"the United States military has had a lot of experience in the Western Pacific, taking down small islands."
---Lt. Gen. Kenneth McKenzie
From their humble beginnings, the People's Liberation Army, or PLA, has come a long ways. As late as the nineties, they were barely able to license produce second rate Soviet weapons. Today, they have caught up to the cutting edge in most areas. The remaining few weaknesses, namely aircraft turbo-fan engines, nuclear submarines, carriers, strategic bombers and transport, they are making rapid progress and may close the gap within the coming decade or so. We still have the advantage outside of China's immediate neighborhood, but as the Chinese military quickly ramp up, the sphere of Chinese military superiority will expand further afield.
Our military is the greatest on earth. In the open seas, our navy has no rivals. What is more, we have military bases all over the world. In East Asia, our bases are dotting across the peripheries of China. Due to their past weakness in their naval force, most of the South China Sea islands have been claimed by surrounding countries such as Vietnam. To stake their claim to the South China Sea, the Chinese have built a few artificial islands out of reefs that were originally semi-submerged. Lt. General McKenzie is correct in stating that we would be successful in attacking these islands. In the age of GPS guided missiles and hypersonic missiles, Fixed and relatively small targets such as the radar installations in these islands will succumb to a determined attack by a peer enemy.
However, in spite of the bluster by the U.S. military, our situation in East Asia and the South China Sea is much more precarious than it would appear. As a precondition, I restrict our future conflict to the peripheries of continental China and the South China Sea, as the Chinese will not challenge us in the open seas for a long time to come. To defend against attacks from the sea, the Chinese have built a thick, layered, sophisticated and interlocking missile defense system all along the border. They have area denial weapons like DF series missiles. They are building strategic bombers like the B2. With today's technology, a determined attack with high end missiles will hit the target, no matter the defense system, so a fight between the U.S. and China means the two countries will trade blows with their missiles and bombers until one is knocked out of the fight. On the U.S. side, the missiles can come from either ships, bombers, and bases along the islands of the Pacific, South Korea, Japan and the Philippines. Here I am excluding intercontinental missiles from the U.S. mainland since this could very quickly lead to nuclear exchanges that nobody wanted. It is unlikely to come from ships since U.S. war ships within 1000 km of the Chinese shores will not survive a Chinese attack. Bombers need runway from our bases to take off and land, runways that are limited in number and easily disabled. Like the artificial islands built by the Chinese, the U.S. military bases in the Pacific Islands all the way up to Okinawa represent weak, isolated and small targets. Even the bases in South Korea and Japan are rather limited. On the Chinese side, they have the power of the entire continent size country with a dense, layered and sophisticated defense that is interlocking. A huge number of bases and dual use runways must be destroyed before the fighting capability is significantly degraded. They also have the ability to back up the front line with an excellent transportation system. The huge asymmetry between the American bases in Asia and China means that if blows are traded between the two sides, the U.S. bases, like the man made islands of China, could quickly be knocked out. Each island in the island chain is separated by vast ocean. So losing one island will weaken the neighboring islands and hasten their fall. What is more, once the Chinese occupy the islands after the bases are knocked out, to re-take the islands will require ships that could be hit from Continental China. The asymmetry between Korean and Japanese military bases and China is not much better. The Japanese lacks offensive capability if the U.S. forces are out of action. The Koreans could be invaded on land by China. Once these bases are knocked out, help will have to come from Hawaii. The bases in the Philippines is further from the Chinese mainland, so only limited types of missiles from China could hit it. As the Chinese develop their strategic bomber and their navy, with a large number of destroyers and maybe four to six carrier groups, even our bases in the Philippines will become vulnerable. What is more, once we lost the bases, we will be forced to fight with a very long supply line.
Once our bases are knocked out and the Chinese occupies the first island chain and secure the South China Sea, they will be in a position to threaten Japan. Both Japan and the Philippines will fall completely under the Chinese sphere of influence. With the Chinese firmly in control of the South China Sea, they will be able to extend stronger influence in the Indian Ocean. The Chinese have the enviable geographical advantage of being able to control both the Indian Ocean and the West Pacific from mainland . This may well end the U.S.'s ability to hold sway the future of the Middle East, since without access to the South China Sea and the Indian Ocean, our war ships will have difficulty reaching the Middle East.
Most Chinese military experts believe that they are without peer inside the first island chain, that includes the South China Sea. As the naval forces advances, their advantages will extend to the second island chain which includes Guam. Today, if we pick a fight in the South China Sea, we might stand a fair chance of knocking out their artificial islands, but a counter attack from China may mean we will lose most if not all of our bases in the East China Sea. Ten years out, with four carrier groups, they will have overwhelming superiority in the South China Sea and East Asia.
That our military can cross the globe and exert so much control on the rest of the world is predicated on a huge asymmetry of power between the U.S. and the target country. As China becomes more of a near peer, it becomes impossible to continue our dominant position so far from home and in their backyard. The development of the Chinese military is the result of Chinese industrialization. As their industrialization continue, their military will be even more formidable. If we are not careful in handling the relative decline of the U.S. military, it could accelerate our decline as the dominant country of the world.
Sunday, April 14, 2019
Sunday, March 31, 2019
The Great Rivalry: Scaling The Commanding Heights of Science and Technology
No country in the post-colonial era has thrived without first building its capacity to conduct scientific research.
---Seth Berkley
America has the best universities in the world. Not just one or two of them, most of the best universities in the top 100 are from the U.S. Most of the new industries that have come out in the last few decades have also been in the U.S. In every field of research and development, we are either at the top or near the top. This is what enabled the U.S. to rise to the number one country in the world.
The Chinese, like all other nations, are playing catch up. The amount of money spent on research is $475 billion for China, versus $553 billion for the U.S. As seen from the graph below, the Chinese are steadily catching up to the United States on R & D spending. In the coming decades, they will spend significantly more then us. Obviously, having done this work for a very long time, the U.S. is still more productive and able to get more results, but the combination of more money spent and a world wide talent search will eventually bridge the gap and the output from the Chinese research will approach or even overtake ours.
In fact, according to the Nature Index 2019, this is already happening. China is now the number two country in research output. producing half of the research as the United States as of 2019, dwarfing the third place Germany. In 2016, just three years prior, China was producing 37% of the research output of the United States. so the volume and quality of the research is growing at the same trajectory as the research spending of China, but the productivity is a few years behind the spending.
The big spending on research by the U.S. has resulted in many new industries for the U.S. In many cases, other developed nations simply failed to even be followers. Japan did not create their own version of the online giants and smart phones. Looking into the future, we are no longer alone in doing research and development.
