, so that's all been done.

But what happens behind closed doors is this sort of horse-trading, because this is where feudal loyalties if you like, within the party, and within the factions within the party, start to dissolve, and then they are reconstituted at the Party Congress. So there is this huge, intensive competition that's been going on in China for the last few months. You could call it a sort of Communist Party metamorphosis where it builds a chrysalis around it to shield itself from any outside interference. Then there's a sort of DNA reshuffling going on internally. And then perhaps it's wrong analogy, but the Communist Party butterfly emerges from behind the curtain in November.

And the process of transparency is entirely within the party. But there is a process of submitting delegates endorsing those delegates, and then the line-up the attendance of delegates at the Party Congress, but the public at large is not involved in this, no.

SP: And so what would Xi's preferred makeup of the Politburo be? What would be an indication in terms of its composition that maybe there was significant pushback to him? How will we judge his authority by the composition when it's revealed?

AN: So when those figures step out onto the stage, we'll know if he has secured his legacy, if not secured backing for a third term by members of the new Standing Committee, stepping out who are clear devotees or loyalists to him. There are people like CCP Central Committee, Head of the General Office, Ding Xuexiang, there's also Li Qiang, or Chongqing party secretary Chen Min'er, who's been quite acclaimed for his achievements there.

There is speculation that some seats could be allocated for senior leaders of the Communist Youth League, and apparently, according to Party pundits who've been looking at CCP behaviours over the last two years or so, there's competition and Xi Jinping took a dislike to the Communist Youth League. And there's probably horse-trading going on between Lika Chang, the premier and Xi Jinping himself to put people in that line-up, but it's incredibly opaque. It’s really difficult to read the tea leaves, so to speak.

SO: So Alex, a blunt question, but why should we in the West care about who's going to be in the Politburo about what's going to happen in the Congress? What difference does it make to China and therefore what difference does it make to us to know about this?

AN: Well that's a key question, Sam. So the Standing Committee members they all have particular remits - the economy, security, propaganda, the military as well. And each of those members are going to be, at least for the next five years, if not 10 years, the architects of China's future path. And it's highly likely that that future path has been engineered by Xi Jinping for his vision for the great rejuvenation of China, in a so called 'New Era'.

These men are incredibly powerful characters. And I say men, but I don't think, in my memory, there's ever been a female member of the Standing Committee. And there's usually only one or two members of the broader Politburo. So I think it'll be interesting to see if there'll be any powerful women who emerge on the stage. I think it's unlikely if you look at the potential candidates and the speculation that's going on. But yes, these individuals are incredibly powerful people who are at the helm of this great power, this burgeoning superpower, which is the People's Republic of China.

SP: So Alex, that is sort of the composition and the politics behind it. In terms of policy, clearly, one of the things that seems to be becoming increasingly evident is that Xi Jinping's direction of travel is taking quite a heavy burden on economic activity. He was behind 'common prosperity' and the dual circulation strategy. And although official data is mixed in China, what we do see in the property market is a high level of bond defaults, land sales have collapsed.

And the property market has been a huge driver, both of economic growth but also fiscal sustainability for the local governments, because land sales make up about 40% of revenue, and then property-related taxes add on top of that to local government revenue. It's not difficult to construct an argument that under Xi Jinping's guidance, the economy has taken a really substantial turn for the worse and arguably is actually a threat to Party authority now.

Do you think that we're going to see a change in policy tone after this Congress? Is it the case that he just wants to maintain the status quo up to November, and then come November, he can perform U-turns on policy with pretty much impunity, because you know, there's then this long period before his authority can be challenged again?

AN: My own view is that Xi Jinping really is a Party purist. I think he feels quite impassioned about the corruption, the endemic corruption that was evident at the outset of his term, when Hu Jintao handed over the reins to Xi Jinping. That was in the wake of a massive period of economic largesse which has produced some of the problems, some of the pressures that you've just described. So property bubbles, massive inflated prices in China's urban centres, which pushes out all but the richest and top of the elite. In China, we saw provincial debt really growing as well and fiscal problems in the provinces which might not necessarily be reported up to the centre in in a clear way, which actually seems to be a sort of systemic problem for China even prior to the rise to power of the Communist Party.

But more recently, we've seen Xi Jinping insisting on the Party-fication, if you like, of the private sector. So in China, corporations and foreign investors find themselves having to appoint Party representatives within their own organisations. We've also seen huge magnates like Jack Ma disappearing off the radar screen for his challenges to the dual circulation and the marketization agenda.

SP: So Alex, then if what you're saying is correct, and he really is ideologically driven, then those people who are sitting there saying, "well come November, things will get better because basically whatever happens Xi Jinping can just relax a bit and adopt a more pragmatic approach." In your view, that's not going to happen that this is ideologically driven. And people need to start reading some Xi Jinping Thought, to understand what's going on in his mind, because he's telling us that he is a Marxist Leninist, and that's the way the economy is going to be structured.

AN: That's right. He has also built a cult of personality as well as purging the party, so the price of abandoning that puritanical approach to leadership could mean factional rivalry challenges, some potential challenges to his own legacy and directly to himself. And that's something that I don't think he's prepared to tolerate at all. And we've seen this tightening up happening over the last couple of years, if not longer.

The economic tsar, if you want to call him that, Liu He, has been under enormous pressure, particularly since the COVID outbreak. But I think Xi's vision is this sort of dream of rejuvenation, and he will not sacrifice anything, particularly any corrosion of his power base. So I think this is set to continue. It may be, come the National People's Congress, with a roadmap for the next five years, there'll be a plan for China's economic development coming out of the National People's Congress. And there'll be hints of what that will be in the 20th Party Congress report as well. So everybody needs to be watching quite carefully in November, what's said, after the Congress and machinations as there's preparations for the National People's Congress, the two meetings, as I described earlier, in March next year.

But I think if you look at the COVID Zero approach, which is ongoing, and the deleterious effect that's had on China's economy, and an absolutely unswerving position by Xi Jinping on that, I think that's a good indication of how he intends to push ahead in the next five year cycle.

At this point, though, I should say that it's almost seems to be a received wisdom that Xi Jinping is going to go on for a third term. I'd like to stick my neck out and say, well, he might stick to party regimen, and actually step down, he might not necessarily emerge from behind that red curtain in November, he may have had enough. But if he does do that, he needs to be satisfied that the people he's put into the Standing Committee are going to secure his legacy and protect his own interests.

SO: And also protect him as an individual because surely, he's made quite a few enemies - the anti-corruption campaign, reducing the size of the army - there's a lot of people that will be out to get him if he leaves office.

AN: Yes, absolutely. All of the loyalties that have been associated with key figures who've been victims of the Tigers and Flies campaign, taking down not just your common or garden party members to rural level, who are rampantly corrupt, perhaps, but taking down those key figures who wielded huge amounts of power in China, at the outset of his term in 2013. People like Zhou Yongkang and others, which created huge reverberations within the Party leadership, and it destroyed people's fortunes, whether that was potentially built on corruption or otherwise. The new line-up, I think it'll be full of Xi loyalists, I imagine.

SO: Okay, so we've talked about what this might mean for the economy. But in terms of China's global position, and its relationship with the rest of the world, what are the different ways that you think that the Congress could take China with its relationship with the outside world?

AN: Well, I think the first key one to mention is the Global Security Initiative, which is clearly a roadmap for presenting an alternative approach to global governance with Chinese characteristics. But inbuilt into that is something called the China Plan, the Zhongguo Fan'an and this idea of the supremacy of the China way. Also implied in that is the moribund nature of the global order, which has been constructed by the West in the wake of World War II, and subsequently, in the wake of the Cold War.

I think Xi and his acolytes have been promoting this idea of the decline of the West and the rise of the East. So what we'll see is a push, particularly in the Indo-Pacific, but elsewhere in the developing world, we all know of the global south agenda, I think we'll see China being much more aggressive pushing its own blueprint for governance and development there, but also securing the world with Chinese characteristics. So we all know that the People's Liberation Army has been really building up its capabilities with some powerful new platforms. I think what we'll see in the next 10 years is, as part of the Global Security Initiative, the People's Liberation Army really moving out globally, to secure or to consolidate China's security interests around the globe. Recently, Xi Jinping has published another book, a fourth volume on governance…

SP: Which you read, right?

AN: I think I struggled to get through even the first couple of chapters of his of his first volume, but he's published, I think, nine books over the last year or so. And his fourth volume on governance is there. I think the diehards, and those who really want to dive into this, but they may find hints of his global outlook.

There's also the Global Development Initiative as well, and there's the Green Belt and Road Initiative. I think those sorts of things will be invigorated at the National People's Congress in March, whether or not see is there or not at the helm? It's an enormous challenge for China. But I think this idea of Rise of the East decline of the West, that's something that's been adopted in Party propaganda, and what has been promulgated domestically. Whether or not the broader Chinese population believes that as a different question, but that's what the Communist Party will be pushing.

SP: Alex, just finally to round off, can I just ask one very blunt question? If Xi Jinping does not come out from behind that curtain, and it's because there has been some sort of power struggle, and effectively a behind the scenes coup, who is likely to be the next Chairman of the Politburo Standing Committee? And if he doesn't come out from behind the curtain, but it's because he's actually secured his legacy, who would you expect to see leading the Standing Committee then?

AN’ Well, if Xi doesn't come out from behind the curtain, then, I think, a character Chen Min'er, who I mentioned earlier, he's been a favourite for taking over the reins of the Communist Party, and he's certainly been nurtured as one of those top favourites. The other one is Li Qiang, who is Party Secretary of Shanghai. And of course, that being the economic powerhouse of China, I think Li Qiang could be potentially another General Secretary of the Communist Party.

But going back to these challenges to Xi Jinping, there are rumours that Premier Li Keqiang has been pushing for a Hu Chunhua, who's a Vice Premier currently looking after China's agriculture apparently, that's a possibility. But it's fiendishly difficult, and probably something that's better placed within the bookies offices than the likes of myself. But those are three names, who I think could be there, whether or not Xi Jinping is coming out from behind the curtain or not.

SO: Well, one thing we can say, based on what you've described, is that the next five years after this congress are going to be incredibly important for both the Chinese economy and China's place in the world. So we wait with bated breath who's going to come out from behind that curtain in exemplary political theatre style. And we can then perhaps have another conversation at that point and see what that means for the rest of the world.

