China vs. West – Thirteen Touch-Points on the Competitive Potentials of Democracy vs. Autocracy

By Nicola Stoev

This book analyzes the most confronting geopolitical and economic domains of contemporary autocracy and democracy. Its analysis is structured into 13 touch-points (chapters) and comprises 131 pages filled in with plain text, numeric data, and charts. The comparative basis on the side of autocracy is mainly focused on China, as Russia is considered only in a supplementary context. Each touchpoint (chapter) ends with some thematic conclusions. The principal conclusion is that China uses its economy as a geopolitical weapon, pressing the West to deindustrialize through its industrial surplus exports worldwide. The West still can defend itself by combining the military power of the U.S., setting trade barriers, making massive investments in near (friendly)-shoring over the most dynamic economic regions in the world, and signing a revised TPP. As my analysis shows, China practically competes with the West's geopolitical dysfunctunality by a low productive economy. However, it does not diminish its competitive potential. And the West does not have too many protective tools either ...

• Language: English
• Publisher: Nicola Stoev
• Release date: Apr 20, 2024
• ISBN: 9798224091164

Book preview

Nicola Stoev

Contents

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Touch-point 1: Chinese Economy as a Geopolitical Weapon        3

Touch-point 2: Why Do Chinese Billionaires Disappear?        16

Touch-point 3:  Chinese Characteristics and Globalization        20

Touch-point 4:  Why China's Economy Stood Up to a Wall      26

Touch-point 5: Are the Economic Hardships Pushing China to a Military Conflict?    33

Touch-point 6: Why the Chinese Communist Party Plan to Revive the Old Days

High GDP Growth of the Country Is Non-Functional or the

Problem with the Savings and Domestic Demand    41 

Touch-point 7:  Can the Chinese Yuan Be Convertible as the US Dollar?    50

Touch-point 8:  Is the Arsenal of Democracy Still Viable?     55

Touch-point 9:  West vs. China in the Advanced Chips Competition      70

Touch-point 10: How Near-Shoring (Friendly-Shoring) Can Help the U.S. to 

Outmuscle China in the Global Economy Competition    91

Touch-point 11: The Frozen Russian Central Bank Assets in the West

Reveal the Western Democracy Dysfunctionality    108 

Touch-point 12: Western Dysfunctionality vs. Chinese Low Productivity    118

Touch-point 13: Why Does Primarily the Western Democracy Seems

Dysfunctional vs. Chinese Low Productivity?    125

Touch-point 1: Chinese Economy as a Geopolitical Weapon

When you look at modern China, you are witnessing something stupendous — a great civilization at the peak of its relative power and effectiveness. Along a few dimensions, modern China is the most impressive civilization humanity has ever built. It has the highest total GDP of any country in history, measured at purchasing power parity (a measure of real economic value created). Its manufacturing prowess is unmatched in world history, in relative terms rivaled only by the U.S.’ dominance after World War II. It has a high-speed rail network and an auto industry that put the entire rest of the world in the shade. By some measures, it is now the world’s leading scientific nation. The skylines of its great cities, rearing into the sky and festooned with multicolored lights, eclipse even those of New York and Dubai.

What makes China even more special is that it is the only major world power experiencing this sort of peak in the early 21st century. The U.S. is divided, chaotic, and hobbled by excess cost; Europe, the UK, Japan, and Russia are experiencing steep relative decline. The next crop of rising powers, especially India, are still far from the peak. Other than a few smaller countries like South Korea and Singapore, China really stands alone.

But when you look at the data on the economy, the picture gets cloudier. Growth has slowed due to the massive and ongoing real estate bust — official numbers say China grew at 5.2% in 2023, but more sober private estimates put it at somewhere around 1.5% to 3.6%. And even those who take China’s official numbers at face value expect it to slow to only slightly higher than developed-country levels over the next five years.

That would not be a terrible performance for a developed nation like South Korea or France. But for China, that long-term slowdown will come at a much lower level of income. Keep in mind that although China has grown mightily in percentage terms, in absolute terms its gap in living standards relative to the U.S. is actually larger than it was in 1990.

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Other countries like Japan slowed down when their living standards were fairly close to those of the richest countries. China is only at 28% of U.S. per capita GDP. When the U.S., the UK, Japan, and Germany hit their relative peaks, they were not just among the largest economies on the planet, but also the richest; China is very large, but it is not rich.

The main reason for this is that China’s productivity growth — the ultimate driver of any nation’s long-run growth after it finishes building out its capital stock — had slowed almost to developed-world levels even before the real estate bust:

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Source: Lowy Institute

There are many possible reasons for this premature productivity slowdown. Most of them point to excessive command and control. For decades, China was steering massive investment toward less-productive real estate. Xi is now trying to steer an already manufacturing-heavy economy toward even more manufacturing; in the meantime, service industries like health care, education, internet services, and entertainment, which Chinese people probably need a lot more of, have been either neglected or actively cracked down on.

In other words, the Chinese Communist Party, especially under Xi Jinping, has focused China’s economy on creating more of what they want, instead of creating more of what the Chinese people themselves want. This may be one reason that popular confidence in China’s government is beginning to wane.

But what is the productivity of the national economy after all? Productivity is commonly defined as a ratio between the output volume and the volume of inputs. Or it measures how efficiently production inputs, such as labour and capital, are being used in an economy to produce a given level of output. It is often calculated for the economy as a ratio of gross domestic product (GDP) to hours worked. When productivity fails to grow significantly, it limits potential gains in wages, corporate profits, and living standards.