While the U.S. is excellent in basic research, it does not always mean that we get to keep the industries that sprung up as a result of the research. From the time the first transistor was created in 1947 by Shockley and company, it took many decades and a lot of work by a lot of companies to bring us to the state of the art semiconductor chips that we produce today. The production of the chips skipped over Mexico, crossed the Pacific Ocean, and landed first in Japan, then in Taiwan and South Korea. The design team and companies stayed in the U.S., but the leadership has changed through many hands. Many of the early pioneers have ceased to exist today. New industries for the coming decades will likely follow the same pattern. While the Chinese may not be as inventive as us, it is at the stages after the initial discovery that they excelled. With access to an equally large market as the U.S. at home, supported by their government, the speed in which new industries (to China) sprung up was mind boggling. It is very likely that no matter who invented the initial technology, in the intervening decades that it will take for the industry to develop into the giant scale like the semiconductor industry is today, leadership will quickly shift to China due to their ability to execute and their manufacturing prowess. This is the tragedy of not having a manufacturing base to capture the inventions. We were fortunate that until this point, no competitor were able to match our inventiveness, scale and entrepreneur zeal. That will no long be the case with the rise of China. When the need arises, the Chinese are capable of doing the research to be at the cutting edge today. Even the U.S. has recognize them as the leaders in hypersonic missile technology. They are the first to produce a quantum satellite and quantum radar. They are the first country in the world to start testing a ship mounted rail gun. On the civilian side, SenseTime was a leader in facial recognition technology. Huawei has now become the undisputed leader in 5G technology.
We see a few patterns over the past few years in terms of Chinese technological advancements. First, the few areas where they reach the cutting edge technology have been relatively recent. Second, these have all been in the areas of emerging technologies where no one had accumulated many years of technology lead. Most are still in the basic research stage. Contrast to other areas, where years of head start by Western firms have created formidable barriers of entry for Chinese firms. Aircraft turbo-fan engine is a prime example. Prior to the Chinese entry, it was controlled by a few firms in the world. All these firms guard their secrets jealously. There is no way for them to ramp up the learning curve quickly. Due to their military needs, the Chinese persisted for many decades. To this day, they still rely mostly on the Russians to provide them with military jet engines, though recently news have come out that their WS-10, an engine of eighties technology, has matured to the level that could be used by their military. Jet engines may well be one of the last areas to be conquered by the Chinese, but their ability to become the best in a few areas mentioned above shows they are quite capable of making progress on their own to blaze new trails. Finally, we see that currently, many of the recent success had military applications. This is no different to how the U.S. did it. DARPA, which was an entirely government funded entity, was originally created due to our need to create better weapons. They had been credited with many innovations which went on to create large civilian industries, including the internet.
Is there a way to stop them from their technological progress? This will be very difficult. Knowledge has a way of crossing boarders which could not be stopped. They are capable enough that they will be able to replicate something by simply knowing that someone else was able to create it. Though it was rumored that they hacked into U.S. networks to steal files for the making of the F-35, their J-20 was quite different then the F-35 in many respects. Their indigenous effort had created something that is competitive against F-35 and F-22. What is more, they did not create a clone. Having fully digested the principles that make a fifth gen fighter, they tailored the design to their own needs, which are different from the needs of the U.S. military. In contrast, the Russians, who had significantly more experience building fighter jets and an equally extensive spy network in the U.S., were unable to come up with something that could match our fifth gen fighters decades after we had come up with them. The approach of the Chinese, at least in the military side, is working to produce a lot of results during the last few years. They characterize the recent explosion of results as "geysers". In the future, it is reasonable to expect this approach to be replicated in the civilian side if this is not done already. Just as the U.S. had reaped a huge military spending dividend in the last few decades, we can expect the Chinese to get something similar. All these factors are completely within the control of the Chinese and we are not in position to change them too much. We reap more benefits to our country if we cooperate with them.
---Seth Berkley
America has the best universities in the world. Not just one or two of them, most of the best universities in the top 100 are from the U.S. Most of the new industries that have come out in the last few decades have also been in the U.S. In every field of research and development, we are either at the top or near the top. This is what enabled the U.S. to rise to the number one country in the world.
The Chinese, like all other nations, are playing catch up. The amount of money spent on research is $475 billion for China, versus $553 billion for the U.S. As seen from the graph below, the Chinese are steadily catching up to the United States on R & D spending. In the coming decades, they will spend significantly more then us. Obviously, having done this work for a very long time, the U.S. is still more productive and able to get more results, but the combination of more money spent and a world wide talent search will eventually bridge the gap and the output from the Chinese research will approach or even overtake ours.
In fact, according to the Nature Index 2019, this is already happening. China is now the number two country in research output. producing half of the research as the United States as of 2019, dwarfing the third place Germany. In 2016, just three years prior, China was producing 37% of the research output of the United States. so the volume and quality of the research is growing at the same trajectory as the research spending of China, but the productivity is a few years behind the spending.
The big spending on research by the U.S. has resulted in many new industries for the U.S. In many cases, other developed nations simply failed to even be followers. Japan did not create their own version of the online giants and smart phones. Looking into the future, we are no longer alone in doing research and development.
 |
| top ten nations in research output, Sourced from Nature. |
 |
| Change in output by country, Sourced from nature |
While the U.S. is excellent in basic research, it does not always mean that we get to keep the industries that sprung up as a result of the research. From the time the first transistor was created in 1947 by Shockley and company, it took many decades and a lot of work by a lot of companies to bring us to the state of the art semiconductor chips that we produce today. The production of the chips skipped over Mexico, crossed the Pacific Ocean, and landed first in Japan, then in Taiwan and South Korea. The design team and companies stayed in the U.S., but the leadership has changed through many hands. Many of the early pioneers have ceased to exist today. New industries for the coming decades will likely follow the same pattern. While the Chinese may not be as inventive as us, it is at the stages after the initial discovery that they excelled. With access to an equally large market as the U.S. at home, supported by their government, the speed in which new industries (to China) sprung up was mind boggling. It is very likely that no matter who invented the initial technology, in the intervening decades that it will take for the industry to develop into the giant scale like the semiconductor industry is today, leadership will quickly shift to China due to their ability to execute and their manufacturing prowess. This is the tragedy of not having a manufacturing base to capture the inventions. We were fortunate that until this point, no competitor were able to match our inventiveness, scale and entrepreneur zeal. That will no long be the case with the rise of China. When the need arises, the Chinese are capable of doing the research to be at the cutting edge today. Even the U.S. has recognize them as the leaders in hypersonic missile technology. They are the first to produce a quantum satellite and quantum radar. They are the first country in the world to start testing a ship mounted rail gun. On the civilian side, SenseTime was a leader in facial recognition technology. Huawei has now become the undisputed leader in 5G technology.
We see a few patterns over the past few years in terms of Chinese technological advancements. First, the few areas where they reach the cutting edge technology have been relatively recent. Second, these have all been in the areas of emerging technologies where no one had accumulated many years of technology lead. Most are still in the basic research stage. Contrast to other areas, where years of head start by Western firms have created formidable barriers of entry for Chinese firms. Aircraft turbo-fan engine is a prime example. Prior to the Chinese entry, it was controlled by a few firms in the world. All these firms guard their secrets jealously. There is no way for them to ramp up the learning curve quickly. Due to their military needs, the Chinese persisted for many decades. To this day, they still rely mostly on the Russians to provide them with military jet engines, though recently news have come out that their WS-10, an engine of eighties technology, has matured to the level that could be used by their military. Jet engines may well be one of the last areas to be conquered by the Chinese, but their ability to become the best in a few areas mentioned above shows they are quite capable of making progress on their own to blaze new trails. Finally, we see that currently, many of the recent success had military applications. This is no different to how the U.S. did it. DARPA, which was an entirely government funded entity, was originally created due to our need to create better weapons. They had been credited with many innovations which went on to create large civilian industries, including the internet.