SP: Absolutely, Sam, and thanks very much indeed, Alex, for joining us for a second time on What China Wants.

AN: It's a great pleasure to speak to your audience again, and thank you very much for some very adroit questions. It's a fascinating topic, and as the summer draws to an end, it'll be really interesting to look at the outcomes of the Party Congress and then later on perhaps in the year we can talk again when things have crystallised a bit.

SO: Great, goodbye.

Get full access to States of Play by Sam Olsen at samolsen.substack.com/subscribe

Hello and welcome to Episode 9 of the What China Wants podcast.

With all that’s happening in No10 Downing Street and the efforts to remove Boris Johnson from power, it’s interesting timing that today’s episode is about what could be one of the British PM’s last contributions to Western diplomacy.

On 26 June he, President Biden, and the other leaders of the G7 announced a massive new fund called the Partnership for Global Infrastructure Investment, or PGII. Designed to provide a Western alternative to China’s Belt & Road Initiative, Sam and Stewart discuss what it is, how it is different to the BRI, and whether or not it has a cat-in-hell’s chance of succeeding.

Our main points from today’s episode:

* The new Partnership for Global Infrastructure Investment (PGII) has just been launched by the G7 group of countries led by the US and UK. It is designed to compete against China’s well-established Belt & Road Initiative (BRI)

* Its funding of $600 billion may not seem much compared to the trillions supposedly invested by the BRI, but there is some debate as to exactly how much the BRI has spent - and this opacity is in stark contrast to how the values-driven PGII is designed to perform

* The proof in the pudding will be if developing world nations want more than just cheap credit to build roads and 5G, and are happy to be bound by the PGII’s values

* As such, countries with the worst governance records are not likely to ditch the BRI for the PGII (or even sign up to both) - but those countries that want to progress up the values curve may well do

You can also listen to the podcast on Apple, Amazon, or Spotify.

Finally, if you enjoy reading about China, but want to look at it from the Chinese point of view, then I have a recommendation for you: the Pekingnology newsletter. (Yes, he knows he spelt that wrong.) The author, Zichen Wang, writes well and about a wide range of topics, so do check it out if you want to see things from “the other side”.

As always please do share, comment, and subscribe. We’ll be back next week.

Many thanks for listening.

***

Here is the transcript for those of you who prefer a more traditional media experience…

Sam Olsen: "The Belt and Road Initiative may be China's idea, but its opportunities and outcomes are going to benefit the world. China has no geopolitical motives, seeks new exclusionary blocks, and imposes no business deals and others."

Can you guess who that was, Stewart?

Stewart Paterson: I'm guessing it's the President of China and the Secretary General of the Communist Party Xi Jinping, is it?

SO: It was, speaking in 2017. For some reason, we've got into the habit of every episode of What China Wants starting with a quote from Xi Jinping. I suppose it's just the gift that keeps on giving, but in this case, it is very pertinent because we're talking about the Partnership for Global Infrastructure Investment [PGII] which is the recently announced equivalent of the Belt and Road Initiative, or BRI, that the West and mainly America and Britain have now agreed to set up.

We thought that it would be very good to go through this and have a look and see what this means - what this means for the West, what this means to the rest of the world, and how it compares to the BRI. But I suppose that the first question is, Stewart, what is the PGII?

SP: So I think this is Build Back Better World Mark Two, isn't it, Sam?

SO: It is, yes.

SP: It’s just a rebranding of what had come out before. The headline numbers look big in the sense that the sort of title number that is thrown around is $600 billion. But my understanding of that is that 200 billion of it is US taxpayers money, and the rest of it has to come from other G7 countries and the private sector. And so, $600 billion does sound like an awful lot. The target I think is distributed over five years, which again, might be ambitious, in fact, because it just takes a long time to find the right projects and finance them.

So I wouldn't hold my breath in terms of the timeline. But what's your understanding of it? Does that gel with what you've seen, Sam, and what's the political background to that?

SO: Well, the Partnership for Global Infrastructure and Investment is designed to do exactly that, which is to build a partnership between the western countries and between those western countries and the developing world to invest in infrastructure. And you're right, a $600 billion is the headline figure over five years, $200 billion from America and $400 billion from the rest. I don't think there has been an announcement on exactly how that other $400 billion has been broken down, but it is going to compete against a BRI which is significantly more funded, as we'll get on to in a moment.

The four main priority areas for the PGI are climate and energy security, digital connectivity, health systems and health security, and gender equality and equity. And the plan is for America leading the way and the rest of us following, to get out there and to say to the developing world, "hey, listen, we've got money, we can invest in your projects in these four areas. What have you got for us? And how can we help?"

SP: Given your expertise, it's the digital side that has caught your attention is it? Why might that be important?

SO: Well, it is. Actually, that makes a very good question in terms of where the West is, with regard to its competition with China, because something that hasn't really been focused on too much by people is the fight over standards, especially technological standards. And we should make no bones about it. The PGI and the BRI will be competing on technological standards. But before we get onto that, I think maybe it's of interest to look at why that's important from a political background.

Well, last year, the Build Back Better programme, which Biden wanted to launch internally, which is a kind of $2 trillion reinvestment in America, after years of neglecting their infrastructure programme. That was Biden's showpiece and the aim of Build Back Better Worldwide, which was launched at the G7 summit, was to capitalise on the initiative and the emphasis there and to create something globally that could compete against BRI. The problem with that was that it didn't work. And the reason didn't work is partly because the Build Back Better programme in America was killed by one of Biden's own senators. So therefore, that knocked the stuffing out of the international equivalent.

So this is a re-launch with significantly less money put into it than the Build Back Better Worldwide. But then things are very different. You have the war in Ukraine, the cost of living crisis which have all happened in the last year. So there is less money to go around, and I think people will feel less comfortable about telling their electorates that they're going to invest more in the developing world considering the tightening’s that's happening at home. But I think that there is a realisation, a political realisation, that something has to be done in order to compete against China.

And then that brings us back to your earlier question about the digital side, in particular in the digital front, because we need to make no bones about it. The digital side is where China is winning against the West, is setting standards and setting its stall out in terms of its influence in those countries for years and years to come, because digital infrastructure now dictates so much whether it's defence and security, whether it's the direction of travel for the economy, whether it's the education and transport mechanisms within the country, so much of it depends increasingly so on digital infrastructure.

So for the West to really stand a chance competing against China in the developing world, in its long term influence has to look at the digital infrastructure side, and I was very glad to see it do it. The question is, Stewart for you is that from an economic point of view, is any of this going to work? Politically we can see the rationale, but from an economic point of view, is there any rationale behind us delving into such a big programme?

SP: I think to answer that, you have to start off by looking at what the economic rationale behind the Belt and Road Initiative is, and there's a very strong economic rationale behind it. China, as most of our listeners will be aware, saves a huge amount of money. So China has a savings rate that is not far off 50% of GDP. And despite the fact that they have some of the highest levels of domestic investment in the world - that the world's ever seen in fact - over a very sustained period, investment to GDP is about 45% of GDP in China, they have a savings surplus. And if you have a savings surplus, you have to export those savings, so that's reflected in the current account surplus that China runs.

In the last five years, for example, China's cumulative current account surplus has been about $900 billion. That means that China has, on a net basis, exported $900 billion of capital. But those net exports of capital are augmented to the degree to which foreigners invest in China. And in the last five years, foreigners have bought about $2.5 trillion of investments in China. So taking the $900 billion of current account surplus, plus foreigners' gross investment in China of $2.5 trillion or so, that means that there's been about $3.3 trillion of capital exports from China over the last five years.

Now, historically, what China did before 2013 was that most of the capital exports from China simply went into foreign exchange reserves. China was buying US Treasuries primarily, but also other central bank assets, rather the liabilities of those central banks or governments, which were China's overseas assets. But since the sort of going out programme and the diversification of China's capital outflows, they've largely stopped buying foreign exchange reserves or acquiring foreign exchange reserves. And the state-owned enterprises have taken the lead in investing overseas. Now, there's an obvious problem with the G7 pushback to this, and that is that the United States is a net capital importer, not a net capital exporter like China, and therefore, its firepower is constrained by the willingness of countries that are capital exporters to buy US assets, because that really is the determinant of how much the US can put overseas.

SO: Can I just be clear of something Stewart, just for the sake of those listeners who are more on my side than on your side in terms of expertise, is what you're saying is that America is going to have to borrow money in order to re-export that money through the PGII?

SP: Borrowing is the wrong word because borrowing implies debt and capital outflows can take any form, they could be equity or debt. Obviously, the government element will have to be borrowed because the government is running a deficit in the United States. In the private sector, capital exports could come in any shape that it is contingent on someone buying the dollar. A currency is a closed loop system; when someone sells a US dollar, someone on the other side has to buy it. Now, of course, some of this investment might be denominated in dollars, but ultimately, those dollars will have to be sold by the cement the steel or whatever it is, unless that is coming from the United States, or denominated in dollars. So America's ability to invest overseas is constrained by the fact that it doesn't save enough domestically to actually cover its domestic investment requirements, whereas China produces this domestic savings surplus.

Obviously, China's capital exports have been largely state-driven. There's an organisation called the State Administration for Foreign Exchange, 'SAFE' as they're called, who oversee China's capital account. What's interesting is that even their own statistics do not account satisfactorily for the capital outflows. So the errors and omissions number over the last five years has actually been just shy of $1 trillion. So there have been $1 trillion of capital exports from China over the last five years, that the state authorities don't know where it's gone, which is surprising given the tightness of their capital controls.

So really, China's capital exports fall into two categories, I would argue. One is tightly state controlled and directed investments overseas, and the other is illicit or semi-illicit capital flight from China, which arguably has nothing to do with the regime. In fact, it's potentially savings trying to escape the grasp of the regime. But those numbers give you an idea of the quantum of investment that is and has been going overseas from China. So officially China has about $6.6 trillion of overseas assets that the government know about, there might be closer to $8 trillion when you include that that they don't know about. Now looked at from that perspective, $600 billion does not seem very much.

SO: What percentage of that has gone through the Belt and Road? I look at figures, sometimes people say $1 trillion, sometimes people say $4 trillion over the last 10 years. Do we know?

