Will China Crash – Part 2

I am from New Zealand, and we look at the world from about as neutral a perspective as I think is possible. Which is not to say neutral, but maybe somewhat less biased than other nations. It is when you start analysing what is going on in the world that you can quickly lose objectivity and start taking on a more judgmental approach. And certainly when you engage in debate with people from other nations, it becomes very difficult to maintain objectivity.  Nevertheless, I will state from the outset that I am trying to be as objective as possible here.

Will China crash? I know I said in part 1 that No, China wont crash, but I am starting to wonder now what the future for China is – is it overstepping the mark? Are internal tensions going to tear it up? Are the systems China operates on (Guanxi etc) compatible with the rest of the world, and how much of the news that makes it out of China (GDP Reports, basically ANY governmental report) realistic, and if not, how much can you expect that they are out by.

First up – is China overstepping the mark. There is one clear case of where the rest of the world is confronted by this question – the South China Sea, and the Island building going on there. To those who dont know some of the intricacies, here is a map of the south China sea and the claims of China (in Red), and the international 200 Nautical mile Exclusive Economic Zone that is the normal marker for territorial claims:

https://lakansugo.files.wordpress.com/2015/03/wo1211-china-rr-fig-03.gif?w=622&h=494

Basically China has claimed the entire area for itself. Why?

China’s reason: It was traditionally our waters, we have fished there since ancient times.

More likely reason: Fossil Fuel reserves, Fishing, and sea lane control.

China’s reason for the claim has been challenged, by its own records: http://www.ancient-origins.net/news-general/ancient-maps-spark-debate-between-china-and-philippines-020179

The Chinese map referenced which dates from 1169 shows that the southernmost limit to China was Hainan Island. Yet China is saying that the claim of the entire South China Sea dates from ancient times.

Whatever it is, the claim is dubious at best, and goes in direct contravention of the U.N. Convention of the law of the sea (which China has ratified) that stipulates a 200 Nautical Mile exclusive economic zone (EEZ) from the shoreline of each country. So even without the claims to rocks and features, China is blatantly in breach of this (its closest claim to the Philippine mainland is 80 Nautical miles, and is not covered by any EEZ derived from its island claims)

So – to return to the question – has China overstepped. The answer, in the perception of many other countries is clearly yes, and in a very troubling way. Troubling because it is building military bases in the South China Sea to extend what it claims to be its indisputable sovereignty in the area – and there is no easy solution – the other claimants have ever friendlier bonds with the USA (even Vietnam…), because they fear China, and the stage is slowly being set for an eventual confrontation. Not lost on these nations is Chinese incrementalism. A little bit here, a little bit there, an Island here, an ADIZ there, nothing that in itself could trigger a major response, but gradually China is getting what it wants, step by small step.

The question then becomes – what is the motivating factor behind China’s expansion, and why does China think it will prevail?

In the case of the South China Sea, I think you see the locus of Chinese thought, Chinese perceived might, and Chinese projection and protection of its mainland. Ancient fishing ground is a convenient, if not somewhat disingenuous, excuse to claim an area that can be exploited for the tremendous gain of China.

It will (and has) provoked a reaction. The USA nor her allies are going to get into a military engagement here – the long term reaction will be an economic humbling of China, and one that it cannot avoid. This will be covered off in a future post. As will the other questions above. But China has made quite a strategic blunder here – while it may gain and hold ground, it should have instead made friends. China has no real friends, except for North Korea, Laos and Cambodia. This is where it is critically weak. China has a somewhat clearly articulated policy of no alliances. My post on Great State Autism goes into this further – suffice it to say here however that this is counterproductive on any conceivable level. It is a massive country and increasingly willing to throw its weight around, maybe it thinks it doesn’t need friends, but instead of a battlefield outcome, the battle will be one of perceptions, and in this, the USA is winning comfortably against a country that is starting to show worrying signs of belligerence.