Is there a way to stop them from their technological progress? This will be very difficult. Knowledge has a way of crossing boarders which could not be stopped. They are capable enough that they will be able to replicate something by simply knowing that someone else was able to create it. Though it was rumored that they hacked into U.S. networks to steal files for the making of the F-35, their J-20 was quite different then the F-35 in many respects. Their indigenous effort had created something that is competitive against F-35 and F-22. What is more, they did not create a clone. Having fully digested the principles that make a fifth gen fighter, they tailored the design to their own needs, which are different from the needs of the U.S. military. In contrast, the Russians, who had significantly more experience building fighter jets and an equally extensive spy network in the U.S., were unable to come up with something that could match our fifth gen fighters decades after we had come up with them. The approach of the Chinese, at least in the military side, is working to produce a lot of results during the last few years. They characterize the recent explosion of results as "geysers". In the future, it is reasonable to expect this approach to be replicated in the civilian side if this is not done already. Just as the U.S. had reaped a huge military spending dividend in the last few decades, we can expect the Chinese to get something similar. All these factors are completely within the control of the Chinese and we are not in position to change them too much. We reap more benefits to our country if we cooperate with them.
Saturday, March 30, 2019
The Great Rivalry
"Even a super power has limits"
---Ariel Sharon
The Recent trade war with China has put the power rivalry between the United States and China in grand display. For the next decade and beyond, the two countries are destined on a path of power struggle between the number one super power and the ascending rival. This competition will involve multiple fronts and will continue long after the Trump presidency. That the Chinese have come to this juncture so quickly from such humble beginnings during the eighties is quite remarkable. What is the best path going forward for the United States and China?
If you were an Englishman in the twenties, looking across the pond to an ascendant United States, you would feel a similar sense of unease as we are feeling now in the United States regarding China. The United States did overtake Britain as the world's super power. So with the perfect hindsight, what could the British have done to prevent the rise of the United States? The answer is, not much. Short of war, the rise and fall of nations are largely due to factors internal to the country. Outside interference could perhaps slow the trajectory but not alter it. What is more, energy spent and the cost of fighting such a "war" could detract from our ability to solve our own internal problems.
The main areas that the two countries compete in includes economics, science and technology development, military, geopolitical and soft power projection. In the upcoming posts, I will look at each of these. For the remainder of the post, let's examine the economic aspect. In particular, how the economic trajectories of China will impact the power rivalry of the two nations.
Most people, having walked through the aisles of Walmart, have come to the conclusion that the way to stop the rise of China is to cut off their exports. This might have been true in 2006, when Chinese exports counted for a whopping 36% of China's GDP. Today, that number is 19% and dropping. The United States' share of the Chinese export is 19%. of that, a big portion (maybe a third) is export by the companies of the United States and allies, so cutting off this portion of the export will hurt companies like Apple way more then it hurts China. Another part of the export are goods that have no substitutes, or one can only find substitute at a huge mark up. For example, virtually all of the world's rare earth metals, which are crucial for many industries, including defense, came out of China. Even the American mines send their oxide to China to have it processed into metal. The portion of Chinese exports that could be taxed without badly hurting the U.S. defense, our companies or our lower and middle class consumers thus are much smaller portion of the total. In addition, their value added, or what the Chinese get to keep by this export, is a small fraction of the export value itself, since often times, they are the final assembler taking components from supply chain across the world. I remember a study done which said that the worst case scenario of the trade war was about a 1% impact on the Chinese GDP.
America's economic problem has to do with the lost of our industrial base. This actually preceded China's rise. I remember watching TV and saw people smashing Japanese cars in front of news crews in the eighties. Our highly inventive research and development came up with products, but were unable to profitably manufacture them in the United States. The causes are complicated. The biggest issue is the quality of our work force. High end manufacturing today is highly sophisticated, requiring huge amount of capital, know how and a highly intelligent, educated and disciplined work force. As America pushes into the more profitable sectors like tech and financial sectors, these sectors have also captured the lion share of the American intellectual elite. Other industries, which have lower profit margins, have been robbed of the talents needed to compete. The exodus of manufacturing would be slower if there were not a diligent work force on the other side of the pond ready to do the work, but the East Asian countries provided competition which pushed the bar higher. This sped up the decline of American manufacturing. The semiconductor industry is an example, Even as the design team stayed behind in the Bay Area and Austin, the manufacturing part has gone first to Japan, then South Korea and Taiwan and now China. Success in this industry is not about having cheap labor, but the ability to get to high efficiency production first. Otherwise the huge amount of capital will sit unproductive longer, causing the firm to fail. Having a high IQ work force that is willing to work day and night makes all the difference between success and failure. That is the reason why semiconductor manufacturing have gone to only East Asian countries. It has to do with the availability of a highly competent and disciplined work force willing to do what it takes to get the job done fast..
The financial industry also contributed to the decline of American manufacturing in two ways. First, they siphon out part of the profits of the other industries via financial engineering. Since banking and investment industry are well established, we would expect profitability to decline like other industries that are matured and highly competitive. This is, after all, the economic theory coming out of the economic classes in colleges. However, profitability of the financial sector is near the top among all the industries. Since financial sector touches all industries, we have to conclude that some of the profits from the other industries have been transferred to the financial industry through financial manipulation. Without the profit to sustain them, many industries have died off. The second way it contribute to the demise of the American industries is through the short term nature of how Wall Street reward our economic participants. If you are two years from retirement and running the company, You would care a lot more about the stock prices in the next two years versus will the company survive in ten. In that case, you would prioritize short term profitability over the longer term survivability of the company. GE, which used to be the model for the rest of the American companies, is a shadow of its former self due to this shortsightedness. Boeing, which had the recent debacle with their 737 Max, is another example.
So what is to be done about this? So some might say we tax the hell out of these products and bring back the industries. Unfortunately, Fortress America is not a solution to this problem. This is because the Europeans, who enjoy working less than the Americans, have tried the Fortress Europe idea and the result has not been good for the last couple of decades. There is no reason to believe that we will do better if we try the same thing. Others cling on the automation and 3D printing as the key to reversing the de-industrialization, but this is unlikely. More automation and 3D printing requires even more skilled and disciplined labor force, not less. Trump tried to deny ZTE chips from American companies, but eventually back out of that idea. Certainly it would badly hurt ZTE, but companies like Qualcom will also be badly hurt. What is more, this action have spur many Chinese companies to start making their own chips. A powerful Chinese chip industry will appear on the horizon a lot faster than it would be otherwise be.
