War & Peace. Choose all of the above to contain China

Partha Chakraborty-

Partha Chakraborty is an Indian-born immigrant; a naturalized US Citizen since 2018. Educated in India and at Cornell University, Partha is currently an entrepreneur in water technologies, Blockchain, and wealth management in the US and in India. The views expressed are his own.

October 1, China’s National Day, is marked with trepidation 100 miles across the Taiwan Strait; this year was no different. Like clockwork, 25 Chinese fighters, bombers and other military aircraft appeared in menacing formations over the strait. “The incursions, dozens upon dozens, continued into the night and the days that followed and surged to the highest numbers ever on Monday when 56 warplanes tested Taiwan’s beleaguered air defenses….When a Taiwanese combat air traffic controller radioed one Chinese aircraft, the pilot dismissed the challenge with an obscenity involving the officer’s mother”, reports The New York Times.


These must be confusing times in the halls of power in Beijing. The myth of invincibility of China’s economic miracle is in serious question, probably the first time ever in four decades. Chinese miracle did raise hundreds of millions out of extreme poverty, no question. The practice of treating the entire country as a single balance sheet, and, a single income statement did help Chinese economy weather maelstroms like financial crisis much better, on the surface, than most developed nations. But the practice of pushing everything under the rug does have its banes.


The Wall Street Journal recently chronicled Lu’an, a provincial city in Anhui in a tale around Evergrande, the troubled builder, to demonstrate how the condition came to pass. Evergrande did complete many projects in Lu’an, an urban sprawl that grew to over 6000 square miles. Lu’an city earned USD 1.2 Billion from land sales to builders last year compared to tax revenue of USD 900 million. Between 2019 and 2021, Evergrande pre-sold over eight thousand apartments in Lu’an, most by any developer. To increase property values, or just as a way of corporate greed that fuels unrelated activities, Evergrande started building USD 9 Billion “Fairyland” theme park, bigger than Disneyland, “featuring pastel-colored European-style pedestrian blocks and a mélange of animal characters, including a reindeer-like creature and a blue dragon”. Work also started on a USD 10 Billion EV manufacturing plant as a Hong Kong listed affiliated unit. At the corporate level Evergrande had, among others, a bank, a property management unit, a web of off-the-book transactions that hid presumably billions in liabilities. Money problems were apparent before. For years Evergrande was offering apartments as payment for services, and, as money became severely tight, missed interest payment twice in a month in September 2021; a default is almost certain when grace period ends by end of October.


Whatever happens to Evergrande’s dollar-denominated debt, China can ill-afford to have house prices drop by more than what a severe contraction might entail – say 10-15% at the most on top of a 20% drop already in the wake of Evergrande crisis. Real estate has a special place in Chinese economy psyche, more significant than the 30% share of the nation’s economic activity it commands. Over the last few decades, certainly in recent years, property investment has become the chosen vehicle of retirement security. Or so people thought, correctly, for all these years. In the process it became a house of cards, a nexus of local leaders, developers, ordinary citizens without social security but driven by hope. 70% or more of lifetime savings are invested in an apartment, with the hope that its appreciation will provide for end-of-life needs in the absence of social security. Unsold inventory of over 21 million apartments may call for correction of 50% or more, but that will wipe away decades of savings that a recently retired couple have no hope of recouping, ever, immediately pushing hundreds of millions back into extreme poverty.


Evergrande crisis could not have come at a worse time for Xi Jinping, the Premier. Xi has a clear preference for Mao’s ideas of economic growth which views state capitalism – China’s current system – a temporary measure to help catch up with the West. Further, he views the time for reversion to socialism is now – “Socialism with Chinese characteristics is socialism, not any other ‘ism,’” he told senior party leaders in January 2013. In a 2018 article in Qiushi, (“Seeking Truth”), the Party’s theoretical manuscript, Xi explained “China’s practice shows that once the socialist transformation is completed, the basic socialist system with public ownership as the main body is established…[and] state capitalism, as a transitional economic form, will complete its historical mission and withdraw from the historical stage.” Consequently, his mantra is “common prosperity”, a more equal distribution of wealth that befits “a modern socialist power” where “Capital serves People”. His campaign to rein in visible excesses of capitalism, however much it existed in China, already destroyed over USD 1 trillion of value and engendered fundamental disruption in industries as varied as private tutoring, online gaming, cloud computing, fintech, and others that are not in sync with his stated goal of domination of high-end manufacturing as in sensors, semiconductors and such. By end of 2022, when Xi is expected to hold on to power in contravention of Party traditions, he will have put the entire government machinery behind the goal of making private enterprise serve the state.


