September 29, 2018: Chinese leaders, more than those of most other countries, look more to historical lessons when deciding how the rule China effectively and remain in power. One event Chinese leaders still pay close attention to is the collapse of communist governments in Europe between 1989 and1991. While China could understand why the East European communist nations rebelled against communist governments imposed on them by Russia after World War II, the Chinese are still careful to avoid the errors that brought down the mighty Soviet Union in 1991. The key Russian problem, as the Chinese see it, was the inefficiency of the Soviet economy. The Soviets never allowed a free market to develop, as China did in the 1980s. By the 1990s the Chinese market economy was growing ten percent or more a year, a rate sustained for twenty years. Thus per capita GDP went from $333 in 1991 to $7,500 now. The Russian GDP continued shrinking after 1991 and it took more than a decade for a market economy to get going. Yet Russian economic growth is still crippled by corruption and the continued existence of state owned enterprises (SOEs).

Chinese leaders thought they had learned from these Russian mistakes but now Chinese economists and bankers are reporting that China has many of the problems that brought down the Soviet Union and kept post-Soviet Russia weak. While China currently has the second largest economy on the planet it has many serious problems that cannot be ignored. For one thing, China still has a lot of SOEs, which employ about a fifth of the workforce. For political reasons the communist government cannot get rid of these SOEs even though they are a major threat to the banking system. Inefficient and often unprofitable SOEs consume about half the available bank credit while only sustaining a fifth of the GDP. The CCP (Chinese Communist Party) needs the SOEs to provide jobs for many key supporters and that means a lot more corruption is tolerated in SOEs than in free market firms.

China has made impressive efforts to deal with corruption it concentrates on, such as corruption that causes the most unrest among the general population. This includes blatantly corrupt behavior at the local level as well as in the military or companies where the bad behavior leads to tainted food or medicine. But if you are a loyal senior official and show discretion and restraint in your corrupt practices you are left alone. That form of favoritism is necessary to run what is, just another Chinese dynasty. The 1911 revolt the ended the monarchy did not replace the emperor and his bureaucracy with anything much different. After four decades of civil war and fighting Japanese invaders the communists took control and what they established quickly evolved into a hereditary aristocracy. By 2017 China had returned to the “emperor for life” model as Xi Jinping persuaded the Chinese leadership to accept the restoration of lifetime tenure for the supreme leader, instead of the five year term system adopted after the disastrous lifetime rule of the first communist emperor (Mao Zedong) in 1976. Mao was better rebel leader than emperor and his 18 years of misrule killed over fifty million Chinese and made an anemic economy even weaker. After Mao, there was reorganization rather than chaos and among the many practical reforms instituted was a market economy that could thrive under the rule of a communist police state.

But then came 1989-91 and the wealthier and wiser Chinese rulers sought answers to why all those communist police states in East Europe just evaporated, replaced by various degrees of democracy and free market economies. Chinese leaders are still unsure what the most important lessons for China are to be learned from all that. Some of the lessons were obvious. For example, a communist command economy cannot compete with a free market economy. Or at least no one has figured out how to do it. But creating a market economy proved easier than repairing the damage decades of communist rule had inflicted. In addition to the corruption (the free market economy grew in part by simply bribing disruptive communist officials to get out of the way), there was the growing pollution of both water and the air. All that economic growth produced more pollution which Western democracies were quicker to clean up. Politicians who got in the way of that were unable to get reelected. In a communist police state bad news could be kept out of the news for a while but with the capital suffering some of the worst air pollution in the world, the pollution became a major issue and it is still a long way from being fixed.

Some of the other lessons learned from the Soviet collapse are also being increasingly ignored. For example, it was noted that the Soviet economy collapsed in large part because such a large portion of GDP (over 20 percent) went to military spending and related foreign affairs. The Soviets recklessly spent large sums on supporting allies. The Soviet subsidies kept North Korea and Cuba economically viable and loyal. Lesser sums were wasted on arms sales financed by low-interest loans that were never paid off. Same with a lot of non-military foreign aid. Now Chinese leaders are being reminded that they are moving towards the self-destructive Soviet practices even though in the 1990s it was agreed that arms races and bad loans to fickle allies were a bad idea. While on paper the Chinese defense budget is about a fifth of what the Americans spend, Chinese economists point out that the U.S. economy is better able to support that degree of spending. Meanwhile, if you calculate Chinese defense spending the same way the Americans do the Chinese defense spending is closer to half what the Americans spend. Another expensive Chinese decision was to adopt a nationalist posture in order to obtain more support from Chinese who would otherwise be questioning the wisdom of communist rule because of the corruption and pollution.