The rise of the Chinese economic power is due to their ability to learn from the outside world and having a large scale manufacturing work force that is intelligent, disciplined and hard working. They have a large internal market to consume their own products.They trade with the entire world, most of whom will not sanction the trade since China is a large trading partner. Many countries would not be able to produce what China was producing and had to buy from somebody anyways. To them, the Chinese provided inexpensive and high quality products that otherwise would cost them a lot more. The most important of all, the government of China is very capable and able to get things moving along. Today, like America was in the 1920s, the fate of their economic rise is mostly in their own hands. Outsider can slightly slow but not stop their rise. Given that they still have lower per capita GDP and other indicators such as lower value added in their industries, lower robotic density per thousand worker etc, there is every reason to believe that they will in time get to the cutting edge in manufacturing. They will have their own aeronautic industry like Boeing and Air Bus. They will have a very large share of the chip designing and chip making industry. AI will also boost their productivity in the coming decades. There is no way to stop the rise of the Chinese economy. We should focus on improving our own. We can also try to benefit from China's rise.
---Ariel Sharon
The Recent trade war with China has put the power rivalry between the United States and China in grand display. For the next decade and beyond, the two countries are destined on a path of power struggle between the number one super power and the ascending rival. This competition will involve multiple fronts and will continue long after the Trump presidency. That the Chinese have come to this juncture so quickly from such humble beginnings during the eighties is quite remarkable. What is the best path going forward for the United States and China?
If you were an Englishman in the twenties, looking across the pond to an ascendant United States, you would feel a similar sense of unease as we are feeling now in the United States regarding China. The United States did overtake Britain as the world's super power. So with the perfect hindsight, what could the British have done to prevent the rise of the United States? The answer is, not much. Short of war, the rise and fall of nations are largely due to factors internal to the country. Outside interference could perhaps slow the trajectory but not alter it. What is more, energy spent and the cost of fighting such a "war" could detract from our ability to solve our own internal problems.
The main areas that the two countries compete in includes economics, science and technology development, military, geopolitical and soft power projection. In the upcoming posts, I will look at each of these. For the remainder of the post, let's examine the economic aspect. In particular, how the economic trajectories of China will impact the power rivalry of the two nations.
Most people, having walked through the aisles of Walmart, have come to the conclusion that the way to stop the rise of China is to cut off their exports. This might have been true in 2006, when Chinese exports counted for a whopping 36% of China's GDP. Today, that number is 19% and dropping. The United States' share of the Chinese export is 19%. of that, a big portion (maybe a third) is export by the companies of the United States and allies, so cutting off this portion of the export will hurt companies like Apple way more then it hurts China. Another part of the export are goods that have no substitutes, or one can only find substitute at a huge mark up. For example, virtually all of the world's rare earth metals, which are crucial for many industries, including defense, came out of China. Even the American mines send their oxide to China to have it processed into metal. The portion of Chinese exports that could be taxed without badly hurting the U.S. defense, our companies or our lower and middle class consumers thus are much smaller portion of the total. In addition, their value added, or what the Chinese get to keep by this export, is a small fraction of the export value itself, since often times, they are the final assembler taking components from supply chain across the world. I remember a study done which said that the worst case scenario of the trade war was about a 1% impact on the Chinese GDP.
America's economic problem has to do with the lost of our industrial base. This actually preceded China's rise. I remember watching TV and saw people smashing Japanese cars in front of news crews in the eighties. Our highly inventive research and development came up with products, but were unable to profitably manufacture them in the United States. The causes are complicated. The biggest issue is the quality of our work force. High end manufacturing today is highly sophisticated, requiring huge amount of capital, know how and a highly intelligent, educated and disciplined work force. As America pushes into the more profitable sectors like tech and financial sectors, these sectors have also captured the lion share of the American intellectual elite. Other industries, which have lower profit margins, have been robbed of the talents needed to compete. The exodus of manufacturing would be slower if there were not a diligent work force on the other side of the pond ready to do the work, but the East Asian countries provided competition which pushed the bar higher. This sped up the decline of American manufacturing. The semiconductor industry is an example, Even as the design team stayed behind in the Bay Area and Austin, the manufacturing part has gone first to Japan, then South Korea and Taiwan and now China. Success in this industry is not about having cheap labor, but the ability to get to high efficiency production first. Otherwise the huge amount of capital will sit unproductive longer, causing the firm to fail. Having a high IQ work force that is willing to work day and night makes all the difference between success and failure. That is the reason why semiconductor manufacturing have gone to only East Asian countries. It has to do with the availability of a highly competent and disciplined work force willing to do what it takes to get the job done fast..
The financial industry also contributed to the decline of American manufacturing in two ways. First, they siphon out part of the profits of the other industries via financial engineering. Since banking and investment industry are well established, we would expect profitability to decline like other industries that are matured and highly competitive. This is, after all, the economic theory coming out of the economic classes in colleges. However, profitability of the financial sector is near the top among all the industries. Since financial sector touches all industries, we have to conclude that some of the profits from the other industries have been transferred to the financial industry through financial manipulation. Without the profit to sustain them, many industries have died off. The second way it contribute to the demise of the American industries is through the short term nature of how Wall Street reward our economic participants. If you are two years from retirement and running the company, You would care a lot more about the stock prices in the next two years versus will the company survive in ten. In that case, you would prioritize short term profitability over the longer term survivability of the company. GE, which used to be the model for the rest of the American companies, is a shadow of its former self due to this shortsightedness. Boeing, which had the recent debacle with their 737 Max, is another example.
So what is to be done about this? So some might say we tax the hell out of these products and bring back the industries. Unfortunately, Fortress America is not a solution to this problem. This is because the Europeans, who enjoy working less than the Americans, have tried the Fortress Europe idea and the result has not been good for the last couple of decades. There is no reason to believe that we will do better if we try the same thing. Others cling on the automation and 3D printing as the key to reversing the de-industrialization, but this is unlikely. More automation and 3D printing requires even more skilled and disciplined labor force, not less. Trump tried to deny ZTE chips from American companies, but eventually back out of that idea. Certainly it would badly hurt ZTE, but companies like Qualcom will also be badly hurt. What is more, this action have spur many Chinese companies to start making their own chips. A powerful Chinese chip industry will appear on the horizon a lot faster than it would be otherwise be.
The rise of the Chinese economic power is due to their ability to learn from the outside world and having a large scale manufacturing work force that is intelligent, disciplined and hard working. They have a large internal market to consume their own products.They trade with the entire world, most of whom will not sanction the trade since China is a large trading partner. Many countries would not be able to produce what China was producing and had to buy from somebody anyways. To them, the Chinese provided inexpensive and high quality products that otherwise would cost them a lot more. The most important of all, the government of China is very capable and able to get things moving along. Today, like America was in the 1920s, the fate of their economic rise is mostly in their own hands. Outsider can slightly slow but not stop their rise. Given that they still have lower per capita GDP and other indicators such as lower value added in their industries, lower robotic density per thousand worker etc, there is every reason to believe that they will in time get to the cutting edge in manufacturing. They will have their own aeronautic industry like Boeing and Air Bus. They will have a very large share of the chip designing and chip making industry. AI will also boost their productivity in the coming decades. There is no way to stop the rise of the Chinese economy. We should focus on improving our own. We can also try to benefit from China's rise.