SP: Well, there's a massive difference between the headline numbers that you see talked about, and what can actually be accounted for when you drill down on a project-by-project basis. So for example, if you look at the American Enterprise Institute's China Global Investment Tracker, which is a fantastic resource that I'd encourage our listeners to utilise, they would argue that total investment and construction activity, going back to 2005, and obviously, most of its happened since 2013 - in fact, all of its happened since 2013 - that is associated with Belt and Road is only about $800 billion. Now, that would contrast very sharply with the propaganda and headline hyperbole that might put Belt and Road's value in the trillions of dollars.

Clearly, this is a reflection of several things - the overstatement of the value of headline projects, the problems that some of the projects have run into, in terms of they just simply haven't come to fruition, and of course, many of them get scaled back when the true economic costs of the host country that comes apparent. So again, looked at from that prism, the $800 billion of BRI money since 2013, then the $600 billion is comparable.

I suppose the question I'd ask you, Sam, here is, is this even the right approach? We know that China uses its BRI projects to promote its state-owned enterprises, to in some ways dump surplus cement and steel capacity from China overseas. It also creates employment for Chinese workers who then move overseas. These are not traits that would be associated, I think, with the G7 equivalent. But we also know that China cultivates structural influence in countries through the ownership of infrastructure. Is that a route that we should be trying to follow? Or should we actually not be trying to compete on the infrastructure side so much as on the soft infrastructure, the digital side, the software, the engineering?

SO: So first of all, I hadn't actually thought about it, but you're right, that China does use the BRI to export an awful lot of manpower. I use that word advisedly, because it's almost entirely men being sent abroad, partly to compensate for the fact that China's got between 20 and 40 million extra men, thanks to female infanticide over the last 30, 40 years, as a result of the one child per family regime. So that's a lot of extra men that they need to get rid of, and the BRI provides a great mechanism to do so by saying "we'll build your bridge in Nigeria, or Laos, but you have to take 22,000 men in exchange." I don't think the UK or America is going to start exporting their manpower like that.

In terms of the main crux of your question, is it actually worthwhile us doing it? Well, I'd take a leaf out of your book and say, "well, let's have a look at the BRI". There are many reasons for BRI in fact. It is not just about the economics; from the politics side, they get an awful lot of influence in these countries because 138 nations have now signed up to the BRI, including 38 in Sub Saharan Africa, to a greater or lesser extent, of course, not every country signs up to every single part of it. But what is interesting is that it is the countries where China has the greatest influence as you and I have measured using our influence models. It's no coincidence that the countries which feel the greatest influence from China are those perhaps most indebted China through the BRI.

But it's not just about the here and now and about creating debt diplomacy, we know that that's overstated. Lots of countries have far greater debt to the West than they do to China in pure monetary value. But what is important is the political and economic debt that the BRI can foster in these countries. A good example for that is where the BRI, for example, leads to the construction of military infrastructure, or health infrastructure. This gives China an awful lot of influence, not just about the now but the future.

And I mentioned that with regard to digital infrastructure. China, in exporting digital infrastructure puts its hands on the levers of development for many countries, and that is really important for the long-term decision making of that country. I think the West has to go toe to toe with China, if it wants to actually have a say in that. There are many examples that you and I spoke about I mean, do you remember speaking about the Pacific last week? It's quite clear that the Pacific has been targeted through the BRI and other similar initiatives in order to capture parts of those countries which would be best suited for providing long term influence for China, whether it's building out the fisheries, or whether it's building more of the additional infrastructure. It is not about the here and now, necessarily, it is majority looking at the future. And economically, I suppose that makes sense.

SP:  One of the key issues with BRI has been the potential for corruption, and elite capture through BRI projects lining the pockets, effectively, of local politicians and local business elites, which then of course, compromises them. Now, presumably, the G7 alternative is not going to be aimed at elite capture. Therefore, will we actually find fertile ground because presumably, those decision makers who are trying to do the right thing by their country and get value for money, do need an alternative source of funding to China but that has been available through the multinational development, banks, etc. Those that have chosen to go down the BRI road, have either done so because of a genuine cost-benefit analysis, that means that China is the cheaper alternative, or because there has been a kickback for them as a result of doing so. If China is the cheapest alternative, it will probably remain so, and if people are after a kickback well, they won't be getting that from G7. So I'm just wondering whether we will be able to disperse the money?

SO: Well, good question, Stewart. For me, the greatest strength of the PGII is actually also its greatest weakness. Now in a quite stark contrast, the PGII has made a great deal about it being a values-driven programme with high standards, transparency, and so on. That is not the same as the BRI, and we don't even know how much that the BRI has spent for starters. But I think that if you are looking to compete against the BRI, with countries with less than perfect value systems, where the elites basically can do what they want, then yes, there will be difficulties there competing, especially considering the beneficial economic terms that the BRI often comes up with.

But I think what we must realise is that there are an awful lot of countries around the world, the majority, I would say, who actively do want to progress along the values curve. And there are people within those countries who are trying to make the case for that almost without exception. So what the PGII does is it gives the people within the countries who do want to progress in that way, an alternative to the BRI, and it strengthens their hand. So, not every battle against the BRI will be won, and not every single piece of infrastructure development will be lilywhite perfect. But there will be the potential for those people that do want to move towards the values-driven investment side to have an alternative that they can get their hands on.

SP: So Sam, in your view, which countries or which regions would G7 get the most bang for its buck from competing head on with the Chinese infrastructure development?

SO: Well, that's a good question. And I can only really talk from a political point of view. I'd like to know your answers on the economic side. But I would love to be able to see some of the sort of the documentation behind this. My gut feeling is that this is primarily aimed at those countries on the periphery between developed and developing, for example, Eastern Europe, some of the more advanced countries in Africa and in Asia, where there is more of a rule of law, where there is more of a debate internally about 'doing the right thing'.

Countries which are much more beholden on China because of the corruption at the elite level - Zimbabwe, for example - I don't think that PGII is going to have much luck there. But if you just look at some of the countries which have been announced as being primary recipients of the PGII money, it's Angola, well, that's a bit of a surprise, but Senegal, yes, they are doing alright, a modular nuclear reactor in Romania, exactly the kind of country that I'd expect would be politically able to take advantage of this. But from an economic point of view, I mean, just think there will be a split in those countries that find it beneficial, and those that prefer the BRI? Is it just about cheapest at the end of the day, if you take the political side out?

SP: I think the value for money proposition is important. But equally, I think one has to be aware that there are countries where there simply don't exist, the domestic expertise and capabilities to build the kind of hard infrastructure that a modern economy requires. And China, because of its large domestic investment programme, has developed large scale construction and engineering companies that are capable of executing projects cheaply, on time, fast, and that has had considerable appeal. So if you look at the success of the economic corridors through Pakistan, for example, and into Southeast Asia, Chinese SOE construction companies have been incredibly heavily involved in that.

And I guess what the West should be offering by way of competition is more skills transfer and technological transfer. Because the impression I have is that that has not been a factor in BRI. It's very much been that the Chinese companies move in, the Chinese workers move in, Chinese materials are used, the projects completed, and well, many of the Chinese workers then stay, but there isn't the skills transfer. And so to my mind, maybe more of a facilitation approach and a greater degree of local participation, local content, and establishing local companies who can then take the infrastructure development forward, is perhaps the way to win hearts and minds, as well as offering a sort of value proposition.

SO: I think you've really hit the nail on the head there. If this PGII becomes just a vehicle for getting the most value for money, then I think we will lose as the West time and time again against the Chinese - it has to be much more than that. And the skills transfer, making sure that we tell the world that this is about values and about helping countries to develop for the longer term, rather than just for the short term 'build a dam and see what happens'. I think all of those things need to be in the messaging. But at the end of the day, if there is no money to invest, then obviously that won't get very far in their hearts or the minds of the target countries. So it is a combination between economic push, and political messaging. And so Stewart, just for a final thought, what's your gut feeling? Is this going to work? Or is this going to be killed by the BRI?

SP: I don't think either extreme is necessarily what's going to happen. I think that when you define, what would you define as working, I think that this project will have worked if policymakers in the global south are given a genuine alternative to accepting Chinese capital. And if our value system and transparency are increased as a result of offering that. It will also worked, I suppose, if we can help curb the spread of sort of China's information technology infrastructure around the world, because I think that poses a significant threat to the sovereignty of many countries in the Global South.

But to do that, we need to have a good product offering of our own. And in the area of 5G, we've been found wanting, or at least that is the common perception. 5G has gained acceptance in much of the world, because it's perceived as being the only option. And for me, my question really, is this, would this money have been better spent making sure that we do have the product offerings available to give people a genuine choice?

SO: Very good question. And I think what we need to do is come back for another podcast and talk about the West's technological options when it comes to competing against China - and we actually have a guest lined up for that, but more on that later. Right, we'd better call it time there, Stewart. Thanks very much to everyone, for listening. We'll be back with a new episode of What China Wants next week. Goodbye.

Get full access to States of Play by Sam Olsen at samolsen.substack.com/subscribe

Hello and welcome to the Episode 8 of the What China Wants podcast.

We are delighted to be joined today by one of the world’s leading commentators on China’s economy, George Magnus. Formerly the Chief Economist at UBS, George is a noted authority on what makes China’s economy tick. His book “Red Flags: Why Xi’s China is in Jeopardy” set the cat amongst the pigeons for those who assumed that what Beijing was stating about their hurtling-along economy was - and would be for some time to come - the reality.

Our main points:

* China’s economy has reached an inflection point – the so-called “end of extrapolation” – and now needs reform to kick on to the next stage of development

* But the renewed assertion by the Communist Party of politics over economics is putting future economic growth at risk

* If China’s economy does continue to splutter then it will have a major affect on the world, particularly commodity prices and those countries that have China as a main or major trading partner

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back next week.

Many thanks for listening.

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Here is the transcript:

Sam Olsen: Hello, and welcome to the latest episode of What China Wants with Sam Olsen and Stewart Paterson. Today, we're going to be asking a question which is a follow up to one of our earlier podcasts asking whether China's economy is shrinking, which I think Stewart gave a resounding answer, 'Yes'. We’re going to be joined by the eminent economist George Magnus. George is an Associate at the China Centre at Oxford University. He's also an adviser to some asset management companies, but you might know him more from the commentary he regularly puts out with the Financial Times the BBC, and so on. George is also the author of the fantastic book, 'Red Flags: Why Xi's China is in Jeopardy'. We're delighted to have George here, so thank you very much for joining us, George, and welcome.