That may change as China's OBOR (One Belt, One Road) program to establish secure sea lanes for Chinese trade and new roads, railways and pipelines throughout Eurasia, especially Southeast Asia and Central Asia. Many of the new port projects are being built in South Asia and Africa. A lot of these projects are very risky because if they cannot trigger enough additional economic activity China will end up holding the bad debt. China is investing over a trillion dollars in OBOR projects and some see this as one huge “make work” (mainly for Chinese workers and engineers who are sent overseas to build this stuff) effort financed by the Chinese banking system. The Chinese bankers are increasingly worried about too much bad debt and what that can do. Japan is a nearby example that suffered from a bad debt crises because of a real estate bubble. Japan has yet to recover from that mess and Chinese bankers don’t want to be stuck with the same mess.

This use of nationalism has led Chinese leaders to make a lot of the expensive mistakes they belittle the American leadership for. While the United States is often accused of ignoring the cultural differences with its allies and opponents and making bad decisions based on misperceptions, other countries often do the same. While the United States has made many mistakes because American leaders believed foreigners thought like Americans (but in a different language) at least the U.S. has come to acknowledge that this problem exists. Not so in China where this lack of empathy for other cultures is rampant in the government and especially in the military. This includes that part of the military that prepares plans for dealing with foreigners in crises situations that could lead to war.

While Chinese leaders are very conscious of their own history and the many lessons they can still learn from all that the one lesson that makes their neighbors nervous is that the Chinese believe Chinese expansion is a natural and justified policy for China. The neighbors are very uncomfortable with China's reemerging (and quite ancient) attitude that China is the center of the universe (the "Middle Kingdom") and that everyone should show more respect and pay tribute. The Chinese government encourages these nationalistic attitudes, and many Chinese are eager to see China become more powerful and "get more respect." This is dangerous stuff and a common precursor to war. But China is run by a communist police state that sees nationalism as a useful tool to keep the communists in power. This is the sort of atmosphere that triggered the two World Wars. In 1914 Germany, long the disunited and picked apart mess in Central Europe was united (in 1870) for the first time and wanted respect to go along with its newfound economic and military power.

In contemporary China, an actual war would likely destroy the communists, who are unpopular already because of corruption, abuse of power and pollution. A major component of any future war would be economic, as China is now dependent on imports of raw materials. That is something new in Chinese history, as the Chinese have, for thousands of years, prided themselves on self-sufficiency. That is gone and can't be regained without some drastic economic and cultural changes. Thus the Chinese communists are playing a game of bluster and bluff. This is especially true when you consider that the Chinese armed forces are also crippled by massive corruption and mismanagement. For that reason alone the Chinese government would avoid actual war. But short of large-scale fighting, there's a lot the Chinese can do to push their neighbors around. China tries to substitute economic power, as the Russians often did with their “loans” but China is finding that their cheap loans are no more effective than the Russian ones. Socialist Venezuela is turning out to be a particularly expensive and unpleasant example of this and North Korea threatens to become a similar expensive catastrophe.

American planners have become aware of the lack of realistic planning by the Chinese military. Chinese wargames tend to ignore the reality of how their neighbors make military and diplomatic decisions. The Chinese military planners are particularly blind to the intricacies of politics in democracies and the influence of media (especially the Internet). While the Chinese appreciate the Internet as a tool for propaganda and espionage they have a blind spot when it comes to how the mass media influence political and military decision making in the powerful democracies (like the United States, Japan, Taiwan and South Korea) they might face in a future war. The U.S. is trying to develop ways to deal with this blind spot and so far can only conclude that China has now become a more irrational and dangerous adversary because the Middle Kingdom leaders are too busy staring at themselves in a mirror rather than paying attention to what is happening outside their border.