So nothing happens in isolation – while the USA isn’t dumb enough to start a fight in the area, both economically and strategically, China is being undermined both externally and by itself in ways that it cannot overcome. Some of them are demographic, some of them are based around cost-of-labour and China’s sprint to become a middle or high income country, but their dependence on foreign multinationals whom are already looking to lower cost alternatives to China (Google “PC-16 Straftor” for a clear explanation of this) has the ability to hollow China out. China is an export driven country – it is heavily dependent on exports to maintain stability. Currently China exports around 24% of their GDP per year. (The US around 13% and Germany around 45% – and Germany is in crisis – they are major creditors and when the debtor countries start winding back  on the credit – where does Germany export to? – that is another story – Google “German export problem Ambrose Evans Pritchard” – This more than anything else is the European Achilles heel). Back to China. If China withdraws credit to the US – “Calling in her debts” – China will be the one who loses – there will be immense pain, but the US already has diversified manufacturing and is quickly reducing its dependence on China as the sole source of products. If China makes conditions bad enough there that foreign companies pull back manufacturing (Microsoft, Intel and others have recently relocated to Vietnam) – China loses. The legitimacy of the CCP is predicated on delivering a slowly improving standard of living, to offset the increasingly authoritarian method of governing the country. They have made huge steps, but now they face huge challenges which they have not had to deal with before.

The South China Sea as I see it is a trap for China, and they’ve created it and walked straight into it. There is no doubt that China’s actions there have frightened and annoyed all the surrounding countries. China’s plan to change the reality on the ground by its own say so, regardless of the wishes of her neighbours seems to follow (some of this hasn’t happened yet, so there is a bit of conjecture here) 3 steps:

A) Appeasement. “We don’t want the trouble, and the pain is not over the threshold that really requires a response”

B) Naked Opposition. 10 years ago,  things may have stopped at appeasement for some time. After which the facts on the ground would have been established and it would be essentially too late to do much about it. With the rise of nationalism and a rightward swing in many countries (most recently in the Philippines with the election of Duterte) – you dont have to be a big player to cause trouble – China loves to bully its neighbours as is clearly visible in the case of SCS – but the neighbours are increasingly less and less afraid to fight back.

C) War. No one wants this, because there is no telling how it would end. The chances of it going nuclear are very real. A national conflict involving China and a US ally that could either conceivably draw the US in, or cause humiliation and a withdrawal from the US in the area – the US currently is clear that That calculus alone means

So why is it a trap for China? If you look at cost/benefit, the costs to China are enormous. The US has many bases abroad, but very few of them face opposition. They are a fact of life for many countries. SCS reclamation, development and defense on the other hand faces universal opposition. China may well think this is just a cost of doing business, but nearly every surrounding country has a vested interest in amplifying that to make the cost to China as great as possible. I think many people are incredulous that China could be so tone deaf to the consequences of their actions, and even more so about their current methods of achieving their desired outcome. I can only imagine that this makes the 6pm news in Beijing the best hour of the day for many Chinese, we’re socking it to ’em everyone, you better keep cheering for the home team. Elsewhere however, people are pointing to agreements and treaties that they have signed, and blatantly ignoring. The US sometimes does exactly the same thing, except they drag others along with them and convince them to add time and resources (think Iraq and the coalition of the willing) – China doesn’t even bother with this sop. It just charges in and thinks it can do as it likes.

In some small part, and I think this has not really been picked up at all in the media, I think Donald Trump’s rise is in some small part attributable to the rise of nationalism in China. President Xi Jinping is one incredibly scary guy. Very widely considered to be the most authoritarian leader since Mao, has taken over direct leadership of the military  (Financial Times article), Xi must walk a tightrope of conflicting demands, rising social tension, falling growth, a population that is aging faster than any other country (and even the relaxation of the one child policy is neither showing any effect, Economist article from 2011, nothing much has changed even though the law was changed in exactly the way the article describes), the fracturing of the country along the relatively affluent coastal cities who are the trade hubs with the west, and the impoverished west – none of these are problems that are going away quickly, and the CCP response to all of these has been to increase the repression and block the media. I’m fairly ambivalent on all of this – it remains to be seen what the outcome will be – I only mention it to point out that the good run China has had to date is well and truly over. What’s next is anyone’s guess.

