China: Friend or Foe?

China: Friend or Foe?

By Mark Rossano (Originally Published Feb 12th, 2021)

President Biden had his first call with China’s President Xi on Thursday, where many of the issues we’ve seen for the last decade were highlighted, including economic practices, human rights abuse, and aggression towards Taiwan. We have been discussing the conflict and tension between China-India on the Primary Vision Network, and the recently labeled (finally!) genocide of Uighurs in Xinjiang. But the problems with China don’t stop there—Tibet, Hong Kong, Taiwan, trade disputes with Australia and the U.S., and consistent strife with regional neighbors are a few more examples. Even after the signing of the RCEP deal, many issues remain unresolved, including water rights and Exclusive Economic Zone violations. Australia and Japan also signed the new trade deal, but that was followed by a signed treaty of mutual defense on the same day, and then military exercises with India and the U.S. (We will cover the India-China current border dispute later in this article.)

In order to know where we are today, it is important to appreciate where we have been. Our relationship with China has been worsening over the last decade, and we sit at a pivotal time in history. But the decision has already been made; we are heading into a new Cold War. In 1978, Deng Xiaoping recognized the need to reopen China to the broader world to expand a weakened economy and struggling growth. This required loosening or abandoning some of the core values of the communist dream and adopting a more capitalistic bent to stimulate growth. The great “re-opening” brought in a flood of investment. Relations improved throughout most of Xiaoping’s time in power, but even as China adopted a “friendly” tone towards the west, the issue of Taiwan’s status was always present, and then this pesky thing called “democracy” wanted to emerge in China. Most of those beliefs were expelled into other countries, and specifically Taiwan.

Nothing dies in a straight line—especially on a geopolitical front—but I go back to Tiananmen Square and the slow disintegration of relations that proceeded it. The damage was done, and public support quickly turned away from the Chinese Communist Party (CCP). There have been peaks and valleys along the way, but the trend has been moving in the wrong direction since this pivotal event. Fast forward to today, and we can see how President Xi came in with a splash by ending the Japan-China tension (lifting the ban on rare earth exports). He also wanted to push China into center stage by establishing government mandates such as “Made in China 2025” and the “Belt and Road Initiative” (BRI), attracting more foreign investment, and investing in local infrastructure. The latest policy to be introduced is the “Dual-Circulation Strategy” to address weak local consumption in their own country and try to drive GDP growth by stimulating the consumer. This quote captures the shift perfectly: “Deng Xiaoping said the Party would ‘let some get rich first.’ Xi Jinping is saying that enough people have gotten rich, and now it’s time to share the wealth more broadly.” [1]

More recently, China’s expansion started to get more aggressive in the worst way possible, and relations deteriorated faster following our country’s “Pivot to Asia,” which has shifted military resources and strengthened relationships in South East Asia. In response, China has accelerated construction programs across various islands, utilizing claims under the 9-Dash Line, which the UN and most countries do not recognize as legitimate claims.

When President Obama pressed the issue in the Rose Garden in 2015, President Xi claimed these locations were only for scientific purposes, but within six months they had air strips, advanced radar, satellite interlinks, all forms of missile protection, and military barracks.

The goal was to push the U.S. Navy farther away from the Chinese Coast and protect their false claims of the 9-dash line that was unanimously defeated in UN arbitration. As part of the Pivot to Asia, the U.S. began “Freedom of Navigation” operations as a way to maintain shipping lanes and disputing China’s claim that defies the Exclusive Economic Zones (EEZ) of their neighbors.

In 2013, President Obama launched a review of stolen IP and overall damage through the IP Commission Reports,[2] identifying the true economic cost of China’s deceit and passing laws to protect U.S. assets. Anyone who has done business with Chinese counterparts knows that the chances of any type of intellectual property being stolen is very high, leading to a Chinese-state owned (subsidized) company cropping up quickly to undercut your business. The depth of espionage was finally appreciated as U.S. Intelligence identified backdoors installed in hardware that Huawei had created/supported.[3] This provided a way for Huawei (aka the CCP) to collect data and control the asset at will.

So now the stage has been set for a ramp in tensions, especially as the true cost of the Belt and Road Initiative (BRI) became public knowledge early last year after documents were leaked by Kenya. Several countries have canceled negotiations since the true impacts have come to light of what these “great rates” and “partnership” actually yield. The BRI was a key President Xi initiative to deliver a vertically integrated solution for their supply chain while exporting Chinese workers and goods into the market to spread a Yuan-based economy. All recipients of the money through loans and/or bonds are required to purchase all equipment, materials, and general services from Chinese companies. The original hope for the receiving country was to stimulate the local economy with jobs and functional infrastructure, but it ends up becoming debt diplomacy—either leaving the country buried in debt or defaulting on the project, allowing China the ability to take control. This has already happened with projects in Laos, Sri Lanka, and Bangladesh, to name a few. Pakistan and Nigeria are also asking for extensions on loans and delays on interest payments. China has made many of the strategic agreements to provide alternatives for their own supply chain to avoid choke points at the Strait of Malacca by cultivating rail capacity through the China-Myanmar Economic Corridor, Pakistan-China Economic Corridor, and the China-Europe Rail Route.

