China: China Had a Bad Year


January 5, 2024: Last year was a Chinese bad year. For example, by mid-2023 Chinese manufacturing activity had shrunk for five months in a row. This was one of several indicators that the Chinese economy was in trouble. The problems are largely self-inflicted. The shrinking of Chinese economic activity is the result of several different economic problems, including consumers not resuming their pre-covid spending habits. Less consumer spending was not expected. None of this should be a surprise because all the problems have occurred in China before, but not all at once. Paying attention to Chinese history is respected and it is still a popular tradition to base major decisions on what has happened in the past.

Chinese leader Xi Jinping came to power in 2012 and initially concentrated on reinforcing government control of the military. Historically, China has always had to deal with those two problems and Xi Jinping, like most Chinese leaders, pays more attention to history than foreign counterparts do. Chinese military history is measured in thousands of years while Westerners, in most cases, have a few centuries of it and don’t pay as much attention to past experiences as China does. Chinese economic history over those long periods did not change. It was largely feudal and, since 1910, China has been trying to develop a form of government capable of handling economic problems more effectively. Xi Jinping has had some success and recently saw the Chinese banking sector improving to the point where it might actually assist in reviving the economy. The economy is still in bad shape, with too much debt, too many foreign companies pulling out of China, too many Chinese companies barely staying in business with a growing number slipping into insolvency and bankruptcy, plus more traditional corruption, and adverse government policies.

An example of unique Chinese economic problems can be seen in the 2023 real estate crisis. The usual solutions did not work as well as the government expected. The largest problem was corruption at the provincial and local level. Over the last decade there has been a major effort to purge the false reporting from national economic statistics. The false data problem is not gone but at least it is recognized. This was painful because it revealed that past economic growth was more uneven and less than everyone believed. Many foreign economists had figured this out but now everyone knows about it. China now realizes it has a dangerous real-estate bubble that must be deflated carefully, or it could cause a major economic recession. China has to be more careful about verifying economic data coming from provincial officials. This is crucial because a major real estate default is a threat to the entire economy. The major real estate firms are Evergrande and Country Garden and to prevent a debt default, government owned banks and enterprises that hold much of this bad debt have been ordered to tolerate delayed overdue payments on this debt.

There are also political problems. Leader Xi Jinping has made himself leader-for-life and now screens or makes all key economic solutions. Xi isn’t an expert in economics or aware of the complexity of the Chinese economy or historical examples of similar situations. For example, back in the 1980s China adopted a market economy and shed most of its socialist, as in state ownership of everything, responsibilities. China was still ruled by a nationalist dictatorship government. This created a similar situation to what occurred nearly a century ago. Currently China has a self-appointed leader-for-life running what is officially known as a socialist dictatorship. Back in the 1930s Germany had a relatively free market economy in a country controlled by the NSDAP, or National Socialist German Workers Party, that was popularly known as the Nazis. Spain had a similar government with a dictator technically acting as regent for a deposed monarchy. Japan had a market economy, but its constitutional monarchy had been usurped by a military coup that put a military dictatorship in power that ruled in the name of the emperor. Italy was run by a dictator who was a lifelong socialist but also a nationalist dictator promising to revive the Roman Empire on the cheap. That did not end well, nor did the plans of similar governments. Despite the risks, Xi Jinping is willing to try a Chinese brand of fascist rule in the hope that it will work for him.

There are other potential problems. For example, in the last few centuries China had endured periods when independent warlords ruled portions of a divided China and the communist Chinese feared this might happen again. For thousands of years, the large East Asian area dominated by the Han variant of Chinese people was sometimes united but more often divided into separate kingdoms. After World War II the Chinese communists won a decades-long civil war with non-communist factions and proclaimed a communist dictatorship of China, or at least most of it. There was a long list of neighboring territories that were still independent or belonged to neighbors and China worked its way through the list diligently and as non-violently as possible.

All this activity in China made neighbors nervous. Japan responded by increasing its 2024 defense budget to $52.5 billion. This was 12 percent more than in 2023. These annual increases will continue into the next decade. This is a major sustained increase in military spending so that Japan can upgrade its armed forces and pay for many new systems. This is an urgent matter because the Japanese population continues to shrink. So does that of other East Asian nations that have experienced a sustained economic boom that has put most of the population into middle-class lifestyles. Even China is now suffering from this, with fewer babies born each year to replace those dying. The current Japanese birth rate is 1.39. In 2008 it was noted that China’s birth rate had fallen to 1.8 births per woman, which was beneath the replacement rate of 2.1. That means the population will begin to decline slowly in the next decade or two.