The risk that such a mission ends up suppressing much of entrepreneurial energy that has powered China’s boom is a small price to pay, if Party continues to deliver on its widely understood general promise of prosperity with stability. This minimizes existential questions that might creep up from excesses in Hong Kong or rampant human rights abuse in Xinjiang, among others. For 60% of China’s population living in villages, Xi’s promise of fight against corruption and economic upliftment still earns support for what is euphemistically labeled as “bringing order out of chaos”.


Evergrande debacle is anything but order. The failure of the system to gloss it over hints at the possibility that technocrats, groomed on order and planning, are simply at their wits’ end. Letting the market work through a possible bankruptcy is no solution either, as it fully lays bare the rot. More importantly, it exposes the Party as impotent nincompoop autocrat as it always has been. Discontent to that level is too much to handle, even if all criticisms on Weibo are systematically wiped out and even if all forces of the State are brought to bear. Every Party functionary is reminded that Tiananmen Square massacre started in a period of general discontent, rapid economic change and few other ways of expressing their grievance. Even if China 2022 looks much like China 1988 it will be extremely unlikely that China can clamp down as easily as it did in June, 1989 in a world of smartphones and VPN. Downside extreme is not acceptable for the Party.


As with any autocrat with back against the wall, distraction is a way out, especially if it whips up nationalism, and results in instinctive submission to its diktats. An open confrontation with Taiwan will come in handy. China likes to play a victim, that’s why we witness escalated dares by PLA. Chinese aircraft violated Taiwanese ADIZ over 500 times this year already, last year the number was 380. Each incursion elicits scrambling of jets by Taiwan, condemnation by US and others, recently a UK aircraft carrier sailed through Taiwan Strait despite Chinese protests. Combine that with misadventure in the South China Sea, where Chinese flotilla of “fishing ships” ram ships with abandon, where China built a new island with airstrip, and PLA conducts regular sorties in foreign waters. A few days back a US nuclear submarine collided with an underwater object damaging the ship, an escalation that is still unfolding.


Not that US strategists are oblivious, and that is the good news. Increasingly there is talk of a low-grade kinetic action – war – by 2023, either around Taiwan or in the Malacca Straits, possibly both at the same time. There is bad news, however. US wargaming consistently exposes gaping holes in allies’ capacity in a non-nuclear war, “blue team” fares badly against a newly empowered Chinese military in an as-is analysis. Echoing Chinese thoughts, Teng Jianqun, a former Chinese Navy Captain, blurted “Would the United States court death over Taiwan?” You can hardly blame him – US performance in Afghanistan makes our vulnerabilities eminently clear to all observers.

It is easy to choose peace as the only option when dealing with China, and talk as the default mechanism to address all conflicts. You would be wrong if you did. China’s neighbors learned of China’s duplicitousness, and shameless self-aggrandizement, not that you will expect anything else from a Communistic system where internal survival demands these qualities. Even if Biden promised a departure from Trump’s policies, the administration learned soon that China’s rhetoric of change is empty in all matters of mutual dispute. The administration moved away from any promise of overturning Trump’s policies when it comes to China, and rightly so. You need to resolve, and even force, to exact concessions from autocrats. Mao was fond of saying “Power flows out of the barrel of a gun”. As Mao’s worthy successor, Xi will appreciate peace if he stares down the barrel of a gun. War is not the option, anywhere. That said, when it comes to China, peace is untenable if there is no option of war on the table.

War & Peace. Choose all of the above if you want to contain China. It’s time we internalize this.