Even though it was written a few years ago, I suppose we'd be interested to know whether the central thesis that Xi Jinping's China is running into economic problems still holds true, or perhaps even more so in light of the recent issues around COVID, and the increasing geopolitical tension. Stewart?

Stewart Paterson: Well, George, thanks very much indeed, for joining us, and welcome. What I loved about the book, George, is that I think it challenges a fundamental premise of many people's perception of China, in fact, probably many of our policymakers' perceptions of China, and that is that China's further economic rise is a kind of inevitability. Your book argues that this assumption is somewhat questionable, and I would suggest perhaps that recent evidence is rather supportive of your thesis. So, for the benefit of our listeners, perhaps you could just recap some of the main arguments as to why China's economy under Xi is perhaps more vulnerable than many people think.

George Magnus: Sure, and thank you, Stewart and Sam, for having me on your podcast. I think, after an eternity - it seemed like - working for UBS with a particular eye on Asian and other emerging markets during the 1990s and the 2000s, and then, having experienced our own financial crisis in 2008-2009, I think what struck me about China really was the sort of spreadsheet-y view, which is, "Gosh, look what's happened over the last 20 or 30 years. And if we just kind of project on a spreadsheet, so-to-speak, China's dynamism and growth going forward over the next 10, 20, and 30 years, this is what's going to happen." It struck me that for various reasons, having kind of sort of looked at the entrails of the Chinese political economy for some time, and travelled there a lot, that China, round about the time that Xi Jinping came to power, had reached something that I called in the book, 'the end of extrapolation'; in other words, throw your spreadsheets away really, because it's a different ballgame.

The economy is now replete with imbalances, which actually the outgoing Premier Wen Jiabao had already spoken about on two occasions in 2007 and 2011. A new leadership had taken over, who was enamoured with a much more kind of Leninist approach to political thinking and to policy, and I was bothered really, that the pragmatism and openness which really ran through the veins of China's policymakers and its economy, since Deng Xiaoping, were in danger of reversing or being corrected, though in fact, what was really what I thought was beginning to take place that it was going to become a more ideological place, that the state and the party were going to be given more emphasis, and that the sort of politicisation of business in China was going to become eventually a bit more of a problem.

We can get into some of these things. But the red flags themselves were really about issues where I didn't think that China's policymakers had oven-ready solutions and maybe had political difficulties and issues in actually reaching solutions. One of those was the consequences of excessive growth in debt, which really began with the measures that were taken at the time of the financial crisis in 2008-2009. One has to do with its currency management policies. The third had to do with rapid ageing; China's the fastest ageing country on the planet, not the oldest but the fastest ageing. Fourth had to do with whether China would actually get difficulties or find difficulties getting out of the middle-income trap or staying out of the middle-income trap because of difficulties and a stall in its underlying growth of productivity. On top of that China looked like – at least then, when I wrote the book - that it was facing the harshest economic, external environment that it had done since the era of Mao Zedong. So that really brings us kind of up to date. Those were the red flags, and that's why I thought China was more vulnerable than the cheerleaders with the spreadsheets were having us belief.

SP: Yes, and you mentioned the fact that you wrote the book in 2018. Time marches on, and a lot of water has passed under the bridge since 2018. But there's probably a lot more evidence now that's corroborative of your thesis than there is that contradicts it. What would you point to that might cast doubt on it that has happened since publication? And what would you point to most compellingly, that is supportive?

GM: Well, if I'm honest, then I'm going to find it easier to answer the question about what supports the thesis rather than what contradicts it. I suppose I do look over my shoulder quite a lot to see, figuratively speaking, just to listen to and see what other people are saying, and just to check that I'm not drowning in my own kind of rhetoric, so-to-speak. And so there have been moments since 2018, for example, China's management of the pandemic, certainly in 2020, where it's like somebody's giving you a kind of a kick in the ribs. You question your premises, you question your assumptions, you question the way that you think about things. You wonder whether, in fact, you know, China's actually got something that other countries don't have in terms of being able to manage through crises. The two major crises that I wasn't able to predict with any accuracy, of course, were the pandemic and the Russian invasion of Ukraine.

But these have accelerated China's desire to prioritise and to champion self-reliance. They've identified a dozen different technologies, advanced technologies, where they want to be number one in the world, where they want their own producers, their 'national champions', to have 70% market share or more. And at a time, when we are all kind of scratching our heads about what kind of political economy do we actually think works in the kind of economic and political environment that we've been left to deal with in the 2020s, and where the state does play a bigger role, you wonder whether maybe China is actually more ideally suited to that kind of situation. So the role of the government, the role of the state in the economy is something which I do think about a lot and try to keep checking whether I'm going off-piste, or whether I'm still on track.

But against all of that, I would say that, that there's nothing in this sort of observable metrics that has really distracted or detracted me from my core. The demographics are playing out as one would have expected, the productivity is as poor as it has been, the issues that I raised about the renminbi, certainly as far as becoming a global currency is concerned, I don't really see any major breakthroughs there. The debt problems are becoming more acute, as we know, from the last couple of years, particularly with property companies and property developers.

And so I think all of that is kind of playing out pretty much as I thought it might. The government's attitude towards private firms and the recalibration of industrial policy in favour of state enterprises and the role of the party in the economy are definitely things that I was worried about, and there have been many, many more data points that corroborate that view. Plus, of course, the consequences of the pandemic and the war in Ukraine in terms of self-reliance, and China cutting itself off from the world, I think this kind of disengagement phenomenon, which is partly made in China and partly being manufactured, of course, in Washington, Brussels, London, and so on, this is something new, right? China prospered and the rising China was based on its engagement with the rest of the world. Disengagement will have consequences.

SP: Yes, that's a really interesting point, George, because this self- reliance, which seems to be a major plank of dual circulation policy, both sides in this if you want to draw this dichotomy between the West and China - and we can loosely  define the West, it can be defined however you want - but both sides seem to be very alert increasingly alert to their trade dependencies and their level of reliance on each other. China seems to have a much more coherent plan, or seems to be expediting a better plan or taking greater action than the liberal democracies do in terms of trying to immunise themselves from the fallout from economic statecraft, the potential to use economic statecraft to try and inflict harm on one another.

In a way, it seems odd, doesn't it? Given how much China has benefited from the global trading order and investment order as it stands at the moment, to be walking away from it? How do you explain that? Is it fear of Western sanctions? Or does it represent a sort of ideological shift towards sort of self-resilience and part of national aggrandisement? It's sort of a real mercantilist turn that you simply shouldn't be dependent on foreigners for technology or frankly, anything else?

GM: Yes, that's a great question. I think that there is no question that really the sanctions regime implemented against Russia, and which the Chinese are quite anxious about. As far as we know, because there may be a lot of things going on, that we don't know, or that I don't know, and certainly things going on under the radar screen. But major Chinese companies, for example, have not really wanted to put themselves at risk of incurring secondary sanctions by engaging in big commercial transactions with Russian companies. Chinese banks have really stepped away, as far as we can tell, from financing big energy deals with Russian companies.  So as I said, no question that China has been, I think, thrown a curveball as it were, by the implementation of sanctions, coordinated by the West, I mean, the politically defined West rather than geographically defined. And there's a sort of 'no way, José' theme that kind of runs through China's policies here, which is, "we're not going to get caught out by this".

And now it's a moot point as to whether China can insulate itself successfully, in every sector, in electronics, in semiconductors, in finance, for example. I don't have any qualms really about some areas of technology, and of course, electric vehicles, although, you know, most of the kinds of producers are foreign, but in battery manufacturing, in artificial intelligence and surveillance equipment in quantum computing, in lots of different areas, solar panels and green energy, China is in a very good position. But there are a lot of areas where it's not in such a good position, and it still has very, very high dependency on the dollar system on advanced semiconductors and other sophisticated forms of technology.

So why are they doing this? Or why are they exposing themselves to being cut off or having frostier relations with suppliers? You can understand why Americans want to diversify their supply chains, but of course, the Chinese want to de Americanise theirs too or de-Westernise, theirs to some degree. And I think that it's just the question of politics trumping economics, as it often does, particularly at times of stress. And we shouldn't forget, of course, that historically, China has had these waves that go over centuries rather than years. But these waves in which it's opened up to the world, and then closed up, opened up to the world and then closed up.

The perverse thing about this is that as we know, from China in the 1980s, 90s, and 2000s, it was very willing to learn and engage with the rest of the world, and there were massive increases in you know, cultural exchanges, student exchanges, scientists' exchanges, and so on, so forth, amongst other things. And now this has all got a slightly frostier feel about it as China kind of feels like they don't need the West any more, 'we can do things on our own, we don't really need you', or that's what they like to themselves. In some areas it might be true, in other areas it might not be true.

SO: Just on that, Deng Xiaoping was well known for saying that we must learn from the West and interestingly with the history you can go back into the great revivalist movements in the late 19th century and early 20th century and the newly republican era where people did actually look to the West for inspiration and for science and culture etc. And we have had one of those 'golden periods' now, where I suppose the politics took a backseat.

What is interesting is that there still seems to be people in the West who disagree - in fact I was on a call with some very senior individuals earlier today, who insist that in China, economics is still in the driving seat rather than politics because economics is so important to the welfare of the nation. What would you say to people who think that economics is still in the driving seat? Do you think they actually it is fair to say that politics really does trump everything now or do you think that it is more nuanced than that?

GM: Well, I was just thinking about what I would respond to that. I think I would say that from, from my perspective, I don't think they understand Leninists. And I think that there is no question about the Leninist hue of Xi Jinping and his thoughts of 'socialism for a new era', Xi Jinping Thought and so on and so forth, embedded now in the Constitution, not just of the Party, but of the country as well, and which people are being taught at school, often from very young ages, etc.