But the biggest problem is the growth of retirees, and the shrinking number of workers to support them. Proposals to allow more births run into arguments about limited resources. Moreover, as women become more affluent, they are less inclined to have lots of kids. Japan is way ahead in this population curve, and China does not want to join them. But no one has yet come up with an acceptable alternative. The impact of fewer births in urban areas over two decades ago led to growing shortages of skilled labor. The costs of manufacturing high tech gear is growing, forcing Chinese manufacturers to move more factories to nations with cheaper labor. The military is giving the troops a raise, especially the technicians. Otherwise, it can’t recruit them, or keep them. South Korea already has a lower 1.11 birth rate than Japan. Taiwan has the lowest worldwide at 1.09, followed by South Korea at 1.11, Singapore at 1.17 and Hong Kong at 1.23. The American birth rate is 1.66 but most Western nations have lower rates. For Europe as a whole, the rate is .98.

A less urgent problem is China’s intent to conquer Taiwan and restore its brief status as a Chinese province. China wants to do so as painlessly as possible because of fear of American blockade, Western sanctions, and the domestic economic costs if Taiwan carries through on its threat to destroy its high-tech industries if China invades.

China is also concerned about military uncertainties if it attacks Taiwan, as shown by the Ukraine War, which is the largest conflict experienced between relatively equal forces since World War II. China is dismayed that its neighbor Russia started the war by invading Ukraine and is losing. The Ukraine war is improving Western weapons by demonstrating what works and what doesn’t and to what extent. Only the Russians and Ukrainians are fighting but Western nations are providing huge, as in over a $100 billion worth, of military and economic aid. Russia has no such wealthy and generous allies. The West imposed severe economic sanctions on Russia which China is skirting with plausible deniability games for fear of a ruinous trade war with the West. China would suffer the most and does not need that sort of thing right now

The war in Ukraine has confirmed the inferiority of Russian weapons compared to Western models. For years some countries, like Pakistan, received most of its weapons from China or Russia. The Chinese gear is superior to what the Russians produce but still inferior to Western systems. Pakistan is China’s largest export customer for weapons and Pakistani military leaders now want to repair relations with the Americans, who withdrew all military aid after decades of being lied to by the Pakistani military about their support for Islamic terrorism. That support backfired with the new Afghan government, installed with much help from the Pakistani government, threatening war with Pakistan over border disputes and growing anger inside Afghanistan against Pakistan because of the even greater economic collapse in Afghanistan.

China has provided Russia some economic and diplomatic support while privately criticizing its impetuous neighbor for getting into a fight it couldn’t win. For example, China has helped Russia deal with its economic problems by lending them more cash and being patient about repayment or interest payment. China is providing many of the essential imports that Russia can no longer obtain from Western countries. For the communist Chinese, this is the second time the Russians have got themselves into trouble and turned to China for help. This first occurred in the late 1940s when Russia installed a communist government in North Korea while American forces occupied and soon departed from South Korea. Russia then told North Korean leaders they had an opportunity to unify Korea. Russia had supplied North Korea with lots of weapons and economic aid as well as military advisors to quickly upgrade North Korean forces to the point where invading South Korea seemed a reasonably good idea. North Koreans invaded and ran into far more resistance than they expected from South Koreans and the rest of the world. China had to send in lots of troops to prevent the North Koreans from being wiped out and North Korea being united with South Korea rather than the other way around. The war was a bloody stalemate and North Korea is still a troublesome neighbor for China.

China also has some major border disputes with its southern neighbor India. One of the disputed territories is Ladakh, where China built fortified bunkers and underground bunkers in a desolate mountain region 70 kilometers on the Indian side of the Line of Actual Control or LAC. India considers the LAC the official border butt China has quietly established military camps and fortifications on Indian territory that China took during their brief 1962 border war with India. This region is sparsely inhabited, desolate and located at an altitude of 5,000 meters in a remote area of Kashmir. The region is flat and dry year-round. Its only military value is that it provides a perpetually dry, flat land connection between India and China. At one point China used the area for live-fire military exercises but halted that because Akasi Chin was too remote and required expensive land transportation efforts to supply troops in what is basically a hard sand desert. The new fortifications allow China to stockpile supplies in underground bunkers and thus gain a military advantage over India in any future border conflict.