Sunday, November 18, 2018
Debt And Return On Investment
“A national debt, if it is not too excessive, will be to us a national blessing."
---Alexander Hamilton
There are a lot of people who objects to what Michael Pettis had to say about the Chinese economy, which I discussed in the previous post. They will point out that whatever infrastructure or other investment that was made, it was somehow useful. Besides, if debt cannot be repaid, the government will just write it off.
When the Soviet Union won World War II, Their per capita GDP was something in the order of $2000 where as the United States at the time was already at $6000. The United States won the cold war in no small part due to the fact that the West in general and the United States in particular, made good use of the resources we had compared to the Soviet Union. Their economy fell behind and they were devoting ever increasing share of the GDP for their military. This was one of the unsustainable situations that contributed to their demise. Efficient use of resources means that there must be a positive return on the investment over a couple of decades.
Debt matters. A company borrowing money must have a higher return on investment then the borrowing cost of the debt. A nation borrowing money must do the same. China is increasing its debt load at a very fast rate in recent years. If China were a company, such debt loads must result in higher profits over the long term. For a country, that translates into GDP growth over the period of the debt. The Chinese GDP growth is slowing down. That means that the debt carrying capacity of China is not rising in proportion to the rise of the debt load. In the last seven years, the Chinese GDP growth has slowed from double digit growth to about 6%, at the same time, the Chinese debt has risen from 162% of GDP in 2008 to 266% of the much larger GDP in 2017. This is unsustainable and must be reversed over the medium term. The Chinese leaders must gradually wean the country off this treadmill of ever rising debt without comparable rise in GDP. China will go through a period of slower growth. The sooner they can get this done, the better off the country will be in the longer run.
Some say the Chinese economy will collapse due to the debt. While this might be a possibility, this is an unlikely event. The debts are mostly domestically sourced and the government has the power to make sweeping changes. The most likely scenario is a "lost decade" type situation like the Japanese.
The Chinese leadership understands this problem, but must deal with the trade war as well as domestic vested interests. I have faith that over the longer run the Chinese will be able to get the debt under control.
---Alexander Hamilton
There are a lot of people who objects to what Michael Pettis had to say about the Chinese economy, which I discussed in the previous post. They will point out that whatever infrastructure or other investment that was made, it was somehow useful. Besides, if debt cannot be repaid, the government will just write it off.
When the Soviet Union won World War II, Their per capita GDP was something in the order of $2000 where as the United States at the time was already at $6000. The United States won the cold war in no small part due to the fact that the West in general and the United States in particular, made good use of the resources we had compared to the Soviet Union. Their economy fell behind and they were devoting ever increasing share of the GDP for their military. This was one of the unsustainable situations that contributed to their demise. Efficient use of resources means that there must be a positive return on the investment over a couple of decades.
Debt matters. A company borrowing money must have a higher return on investment then the borrowing cost of the debt. A nation borrowing money must do the same. China is increasing its debt load at a very fast rate in recent years. If China were a company, such debt loads must result in higher profits over the long term. For a country, that translates into GDP growth over the period of the debt. The Chinese GDP growth is slowing down. That means that the debt carrying capacity of China is not rising in proportion to the rise of the debt load. In the last seven years, the Chinese GDP growth has slowed from double digit growth to about 6%, at the same time, the Chinese debt has risen from 162% of GDP in 2008 to 266% of the much larger GDP in 2017. This is unsustainable and must be reversed over the medium term. The Chinese leaders must gradually wean the country off this treadmill of ever rising debt without comparable rise in GDP. China will go through a period of slower growth. The sooner they can get this done, the better off the country will be in the longer run.
Some say the Chinese economy will collapse due to the debt. While this might be a possibility, this is an unlikely event. The debts are mostly domestically sourced and the government has the power to make sweeping changes. The most likely scenario is a "lost decade" type situation like the Japanese.
The Chinese leadership understands this problem, but must deal with the trade war as well as domestic vested interests. I have faith that over the longer run the Chinese will be able to get the debt under control.
Saturday, August 25, 2018
The Great Rebalancing
"China is having a heart transplant.You're probably going to be fine in the long run, but it's going to weaken you, and it's got to be well executed"
---Raymond Dalio
Despite the phenomenal economic growth that China has achieved in the last few decades, or perhaps as a consequence of it, the Chinese economy has fallen into serious imbalances. In the next decade or two, the best outcome is a significantly slower growth to correct the problem before higher growth could resume. There are other worse possibilities, like the lost decades that the Japanese had gone through, or more remote, a financial crisis like Brazil had experienced in 1997-1999.
To see how this could have happened, let's channel Michael Pettis and consider the following scenario. Say you are in charge of a farm with 100 able bodied workers eking out a living. All of these people till the land, but yield was terrible, and life was hard on the farm.
One day, you realize that people spend two to three hours a day going to and from the fields. You came up with a scheme. The farmers would loan their hard earned savings to the collective. You had instructed your right hand man Joe to take all the money to buy construction material and make him work to fix the roads. Since Joe could no longer work at his plot of land, you collected a small share of the harvest from each family to pay off the monthly payment of the loan and also allow Joe to feed his family.
The idea was a success. The travel time has been cut to an hour and a half per day. The farm was more productive. Since the amount of crops collected from each household was a bit arbitrary, Joe was living better than the people who still do the farming. The farmers did not mind, since their lives were better than before, even after giving up a share of their crop.
The farm book keeper, who had read some book about economics, started adding the roads built as part of the output and told everyone that production of the crop and the roads combined had exceeded last year by 5%
Doubling down on your success, you started adding more people to build things. Since the irrigation was bad, you borrowed more money from the farmers and added a few more people to build the irrigation canals. Some of your friends got the job since it pays more than farming.
Farm productivity soared and people have never had more food in their recent memory. By now, thirty people, some your relatives and your friends, are working on the more lucrative construction jobs. There was just one problem, the farm is running out of projects to do. The crops, after getting all the care, water and fertilizers they need, are not yielding more. Travel time has been further cut to 20 minutes and any improvement is now marginal. Yet, the construction workers, seeing how lucrative the jobs were, have lobbied you to add more of their relatives and friends on the job.
Since the construction projects are not increasing the amount of crops produced, the obvious thing to do is to stop many of the construction projects so the saving of the farmers is not wasted. Since this would result in people losing their construction jobs, you need to find a way for them to return to farming their land. If people were starving, they would be willing to return to do farming work. But life on the farm was good, so the construction workers resisted returning to till their plot of land again.