So this is a political ideological foot forward, and they believe that, obviously, that if they follow the policies of Xi Jinping and Xi Jinping Thought that the economy will deliver the reduction in poverty, which they claim already has been achieved by their definition, plus the construction of a prosperous nation, and indeed, a dominant nation by the middle of the century. They haven't talked very much this year about common prosperity, which was aired and spoken about a lot in 2021. It made a fleeting reference in one or two of the documents presented at the National People's Congress in March of this year, but I think that's been sort of side-tracked in a way because of the economic crisis at home.

I suspect that China will find its way through with, I imagine, Xi Jinping at the helm, still into 2023-2024, and I think that we will hear more about common prosperity policies. But, you know, we can be critical about common prosperity and whether it has any substance or whether it's just a campaign. But actually, the belief in Beijing is that if you get the politics right, the economics will follow. I don't honestly believe that they think about it the other way around. They want prosperity for people, of course, and they know that their greatness and the projection of power in the world depends on their economic heft. But they just have a different kind of perception about how to create that compared with me.

SP: So George, I think that's very interesting, because one of the themes that we've been talking about is the downplaying of economic growth as a source of party legitimacy. One of the reasons for that we think, is precisely what you point out in your book, that the economic model is showing many signs of being broken, it needs an overhaul, and it needs an overhaul by economists, not by politicians. You use in your book the adjective 'brittle', to describe Xi's machine, which many observers would say is, the antithesis of what has gone before, which was pragmatic and flexible, and technocratic excellence was rewarded. Whereas under Xi, it seems more as though being true to the ideology and loyal to the man seems to be more of a prerequisite for promotion than technical excellence, and the past execution of good policy.

So if that's the sort of direction we're going, does this make you worry about the size of the economic fallout that we might see from China? Because if we look at the global economies since 2009, say the financial crisis, China's accounted for about 40% of the world's growth. And we're all well aware of the fact that macro-economic data out of China has become increasingly politicised and is really just a source of, of national propaganda now in many ways. But how big could the fallout in from China be? And what could be the global ramifications of that, if Xi carries on down the brittle road is at were?

GM: Right. So, just to contextualise the answer and relate it to the previous answer to Sam's question, and also to anchor it in what I said right at the very beginning when I was talking about 'the end of the extrapolation', what I what I mean by that is that China's development model needs a makeover. Because the old one doesn't really work anymore. And we know that doesn't work because property market has been keeling over. You can't keep on investing ever bigger shares of GDP without getting capital misallocation and diminishing returns and growing debt problems.

So we know things have to change. I haven't been there since 2019, probably very, very few people have, and so it's very difficult to keep tabs on this. But my impression certainly is that China's leaders, many of them know that some things have to change, I just don't think they can bring themselves round to doing the kind of changes that I think are necessary. And many of these revolve around the construction of institutions. Institutions play an absolutely critical role in economic development, whether you're poor, whether you're a middle income country, and even for Britain and the United States and Western Europe.

The robustness and inclusive nature of institutions are really what drive economic progress, I would say, because that's how you basically get more bang for your buck in terms of productivity. So the implications of all of this if China cannot change, or it finds it politically difficult to change, which I think is the case, I think the outlook for China over the next 10, 15 years or so, is that it's a low growth economy. It's going to be two and a half, three, three and a half percent per annum, on average. The question is how much disruption accompanies that sort of growth rate? Is it a lot of disruption, or is it minimal disruption? And are the political constructs in China robust enough to be able to manage with minimum disruption?

But a slower-growing Chinese economy has huge implications for the rest of us. We fret every day now about oil and gas and commodity prices and resource prices and rare earth prices and goodness knows what else. But a China that grows at a much slower rate, once the shock impact of the Russian invasion is over, China's impact on global commodity prices will be to depress them basically, if the property market, is as languid or languishing for the next years, as I expect it might.

Supply chains are going to exert a very significant impact on people's perceptions about inflation. On the one hand if supply chains are recalibrated and new opportunities, and new investment outlets are found in say Malaysia or Cambodia, Vietnam, India, and so on, if there are new business opportunities, there are new downward pressures on prices as a consequence of that. On the other hand, of course, disruption to supply chains and the possibility of Yuan depreciation in the future, will have an opposite effect on inflation. So, I don't think it's easy to say categorically a low-growing China will be positive or negative for inflation. Rather, it depends on the context in which this happens. But yes, I mean, for 75 or so countries that have China as its biggest trading partner either in exports or imports or both, then a slower growing market, or a slower growing GDP should we say, will have consequences, and it means it's not obviously great for global growth, or you have to find different markets that are growing more quickly. 

SO: So George, just to finish off, you've given a very eloquent description of how that are indeed some red flags in the Chinese economy. And if I could just summarise, it seems that the end of extrapolation is basically the cause, and because the Chinese economic model needs a different direction, because it got to a certain level of development. But the problem is, is that the politics have really interjected to make sure that those changes in the economy that need to happen to continue with good growth haven't really happened and can't really happen because of the political system they rest upon.

So here's the final question for you. If that is the case, then surely there must be some kind of blowback onto the politics from the economics, if the economics is stuttering because of the politics. But is that blowback strong enough, in your opinion, to put at risk, the regime of Xi Jinping? He's obviously got his party congress this autumn, looking for re-election? And do you think that the economics are bad enough yet, or might be soon, to challenge Xi Jinping on his home turf?

GM: Well, okay, let me be a hostage to Fortune. As people probably know, there's certainly been speculation this year about opposition to Xi Jinping, who has not been able to bask necessarily in the kind of environment he would have wanted, in this run up to the big 20th party congress, whenever it's going to be held later this year. And the pandemic, and particularly the Omicron experience in Shanghai and Beijing and other places obviously played a part in that. And additionally the way that China's support for Russia has also been lots of rhetoric in favour, but it's obviously not really worked out the way they planned. I think that speculation is just, that's all it is, it's speculation. I don't think we have any real basis for believing that there is an orchestrated or planned move to oust him or to elbow him aside.

However, lots of positions have to be filled on the Politburo Standing Committee, and also at various levels in the party hierarchy, and we'll see whether he gets his way with all his nominees or whether there is opposition from the party. These things will become clearer to Sinologists in the fullness of time, but I think the working assumption is that he will still be nominated to have his third term at the party congress. I would say with the economy, the significance of the economy, I think, is changing. So rapid economic growth and high levels of employment always used to be, I think, deemed to be the core of the Communist Party's legitimacy to rule and the leader’s authority within the party. They're still important, not so much GDP growth itself, but actually jobs are really important and jobs are certainly at a bit of a premium right now. But that's a kind of a “watch this space”.

I would add to that, that a rising China is the basis for the way in which Xi Jinping has claimed and staked legitimacy of the Communist Party in China and his role within it, if a rising China is basically back in the melting pot, because it can't grow that quickly or because things don’t work out in the way that they have done in decades gone by, and the rest of the world starts to look at China in a different light from an economic point of view, these things then can become quite important to the position of the General Secretary himself and for those that would be his enemies, that might now be quite frightened to put their heads above the parapet but might not be so frightened in years to come.

SO: George Magnus, thank you very much. That was a fantastic tour de force, not particularly encouraging for those wanting to invest in China I should think.

SP: George, thank you very much for joining us.

GM: And thank you for having me.

Get full access to States of Play by Sam Olsen at samolsen.substack.com/subscribe

Hello and welcome to the Episode 7 of the What China Wants podcast.

We in the West are so used to looking at maps from our point of view, with either Europe or the US in the centre of the page. What’s more, we always look at them with North at the top and South at the bottom.

This gives us a certain idea of the world, and one that isn’t necessarily shared by everyone. In the map below, you can see China with the map altered so that the ocean is the main point of focus. Taking this perspective, it is easy to see why Beijing looks at the Pacific as vital to its security - and why it is making strong moves to further its control there.

In today’s podcast we are joined by Alex Neill, an expert on China and the security of the Pacific, as we ask what China wants with the region.

Our main points:

* The western Pacific is strategically vital for China, for example as a conduit for trade but also as a way to project its power and not be hemmed in by the US.

* Beijing is investing in a military that can theoretically be a major presence in the Pacific, but it is also investing heavily in parallel economic and political initiatives too.

* China has a track record in obfuscating its true intentions, so we should be careful about believing all the messaging when it comes to their Pacific aspirations.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back next week.

Many thanks for listening.

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Here is the transcript:

Sam Olsen: "China will always be a good friend of Pacific Island countries, no matter how the international situation changes", said Xi Jinping at the end of May this year. Furthermore, he said, "China is willing to work with Pacific Island nations to build a community with a shared future".

So Stewart, that is a very clear statement of intent regarding the Pacific from a Chinese point of view, wouldn't you agree?

Stewart Paterson: Well, it sounds like it to me, Sam. But fortunately, our listeners don't have to take my word for it, because we're being joined by a real expert today on Pacific security issues, Alexander Neil. Welcome, Alex.

Alex Neill: Thank you, Stewart, thank you, Sam.

SP: Alex worked for the British and US governments in his early career, focusing on the Asia Pacific security concerns and from 2005, he served as the head of the Asia Security programme at RUSI, that's the Royal United Services Institute for Defence and Security Studies. based in London. There he developed a programme of research focusing on British policy concerns towards Asian security. He coordinated several projects in Asia, including high level dialogues in Beijing, Pyongyang, Taipei and Tokyo.

He's a graduate of SOAS, he's a fluent Chinese linguist, and he's much published on Chinese security issues. But his interests are much broader than that, including counterterrorism issues in Asia, deterrent studies in Asia and cybersecurity. And for seven years through to 2020, he was the Shangri La Dialogue Senior Fellow for Asia-Pacific security at the International Institute of Strategic Studies in Singapore, responsible for delivering the agenda and research products for the Shangri La Dialogue Summit, which is the defining summit in in Indo-Pacific security issues, particularly on China.

So Alex, maybe I can just kick off with a question, which is, how do you define what the Pacific is from China's perspective? And why is the Pacific so important to China?

AN: Well, thank you very much, Stewart, and it's a great pleasure to be joining this podcast today. I think the best way that I like to frame China's strategic perspective when it comes to the Pacific is actually to look at a map of China, but to actually flip it upside down. What you get is a very large continental power, which is hemmed in, in many ways geographically. To its north, by mountains and deserts, the Gobi Desert and Mongolia, but to the south, it's actually constrained in a maritime way, by the so-called 'first island chain' or the Pacific Rim of fire, which comprises Japan, Taiwan, and then down towards the Philippines, that's known in the strategic community as the first island chain.

