The Bear’s Lair: China’s size may not make it dominant

For sheer Silicon Valley silliness, the FT article “China is leaving Donald Trump’s America behind” by Sequoia Capital boss Michael Moritz will take some beating. It is inaccurate and politically unbalanced about the United States, but even more so about China. It also misjudges China’s present position, its actual policies and its future prospects. China’s share of global GDP could double from what it is now, but without good management it would still be geopolitically puny.

For proof of that apparently extreme statement, I would refer you to Angus Maddison’s admirable calculations of countries’ share in world GDP, dating back 2,000 years. China’s current share of world GDP, based on purchasing power parity, is estimated by the website at 18.3%. In AD1000, in the early years of the highly intelligent Song dynasty, in many ways China’s relative high point in civilizational terms, it was somewhat higher, at 23%. Since its share of the world’s population in AD1000 was only 22%, it was slightly richer than the average country, and it is reasonable to believe that its global influence and its share of human knowledge and innovation were both at least proportionate to its economic and demographic size.

But according to the Maddison figures, China’s share of world GDP did not peak in AD1000, it peaked around 1820, when China had a munificent 33% of world GDP, nearly double the current percentage. It was still near the mid-point of world wealth, with population 37% of the global total it was about 10% poorer than the global average. Yet it was close to helpless militarily and economically, ruthlessly exploited through the opium trade by a country with a pathetic 2% of world population and 5% of world GDP.

The 1820 figures illustrate the fallacy of assuming that a mighty share in world GDP equates to global domination, militarily, economically or intellectually. China had more than six times the GDP of Britain, yet under the Jiaqing Emperor (1796-1820), feeble son of the great Qianlong Emperor (1735-96), it counted for nothing in international diplomacy, its economy was stagnant and intellectually it was even more so (several discoveries of the Song period had subsequently been lost.) The only thing it had in superabundance was population, which had increased from 59 million in AD 1000 to no less than 381 million, at a time when the world’s great Industrial Revolution population bloat had yet to take off. (China today represents only 18% of world population, about in line with its output.) Britain, on the other hand, even with an 1820 population of only 21 million, had already had the Scientific Revolution, and was in the most dynamic phase of the Industrial Revolution.

The point is clear. Simply outstripping the United States in GDP (which it has so far done only on a purchasing power parity basis) will not automatically make China likely to become more powerful militarily or intellectually. The Jiaqing Emperor never faced a military challenge from Lord Liverpool’s Britain, because Liverpool’s was a peaceable and non-expansionist regime, but 20 and 40 years later, against the more aggressive Palmerston, China’s military performance was abysmal, losing the Opium War and seeing the Summer Palace burned. (Palmerston’s over-aggression was a significant contributor to the decline of Britain’s transient hegemony, but that is another story.)

Moritz’s Sequoia is a big investor in China, possibly the leading US venture capitalist in China, so it’s not surprising its leader would tout China’s virtues. All the same, when he explains about China’s “tolerance for Muslims” we should be reminded that the country force-installs spyware onto Muslims’ phones, detains thousands of Muslims in “training camps” without trial and removes loudspeakers from their mosques so Muslims cannot issue the call to prayer.

Moritz is very impressed with Chinese payments systems. Indeed, the Chinese government is assigning everyone a credit score, compulsorily, whether or not they have credit outstanding. However, it wants to use a “social credit system” so that the quality of your citizenship, your adherence to Party norms, your social networks and behaviors, etc. are used not only for credit ratings, but to deny you air travel, for example. The People’s Daily denied indignantly that the system was “Orwellian” but it would say that, wouldn’t it. Looked at in this light, the sophistication of China’s payment systems appears less benign.

Big Data in the Chinese government’s hands is a truly sinister force. Not only is there universal surveillance, but the data so collected is for sale – not just to major reputable corporations, but to anyone, no questions asked, such is the level of China’s corruption. Conversely, Chinese private citizens are strictly regulated in what they can know – the Great Firewall prevents access to international sites, unauthorized VPN networks are strictly forbidden, and even the Big-Brother-friendly Google found itself unable to operate there.

You should also remember that China, the supposed export powerhouse of the world, is still so frightened of what its citizens might do with their money that it operates a system of exchange controls. Moritz, as I did, grew up under exchange controls, in force in Britain until 1979; he will thus be able to confirm that they are highly destructive both economically and psychologically. As Moritz must surely remember, the citizens of a country with exchange controls automatically regard themselves as economically inferior to those lucky people without them; the controls produce a kind of “economic cringe” similar to Australia’s “cultural cringe” but more damaging.

Given China’s data policies, if China’s entrepreneurs are “facing the future with an unrivalled sense of adventure and curiosity” as Moritz claims, they must be a pretty frustrated lot. Finally, Moritz suggests that Trump should send his hotel staff to visit hotels in Shanghai, where they will find “a level of service unparalleled in New York.” Alternatively, Trump could send his staff to almost any U.S. small town, where he will also find service unparalleled in New York, whose service quality is lousy, second only to London and Paris for hostility and greed. Further, it is a long time since I was in Tokyo or Singapore, but I’ll bet they both still beat Shanghai hands down.

One problem with writing about China is that its figures are dodgy. GDP figures are produced almost immediately after the end of the quarter, and clearly come from the Planning Ministry’s computer rather than through actual observation of reality. Furthermore, China’s growth rates have always been suspiciously high, and its consumption a suspiciously low percentage of GDP, for a country whose richer citizens are famous for their bling.

So, let us suppose that the GDP figure is overstated, but that the consumption figure is approximately accurate, and that China’s consumption is in reality not 37% of GDP but 57%, close to that of India (59%), Indonesia (55%) and Japan (57%). Then its GDP at purchasing power parity is 37/57 x $23.2 trillion (the official 2017 estimate) or $15.1 trillion, just 78% of the U.S. level, and its growth rate, if you amortize the GDP shortfall over the past 20 years, is about 4.5% annually rather than 6.7%.

At that rate, if it continues to grow 2% faster than the U.S. on average, it will pass the United States in purchasing power GDP in about 2030, and in market-exchange-rate GDP about a decade after that. China will still have heavy social and information controls over its citizens, and therefore will still operate less efficiently than the truly free society of the United States. It is also quite likely that it will have retained its exchange controls, and so still have an “economic cringe.”

Given the existence of nuclear weapons, it is probably unlikely that a future aggressive U.S. President will burn whatever is China’s current equivalent of the Summer Palace (the Great Hall of the People?) But if China’s society remains as restricted as it now is, with gigantic loss-making state corporations, an official ideology of Communism and exchange controls on its domestic citizens, then it will still be limited to a position in world affairs like that of the Jiaqing Emperor, isolated and uninfluential. However large its population, and however dominant its share of world GDP, China will not be central to the surging economic, intellectual and political forces of the world, any more than was the Jiaqing Emperor’s celestial domain.

(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)