More people joined the construction crew and try to find more reason to do construction. By now, fifty people, half of the able bodied folks at the farm, are working construction. A third reservoir was built, though the second one was already not very useful. The farm book keeper had told you with glee that production, counting the farm yield and construction, have increased by more than ten percent from last year, but you know that the building of the third reservoir was a big waste of manpower and money so must be marked down in the future. Also, if people switch from construction to farming, the production number would go down more, but that was the right thing to do.
You tried to get the construction crew to work on the neighboring farms, but it had created trade imbalances. Your neighboring farms got mad at you and pass laws to reduce the number of construction crew that are allowed to work on their farms. Though cheer leaders in your farm proudly show off the shiny new roads and reservoirs, and told everyone that the trade imbalances were a result of the hard work and thrift of your farmers, you knew that the real reason is you had too many people in your farm working construction and not enough growing food.
If the trend continues, 100% of the farmers will work as construction and everyone would starve. The solution is still blindingly obvious. You need to reduce the number of people doing construction and return them to do farming, but they don't want to see their life style reduced so they dig in their heels and refused to go. Some of them pointed out that the village next door spends even more money and people doing construction. You argued with them that the next village are artisans and craftsmen. They have a need to maintain their equipment. They are wealthier because they had better skills and laws as a town of craftsmen. Someday, you can transform your farm into more like them, but until that day comes, building a third reservoir and other roads etc are still a waste of manpower and money.
Exacerbated, you start crafting a baseball bat and threaten the construction workers with violence if they don't stop working on construction and return to till their plots of land. Folks inside and outside the farm started calling you a tyrant and a dictator.
Similar to the farm above, China is overly reliant on debt driven capital spending to boost their GDP, capital spending that are increasingly non-productive. The accumulation of such non-productive spending overstates past GDP growth, which must be written down in the future as slower growth. Japan in the nineties, had 17% of the world's GDP, today, they are something like 4%. Such is the impact of writing down these non-productive use of capital. Something similar will happen to China in the coming years or even decades. China needs to go through some gut wrenching transition from an investment and debt driven economy to a more consumption driven economy. The persistent trade deficit and high debt accumulation as a result of having too big a piece of pie devoted to capital spending cannot continue for very much longer. Like the farm, China was not in great danger of an abrupt default since the money was owed by the farm to the farmers. The most likely danger is slower economic growth due to unproductive spending and a scenario of the lost decade like Japan. The leadership seems to be aware of this problem, but executing is extremely difficult due to the power of the vested interest groups, namely the local governments. Part of the reason Xi Jingping wanted to accumulate more power and longer time is that he needed the power and time to fix this mess. We should all wish them luck. In a sense, the trade war that is happening now may present the Chinese government an opportunity if they use this as an excuse to slow down the economy and deleverage. A further slowdown of the economy will itself be a sign that Xi Jingping has finally succeeded in gaining control of the vested interest groups and finally able to implement the reforms.
---Raymond Dalio
Despite the phenomenal economic growth that China has achieved in the last few decades, or perhaps as a consequence of it, the Chinese economy has fallen into serious imbalances. In the next decade or two, the best outcome is a significantly slower growth to correct the problem before higher growth could resume. There are other worse possibilities, like the lost decades that the Japanese had gone through, or more remote, a financial crisis like Brazil had experienced in 1997-1999.
To see how this could have happened, let's channel Michael Pettis and consider the following scenario. Say you are in charge of a farm with 100 able bodied workers eking out a living. All of these people till the land, but yield was terrible, and life was hard on the farm.
One day, you realize that people spend two to three hours a day going to and from the fields. You came up with a scheme. The farmers would loan their hard earned savings to the collective. You had instructed your right hand man Joe to take all the money to buy construction material and make him work to fix the roads. Since Joe could no longer work at his plot of land, you collected a small share of the harvest from each family to pay off the monthly payment of the loan and also allow Joe to feed his family.
The idea was a success. The travel time has been cut to an hour and a half per day. The farm was more productive. Since the amount of crops collected from each household was a bit arbitrary, Joe was living better than the people who still do the farming. The farmers did not mind, since their lives were better than before, even after giving up a share of their crop.
The farm book keeper, who had read some book about economics, started adding the roads built as part of the output and told everyone that production of the crop and the roads combined had exceeded last year by 5%
Doubling down on your success, you started adding more people to build things. Since the irrigation was bad, you borrowed more money from the farmers and added a few more people to build the irrigation canals. Some of your friends got the job since it pays more than farming.
Farm productivity soared and people have never had more food in their recent memory. By now, thirty people, some your relatives and your friends, are working on the more lucrative construction jobs. There was just one problem, the farm is running out of projects to do. The crops, after getting all the care, water and fertilizers they need, are not yielding more. Travel time has been further cut to 20 minutes and any improvement is now marginal. Yet, the construction workers, seeing how lucrative the jobs were, have lobbied you to add more of their relatives and friends on the job.
Since the construction projects are not increasing the amount of crops produced, the obvious thing to do is to stop many of the construction projects so the saving of the farmers is not wasted. Since this would result in people losing their construction jobs, you need to find a way for them to return to farming their land. If people were starving, they would be willing to return to do farming work. But life on the farm was good, so the construction workers resisted returning to till their plot of land again.
More people joined the construction crew and try to find more reason to do construction. By now, fifty people, half of the able bodied folks at the farm, are working construction. A third reservoir was built, though the second one was already not very useful. The farm book keeper had told you with glee that production, counting the farm yield and construction, have increased by more than ten percent from last year, but you know that the building of the third reservoir was a big waste of manpower and money so must be marked down in the future. Also, if people switch from construction to farming, the production number would go down more, but that was the right thing to do.
You tried to get the construction crew to work on the neighboring farms, but it had created trade imbalances. Your neighboring farms got mad at you and pass laws to reduce the number of construction crew that are allowed to work on their farms. Though cheer leaders in your farm proudly show off the shiny new roads and reservoirs, and told everyone that the trade imbalances were a result of the hard work and thrift of your farmers, you knew that the real reason is you had too many people in your farm working construction and not enough growing food.
If the trend continues, 100% of the farmers will work as construction and everyone would starve. The solution is still blindingly obvious. You need to reduce the number of people doing construction and return them to do farming, but they don't want to see their life style reduced so they dig in their heels and refused to go. Some of them pointed out that the village next door spends even more money and people doing construction. You argued with them that the next village are artisans and craftsmen. They have a need to maintain their equipment. They are wealthier because they had better skills and laws as a town of craftsmen. Someday, you can transform your farm into more like them, but until that day comes, building a third reservoir and other roads etc are still a waste of manpower and money.
Exacerbated, you start crafting a baseball bat and threaten the construction workers with violence if they don't stop working on construction and return to till their plots of land. Folks inside and outside the farm started calling you a tyrant and a dictator.
