Will China overtake the U.S. as the world’s leading superpower?
(David Goldman, October 25, 2017)
Transcript available below
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About the speaker
David Goldman is an American economist, music critic, and author, best known for his series of online essays in the Asia Times under the pseudonym Spengler. He is the Wax Family Fellow at the Middle East Forum, a Senior Fellow at the London Center for Policy Research, and a member of the Board of Advisors of Sino-Israel Government Network and Academic Leadership (SIGNAL). According to the Claremont Review of Books, the “Spengler” columns in the Asia Times have attracted readership in the millions.
His analyses of global events have become highly regarded. Former C.I.A. National Intelligence Council Vice Chairman Herbert E. Meyer said, “Ask anyone in the intelligence business to name the world’s most brilliant intelligence service, and we will all give the same answer: Spengler. David P. Goldman’s ‘Spengler’ columns provide more insight than the CIA, MI6, and the Mossad combined.” Goldman concealed his identity under the “Spengler” pseudonym until 2009, when he revealed his identity in the Asia Times article, “And Spengler is…” and the First Things article “Confessions of a Coward”.
Goldman regularly appears as a guest on CNBC’s Larry Kudlow Program, where he has been an outspoken critic of Federal Reserve efforts to resuscitate the American economy. He is the author of How Civilizations Die: (And Why Islam is Dying Too) and It’s Not the End of the World, It’s Just the End of You: The Great Extinction of the Nations.
For more on China, see Chen Guangcheng’s Westminster talk, Civil Rights in China.
Robert R. Reilly:
David Goldman is not only an economist with a lot of experience on Wall Street, he is a music critic and a music theoretician who has taught on that subject. Of course, he is best known not as David Goldman, but as Spengler through his years and years of extraordinary articles and columns in the Asia Times, which I avidly followed, which I am sure many of you did as well, always wondering who could this man be who knows Islam so well, who knows the Middle East so well, Turkey, who knows, of course, the Asian- who knows everything.
I was wondering about that too.
Robert R. Reilly:
And so finally he has been exposed as, indeed, David Goldman, who is going to talk to us tonight on, “Will China Overtake the US as the World’s Leading Superpower?,” question mark.
I just want to share with you, because it is such a delicious quote and there are a number of you in the audience tonight who have worked in the intelligence world, the quote about our speaker by the former CIA National Intelligence Council Vice Chairman Herbert E. Meyer. Quote, “Ask anyone in the intelligence business to name the world’s most brilliant intelligence service and will all give the same answer: Spengler. David Goldman’s Spengler columns provide more insight than the CIA, MI6, and the Mossad combined.” Please join me in welcoming David Goldman.
I am humbled to be invited to such a distinguished group in the presence of so many people whose work I have admired for many years, including Bob Reilly’s. Bob’s work on music, by the way, is some of the most interesting and important I have read. His book on 20th century music I think should be the standard on the subject, so I will throw that in as a free advertisement.
The simple answer to the question “will China overtake the United States as the world’s leading superpower?” is yes, unless we change course. The hour is late and it is time to be alarmed. I will explain the point of my title, “Geeks in a new Roman Empire,” in a moment.
Depending on how you measure the Chinese economy, the Chinese economy is either 20 percent larger than ours or 20 percent smaller, what the World Bank calls purchasing power parity (PPP), that is the actual cost to do business. So, for example, if you want to create a research lab and develop a new hypervelocity missile in China, the costs of the engineering personnel will be considerably less, so the GDP of China in that respect should be upgraded a bit.
If you calculate it in ordinary U.S. dollar terms, they are still somewhat behind us, but even so, given the growth rate of the Chinese economy, sometime in the early 2020s, it is very likely that China will overtake us in nominal dollar terms and however we measure it, it will be roughly our size. Given that China is growing at six or seven percent a year, which is say doubling every ten or twelve years, not very long from now the Chinese threat that we have now will double.
We are like Hercules wrestling the giant Antaeus, the son of Gaia, the earth goddess who every time he touches the ground, doubles in strength. Hercules finally had to strangle him in midair. And the problems that we now face are going to be much greater in the future, and if we do not address them, we will be dealing with a power that will in many ways swamp us. I will try to explain what those ways are.
First, I would like to say something about what China is. China is a civilization that has been with us for five thousand years. It is much older than us. It has had periods of extreme decline and chaos followed by periods of reconstruction, but overall it is certainly one of the world’s few truly successful civilizations.
According to the linguists, not quite a hundred and fifty thousand languages have been spoken on planet earth since the dawn of man. Of those, perhaps five thousand are still spoken, but if you eliminate the languages spoken by a few hundred people in the New Guinea Highlands and the ones that are likely to survive another 100 years, you get into the hundreds. So of this enormous pool of languages and cultures, Chinese culture has been one of the very few successes.