The second island chain is where China's strategic ‘over-the-horizon sight’, if you like, meets Micronesia, it meets Oceania, and it meets the South Pacific. That is where new strategic rivalry is taking place in the Pacific. So, I would encourage our listeners to get a globe, flip it around, and have an idea of how China actually sees its maritime outreach and its strategic interests towards the Pacific.

SO: We'll put that map into the show notes so everyone can have a look.

AN: Great. So, over the last couple of decades, China has stated very clearly its aspiration to become a 'blue ocean', or a 'blue sea power', and the ability to project power and to preserve its own interests increasingly, into the Pacific region. And that is why Oceania and the South Pacific has become such an important area of competition between China and particular Western interests in the region, but also, of course, the interests of the people in the countries who actually are there.

There are questions of diplomatic recognition, there are military deterrence questions for China in this area and also its geo-strategic gambit or geo-economic gambit, the Belt and Road Initiative, the Global Development Initiative, that's starting to rub up against Western interests in this region.

SO: Alex - Stewart and I have spoken about this in previous podcasts, but we think that there are three reasons why the Pacific is so important for China and it would be great to know whether you agree or not. The first one is it is a gateway to China and it's vital for their trade and all their imports and exports. Secondly, it is because by dominating the western or the south Pacific, they get to cut off Australia from America and interrupt that flow there. And then the last reason is because if they can control the first island chain, that means that they are much more able to project power into the Pacific, and in so-doing extend the defensive line away from their shores. Would you agree with those three points?

AN: I think that's very fair. Traditionally, we've been quite preoccupied with the idea of the Malacca Strait and bottlenecks along the Indonesian archipelago. But as China builds links with South America, for example, with Latin America, places like Oceania are strategically fundamentally important for China.

And so, developing new maritime access through this region as an important junction where sea lines of communication intersect, and also, where digital infrastructure is being built out as well, I think this area is fundamentally important for China. It's also part of the sort of South-South concept in terms of Beijing's willingness to court the developing world, in Oceania. And so part of the narrative is, or at least Xi Jinping's narrative is to offer a model of governance and geo economic opportunity, which hasn't been offered in this way before.

SP: How is this China’s interest in the Pacific Islands manifesting itself? Our listeners will probably be aware that China has just launched a third aircraft carrier, is that of big significance? Is that something that we should be worried about?

AN: Well, I referred earlier to the ‘blue water capability’ that the People's Liberation Army Navy is aspiring towards. The new super carrier is similar in scale to a Nimitz class carrier of the US Navy, and its displacement is very significant, I think, at 80,000 tonnes. It doesn't have this ski ramp take-off configuration on the carrier, it's got an electromagnetic catapult. So it's really demonstrating catch-up capabilities with that of the US as a naval superpower.

The previous two aircraft carriers are actually more or less experimental platforms, or at least training platforms. But really, this carrier represents China coming of age, and its ability to project power out into the Pacific Ocean and the intent to do that. Taking a carrier strike group out into the Pacific to back up its interests in the South Pacific is something that this aircraft carrier will be doing in the not-too-distant future.

SO: So Alex it's interesting you mentioned about the catapult system there, because as you probably saw, there are lots of allegations that China was able to develop that catapult technology using technology that it gleaned from a British company called Dynex that a Chinese company bought a few years ago, and which observers have said was instrumental in the development of many technologies to do with the Chinese navy.

But going back to your point, just to be clear, what you're saying is that it's not just about the aircraft carriers, though, it's about Xi Jinping going to the Pacific and saying, "we've got a new system of governance, and we're going to give Belt and Road Initiative funding as well". So, with all that in mind, when does the Solomon Islands announcement that was made recently come in? Is this a purely military thing? Or is it something that encompasses all those different points of China trying to extend its influence in the Pacific?

AN: Well, the Solomon Islands has recently refuted or rebutted accusations that the Solomon Islands will be used as a basing, a lily pad, if you like for the People's Liberation Army Navy. The PLAN may not build a base there, but I think dual-use utility is really important here.

And when you refer to the catapult technology, on the aircraft carrier, the Chinese military over the last two decades has become very adroit at acquiring dual-use technologies and putting them into a military platform. So this may be an example of a very successful dual-use capability and China's ability to evade sanctions like the EU arms embargo for example.

I think when it comes to port access, this is very much part of the Solomon Islands security agreements. And this gives geographical reach to China, it doesn't necessarily have to have a fully-fledged military base built on the Solomon Islands. But if there's a deep-water port capability, and the right size of berthing, then you could get an aircraft carrier in there, much in the same way as Guam is a hub for the US Navy in the South Pacific. So very much a dual-use capability, possibly under development with this security agreement.

If you look further afield, to Djibouti, for example, China's narrative initially about China's garrison, which is what it really is now, at the mouth of the Red Sea, was that it would be a replenishment base, a logistics hub for the increasing naval operations by the PLA Navy in that part of the world. But then over time, with satellite imagery and closer scrutiny of that base, it was very apparent that it's a sophisticated bastion for China, in that part of the world.

So I wouldn't rule out China talking about replenishment and logistics and dual-use, but over time, the possibility of actually building infrastructure for dedicated use by the PLA Navy. We've also seen recently, the Ream Naval Base Development in Cambodia and China rebuilding that out and clearly that will have dual-use capabilities for the PLA Navy too.

SP: Alex that's really interesting that you mentioned the Cambodia base because is there a strong parallel and similarity in the tactics that China can be expected to use or is using in the Pacific Islands vis-à-vis what has happened in the South China Sea, with China's desire to gain access to the Indian Ocean, the Gulf of Thailand, and to alleviate the pressure on the Malacca Straits. Is it the same strategy being rolled out across the world?

AN: Well, China is pretty good at obfuscation when it comes to its core interests and security interests. So initially, there might be talk of the need for civilian utility, so things like maritime domain awareness, humanitarian assistance and disaster relief, that kind of softer end of maritime capabilities. And then over time, it becomes part of a dual use narrative. Eventually, you might see an actual fully functioning military base, crystallising in this part of the world.

If you look at China's aircraft carrier programme, initially - and I'm talking about at least 15 years ago, 20 years ago - there was flat out denial that China was going to build aircraft carriers. But I remember once visiting a strategic think tank in Beijing and seeing a scale model of the Liaoning aircraft carrier in a glass box. And I thought, 'well, I don't think these aircraft carriers are just going to be purely conceptual'. And within a few years, we saw the Liaoning launched, which was a kind of refurbished Varyag hull, interestingly, built in Ukraine, and headed up from the Black Sea and got completely overhauled and became China's first aircraft carrier.

But this latest one is really something to behold. And I think it's important to put aircraft carriers also into the context of military diplomacy, and increasing your footprint in remote places. That's certainly what the US Navy does, and recently, the Royal Navy, with the mission by the HMS Queen Elizabeth, heading out to the Indo-Pacific region, I think that's another example of how military diplomacy and increasing your footprint and possibly even defence sales is all part of the equation. That's how aircraft carriers can be used in a non-lethal way if you like.

SO: Well, just talking about obfuscation, I was smiling when you were saying about denial about aircraft carriers, because it reminded me of the fact that China said that they didn't have any intent to do anything with the Ream port in Cambodia. And then when it broke ground a few weeks ago, it was it was opened by the Chinese ambassador.

AN: Yes, that's right - and the Cambodian Defence Minister has recently been swimming in the sea with I think the Chinese ambassador who opened up that bas. So yes, the turnaround from rejection of any hint of building infrastructure to the actual materialisation of the reality was quite quick in the case of the Ream base. But these things often take time. China is very adept at having a kind of malleable narrative about how it's developing these capabilities.

And I think we also shouldn't forget that the People's Liberation Army is the armed wing of the Communist Party. So it's not a National Defence Force in the way that you'd think of them in western democracies.

SO: Going back to Stewart's point about the parallels between the South China Sea and the Southwest Pacific, you mentioned about the aircraft carriers. But funnily enough, the Chinese have been talking for a while now about how they've got carrier killer missiles, and that they have put in place what's called the A2AD, which is basically the area denial mechanisms to stop any American or allied forces being able to operate in the western Pacific if there was a clash. So it does seem slightly weird or ironic that the Chinese having said that no carriers could operate because they're so good at missile technology, have then built their own carriers.

With regard to the South China Sea, and the islands there, they are being used as sort of basis, perhaps sort of fixed aircraft carriers, if you will. What do you think the planning is with China? Are we looking at these as being military outposts to deny the areas to the Americans and their allies in case of war? And if so, do we think that they're going to try and replicate that in the western Pacific to in essence, take away those areas from the allies if there was a clash over Taiwan, for example, what do you think we do early in that story to be able to tell?

AN:  Well, I think the big difference between the South China Sea and the South Pacific is that China claims a very large swathe probably two thirds of the South China Sea as its own maritime sovereign territory. it views the sea space within what's called a 'nine dash line', which extends from the southern tip of Taiwan, down through the South China Sea, along the maritime periphery of Vietnam, and then it loops back along the coast of Borneo. It's a large appendage, or a tongue of maritime space, which China views as a Chinese lake, and that's a term that's been used in the past.

What the terraforming does, the creation of these artificial islands, is it substantiates that claim by creating terra firma, so to speak, on these coral atolls, and the 'nine dash line' suddenly becomes perhaps more enforceable. So eventually, you might come across a scenario where maritime traffic transiting the area, do so at the tacit behest of Beijing. When it was apparent that these naval and air bases were being built in the South China Sea, very early on US military planners and strategists said that these island bases were inherently vulnerable. Something that popped into my mind was, you know, this idea of a sort of maritime Maginot Line, something that in peacetime looks quite impressive, but in wartime, would have little utility.

But I think what China is, is very good at as well is talking about the civilian utility of these islands, and the so-called grey zone tactics moving into the grey zone below the threshold of war to saturate the South China Sea with Chinese presence. And that's what's happening. Now, it's not just the Navy, its maritime and border enforcement, the maritime militia, all those sorts of agencies, which are saturating this part of the South China Sea.