The ownership of key ports has also provided control over other countries’ flow of goods and has helped spread a Yuan based economy priced away from the U.S. dollar. China has actively been looking to limit the use of USD in their economy to regulate impacts of U.S. sanctions, as well as move away from a reserve system dominated by USD and Treasury Bills. The poor investments have caused issues within China, though, as collateral is limited and revenue assumptions on these projects are proving to miss even the lowest Chinese estimates. Regardless, China has been selling some Treasuries in order to pull forward more U.S. dollars to prop up foreign reserves against the rising bad debt expense . . . but were any of these investments ever about economic growth, or rather a land grab at all costs?

The amount of raw materials China requires to diversify themselves across the supply chain is huge, but it is also pivotal in achieving another key economic initiative: Made in China 2025. This official term was recently abandoned in the hopes of appeasing President Trump, but the economic push remains firmly in place. It is a state-led industrial policy to make China a global high-tech powerhouse and thought leader in the arena of advanced technology. “The program aims to use government subsidies, mobilize state-owned enterprises, and pursue intellectual property acquisition to catch up with—and then surpass—Western technological prowess in advanced industries.”[4] This plan was used to jump-start the industry of combining the BRI raw materials and industrial strength with AI, advanced robotics, bio-medicine, and other components of the “fourth industrial revolution.”

All of these industrial initiatives and drive to build out a bigger system sounds fine, but it is coming at a rising cost to the rest of the world. China has approximately 21% of the world’s population, but only about 6% of the world’s arable land, which also happens to be where most of their populace lives. The lack of rainfall in 60% of the country limits the amount of food they can produce for themselves, pushing China to purchase more from other nations and increase fishing activity.

The richness of the South China Sea makes the 9-Dash Line EEZ grab all the more logical for a growing populace. There is only so much fertilizer, seed traits, and soil management that can be done to optimize yield. But overfishing can create the same long-term damages and ecological effects, which is a big problem. Their aggressive fishing tactics have recently led to a handful of Vietnamese fishing vessels being sunk, and several African nations revoking their fishing licenses.

This picture highlights many of the incidents that have happened with several more taking place since 2019. The color-coded chart shows where many of these fishing vessels overlap and how more incidents are bound to happen.

The massive rise in Chinese purchases of food has come on the back of extreme droughts, flooding, locusts, army worm outbreaks, swine flu, and avian flu (just to name a few) tightening the food supply and driving nationalistic behavior in other countries to protect local citizens. Thailand and Russia have enacted restrictions on exported food to ensure sufficient local supply. Global extreme weather events have also slowed the harvest and planting of core crop lands (most recently, in Brazil), which is keeping the current supply chain extremely tight. Food security is a rising theme for many nations, and there is a lot of farmland just south of China in Indian territory.

The topography of Asia creates many weather restrictions, with the Himalayan mountains limiting moisture movements farther inland. It has created flat lands, rivers, and soil perfect for growing crops—but the Himalayas also creates a natural barrier for moving heavy equipment (especially military equipment) through the mountain range. Lately, China and India have come to blows in several key areas: Sikkim, Doklam Plateau (in Bhutan), and the biggest in Ladakh where soldiers were killed on both sides. Bhutan requested India’s assistance to stop the movement of Chinese soldiers crossing into their borders. While the conflict ended without incident, both sides have been building additional military resources and moving equipment into the region. Farther to the West in Ladakh, soldiers were killed on both sides after China ambushed an Indian patrol, sparking a heated exchange. China and India have claimed pivotal territory high ground and have strengthened nearby assets to support forward positions. Even as both sides agree to pull back forward positions in an attempt to de-escalate, India still has a number of restrictions on Chinese goods, including a ban on over 50 Chinese apps. The problem is: they are big trade partners and can’t risk a near-term escalation. It doesn’t mean one can’t happen, but each side continues to test the military waters to understand positions. The Ladakh region is a key area for the Indus Water Treaty (the water in the region serves large parts of India and Pakistan), as well as an intricate part of the PAK-China Economic Corridor.

China has already created close relationships with Bangladesh and Myanmar (supporting the coup; there are many logistical and commodity reasons they want control) that open up their flows to the Bay of Bengal. If China were to push South through the Sikkim, it would cut off India at the choke point—delivering farmland to Chinese control and opening up the Bay of Bengal to China. A huge portion of the world’s population lives along this China-India border and need the food and water it provides.

