Asking the Weight of the Emperor’s Cauldrons: Ten Problems that Lead to the End of China as We Know It
The 20th National Congress of the Chinese Communist Party is here. During these days, despite the turmoil in Europe, many look to China with curiosity: where are they heading?
The symbol of the power of the Zhou dynasty (1046–256 BCE) was nine pots or cauldrons. These cauldrons would be removed from the emperor of Zhou when they would no longer have the “Mandate of Heaven”, the legitimacy to rule. So when the King of Chu, a significant ally of then declining Zhou, asked a Zhou ambassador the weight of their cauldrons, he revealed his desire to challenge him before the time was right to attack them. The lesson of the story is that one should not let your enemy know you’re his enemy until you are ready.
Ancient stories such as the one above are well-known in China. Partly for this reason, Europeans tend to imagine that China operates on a multi-generational timeframe. It is sometimes mentioned that the Chinese aim to be a global leader by the hundredth anniversary of the Communist revolution in 2049. The hundred-year goal was called the “Chinese Dream” in a speech in 2021 by Xi Jinping.
Such a long-term guiding vision is lacking in most countries, but its centrality in the analysis of China might hide a more important insight, causing Europeans to overestimate the Chinese preference for the long term. A mere vision can motivate and guide actions, but it’s not a plan. China lacks foresight capacity. This essay demonstrates ten problems that might easily tip the Chinese vision-driven development to a reactionary mode, with chaotic consequences.
One. Chinese Covid response is a Gordian knot
We will protect people’s lives and health at all costs, Xi Jinping claimed at the beginning of the pandemic, contrasting Chinese reactions to previous health crises. China with its large and largely unvaccinated older population has stuck with its initial plan. The approach that was first successful has turned into a burden with the increasingly endemic disease that spreads uncontrollably in other countries. Beijing has found it difficult to change the strategy, however, as it would mean accepting that the significant sacrifices to control the disease would have been partly in vain.
The covid response had led China to an impossible situation. They cannot change their response without someone taking the blame and that someone at the same time must be and cannot be Xi — he does not make mistakes. Simultaneously, they have to change their strategy at some point to let people get back to their normal lives, permit economic activities, enable exports, and permit factories to run again.
Two. Chinese crackdown on platforms significantly slows down tech development
Tencent, Alibaba, and Bytedance, among others, were massively successful platform companies. Their growth was supported by the Chinese Communist Party (CCP) which picked the winners in the early stage and supported their growth. But these companies grew too large. Thus, China has been cracking down on the platforms with a heavy hand to control their power, leading to tens of thousands of layoffs and a much more centrally governed online platform ecosystem.
The crackdown slows down the innovative Chinese platform development and will hinder the ability of Chinese companies to gain success outside the mainland.
Three. Chinese population pyramid requires a significant and massive response
Due to the “one-child policy” once hailed as a great success, the Chinese population reaches its peak this year. By 2036, the segment that “the elderly” will be twice as large as the population segment “the young”. Around the year 2050, the working-age population will be slightly more than half of the population while old people constitute almost a third of the whole population.
Because China is a massive country, the shift is rapid and enormous. There is a significant change required due to new housing needs, more functional pension systems, healthcare and elderly care, and the ability of the working-age population to maintain living conditions for all.
For now, it seems that China simply lacks the funds to do this transition.
Four. Infrastructure-led growth sometimes did not produce tangible outcomes
Initially, it seems that investments in infrastructure always make at least some sense, because the outcomes of these investments are tangible. Not so in China. Their growth has been championed by strong infrastructural programs, incentives, and investments, leading to an array of issues when the growth halted. Many Chinese homeowners are refusing to pay up their loans for their unfinished apartments, and there are even large urban areas built in places where no one wants to live. These empty houses could house the whole population of France.
Properties accounted for almost 30 percent of China’s gross domestic product. This will change. The companies that built the “ghost cities”, such as Evergrande, need to write down many of these buildings. This again is another problem as their financial structure relies on the future profits of these housing developments.
Five. Debt risks are realized
Debt is always taken to enable future profits. But the future is uncertain, and even very predictable projects such as building houses for a very predictably aging and urbanizing Chinese population might fail when there is too much speculation.
The Chinese leadership has tried to lessen the country’s over-reliance on risky property investments. Speculation has been tamped down. But this might be too little, too late, as many developers had been previously working outside the newly installed legal framework and had already amassed massive debts. The new policy framework worsened the trouble, as it forced companies that were relying on constant additional debt to slow down their operation. This led to large problems in their financial structure.
The problem for Chinese leadership is that these costs fall to individual middle-class consumers, who might be angry enough to voice their discontent. They are crucial people in functional and harmonious Chinese society as they constitute a large segment of the commercially active and viable population. Their role is further enhanced as China lacks sufficient internal markets.
Six. Lack of domestic markets
Chinese internal market is fragmented and political guidance to change it is conflicting. There are ongoing efforts to unify the internal market but these attempts have yet to change the overall picture.
The underdevelopment of the domestic market in China is curious, as the home-grown demand has large and well-known potential to help in many of China’s woes. The domestic growth has been significant, contributing to almost 80% of the economic growth in 2021 due to covid’s limitations on exports. But issues in how people spent their wealth, lack of social security, large shadow economy, and limited growth in salaries in many occupations have so far limited the internal demand.