As Sun Tzu said in the Art of War “When weak, appear strong, when strong, appear weak”

China is appearing a little too strong currently. Look beneath the surface and the reality over there is not good. Do I take back what I said in the original post about China wont be crashing any time soon – I’ll rephrase it – I don’t think anyone can tell what is going to happen over there now. China is not the west, refuses to be dealt with on western terms, and how thing plays out from here are anyone’s guess.

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Will China Crash

The answer in short: No.

There is a level of paranoia about China, the rise, the methods, and who stands to gain and lose out of this ascent. They are an unknown quantity, an opaque figure with seemingly few friends, but an enormous and growing influence that buys a seat at any table it chooses.

I’ll take a different tack in the way I look at this. To start with, galling as it is for China, they have a lot to thank the Japanese for in their strategy. What China has done is more or less a carbon copy of what Japan did 40 or so years ago. With one critical difference that we will get to. Japan figured out very early on that manufacturing and export earns cold hard cash. The first trade deficit they had in 30 years was in 2011.

http://www.customs.go.jp/toukei/shinbun/trade-st_e/2011/2011_117e.pdf

This was as a direct result of the Fukushima eathequake and the idling of their nuclear power stations and follow on reliance on fossil fuels.

http://www.eia.gov/todayinenergy/detail.cfm?id=13711

$248 billion in 2012 for fossil fuels. It isn’t hard to see why they need to restart the reactors, but thats not the point here. The point is despite the “lost decade”, Japan’s economy is still very strong, and natural disasters aside, it would have remained so. Healthy trade surpluses are healthy trade surpluses. They weren’t made a big point of in Japan, everyone seemed a bit too focused on growth rates or the lack thereof. Back to China. They have followed Japan in making their economy export driven. And its working for them. Even with the downturn in Europe and the US only now getting back on its feet, China still posts solid gains in export earnings.

http://www.statista.com/statistics/263632/trade-balance-of-china/

How much you believe that is up to you. By other measures it looks on the high side:

http://blogs.wsj.com/chinarealtime/2014/01/20/what-chinas-electricity-usage-says-about-growth/

Li Keqiang  (Chinese Premier) said in 2007 that the GDP figures are “Man-Made” and for “reference only”

http://www.bloomberg.com/news/2012-07-13/china-economic-data-questioned-as-electricity-use-slows.html

So its hard to draw a solid conclusion, and will get even harder as China’s economy slows – local governments are told to reach a figure, but no one knows how they do it – borrowing, debt fuelled construction, who knows, the figures are not available, and what is seems questionable.

So to go back to the subject line – will China crash – we need to draw in 2 more points before making any conclusion. Firstly is who owns the businesses in China that export, and secondly demographics and cost-of-manufacture and how this is changing. No mention of debt levels, shadow banking industry or corruption – thats in another post.

Ok, so who owns the industry in China – the exporters are generally not Chinese brands, with a few big exceptions. Apple, Nike, Sony, Toyota, etc, all use Chinese labour. But they dont HAVE to, they use it simply because the cost is cheaper. There are very few Chinese name brands – Huawei, Lenovo and Haier are among the few exceptions. As wages in China rise, the very thing that China offered to the world vanishes – cheap labour. And its unfortunate that the world regards China as a factory to make its goods for it, but the jump to a “knowledge Economy” and a move away from manufacturing is very difficult to do in practise. It cannot be done quickly. And it makes for massive inequality along the way. Factory workers are the backbone of an economy. Certainly true in China’s case. But the squeeze is on for China – on one hand rising wages, and on the other hand non-Chinese brands who will move if the price is not right. Stratfor has posted about the 16 countries identified as follow-ons for China, the “PC-16”

http://www.stratfor.com/weekly/pc16-identifying-chinas-successors

One quote from that report “The arcs along which nations rise and fall vary in length and slope. China’s has been long, as far as these things go, lasting for more than 30 years. The country will continue to exist and perhaps prosper, but this era of Chinese development — pyramiding on low wages to conquer global markets — is ending simply because there are now other nations with even lower wages and other advantages. China will have to behave differently from the way it does now, and thus other countries are poised to take its place.” – it makes for interesting reading, even if you dont agree with it.