SP: Alex, it's interesting that you mentioned the maritime militia there, because our listeners are probably aware of the fact they might have heard on the news that China has been warning the United States, but other countries, too, that the Taiwan Strait is its sovereign water, its territorial water, not international waters, as is claimed by others, and under new law that allows their coastguard freedom of action in the Taiwan Strait. Do you see that as being a very significant step? And what should the rest of the world be doing about that?

AN: Well, I think part of this ratcheted approach by Xi Jinping and the Central Military Commission to say that from China's perspective, and if we return to that map concept that I described earlier, the Taiwan Strait, I think has always been viewed as China's maritime territory and China's outer periphery, if you like, is the east coast of Taiwan. So anything inside that off the west coast of Taiwan, namely, the Taiwan Strait, is China's maritime territory.  I think conceptually, that's always been in the mind's eye of Chinese military planners. But what they've done now is they've said it.

And in recent months and years, we've seen US freedom of navigation operations transiting the Taiwan Strait, in what is viewed and is international waters, There's a median line through the middle of the Taiwan Strait, and Taiwanese forces as well as the People's Liberation Army are very careful not to cross that median line. But to say that the entire Strait is Chinese maritime sovereign territory is part of a ratcheted approach towards the eventual goal of reunification with Taiwan, and that's what's been in the news in recent months. It's a very, very contentious question, and it begs the question of preparedness of the United States to intervene under the Taiwan Relations Act. And indeed, countries like Japan as well, because Taiwan has been publicly stated as part of Japan's national security calculations now.

SO: Great, thank you so much, Alex, that was very interesting indeed. I suppose for me, the key takeaways are first that we've got to look at the Pacific from the Chinese point of view, as a continental power. And that first island chain is obviously really important to them and hems them in; you can see it quite clearly, if you look at the map the other way around. Secondly, in the Pacific, they're not just looking at the security, the pure security element, but they've got the political outreach, and the economic outreach, et cetera, and that all falls into the category of Chinese influence. And thirdly, is that the South China Sea and the aircraft carriers and their position in the West Pacific, they all come down to China really preparing itself to be a much stronger military power, whether that's got anything to do with Taiwan moving forward or not.

So thank you very much. Stewart, have you got any other final points you want to add?

SP: I would just like to thank Alex very much indeed, for his time. And I think we should have him back, Sam, in order to talk about the power transition in China.

SO: Yes, good idea. Alex, you and I have spoken about that before, so you should have quite a lot to say.

AN: Yes, that's right Sam, we've had long conversations about this. But thank you very much to you both for hosting me today, and it's a great pleasure to speak to your audience. I look forward to having another conversation with the approach of the 20th Party Congress coming up at the end of this year.

SO: Great. Thanks very much, Alex. Goodbye.

AN: Thank you.

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Hello and welcome to the Episode 6 of the What China Wants podcast.

In last week’s episode we discussed the potential for a Great Split between China and the West over Taiwan. Today we examine the different ways that Beijing might force reunification with what it terms a renegade province, and what the global economic repercussions would be from such a move: it’s not a spoiler to say that they would be horrific.

You can also listen to the podcast on Apple, Amazon, or Spotify.

As always please do share, comment, and subscribe. We’ll be back next week.

Many thanks for listening.

***

Here is the episode transcript:

Stewart Paterson: "If the US and the West impose destructive sanctions on China, like those sanctions against Russia, we must recover Taiwan [...] we must seize TSMC." That was Chen Wenling, the chief economist at the China Centre for International Economic Exchanges.

For those of our audience who don't know, TSMC is the Taiwanese Semiconductor Manufacturing Corporation, and it's the largest foundry operator in the world, and that's a manufacturer of semiconductors. Sam, welcome, hello.

Sam Olsen: Hello Stewart. That was quite a worrying quote you started us off with.

SP: Indeed. Just before we get on to talking about the economic and political ramifications of a Chinese invasion of Taiwan, and the ensuing 'Great Split' between China and much of the rest of the world, I'm sure some of our audience are wondering, particularly in the light of Russia's making a bit of a meal out of its invasion of Ukraine, what sort of form would a Chinese invasion of Taiwan take, in your view? What are their options?

SO: First of all, it's important to note that China is not actually sitting there saying, "we are going to invade in the next few months". They have however said, as we've said a few times in the podcasts already, that they are likely to start planning for reunification of Taiwan, whether peaceful means or not, before 2027, which means that they're certainly looking to do something in the near future. I don't know if any of our audience heard it, but last week there was a leaked audio file from the Guangdong Military Command, talking about how they would be involved in an invasion of Taiwan.

Certainly, even though there isn't any official announcement on this preparation, from the outside China certainly looks like a country that is preparing for war. Politically, it is preparing its population, talking about Taiwan as being an immutable part of the mainland. In fact just a few days ago, at the Shanghai Dialogue in Singapore, the Defence Minister said that anyone that tried to get in the way of China and Taiwan's reunification would feel the full force of the People's Liberation Army.

And militarily, they're certainly looking to get things in the PLA and the PLA Navy up and running to be a match for the Americans, or so they hope.

So, in terms of how that will go, there are three scenarios that I think people look at. Now obviously the third one is an invasion, whether that be an air assault, or a full-on naval invasion. But the first one, before we get there could be a salami slicing of territory.

SP: Yes, well hold on, we might need to just explain that because people tend to think of Taiwan as being one island. But actually, the Republic of China, which we call Taiwan, is made up of an archipelago isn't it? There's one big island, but then there are some small islands that the Republic of China, i.e. Taiwan - not the People's Republic - the Republic control. And those are very small, but some of them are literally a stone's throw from the People's Republic, aren't they?

SO: Exactly. Now, did you know that there is actually an island controlled by Taiwan called Taiping Island in the middle of the Spratlys? And there are approximately four people defending it with no weapons and a large runway. So that's something that could go very easily. There are also some islands, just off the coast of China; in fact that I've sat in Xiamen having afternoon tea, looking at an island belonging to Taiwan, a mere stone's throw away from the coast. So it's very possible for China to go and grab some of those.

I suppose the next question will be why would they want to do that? It'd be a show of force, of course. But what would spark that show of force? Well in 2024 we will have the new elections for president in Taiwan. President Tsai, the current president, is time-barred, so there'll be a new generation coming through. And there is a great fear amongst people we know in Taiwan, that there's the so-called Zelensky-isation of Taiwanese politics where these youngsters don't want the status quo anymore. They want to stick it to China, the big country (like Zelensky stuck it to Russia), and say "Look, the status quo is not working for us anymore. We're sick and tired of being bullied by China, we want to go down the independence route."

And if they did that, then it's highly likely that China would do something meaningful in return, for example, by salami slicing and grabbing some of the islands like Taiping or the Pratas islands or whatever. And at that point, Taiwan would have to make a decision - are we going to fight back, are we going to use our submarines to try to sink some Chinese ships? And if that happened, what are the Americans going to do, etc? This is the least-worst case scenario.

The second scenario is far worse, and that brings in your side, the economic side. Can you guess what the second scenario is, Stewart?

SP: No, go on, you'll have to tell me. I don't know much about military strategy Sam.

SO: It would be a blockade of the island. Okay, so I'm pretty sure that you that's got your economic alarm bells dinging because in January last year, in 2021, China brought in a new law, which in effect allows its coastguard, to use all necessary means to stop and search non-Chinese vessels in any waters that it claims for itself - which, in other words, is the Taiwan Strait and the South China Sea.

So you can easily imagine a situation where the 300 or so ships from the Chinese navy, plus all its coastguard, and its militia, its grey-zone boats that are meant to be fishing boats, but they're not, blockading the island. And anyone that turned out with food, let them in, because China doesn't want to be seen as a humanitarian ogre. But anyone with arms or shipments or anything like that designed to help Taiwan shore up its defences, well just take them and take the ship and move it to Xiamen or Shanghai.

SP: So that's interesting, Sam, because I think even just today, I was reading that the American administration have come out and publicly said that at multiple levels, the Chinese have been telling them that the Taiwan Strait is not international waters, it is a part of China's exclusive economic zone. And therefore, there is no right to freedom of navigation through the time Taiwanese Strait. That's quite alarming, isn't it?

SO: It is, and that plays entirely into the hands of the China lawmakers that made that law. In other words,  whatever they declare to be Chinese waters is their waters, and they basically can blockade it. A blockade might stops arms going to Taiwan and so allowing the island to increase its military capabilities, but also it stops economic stuff coming in from the rest of the world. This also means  China  might want to then stop shipments of Taiwanese semiconductors going anywhere except for China. There are so many economic ramifications from a blockade that I don't even know where to start.

The third scenario, after salami slicing and blockades, is even more dangerous for the world. It is a hot war where China just sends in either an air assault to capture Taipei very quickly, or a huge flotilla of ships. If they've already got a blockade, it's going to be so much harder for the Americans or the Japanese to do anything, because the Allies won't be able to land personnel, and they won't be able to do much to reinforce the Taiwanese military full stop. So once the blockade goes in, I think that then we know that the end game is nearing. And I think that's probably where the economic side really kicks in, wouldn't you agree?

SP: Well, if Taiwan were blockaded, or the Mainland were able to determine what came in and what came out, then if they wanted to cause a lot of disruption to the rest of the world they certainly could.

I think it's quite interesting to note, we often use Xi Jinping quotes. Usually, when they pertain to economics it's about self-sufficiency, resilience, and national power. I will give you a quote from Michael Boskin, from 1992. And he, for those of us who need reminding, was the chairman of the Council of Economic Advisers at the White House, so the presidential advisor on the economy. He famously quipped, "potato chips, computer chips, what's the difference?" In other words, what he was saying was that there was no need for the United States to have an industrial policy whatsoever. American companies would make what they were good at making and America would buy from the rest of the world what needed to be bought from the rest of the world.

Then we contrast that with China's mercantilist approach to industrial policy, where in fact in China, the government is spending more now on industrial subsidies than it does on defence. In other words, China is putting a lot of money into ensuring that it is as self-sufficient as can be in the key ingredients into its economy. And obviously, semiconductors are one area where they've come up short.