Similar to the farm above, China is overly reliant on debt driven capital spending to boost their GDP, capital spending that are increasingly non-productive. The accumulation of such non-productive spending overstates past GDP growth, which must be written down in the future as slower growth. Japan in the nineties, had 17% of the world's GDP, today, they are something like 4%. Such is the impact of writing down these non-productive use of capital. Something similar will happen to China in the coming years or even decades. China needs to go through some gut wrenching transition from an investment and debt driven economy to a more consumption driven economy. The persistent trade deficit and high debt accumulation as a result of having too big a piece of pie devoted to capital spending cannot continue for very much longer. Like the farm, China was not in great danger of an abrupt default since the money was owed by the farm to the farmers. The most likely danger is slower economic growth due to unproductive spending and a scenario of the lost decade like Japan. The leadership seems to be aware of this problem, but executing is extremely difficult due to the power of the vested interest groups, namely the local governments. Part of the reason Xi Jingping wanted to accumulate more power and longer time is that he needed the power and time to fix this mess. We should all wish them luck. In a sense, the trade war that is happening now may present the Chinese government an opportunity if they use this as an excuse to slow down the economy and deleverage. A further slowdown of the economy will itself be a sign that Xi Jingping has finally succeeded in gaining control of the vested interest groups and finally able to implement the reforms.
Sunday, July 15, 2018
The Chinese Demographic Time Bomb
"Demographic is destiny"
---August Comte
It is well known that the Chinese are growing old before they grow rich. They are not making enough babies to sustain the population. Most people, when they hear about this, go straight to the lost of labor and declines of the economy. Actually, the decline of the population does not have a big impact on the economy in the short term. The reason is productivity gain and economic growth occurs at a much higher rate compared to population decline. The population decline is also counteracted by lengthening of the life span and thus increasing the productive years left for each person. Increased life span also has the effect of increasing population size, at least in the short term.
Nor is liability for the elderly going to be a big issue for government finance. Unlike the United States with Medicare and Social Security, the Chinese government does not have formal agreements with the population to provide for the elderly with certain level of benefit. What is more, the elderly in China have seen a steep change in prosperity from when they grew up, and will be very happy with whatever benefit that they will get.
The imperceptible nature of demographic change makes it easy to mask titanic and dire changes until decades later, at which time it will long be fait accompli. Imagine a situation in which China cease to have any babies. Each year, the population would decreased by 1.5% or so. Since the kids would not even be productive until they turn 20 or 25, we won't see any change in economy for a while. Thirty years later, the entire nation has gone extinct, but there would still be six or seven hundred million souls walking about. In certain part of the country, you could still say that there is over population. At this time though, there would be some dramatic change in the economy. Work that require youthful physical labor would find it increasingly impossible to hire. The pool of old folks relative to the general population has shot up dramatically. Someone must care for them. Both of these situations hugely incentivize import of menial labor. The Japanese and the Koreans, who are currently at an advanced stage of aging, have resisted this urge. They are right to do so. Due to the nature of the work involved, the people thus imported will likely have significantly lower IQ compared to the native population. Just as the Hispanics in the United States, they will form a permanent underclass that will increase crime and contribute to the internal strife of the nation that import them.
The current Chinese total fertility rate(TFR) is about 1.5. This number is similar to the developed world in general. A TFR of 2.05 is required to maintain the population. However, the trend is ominous. The TFR for most Chinese urban areas is around 1 or less. Since the Chinese are urbanizing at a very fast pace, the national TFR will fall from 1.5 toward 1 as more and more Chinese move from rural areas to cities. At TFR of 1, the young population gets cut in half every generation. Unless China succeeds in getting young people in urban areas to have more babies, they will not be able to reverse this trend. So far, not a single country who see low TFR has the ability to reverse the trend. Without intervention to break the trend, China will zoom past Europe and United States to become some of the oldest populations in the planet.
On the positive side of the ledger, the Chinese starting out with larger number of babies. Among the high IQ population of European and East Asian countries, the Chinese gave birth to more than twice as many babies as the rest combined in 2016. There is still some time to fix this problem. If the government is able to find a solution to stabilize the population, they would pull off something that no other government could.
In the longer term, if China can resist bringing in low IQ immigrants, the low birth rate would eventually fix itself. That is because those who have babies by definition pass along their genetic and cultural attributes to the next generation, who would be more inclined to have babies in this urban environment. After many generations of weeding out the people who will not have kids, the younger generations will have a much stronger drive to reproduce, despite the urban environment that deterred others in the previous generations. The Chinese can accelerate this by allowing as many babies as anyone would like to have.
Longer term, demographic implosion is the biggest danger to the rise of China. The Chinese have some time to fix this problem, but the trend is unmistakable. The awful statistics of the other East Asian countries points to an ominous future. Hopefully, the Chinese can intervene and turn this around.
Friday, July 6, 2018
Potholes In The Paths of A Rising China
"The world is getting better, but not in a straight line."
---James P. Goreman
The rise of China has encountered many obstacles along the way, it was due to the intellect of the leadership and their ability to execute difficult decisions that the Chinese economy and society continues to grow and transform itself. What pot holes lie awaiting in the future?
The United States started the first salvo of a trade war with China today, but I am pretty sanguine that this wouldn't lead to a major setback for either country. Fortunately for China, their future is largely in their own hands. China still face many challenges in the future. In the economic front, they face the prospect of slower growth and the need to transition from an investment driven economy to a more consumption driven economy. In the security arena, having grown dependent on trade, especially raw materials to fuel economic growth, the Chinese must now protect the ever growing trade routes, both from the ocean and from land. On the diplomatic front, China faces the challenge all rising power faces. There is a great deal of fear, jealousy and push back against the rise of China from the established powers, particularly U.S., Japan and Western Europe. China also faces enormous environmental challenges still as they continue their industrialization. The Chinese government structure have not faced a challenge that is bound to come up in the future, namely how to govern in hard times. China had slowed growth from time to time, but never a prolonged recession since Deng took over. With all the corruption and abuse of power of some of the Communist party members, a new generation of people accustomed to an ever growing economy, would the government be able to handle hard times if and when it comes will determine if the country would fall apart or continue on its course. Finally, the looming demographic crisis on the horizon could threaten to severely diminish the prospect for China in the longer term.
Looking at the past track record of the government, I feel that China will be able to handle the economic transition. There are still enormous opportunities to add to the economy. The robotic revolution, which is just starting in China, will greatly accelerate productivity gains. There are still a lot of room to improve the infrastructure, like the Chinese version of the hyperloop, which will provide travel at faster than speed of sound at a tiny incremental cost. Urbanization, which greatly enhances the productivity of the urbanized inhabitants, is happening at a scale and compressed time frame never seen before in human history. A.I., which will greatly accelerate productivity in many industries, is happening at a very fast pace. The Hongqi River Project, with the potential to create a gigantic farming area out of the arid Xinjiang, is the biggest water project since the Hoover Dam. Hoover Dam diverted the Colorado River to make California a farming power house. Hongqi River project has the potential to do the same for China. An area that is barely habitable will now have enough water to host two hundred million people or more. Mechanized farming at huge scale, as practiced in United States and Canada, will now be possible in China. On the negative side of the ledger, the economy does contain some very serious imbalances that needs to be rectified. In the next decade, we will see some significant slow down if we are fortunate, or, equally likely, China may experience lost decades like the Japanese if the leadership fail to reform. I will discuss this further in a future post.