China is going to spend billions of dollars a year between now and 2028 to upgrade its navy to enable it to operate longer distances from the Chinese coast. This plan includes building a fourth aircraft carrier, another SSBN or nuclear powered ballistic missile sub as well as more ocean going destroyers and frigates. This is part of the continuing conversion of the Chinese navy from a coastal to high seas fleet able to operate a thousand kilometers from China. This program is made possible by large annual increases in the defense budget, which was $230 billion in 2023 compared to $172 billion four years earlier.

The increase in spending on the navy is needed to back up Chinese claims offshore. A newly released Chinese map revealed claims on territory belonging to neighboring countries. The map includes all of Taiwan and the entire northeast Indian state of Arunachal Pradesh. The Taiwanese pointed out that Taiwan had never been a part of China, in part because China did not want to be bothered with ruling a large island off its coast. Historically, there was a similar attitude towards Japan. Korea, which shared a land border with China, was considered a dependency. That is, a semi-independent entity that ruled itself but obeyed Big Brother China. The list of areas claimed by China changes over time depending on how realistic it would be for China to seize, keep and rule an area. India replied that China had never ruled Arunachal Pradesh. The other claimed areas were islands and surrounding waters in the South China Sea. Most of the South China Sea claims were at the expense of the Philippines but also included some islands belonging to Southeast Asian nations Brunei, Malaysia, and Indonesia.

China prefers to take claimed territory via threats and economic pressure. Some of the military threats in the South China Sea are quite elaborate, involving hundreds of ships, most of them commercial vessels belonging to the Chinese naval militia. Now China is sending more coast guard ships into the South China Sea. These vessels are armed, but the only weapon they’ve used so far is their powerful water cannon. The victims of this intimidation campaign have not been impressed and instead formed defensive units consisting of ships and aircraft from allies like Japan and the United States.

China has become a major naval power because it is a major builder and operator of commercial shipping. In terms of the most merchant ships owned or controlled, China is now in first place by operating nearly a quarter of the 119,000 sea-going cargo ships. For the last decade Greek shipping companies were on top, controlling over 20 percent of the global shipping fleet. This was not because the Greek economy needed that many merchant-ships, but because the Greeks have long been the most efficient managers of commercial shipping. That is still the case, but China now has the second-largest economy in the world, is the largest ship builder and a major user of merchant ships to move its growing tonnage of imports and exports and prefers to manage most of the ships moving this cargo. China may not be as efficient at managing shipping as the Greeks, but China is good enough and is only managing China-owned or operated ships.

The neighbors are noticing and acting. For example, the Japanese navy is second only to China among Far Eastern navies. Japanese combat ships are all of modern design with the best trained and experienced crews in the Far East. Japan, along with China and South Korea, are the largest shipbuilding nations in the world and produce, in terms of tonnage, over 95 percent of the commercial shipping built annually. For centuries the major manufacturer of commercial ships tended to develop and build the most innovative and numerous warships. This is how the United States became the leading warship supplier after World War II ended in 1945. European nations rebuilt their shipbuilding industries after World War II and became and remain major warship builders. Later in the 20th century China, Japan and South Korea became and remain major commercial shipbuilders and that enabled them all to design and build their own warships. The U.S. is now a minor component of commercial shipbuilding and having problems building world-class warships at all, let alone doing it on time and under budget.

The neighbors are also nervous about how much effort China has spent in trying to improve their military. Since Chinese leader Xi Jinping came to power in 2012, he has backed growth of the military as well as reinforcing government control of the military. Xi Jinping is aware that although the Chinese military has achieved many visible signs of modernizing, like new weapons, equipment, uniforms, troops, and officer training, it is still having problems in several key areas. When it comes to leadership there are problems with the political officers. The CCP or Chinese Communist Party long ago borrowed the concept of the Zampolit political officer from the Soviet Union. The political officer represents the Communist Party and has the authority to overrule any order a military officer gives. In reality, the political officer usually acts as a combined morale and special events officer. The political officers are primarily responsible for preventing anything happening in their unit that would embarrass the party. In theory, political officers are supposed to prevent their commanders from getting involved in fiscal corruption, but often it's the other way around, with the political officers getting involved in illegal money-making schemes first. Corruption is probably the biggest problem the Chinese armed forces have.

