After four decades of spectacular expansion, China is taking a step backwards. This is a real opportunity for the free nations.
In the 15th century, China and Europe went down different paths. China, the leading world power at the time, closed its doors. In 1433, it put a sudden end to its maritime expeditions, which had led Admiral Zheng He from south-east Asia to the Arabian peninsula and the east coast of Africa. It sanctified its bureaucracy, and stopped any development in its extensive production method based on work. At the same time, Europe engaged in globalization for the first time and advanced towards a capital-intensive economy. The Chinese empire withdrew into itself and then went into a long decline, whilst the West took control of history.
Whereas Mao gave China back its sovereignty, Deng Xiaoping made it a great power when he launched the “Four Modernizations” in 1978. By opening China up to the market economy, to foreign capital and to technology, he enabled the country to make the most spectacular advance in history and; in the space of four decades, to become the leading economy in the world in terms of purchasing power. During celebrations of the hundredth anniversary of the Communist party, Xi Jinping seized the opportunity presented by the Covid epidemic to turn in the opposite direction by closing China up and prioritizing ideology over growth and the party’s power over innovation.
The first signal came when the government took back control of the technology sector. First of all, on the pretext of countering speculation and guaranteeing competition, Beijing broke Jack Ma’s backbone by forcing him to put off the stock market flotation of Ant Technology, and subsequently inflicting a fine of $2.8 billion on Alibaba. Then Didi, the market leader in China in chauffeur-driven hire cars with 90% of market share and 493 million users, which had just been listed on Wall Street, was submitted to shock treatment by regulators under cover of data protection. This led to a fall of over 40% in its share value and forced the company to envisage withdrawing from the stock market.
The de facto nationalization of private education (with a $100 billion market) by means of a ban on profit-making has been an even more extreme measure. The official aim was to reduce inequality, but what lies behind it is simply the desire to exert ideological control over education and society. Furthermore, it is linked to entering the capital requirement of state companies and to Chinese companies being banned from being listed on stock markets outside China, with questions being raised over Variable Interest Entities, holding companies that used to enable foreigners to get round the ban on investing in strategic sectors. The blow was sudden: the groups involved saw their shares fall by over 70%.
2021 will remain the year of the “Four Closures” in China. Firstly, closure of the economy: priority is being given to the domestic market, with its stumbling blocks of Chinese vaccines that are ineffective because of their poor quality, and of weak demand linked to gaps in the social benefit system. Secondly, monetary closure, with strict supervision by the Chinese central bank over any financial operations, even in the crypto-currency sector in which it intends to guarantee a monopoly for the e-yuan. Thirdly, technological closure, with the Chinese internet being uncoupled from the Western world. Fourthly, strategic closure, with fewer loans being granted within the framework of the New Silk Routes (reduced from 75 to 4 billion a year since 2016), and above all with pressure on Taiwan to force it back into reunification with the mainland.
This change of policy has caused Chinese stock exchanges to plummet – with a drop of 25% since February. It has has brought about the flight of foreign capital, and made the US stock exchange authorities suspend the listing of Chinese companies, given the uncertainty surrounding their financial information and their regulation.
There are serious long-term consequences. The killing-off of private education will put yet another brake on the population figures. After a boom in growth linked to emergence from the epidemic, it will slow to around 5% per annum, and will then wither away because the public sector will take back control of private companies and there will be a brain drain. On the international front, China’s image will suffer because of the hardening of its model of totalitarian capitalism, its support for nations that are hostile to freedom, and its expansionism. This will go hand in hand with extreme aggression, particularly with regard to Taiwan, which Xi Jinping has promised to annex at all speed.
The closure of China is a major event that it is imperative for democracies to use to their advantage. By withdrawing in on itself, China is making the same mistake that Donald Trump made with regard to the USA: it is facilitating its own containment. The free nations must mobilize and attract the talent that will undoubtedly be leaving China. The nationalistic and ideological turn that Beijing is taking is also increasing the risk of armed confrontation which free nations must be prepared for by strengthening their alliances and rebuilding their technological leadership.
The right way to retaliate to China is to rebuild our democracies. They must solve the problems that Beijing would rather hide, and regain their guardianship. These are real problems: the excesses of a bubble economy; the unearned income and exorbitant power of technology monopolies and social media, the appropriation and manipulation of personal data; the surge in inequality. Democracies will only gain the upper hand over Chinese totalitarian capitalism if they go back to the values that made the West so successful: risk-taking and innovation; openness and unlimited choice; taking the gamble of political freedom.
(Article published in Le Point, 5th August 2021)