Coming from a younger and also reasonably successful culture, which is the Jewish culture, I look at the Chinese in awe. They should never be underestimated. What makes China China? What is it? How does it understand itself? Until the Jesuits turned up in the 16th century, Matteo Ricci and his colleagues, China simply understood itself as civilization. China was a civilizing principle. It was a means of unifying different ethnicities on the basis of a very different principle than Rome or Alexander or the Holy Roman Empire or any entity in the West or its antecedents, and I think that is best illustrated by what it is like to be a Chinese child.
Growing up in China
Chinese children are very bumptious and sort of have a free happy-go-lucky kind of existence until they are about six at which point they are given a pen and the pot of ink and a piece of paper and they are told now you are going to learn the characters. And for the next six or seven years they will spend four hours a day learning the characters.
Disunity and Fragility
China managed to combine roughly 70 major language groups by having a unified written language and entirely diverse spoken languages. It is not until very recently with the advent of telecommunications and the centralizing influence of the Mandarin dialect, the old Beijing imperial court dialect, that China has had anything like a unifying culture in the sense that we understand culture. No Chinese mother for thousands of years sang a lullaby to a child in Chinese. Chinese was what you wrote.
This duality lies at the heart of Chinese strength and Chinese fragility. China has never quite been unified. It is like a bag full of oppositely charged magnets held together by super glue. China spent a hundred years until the Communist revolution, the so-called century of humiliation, disunited, dominated by warlords, with civil wars that may have cost up to a hundred million lives in the middle of the 19th century, the Taiping Rebellion, for example. This is still a living memory. There are people who remember this in the 1930s and 1940s.
So China’s paranoia about a rebel province, Taiwan, breaking away, or Tibet, is deeply rooted in the fragility of Chinese history, but at the same time the process of acculturation of Chinese citizens is so intense and so deep, requiring so much effort in childhood, that the unifying characteristics have a different kind of strength, which no supranational entity in the West has ever achieved.
Important to remember that China had by some estimates 30 percent literacy 2,000 years ago when literacy in the West was a tiny fraction of that. Now, China essentially grew from the tiny area denoted by the Shang Dynasty 3,500 years ago by making its neighbors an offer they could not refuse. The offer was you become Chinese, which is you learn the characters you adopt Chinese dress, Chinese customs, and you pay taxes to the Emperor, who will be the arbiter of conflicts among various ethnicities and so forth. That is an option one.
Option two is we kill you all, and it worked quite effectively. China basically reached its current geographical boundaries, which are natural, the Gobi Desert, the Himalayan mountains, and the oceans by the year 700. They have not changed substantially since then nor are they likely to change. This is not Rome or Alexander or the British Empire or the Comintern, which wants to conquer masses of territory. China wishes to project influence, but it has not in thirteen hundred years, fourteen hundred years looked for territorial expansion.
Chinese Society vs Western Society
The differences between China and the West are deeply set. The most important thing one notices in China is that there are no subsidiary institutions to use the terminology from Catholic social theory. There is no Football League, no Church bingo game, no Board of Education that is organized outside the imperial structure, which is run by the Communist Party, which tolerates no competition.
The fundamental unit in Chinese society was never a subsidiary organization like the New England churches that elected their own clergy and did not like Anglican bishops telling them what to do, it is nested dolls. The fundamental unit was the extended family form in which the head of the form was a miniature Emperor and many forms formed a clan, which had a head who was another slightly less miniature Emperor, going up to a provincial governor, going up to the Emperor. It was a structure that reproduced itself down to the capillary level of society. That, in a deeply oversimplified summary, is what Confucianism is.
China vs Rome
My friend Francesco Sisci, an occasional writer for Asia Times, points out that the Chinese conception of law, rights, and obligations is radically different from the West, starting with the Romans and certainly ancient Israel, elsewhere, the state was an entity to which one had obligations and from which one derived rights and privileges.
In Rome, you paid your taxes, you served in the army, you could demand certain things of the state. You had certain economic benefits as a citizen. You would deserve protection and so forth. It was a very well defined quid pro quo engraved in common law.
China vs Japan
In China, you do what the emperor feels like at the moment and you hope you get a reward. There is no sense of rights and privileges. China is radically different than Japan. Japanese love their emperor. The Chinese have never loved their emperor. The emperor is a necessary evil. Chinese will tell you today we have always had an emperor, why should we change now? When we did not have a strong Emperor, we killed each other. Look at the century of humiliation, so we do not like the Communist Party. We do not like any of these people, they are tax collectors, they are brutal, and they are arbitrary, but without them we would all kill each other.[I will] close this part of it with an anecdote. I worked for several years for an investment banking boutique in Hong Kong, Chinese-owned. We took a number of tech companies public and got a good view of some of the more interesting things happening in the Chinese economy.
The Mandarin System
And once I wrote a research report and included the name of a young Chinese colleague on it. He said, “why did you do that?” I said, “Well, I am trying to give your career a little help. It is what we do.” He said, “No one in China does that.” I said, “Really?” He said in China, no one has any friends.