The CCP has long been trying to purge political officer ranks of dishonest and unreliable elements. It has been slow going. This has caused more friction between commanders and their political officers. That tends to reduce the effectiveness of the unit these two officers are in charge of. There is no easy solution to this problem. Russia got rid of the Zampolits in the early 1990s but a decade later brought them back to assure the loyalty and reliability of the armed forces.

Despite years of opposition by Western intelligence and police agencies, China continues its efforts to develop favorable attitudes towards China in Western universities. Most of this effort is concentrated in large English-speaking nations like the United States and Britain. Western officials have long realized this. Western universities and faculty were always a prime target because these institutions and their key staff are not seen as a target for Chinese influence operations. China understands that the staff of universities in the West are recognized by locals as a source of expert opinion on many matters. These faculty members can also be influenced by gifts of cash. These are not called gifts or, more accurately, bribes. Rather the money is considered a grant to support further academic studies on one subject or another. China arranges large grants. Government and popular opposition to these programs has not eliminated them, just forced China to change how it implements the program. While Western intelligence agencies remain alert and aware of this program, few others in government or academia seem to be concerned. After several years of indifference by university administrators towards requests to monitor and block Chinese influence efforts, governments are becoming more energetic and aggressive about it.

China is not a good neighbor. For example, while North Korea has improved relations with Russia, the same can’t be said for China. Along the 1,352 kilometer border with China, the Chinese have installed additional walls, fences, and guard posts. On the Chinese side, a growing network of video cameras are monitored locally and from a central facility. The cameras are believed to have night vision capability but are still blocked by fog and smoke. China has been using similar camera technology internally, with the addition of a very effective facial recognition system. Anyone spotted on the border that is concealing their face is regarded as suspicious and investigated. All the border surveillance and obstacles were installed in the last few years. As a result, it is much harder to smuggle anything or anyone across the border. In 2022 and 2023 fewer than a hundred North Koreans made it across the border into China and then South Korea. In 2019, before most of the new border obstacles and surveillance was installed, 1,047 North Koreans made it to South Korea via China. There are still fewer border obstacles along remote portions of the border. It is more difficult to reach these areas without being noticed on one side or the other. This means some snuggling still continues, but the risk of being caught is greater and smugglers charge higher fees because of the increased risks of being spotted. This often leads to smugglers being arrested or retreating from the border before they can cross.

All of this aggressive activity by China has caused the neighbors to prepare for the worse. Japan has revised its defense budget increases and over the next five years it is gradually increasing its defense budget from one percent of GDP to more than two percent. That means that in 2028 the defense budget will be about $85.9 billion. In 2022 Japan announced it would increase spending by 2027 to $73 billion. Japan currently spends $52 billion while South Korea spends $86 billion and North Korea about $5 billion. In the last year Japan assessed its defense spending plans as inadequate and increased them again. Japan already has the Far East’s third largest annual defense budget. China currently spends $225 billion a year compared to $816 billion for the United States. Russia is also spending more on its military. This is more than Russia planned to spend because they are at war in Ukraine and losing. This Russian spending is temporary because much of it is borrowed money and, unless the economic sanctions on Russia because of the war are lifted, sustaining that high defense spending is not possible.

For Japan, most of the additional defense spending is being spent on missiles for retaliating against attack by North Korea, Russia, or China. This counter-strike capability is a major change in Japanese defense strategy. South Korea sees this as a welcome but worrying change in Japanese defense policy. There is some concern that Japan might be too aggressive in reacting to a possible threat. Both Koreas are still angry at Japan because Korea was a brutally treated Japanese possession from 1910 to 1945. The four decades of Japanese occupation were very cruel. Think how bad the Nazi occupation of conquered countries was during World War II and realize that the Japanese occupation of Korea was much worse and for much longer. The Japanese don’t help with their post-World War II attitude that Japan was a victim because it was forced into World War II by evil Westerners and was only trying to help its neighbors by occupying them and treating them badly. Japanese have a hard time understanding how their victims don’t appreciate all that Japan tried to do for them. What the foreigners do remember is what the Japanese did to them, something the Japanese tend to downplay or deny outright.




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