Seven. The too-high savings rate
China has one of the highest savings rates in the world, i.e. Chinese tend to put their money in the bank and not consume it. The domestic savings of GDP in 2020 was 45,2% in China, compared to 18.3% in the US and 16,7% in the UK. After 2020, the savings rate has gone up significantly, partly due to increased insecurity and anxiety towards the future, and partly because it has simply been too difficult to spend money during Covid lockdowns.
There are many reasons for the initially high savings rate. Two important reasons are the underdeveloped healthcare system that requires people to have extra cash in case of sickness, and the underdeveloped pension system that requires people to save money for retirement. The trend of the aging population further escalates the situation, as people need to prepare for expensive elderly care.
A high savings rate reduces consumption and inhibits the domestic market to be fully effective. Because the causes of the high savings rate are systemic and require expensive reorganization of core societal processes, fixing the economy would require massive investments. Those investments, on the other hand, are more problematic now because of the housing bubble that has damaged the flexibility of the financial markets to invest in new societal capabilities.
Eight. Youth employment
China’s officially reported youth employment is nearly 20%. The actual number might be significantly higher, as Chinese statistics are notoriously unreliable. In any case, even the official number has been growing rapidly, from less than 10% just four years ago.
Unemployment is mainly caused by Covid-related lockdown and its aftereffects. But the side effects of multi-year youth employment might be harsh. Large youth employment has been many times the cause of change in static regimes.
Nine. Geopolitical division
In addition to the internal pressures within Chinese society, the game is also getting more tough in international circles. The implementation of the foreign product rule by the USA and the simultaneous sanctions on Chinese semiconductors decapitate Chinese ability to produce high-quality chips and products for AI products and limit the availability of middle-level technology.
These harsh sanctions demonstrate the US superiority in high-tech products and very likely draw an extensive Chinese counter-action. One possible field of Chinese counter-sanctions is in the availability of rare earth minerals–an industry that the Chinese practically dominate. In essence, these moves with the situation in Russia set in motion a geopolitical division that has been in the making for a long time. The timing of the unfolding of concrete geopolitical boundaries is bad for the Chinese, as the decisions are likely to delay their abilities to compete in the high tech for perhaps even a decade. Combined with other problems listed in this short text, China will struggle to maintain its rigid growth numbers, increase the well-being of its citizens and maintain harmony in its society during the next five to ten years.
Ten. Xi Jinping’s theory of leadership
The last problem that China has is the theory of leadership that Xi Jinping possesses. He has coherently acted to protect and maintain, never opting to open and disrupt. Considering the history and size of China, the strategy has been mostly sound. But it also leads to increasingly caged, monotonous, and static behavior. Take this excellent essay from the London Review of Books, where the author Long Ling explains how the members of the CCP are required to study Xi’s ideology for hours in an AI-monitored system. Simply the name of the ideology shows what is the issue. It’s called Xi Jin Ping Xin Shi Dai Zhong Guo Te Se She Hui Zhu Yi Si Xiang, abbreviated as XJPXSDZGTSSHZYSX. The Chinese assume that they can lead a society through complex times by providing them with a complex ideology, the purpose of which is outspokenly just to enable the leadership of Xi to take form and value. But simply adopting hierarchically generated principles and dogmas does not make a society more resilient. It makes it more fragile.
The Chinese civil society is very different from the European one. In China, the public is nearly synonymous with the state. Simultaneously, because Confucianism imagines every social relationship as an intimate one, it has no conception of privacy. That is, it contains no sense of private space outside of social obligations. In China, the opposite of “public” is not “private”; rather, it is “secret”, a term that implies selfishness.
Combining the concept of the public as good and open, as opposed to secret and bad, and the authoritarian system demonstrates why the current Chinese society relies on extensive monitoring, behavioral nudges, and broad and strict governance from covid lockdowns to social credit. These solutions stem from a limited understanding of society.
Asking the Weight of the Emperor’s Cauldrons
The harmony of China is in grave danger because the premises to maintain it are built on unsound foundations. From a more elevated perspective, China seems to be getting stuck with the Middle-income trap. The wages are rising, industries are moving away from China due to some of the aforementioned problems, and people are still poor and the education level is low. Scott Rozette and Natalie Hell claim in their book Invisible China that the main issue for China’s difficulties to come is the severe lack of human capital. I tend to agree, and so does the CCP: one of the main outcomes of the 20th National Congress was an increased focus on education — a topic that was featured with emphasis also in the previous National Congress. Another main outcome was an increased focus on Taiwan.
These two outcomes demonstrate the path forward for China. The problems mentioned above are so massive that China cannot afford to operate on a long-term basis, at least not without a plan. Instead, they have a five-year perspective, as dictated in the five-year plans. They will make a significant contribution to education to enable a transfer of their economy from an industrial base to a knowledge economy, but they will most likely fail this endeavor. The timeline is too short, and the scale of the problems is too massive. So they have a plan B: an external enemy in Taiwan.
With this enemy burdened with their imminent problems, China is asking about the Emperor’s cauldrons too fast. They cannot afford to prepare for a long game. So they prepare for a short one. And thus, they are likely to lose the game.