The growth of the Chinese military, which will be the topic for later posts, is progressing extremely well. This bodes well for their security and diplomatic areas. The Chinese have also grown much more adroit at diplomatic maneuvering. China still faces the Thucydides Trap as a rising power, but I feel that the leadership from both countries are smart enough to avoid a hot war. The fly in the ointment is Taiwan. The independent wing of Taiwan, feeling their prospect for independence ebbing away as China gets stronger, are feeling anxious. Egged on by Trump, who uses Taiwan as a bargaining chip, they are calling for a referendum to declare independence in 2019. This could trigger a war that at the end will not be in anyone's interest. Hopefully, cooler heads prevail to avoid a war.
While pollution is still a problem, they are being tackled by the government using many innovative approaches, like using nuclear power to heat homes. I feel that they have moved past the worst polluting era for China and the trend is good.
The government, like all governments in the world, has many problems. The current incarnation is still relatively new and untested. This in contrast to the United States government, which has gone through many challenges and is quite staple. Continue reform is still needed to fix many of the contradictions and inertia that still plague them. One can observe one of these through The existence of Tea House Scam in Beijing. For the uninitiated, the tea house scam is one of many scams that were on going in big cities like Beijing where tourists were fleeced out of hundreds or thousands of dollars by scammers. Given that this is happening for many years right in the capital of China, the police and other authorities must have allowed it, mostly because the part of the money that the scammers got went into bribes for the authorities. Scams have become one of the industries that enriched the CPP members in power. For the small money that the scammers got, this generates enormous ill will for China, yet it seems the authorities are unable or unwilling to stop such practices. One of countless issues to be fixed by more reforms in the future. The changes that were made thus far bodes well for them to continue to make reforms that would allow them to make progress on their system in the future.
The biggest issue in the medium term is demographics. Like all their East Asian counterparts and Western world in general, China's birth rate is significantly below replacement level. In the short term, the impact is still limited. In the longer term, the impact could be quite catastrophic. The problem of population implosion is now a major issue with Japan, Korea, Taiwan, Singapore, Western Europe and the White population in the United States. So far, no country has found a way to reverse this problem. I will discuss this problem in my next post.
---James P. Goreman
The rise of China has encountered many obstacles along the way, it was due to the intellect of the leadership and their ability to execute difficult decisions that the Chinese economy and society continues to grow and transform itself. What pot holes lie awaiting in the future?
The United States started the first salvo of a trade war with China today, but I am pretty sanguine that this wouldn't lead to a major setback for either country. Fortunately for China, their future is largely in their own hands. China still face many challenges in the future. In the economic front, they face the prospect of slower growth and the need to transition from an investment driven economy to a more consumption driven economy. In the security arena, having grown dependent on trade, especially raw materials to fuel economic growth, the Chinese must now protect the ever growing trade routes, both from the ocean and from land. On the diplomatic front, China faces the challenge all rising power faces. There is a great deal of fear, jealousy and push back against the rise of China from the established powers, particularly U.S., Japan and Western Europe. China also faces enormous environmental challenges still as they continue their industrialization. The Chinese government structure have not faced a challenge that is bound to come up in the future, namely how to govern in hard times. China had slowed growth from time to time, but never a prolonged recession since Deng took over. With all the corruption and abuse of power of some of the Communist party members, a new generation of people accustomed to an ever growing economy, would the government be able to handle hard times if and when it comes will determine if the country would fall apart or continue on its course. Finally, the looming demographic crisis on the horizon could threaten to severely diminish the prospect for China in the longer term.
Looking at the past track record of the government, I feel that China will be able to handle the economic transition. There are still enormous opportunities to add to the economy. The robotic revolution, which is just starting in China, will greatly accelerate productivity gains. There are still a lot of room to improve the infrastructure, like the Chinese version of the hyperloop, which will provide travel at faster than speed of sound at a tiny incremental cost. Urbanization, which greatly enhances the productivity of the urbanized inhabitants, is happening at a scale and compressed time frame never seen before in human history. A.I., which will greatly accelerate productivity in many industries, is happening at a very fast pace. The Hongqi River Project, with the potential to create a gigantic farming area out of the arid Xinjiang, is the biggest water project since the Hoover Dam. Hoover Dam diverted the Colorado River to make California a farming power house. Hongqi River project has the potential to do the same for China. An area that is barely habitable will now have enough water to host two hundred million people or more. Mechanized farming at huge scale, as practiced in United States and Canada, will now be possible in China. On the negative side of the ledger, the economy does contain some very serious imbalances that needs to be rectified. In the next decade, we will see some significant slow down if we are fortunate, or, equally likely, China may experience lost decades like the Japanese if the leadership fail to reform. I will discuss this further in a future post.
The growth of the Chinese military, which will be the topic for later posts, is progressing extremely well. This bodes well for their security and diplomatic areas. The Chinese have also grown much more adroit at diplomatic maneuvering. China still faces the Thucydides Trap as a rising power, but I feel that the leadership from both countries are smart enough to avoid a hot war. The fly in the ointment is Taiwan. The independent wing of Taiwan, feeling their prospect for independence ebbing away as China gets stronger, are feeling anxious. Egged on by Trump, who uses Taiwan as a bargaining chip, they are calling for a referendum to declare independence in 2019. This could trigger a war that at the end will not be in anyone's interest. Hopefully, cooler heads prevail to avoid a war.
While pollution is still a problem, they are being tackled by the government using many innovative approaches, like using nuclear power to heat homes. I feel that they have moved past the worst polluting era for China and the trend is good.
The government, like all governments in the world, has many problems. The current incarnation is still relatively new and untested. This in contrast to the United States government, which has gone through many challenges and is quite staple. Continue reform is still needed to fix many of the contradictions and inertia that still plague them. One can observe one of these through The existence of Tea House Scam in Beijing. For the uninitiated, the tea house scam is one of many scams that were on going in big cities like Beijing where tourists were fleeced out of hundreds or thousands of dollars by scammers. Given that this is happening for many years right in the capital of China, the police and other authorities must have allowed it, mostly because the part of the money that the scammers got went into bribes for the authorities. Scams have become one of the industries that enriched the CPP members in power. For the small money that the scammers got, this generates enormous ill will for China, yet it seems the authorities are unable or unwilling to stop such practices. One of countless issues to be fixed by more reforms in the future. The changes that were made thus far bodes well for them to continue to make reforms that would allow them to make progress on their system in the future.
The biggest issue in the medium term is demographics. Like all their East Asian counterparts and Western world in general, China's birth rate is significantly below replacement level. In the short term, the impact is still limited. In the longer term, the impact could be quite catastrophic. The problem of population implosion is now a major issue with Japan, Korea, Taiwan, Singapore, Western Europe and the White population in the United States. So far, no country has found a way to reverse this problem. I will discuss this problem in my next post.
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