It's worth noting here that semiconductors are not fungible things, you're comparing apples and pears here. But Taiwan accounts for almost two thirds of foundry-made semiconductors by value in the world. And its total semiconductor revenue accounts for about a quarter of the world's revenue. Now the big difference there is that of course a lot of semiconductor revenue goes to people who designs semiconductors and hold the patents on them, but they don't actually make them. And TSMC is by far and away the leading semiconductor manufacturer of low geometry production. So in other words, the most efficient and cutting edge of the foundry-made semiconductors. The idea that the People's Republic of China would be able to control what came in and what went out of Taiwan would leave basically the rest of the world semiconductor industry, or electronics industry rather hostage to the whims of the PRC.

SO: Okay, so what happens? Let's just talk about the worst-case scenario, and that there is an embargo, and they tend to allow chips to go out anywhere except for China. What happens to the rest of the world? What happens to the UK, what happens to the US and their economies? Do they just grind to a halt?

SP: Well, there would be chronic shortages of everything that involves semiconductors, and obviously a lot involves semiconductors. And so the prices of semiconductors - they've been strong anyway but I'd imagine they would go through the roof. And what we are seeing in all Western countries really is a very belated effort to push back against Michael Boskin's ethos of potato chips and computer chips being fungible by an attempt to create an entire ecosystem in the manufacturing, design, production, etc, of semiconductors that is not dependent on the People's Republic, or the Republic of China, Taiwan. But this takes time, and semiconductor manufacturing tends to evolve in generations, as you move through geometries. And inevitably, the companies that were leading-edge in the previous generation tend to have the cash flows to invest and be leading-edge in the next generation. And that is a model that TSMC have been particularly good at perpetuating.

It would be devastating for the global economy, in my view, if Taiwanese semiconductors were cut off from the rest of the world. What we would be compelled to do would be effectively to turn a blind eye to everything that was China was doing, because we would be then forced to effectively import from China or import products from China. And obviously, one would imagine that they would make the sale of those products conditional on us accepting the fait accompli on the future of Taiwan.

SO: I saw a report which said that America would take five years or so plus $30 billion to get to the stage where Taiwanese semiconductor industry is right now. That's an awful lot of money, and also has no guarantee of success. The Europeans are trying to build up their own industry, but again, lots of people are saying that that's not going to happen. At the end of the day, I think you're right, how could there be any other option but to rely on Chinese exports of semiconductors if they control the island?

But if they did invade Taiwan, then it wouldn't just be about the semiconductor industry? Surely there'd be other economic issues stemming from that? What about all the sanctions and the counter-sanctions laws that China's got now? Surely there would be some kind of push-back by the West in the form of economic sanctions, since we don't really want to fight them directly? And then the counter-sanctions law come in, and then what happens then? Do all our assets and all Western assets in China get frozen, or stolen, or appropriated whatever word you want to use? What's the scenario there?

SP: Yes, well, I mean, it's very hard to say, isn't it, how far this economic warfare would go? Because if it was a fait accompli, that China had control over a large part of the global semiconductor industry, we would find ourselves as a free world trying to push back against China in a similar kind of position to the one that Germany has found itself in through its dependency on Russian gas, where they're saying, well, we'd love to have an embargo on the gas, but not yet because we can't afford it. And your five-year timeframe for America to ramp up the right amount of volume in semiconductor manufacturing to offset the losses from Taiwan is interesting, because it puts a kind of window doesn't it, in which China will perhaps feel that it can operate without Western repercussions?

But I think the points I would make with regards to China's importance to the global economy is that China now commands close to 30% of global manufacturing, across a large range of industries. It's not just toys anymore. It's capital goods, electronic machinery, electrical machinery, where they have a high degree of dominance.

Their core vulnerabilities are obviously in hydrocarbons and to some extent, food. And obviously when one looks around the world at the big food exporters, they tend to be fairly closely Western-aligned. The United States itself is a huge net exporter of food. Canada, Australia, are big exporters, Brazil is more non-aligned, perhaps more neutral in this. But then, of course, we must remember that the European Union has spent the best part of 40 years trying to encourage its farmers not to produce food through the Common Agricultural Policy, and therefore there is a huge amount of latent capacity in the European economy to ramp up food production, one would hope. So, from the food side, I would argue that the aligned Western powers actually hold the upper hand in that regard. But the kind of economic dislocation that would be associated with…

SO: Sorry to interrupt you there, but you were just talking about food security. Well, surely one of the benefits of the 'Great Schism' between Russia and the West is the fact that Russia is now in China's court, and China has access to all Russia's food. So that makes them less vulnerable, surely moving forward?

SP: Oh, yes, it's a good point. And of course, particularly, if when you talk about Russia, if one were to assume that part of Ukraine was subsumed into Russia, or that Ukraine's ability to export out of Ukraine was limited, because the Russians were occupying or controlling the Black Sea or the Sea of Azov and making it hard to get wheat and grains out, so that would be true. But China still has these dependencies on food, so it doesn't get them off the hook there.

SO:  Okay. So what about Western assets being seized in China, as some people were saying that that's what the counter-sanctions laws lead to? But what about the other way around? If there was this 'Great Split', what action will be taken against Chinese companies working in the West? Do you think that we would do tit-for-tat and basically stop them working in the UK and Australia, etc? Or do you think that because of the threat that China has over semiconductor supply, and other parts of the world economy, that actually it's more likely we'll just leave everyone alone, and it'd be a lot of hot air like there has been with Russia?

SP: Yes, I mean, it's a great point. I think that Russia probably provides the model, in terms of the way the West would want to pursue things. And of course, it doesn't have to be assets being sequestrated; they can be frozen until such time as the economic warfare ceases, which presupposes that ultimately, the West would triumph in such an eventuality. And I think we would, because when you look at the balance of economic power, as successful as China has been, the economic dimension to its national power is not as great as one might imagine. When you know what you're doing and measuring the economic power and the resilience of a country to withstand a sustained economic shock, per capita GDP in China is only about $10,000 in nominal terms, and so there are a lot of people who are still very close to the breadline, as it were. So the speed with which unrest, disillusionment with the state of affairs could spread in China, I think, should not be underestimated.

What we're sort of concluding on the economic side is that it pivots around a few things. When the need arises, how far down the road are we of replicating Taiwan’s semiconductor supply, which depends on the timing of this event, how quickly we pursue that. And clearly, I would argue that one of the policy ramifications of this discussion is that the West needs to pursue self-sufficiency in semiconductors as a point of urgency or it will find itself in emasculated when it comes to pushing back against any Chinese attempt to militarily take Taiwan or to blockade Taiwan.

And so, I think that's really the hinge point; that will depend on whether it's China or the US that has the ability to prevail in the economic dimension. But Sam, what about the political dimension? Surely one of the ramifications of the Great Split would be that a lot of the multilateral organisations that we're used to overseeing the global commons and sort of establishing global norms will become dysfunctional if we're in this standoff between China and the United States and the other permanent members of the Security Council?

SO: Yes, you raise a very good point. And just before I answer that, I think it's important to note that the five years you mentioned about the hinge point on whether China or America has the upper hand when it comes to semiconductors, which is such a crucial part of the economy - that five years between now and 2027 is also the period of the National People's Congress time limit as well. So the next time that Xi Jinping will be bringing everyone together, in 2027, he wants Taiwan's question to have been resolved. I think that we have two very good reasons why the 2027 timeframe is very much the one that people should be thinking about.

But in terms of where we go after - the political fallout - it could be incredible. If people remember their history, the League of Nations fell apart when you had the Italian bloody adventure in Ethiopia, and also Japan as well and the failure to agree about rearmament. And it was an awful time in the 30s, when the countries did start to pull apart from the multilateral organisation that had been put together at the end of the First World War. And I think that such a move on Taiwan would really put those pressures back into the international environment. First of all, the United Nations Security Council would be completely broken. You'd have China and Russia on one side, Britain, America, and hopefully France on the other, and, everyone else will fill in-between. Therefore you would have the most important global body paralysed, and China's been putting an awful lot of effort into winning the hearts and wallets of the United Nations over the last decade or so, getting its people put into the top positions in lots of different bodies. And that means that China is a much better operator at the UN level.

And if we have in 2024, an isolationist - a unilateralist - back into the White House, whether it's Trump or someone else on that side of politics, it's very easy to say, "Okay, well, the United Nations is not working for us, America is not going to be part of it anymore, because we think it's just a tool for China." And at that point, you do start to see the great fissures across the world re-emerging. But it's not only that people keep saying that, if Russia wins in Ukraine, it will be emboldened to capture back other former Soviet Union Territories - Moldova, Baltic states, perhaps parts of Central Asia. But if China wins in Taiwan, it may feel that it's able to offer a better source of legitimacy for the CCPs rule by winning back territories. Remember that the Qing Empire was far bigger than China today, by a quarter or a third, if I remember rightly. And there are at least 10 different territorial disputes that China has around his borders.

So I think that if China won and Taiwan and basically got rid of American power from that part of the world, it would signal the end of American hegemony in Asia simply because all of its security guarantees will be null and void if it's unable to keep Taiwan out of China's reach, especially after Biden, in recent months has jettisoned at least verbally the position of strategic ambiguity. At the end of the day, Taiwan will play a massively important role in determining who leads at least Asia if not the world, America or China. And that's not good for politics, let alone economics.

SP: So the conclusion we seem to be drawing here is that if the West doesn't get its act together, and put itself in a position where it can act freely, free from fear of being sanctioned, and being cut off from Taiwan's semiconductor supplies, then we will basically be impotent in the face of a Chinese invasion of Taiwan. That in itself, will probably lead to Chinese hegemony over Southeast Asia, and indeed, the Asia Pacific, and probably the multilateral order.

SO: And economically dominant because they will control the technology supply chain until the West can get its own act in order. And I think that's a really important thing that companies and governments need to do. And at the risk of not sounding too alarmist. One of the things that you and I do at Evenstar is to help companies prepare, using wargaming analysis, how they would react to some of the economic scenarios you've so eloquently set out. But I think that if we don't start preparing now, within these next five years, then I think that a lot of difficulties will be faced by the West, but by China as well.

SP: Indeed. Thank you very much, Sam.

SO: Well, we'll be back next week for more What China Wants topics. We haven't actually decided what we're going to talk about next week, but I'm sure we will find something in the next few days. But thanks for your upbeat assessment of the economic future Stewart.

SP: And thank you, Sam.

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