And the final point before the conclusion is drawn – demographics.

http://www.theguardian.com/world/2012/mar/20/china-next-generation-ageing-population

This is a problem that many countries are facing, but will likely hit China much harder than others. The “one child” policy and the lack of immigration are going to put massive strain on the country as the population gradually ages. This has to be tackled now, and they are starting to relax the one Child Policy in the latest 5 year plan. As in Japan’s case, immigration on a large scale will be avoided at all costs.

So – conclusion – will China crash? Up until now China has had a good run, and the west has a lot to thank China for, but the pressures are steadily mounting – growth is slowing, population is aging and wages and costs are rising. To add to this, local governments are now saddled with mountains of debt and there is corrption on a grand scale.

http://www.theguardian.com/world/2014/jul/29/zhou-yongkang-china-profile

For a taste of how far the corruption goes there.

So for now, China wont crash in any major way, but it is likely to slow a lot more.

It will still be an important player on the world stage, I doubt it will ever reach no.1.

Predictions for the next 30 years

I’ve been reading with interest someone in Australia pulled out a letter stashed in a wall in 1995, that turned out to have some eerily prophetic guesses as to the future.

Now’s my turn. I promise not to be too negative. I’ll break that, but my intentions are not bad.

First up – Artificial Intelligence. Some of the work I do is in Machine Learning, and I am reasonably confident when I say that we’re a long way off General Artificial Intelligence. Just today we had Glenn Gore, chief architect for Amazon Web Services come and speak to a group of us, and the questions he took at the end mainly revolved around AI/ML, its applications and future. He gave a quick breakdown of all the companies who thought they were working on ML – 90% are working on clever spreadsheets – analytics. Clever, but not real ML. Of the remaining 10%, 9% of those were working on ways of adapting ML to simple use cases within their industry. I fall squarely into that category – we’re moving things out of a simple engineering environment and into a data science environment – and learning about feedback loops and reinforcement and how we can improve our system in this way. It’s very early stages for a lot of this stuff. The remaining 1% was deep learning, where the machine was developing new ideas, and basically this is the preserve of research institutions and places like Google. I only make mention of the stuff I am working on to highlight the simplicity of what we are doing – the use cases are so simple that the whole thing can be done faster and better using a logic engine and a set of correlations. No feedback required. The challenge we have is when a machine makes a decision, we need to be able to tell if it did a good job or not. Possible if your job was to sit there and monitor this thing, but not so easy if this is a minuscule part of the many things you do in your day.

We keep well abreast of AI/ML, and I both agree and disagree with Elon Musk’s statement about regulation of AI – yes, we should, but basically it’s impossible. The main drivers behind AI are state actors with nationalistic imperatives. The following talk is one of DARPA’s director of information innovation – this is the US military’s advanced research lab – the talk is both understandable and frightening if you consider the implications of the very last piece on contextual learning.

You can imagine that China has its own lab, along with other major nations. Now talk to me about regulation. End of. I would give AI about a 15% chance of a major breakthrough that changes everything, otherwise incremental achievements will finally get us to our goal, and given that neural networks have been around since the 80’s, we have a long way to go there.

Secondly – Resource Depletion. I think we have our finger in the dyke on this currently – we’re holding back little issues, in the knowledge that they will snowball over time and become critical. Just take fish as an example.

BBC Article on declining fish stocks

While I think this is a bit alarmist, this is hardly the point. The point is that we have this out of sight out of mind approach to a very rapidly depleting resource. Documentaries like “End of the Line” paint the decline out in graphic detail, along with the incredible amount of unwanted (dead) fish we just toss back. We have a 20th century attitude to a very 21st century problem, and the longer we leave these things unaddressed the more parts of any available solution disappear. Governments don’t want to deal with it even though the science seems reasonably clear.

