China is in decline

This is Iain Martin’s weekly newsletter for Reaction subscribers.

If you’re feeling down about the future of the West, cheer up! American failure and retreat may be getting all the attention after the ignominious withdrawal from Kabul, but China is in decline too, it turns out.

The veteran investor George Soros got to the heart of it this week with a clear-sighted observation about where the dictatorial Xi Jinping is taking a country that has deep demographic problems. In political terms, George Soros is a controversial figure in the West, but no-one can deny he knows the power of capitalism and how it works. He infamously is said to have made at least £1bn betting against the Bank of England on Black Wednesday in 1992, when Britain was forced out of the ERM.

He is now warning investors about a crackdown on the private sector by China’s leader. Xi’s actions have spooked foreign investors in China, although some have rushed back in recently, reassured by the pledges by Chinese officials that there is no threat to their money or personal wellbeing. Those are pledges not worth the paper they’re not written on.

“Xi does not understand how markets operate,” Soros wrote in the Financial Times this week.

China’s Communist leader is “putting in place an updated version of Mao Zedong’s party,” says Soros. “No investor has any experience of that China because there were no stock markets in Mao’s time. Hence the rude awakening that awaits them.”

As Xi imposes himself on companies and cracks down on tech industries he dislikes, investors cannot be sure where his displeasure will be directed next. Investment is difficult enough to get right, without the constant threat of expropriation and worse.

In contrast, the rise of Western capitalism was only made possible by the emergence of property rights, and the steady development of corporate law, to minimise the scope for the arbitrary exercise of power by a punitive leader disrupting commerce or stealing on a whim. Before this, the bad monarch or tribal leader could simply take what he wanted by force and the threat of death. For a proper merchant class to prosper, some degree of order under the law providing greater certainty and reassurance was required.

In contemporary China, the party now plays the role of the pre-capitalist feudal baron, exercising total authority like a capricious overlord. Last year the government crushed Jack Ma, free-market founder of tech giant Alibaba, the Amazon of China, who was once worth an estimated $50bn, after he gave a speech criticising the country’s financial establishment. He was effectively removed.

Beyond Soros, others are warning investors too. Business Insider carried a piece this week saying that American investors in China should get out while they still can.

How can this have happened? It is only a few years since Western politicians were posing merrily with Xi and describing him as a partner. Unfortunately, there was a widespread failure among Western policymakers, academics and journalists (guilty) to understand what the switch to Xi in 2012 really meant.

As the historian Francis Fukuyama put it last year – in a landmark essay on how the West should deal with China (be vigilant, stand well back) – it was assumed that Xi represented a continuation of liberalisation. This was wrong. China’s leader for life is a proper Marxist and a nationalist totalitarian in his outlook. He’s not faking it in his writings. This is what he is. 

Under Mao, China was totalitarian. Under new leaders pre-Xi it then began a process of economic liberalism, moving from totalitarianism towards authoritarianism.

There’s a meaningful difference between the two terms, authoritarian and totalitarian. Authoritarianism involves centralised power and a lack of pluralism. A totalitarian mindset means something even more sinister, with the state having complete, absolute control over every aspect of life, wanting to know everything and having to direct everything. What Mao lacked, in terms of surveillance technology to track every move of the population, Xi now has in the form of the apparatus of a police state equipped with the latest hi-tech kit to monitor smart phones, movements and facial recognition.

Why does any of this suggest China is in decline when Xi is, for now, in such an apparently  strong position? Well, the basis of the rise of China since economic liberalisation began is being undermined, by China’s own leaders. They are, perhaps unwittingly, chiselling away at the foundations of the model that made China rich and powerful again.

The country’s resurgence as a superpower since the 1980s rested on a pragmatic compromise, the idea that although it is a one party state the party allowed the operation of relatively free markets, powering prosperity by letting business and entrepreneurs get on with it, as long as they didn’t question the edicts of the party. Now that’s not enough. The party leadership wants absolute control.

Ultimately, the regime’s conduct looks defensive in nature, possibly reflecting, as Soros said this week, concern about China’s worsening demographic crisis and what that means for long term economic prospects. This week, China’s National Development and Reform Commission warned of shortages of skilled labour, when it published a five year employment plan. Businesses in key industries are struggling to recruit young workers.

There is further trouble ahead. According to figures released by China’s ministry of public security earlier this year, the total fertility rate (the number of children a woman will have on average) is now 1.3, below the 1.5 that is the international standard warning line. Sceptics suggest the real numbers may be worse than the government admits, and even state media says China could be on track for the lowest fertility rate in the world. Combine a shrinking workforce and an ageing population, and China under Xi looks not nearly as strong or confident as its leadership pretends.

Extinction Rebellion extremists are losing

More good news this week, for those tired of being hectored by bossy XR types. The Extinction Rebellion leadership is losing the battle for public opinion in Britain ahead of the Cop26 environmental jamboree, due to be held in November in Glasgow.

As the tactics deployed to grab attention become sillier (this week it was reported that they occupied the offices of the WWF to object to that organisation’s conservation activities) it’s not impressing the voters.

Asked by YouGov if they have a generally positive view of XR, 49% of voters said they don’t and just 19% do. Even among 18-24 year-old voters, who might be thought to be more naturally sympathetic, 40% take a negative view of XR and 20% are positive.

Weirdly, these numbers may turn out to make Cop26 easier for the government to handle. The looming farce will on one level be enormously embarrassing for Boris Johnson. Key world leaders could decline to show up and little that can be implemented will be agreed. Domestically, he’ll have to contend with Scotland’s First Minister Nicola Sturgeon running around Glasgow being sanctimonious about the climate challenge, presumably welcoming Greta Thunberg’s yacht to the Clyde. 

If, however, Johnson can say he tried to get his fellow world leaders to take it seriously, and then XR kicks off in its silliest style, the voters don’t seem in any mood to back the fanatics.

The unpopularity of the XR campaign suggests that the public don’t like eco-grandstanding, so politicians shouldn’t pander to it. Instead, perhaps (we live in hope) the debate on how to deal with climate change can be conducted on a reasonable, scientific and philosophical basis, rather than being dictated by excitable people dressed as druids gluing themselves to roads.

Watch Press ReviewIf you haven’t seen our new show on the old YouTubes, you can watch it here. The idea is simple. With my colleagues Maggie Pagano and Tim Montgomerie, we discuss the best stories, writing and podcasts globally that grabbed us in the previous week.

What I’m reading

I’m interviewing Helen Joyce early next week about her essential book Trans: When Ideology Meets Reality. Helen is Britain Editor of The Economist. In Trans she dismantles gender-identity ideology. Or should that be theology? The movement denying biological sex, effectively abolishing women, appears to me to be behaving like a religious cult. l’ll post the link to the interview for subscribers, early next week.

Have a good weekend.

Iain Martin,
Editor and Publisher,
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