The conventional drivers of China’s meteoric economic rise are entering an ineluctable decline. As Chinese capital has become less productive, the economy’s structural problems are bound to further inflame global trade tensions. Even the Chinese leadership addressing the structural problems by investing heavily in new industrial drivers, such as the manufacture of electric vehicles (EVs), lithium-ion batteries, and cellular panels where the country tries to monopolize the global supply chains cannot solve autonomously Chinese economic hardships, because the success of these investments depends greatly on the Western market reception of the sectorial outputs. Besides, the same drivers currently produce about only 11% of the Chinese GDP, while the decline in the real estate sector is related to around 25% of it (China's economy looks like a mess — but some sectors are quietly doing well in its '2-speed economy' (msn.com)). 

Since former Premier Wen Jiabao’s 2007 proclamation that China’s economic growth was unstable, unbalanced, uncoordinated, and unsustainable, China has talked a big game about rebalancing the economy towards domestic consumption. President Xi Jinping’s common prosperity campaign and deleveraging of the property sector sparked hopes that Beijing was serious about doing so.

Instead, a political decision has been made to divert capital into manufacturing – another pillar of China’s traditional growth model. The likely result is more industrial overcapacity and the ratcheting up of trade tensions. To top it off, the envisaged magnified industrial overcapacity is mainly concentrated in manufacture fields where the Chinese industry has already satiated the global markets enough (e.g., turbines, EV, spare parts, cellular panels, etc.). Therefore, in strategic sectors favored by Beijing, China’s trading partners will view protective trade measures as being necessary to shield their own industrial bases against Chinese overcapacity.

The overzealous and ideologically motivated policymaking has undoubtedly contributed to the recent growth deceleration. A case in point was Beijing’s recalcitrant adherence to its zero-Covid policy and refusal to provide substantive income support to affected workers.

Beijing’s crackdown on tech platform companies like Alibaba and Tencent wiped hundreds of billions off market valuations, resulting in substantial layoffs across the sector, too.

But a fixation on such policy overlooks the broader structural forces precipitating China’s slowdown.

Over the past two decades, investment has oscillated between 40% - 47% of China’s gross domestic product. Property and infrastructure have each absorbed 30% of this investment. These are all historically unprecedented figures for any major economy.

When China was underinvested in infrastructure, logistics and housing, that kind of investment was productive, laying an integral foundation for China’s breakneck economic development.

However, as China’s stock of housing and infrastructure rapidly increased, the same investment line has become divorced from genuine economic needs. The level of non-productive investment has been so extreme that some experts argue up to half of China’s GDP growth in recent years would otherwise be written down as losses in OECD economies.

These excesses are clearly visible in the infrastructure sector. By 2019 and before subsequent rounds of infrastructure stimulus, China’s stock of public infrastructure was equivalent to 151% of GDP. Local governments went to absurd extremes to meet politically determined growth targets. The relatively impoverished southern province of Guizhou is an infamous example, possessing over 1,700 bridges and 11 airports – more than the combined number of airports in Beijing, Shanghai, Shenzhen, and Chongqing.

As well as coming with a hefty maintenance bill, China’s underutilized infrastructure has caused exponential increases in debt, which is now coming home to roost. Estimates of the debt incurred by local government financing vehicles (LGFV) to fund pet projects range from 50% of GDP to 88% of GDP. Concurrently, China’s overall debt has risen to levels close to 300% of GDP.

This debt was much more sustainable when local government coffers were flush with cash from land sales. But today they are not flushing and there are much fewer lands for further sale.

Beijing’s August 2020 three red lines policy, which curtailed the ability of highly leveraged developers to access debt, has been criticized for unnecessarily maiming the golden goose. In actuality, the policy was a long overdue, albeit painful attempt at economic readjustment. The level of ensuing economic pain has in fact prompted a series of interventions – mostly in the form of government pressure on banks to extend favorable loans to the ailing sector – which has undercut the policy’s overall consistency.

With the entrenched maxim that housing prices would only ever rise, the sector become an integral part of China’s political economy and one of the most rapid drivers of wealth accumulation in human history. Local governments – which until 2021 routinely derived over 40% of revenue from land sales – households, developers, and suppliers all benefited handsomely.

Despite fitful attempts to rein in the sector, property and related industries grew to consistently encompass around 30% of GDP for much of the last decade. Before the ensuing liquidity crunch in October 2021, new housing starts exceeded demand by 50% as China’s floor space per capita surpassed those in wealthier economies.

A sector, which in 2015 accounted for more than one-fifth of that year’s 7% annual growth figure is currently a net drag on GDP growth. Overall activity across the sector has collapsed by half.

Efforts at reviving the broad Chinese market are flagging even in Tier 1 cities, as China’s housing bubble slowly but surely deflates. Demographic decline is expected to more than detract from additional demand from (also slowing) urbanization and property upgrades.

With such property and infrastructure oversupply, it is unsurprising that China now must invest US$8 for US$1 of GDP growth gain – twice the level a decade ago. If we apply the Solow model in its case, we shall have the following chart, reflecting chronologically the trend of Chinese economic productivity decline:

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The concept of the Solow model signifies that replacing or maintaining your old worn-out capital costs money and thus if you strive on its increase through massive investments in physical assets for a long term, then one day you will reach a point, where the return on these assets will not suffice