Before too long I believe we will see one of the first big shocks – a resource that we have depended on drying up in very short order. Candidates are:

  • Freshwater on a regional level. This is a global problem, but it will have regional effects first – we are already seeing this in places – sinkholes, aquifer depletion, water tables going down etc. There hasn’t been a city run dry yet, but some of China’s northern cities are running perilously close. Beijing’s water table has dropped 300 m since the 70’s:

China’s Northern Cities running dry

  • Phosphorous. You know, the fertiliser. We have around 50-100 years worth remaining.
  • Fossil Fuels. You all know about this one. Depending on whether electrics and renewables kick in and to what degree, even if you have an electric car it still needs to draw its power from somewhere, and fossil fuels are still a massive part of the energy production mix.

You could go on – there’s lots. Point is more and more (population is expected to top 10 billion in this century) of us puts more and more strain on resources. As it is we’re heading towards zero on a lot – and I don’t subscribe at all to the idea that we’ll figure this one out like we did for food production in the 1800’s and all of the other obstacles we have overcome. We’re dealing with hard limits here – not just our abilities to adapt. This will becoming a sharply growing problem over the next 3 decades.

Third. Mental health problems, and societal dysfunction. The first two were obvious and very current in the media. This next one is something that I think is just starting to come into focus now. It is talked about in a range of ways, but none that I think really highlight the overall risk to society in a way that encompasses the problem.

From snowflake syndrome to social anxiety to the perception (and I do make the point of saying perception – because who knows…) of reduced social mobility, Governments washing their hands of social responsibility, the most unbelievable things happening in the US with regards to healthcare (to highlight the point of how much government is winding back its support), substance abuse epidemics etc.

I made another post some time ago about Universe 25, the mouse universe that tore itself apart because of abundance of everything, except it seems space. To me, space is absolutely a perceptual concept. Sure it has it’s hard edges – crowded stations, full lunch canteens – etc – these aren’t the problem. The problem as I see is that there isn’t the ability to disconnect anymore. It’s the very perception of being hemmed in by society, that you HAVE to be a part of this, don’t miss out, and in the midst of it you have some very bad actors, people are arbitrarily attacked for being in the wrong place at the wrong time, the rise of terrorist events, and the dislocation and dissociation of self – you can see above it’s little slices of problems, all gnawing at us from different angles.

I see this problem steadily continuing to deteriorate. And I don’t see any solution to it either, except for some major depopulation event, after which we can start to build up again. Already the natural population growth in 1st world countries is generally below the 2.1 children natural replacement rate. The population however is still expanding rapidly. This is being fueled by comparatively disadvantaged countries, with much lower standards of education – and we need these people to fill roles in our society. If you take Japan as an example of a country which restricts immigration to an incredible degree, there are currently on average 2 job openings for every applicant.

My gut feeling is that to all of these problems, it’s only after a massive shakeup – in whatever form that takes, that these problems become so overwhelmed by a much more basic issue – survival, that it takes a long time for the distortions to start appearing again. Case in point here is WW2 until now. After the war there were a number of fairly revolutionary things happen – the new deal (which was well underway by the time, but it was very popular and continued for decades afterwards), the welfare state, the Marshall Plan etc – all growth and support plans that encouraged social mobility, education, nation building etc. Growth was explosive, national debts were kept in check as a result of this growth, and many of the problems seemed fairly manageable. Contrast that to now – in the US, a growth rate of 2%, government debt to GDP of 106% and they want to talk about tax cuts and axing of medicare.

Mental health is an unseen problem – we’re not talking schizophrenia, dementia or anything obvious, we’re talking about our natural ability to deal with ever increasing stresses, every decreasing (it seems) empathy, and extrapolating from this what might be the long term consequences.

I dont think I am pushing things too far by saying that I feel this is the biggest underlying threat that we have. It will manifest itself in some major catastrophe, but this present and growing instability is one of the central causes.

You read what some people think on this subject – that we are going to back to the natural survival of the fittest mode of life where the strongest weed out the weaker and less deserving. Except when you have the ability to destroy the planet now, I’m not so sure that this way of thinking necessarily ensures any long term chances of survival. Over the next 30 years I think this idea will be put to the challenge like never before.