Flash droughts in China are making it more important to find ways to diversify their food supply, as we can see below in the 2019 picture. The population density in the region and slowing global economy create a powder keg waiting to ignite. Wars typically aren’t fought during periods of strong economic growth, but rather during hard times where one country wants (needs) someone else’s resources.

Outside of the basic living requirements, China also needs a significant amount of technological infrastructure. The largest amount of it sits just across a small body of water in Taiwan. The U.S. has been very active in supporting Taiwan with missiles and equipment, and have recently disclosed the presence of a “trip force” in the region. China has sent fighter jets and bombers over the Taiwan Strait to test several things: 1) the response time 2) direction of intercept 3) what equipment was used. The U.S. has responded by sending an aircraft carrier fleet through the strait in a show of force and support. This helps China develop a strategy for when the time comes for force. The U.S. will not let Taiwan fall, with their defense technically built to withstand an attack for 2 weeks—which is the amount of time needed for the U.S. to muster a response from assets in the region. Taiwan and their technology industry is pivotal for U.S. security, highly classified technology IP, and just general supply chain/logistical importance. China has purchased huge amounts of reserves ahead of sanctions against Huawei, tightening the market further beyond just COVID19 problems. The below charts help highlight WHY this is so important, especially as the cost of building a new foundry facility would cost billions of dollars and years in construction. As the chips get more complex, the cost and time it takes to build one rises exponentially . . . so why not just go take it? I mean, China already views Taiwan as a province under the “One China Policy” and has forced countries to stop recognizing Taiwan as a country in exchange for money.

President Trump looked to address the challenges faced with China by trying to create a trade deal that most knew was dead on arrival. China will only adhere to an agreement that is in their favor, and I have personally experienced getting to the eleventh hour of a negotiation and have it ripped up and presented with a “take it or leave it” option. In the early 2010’s, you could say: China is huge and there is a ton of opportunity, so I will sign it and make it work. Those years are gone because many companies have lost billions or flat-out gone bankrupt with that mentality. The trade war shined a big bright light on the underlying problems with China, and while it would take a full additional article to go through the pros and cons, we can all agree that the supply chain needs to shift. Apple and other companies have started shifting production into surrounding regions, such as Vietnam and India, at an increasing rate. South Korea is investing heavily within South East Asia to help strengthen supply lines and capture more market share from China. China is sitting in a massive debt bubble that is growing by the day, and their ability to subsidize exports further is dwindling. SHIBOR exploded higher and remains elevated as the PBoC attempts to pull liquidity out of the market. The problem is: President Xi is increasing the communist push and the importance of adhering to party rules. China is going further down the rabbit hole by increasing CCP control at all levels of the government and corporate ranks.

The U.S. and President Biden have some pivotal decisions to make. Russia and Australia were quick to back India in the Ladakh conflict and show support. Russia sped up the deployment of the S-400 system and other military equipment, but because China still needs Russia, they let this pass. But China views Australia as more expendable, so they have entered into a worsening trade war. When you look at the BRI map, everything conveniently skirts India, as China and India have been enemies for centuries. Chinese aggression will worsen as their economy slows, food shortages intensify, and anger boils over. The narrative push will be one of atoning for “The Century of Humiliation” as Xi describes it, which in his eyes, has caused the current problems within China. Many in China believe they are the “Middle Kingdom,” which has been echoed by Xi, especially when considering the humiliation described at the hands of the West and Asian neighbors. It helps to mold the narrative around an ethnocentric belief of uniting people against a common enemy; they project problems abroad and blame someone else for internal failings. The renewed push by Europe, Japan, and the U.S. to pressure Beijing at the WTO provides more fuel for the fire, even though little has been achieved through diplomatic means. The route of appeasement is a failed avenue that has cost millions of lives over the last 150 years. It may be time to confront the bully directly or China will continue to vote diplomatically for their own self-interest no matter the cost of human life. Most recently, they vetoed condemning the actions taken in Myanmar at the UN council.

In my opinion, a trade war/cold war has been the next logical step in the process of mounting pressure against China. Whether Trump or Clinton had been elected President in 2016, the stage was already set for a big escalation. Many have been concerned about Biden’s position, but based on his support of the Genocide call against China and recent administration comments, it seems that he “will remain tough on China.” President Biden was Vice President when Obama finally started to recognize the growing problems in Asia and created the “Pivot to Asia” in his second term. As I said at the very beginning, the stage was set decades ago, and now the decline is accelerating. Biden may find ways to slow the tide of change, but it will be hard to derail a country facing many issues beyond just economic growth. I go back to the quote from G.K. Chesterton: “The true soldier fights not because he hates what is in front of him, but because he loves what is behind him.” Would you be willing to fight to feed your family?