At age six you look around yourself in primary school and try to figure out whom you are going to walk over to get ahead. That is not a lack of altruism, it is the way the system is gamed because in parallel to this arbitrary, imperial structure, China has had for 3,000 years a form of meritocracy, which has been on many occasions highly effective. That is the Mandarin system.
If you pass the Mandarin exams, your family becomes rich, so a vast number of people spend [money]. Families will find one talented boy, invest all the resources to try to get him to pass the Mandarin exam so it can elevate the entire family.
Meritocracy, not Aristocracy
China has no hereditary aristocracy unlike the West, no Dukes, counts, princes and so forth. There are aristocratic families, but they tend to last two or three hundred years. They keep turning over because talent from the base is allowed. It is a cold-hearted and merciless meritocracy but it still works.
The one thing Xi Jinping cannot do is to get one of his children into Peking University or Tsinghua University. You have to pass the exam and get the right score. Of course, there are people who hire professional exam passers and with fake fingerprints to get through the security. There is a whole industry in cheating on exams, but the principle is nonetheless there.
That is one of the great difficulties we have in communication with Chinese. If you meet any Chinese public official of any significant rank, you are guaranteed that he or she has an IQ of over 150. It is as if we had a government entirely composed of National Merit Scholars not semi-finalists because out of the vast population you select out the brightest by competitive exam systems, and those are the people who manage the government.
The difficulty the Chinese have is understanding that democracies frequently advance stupid people. You are talking to people who since the age of 12 have never met a stupid person, and they are completely unable to believe that some of the things we do are not conspiratorial subterfuges but simply incompetence and stupidity.
The Threat of Peasants
Dynasties have always fallen in China because they become soft and corrupt and then get invaded or because they are successful and the population expands faster than the arable land. China is cursed with a very small portion of arable territory, so lack of arable land has always produced peasant rebellions, chronically.
The current dynasty has had a very simple solution: decimate the peasants and there will not be a rebellion. That is the reason for the one-child policy. It is a social control mechanism. Overpopulation overthrew other dynasties. Okay, we get rid of the population. There will always been plenty of Chinese. It is one of the cruelest policies that any government in history has ever adopted, really ruthless, but that is the motivation.
Second thing, of course, is since peasants tend to be fractious as Mao Zedong observed famously in his report on Hunan in the 1930s, eliminate the peasantry, move them to the cities, put them into a polyglot block of urban residents with people who come from other provinces who cannot even talk to each other. And, of course, keep China prosperous, maintain the mandate of heaven, and make China impregnable.
So what is China’s problem? China’s problem is the same as that of every other country in the world, and I would like to step back and mention a bit of wisdom from Robert Mundell, the grandfather of supply-side economics, 1999 Nobel Prize winner in economics, who observed that chronic current account deficits are the result of aging. All capital markets are as young people borrowing from old people, old people need to retire, young people need to raise families, start businesses. Old people have savings and they lend money to young people.
What happens if you have a country with lots of old people who need to lend money to retire on, but they do not have a lot of young people? Well, you find another country which has young people and you lend the money to them. How do you get the money? You sell them more goods than they sell to you. That is what national savings is. It turns into a current account surplus, so there is a relationship, a loose relationship, between the percent of population over 65 and the current account balance as a percentage of GDP. This is what Mundell predicts.
Now, of course, it is a loose relationship and how far you are from the regression line is an important data point, so I have labeled the one, the countries who have more of a current account balance than their position and age would indicate as the ‘ants’, and the ones below it as the ‘grasshoppers’. The ants are saving, the grasshopper’s are dis-saving, and China is way above the line. We are way below the line.
Now, since the whole world does not appear to be aging, if you look at the UN population tables, it appears static but that is deceptive because most of the young people are in Africa or South Asia, and it is very difficult to invest Western capital in a politically safe, productive fashion in countries with low educational infrastructure, poor political governance, and so forth, so actually, there is a race on to control those markets, which are investable, and that is the decisive race in the world today.
Chinese have a rapidly aging population. The question for every population of the world is will you get rich before you get old. In the past I have drawn attention to the extraordinary fact that Iran will without any doubt be the first country that gets very old without getting rich at all. This is because of the extraordinary fact that the Iranians running around today in their 30s, 40s, childbearing age come from families with an average of seven children. They are having one and a half to two children, 1.6, 1.7.
Never in the history of the world has there been such a radical and sudden shock to fertility behavior. That means in 20 years from now, there will be only one-and-a-half Iranians of working age to support every elderly Iranian, so grandma is going to be left to starve in a garret and the society will break down. Iran is the Walking Dead, economically.
Now, China has aged not as fast as Iran, but it is aging as a result of the one-child policy. That is been rescinded. It is now a two child policy. It has yet to be seen whether having been muscled into a certain kind of fertility behavior, the Chinese population will change, but China’s problem is they need to save massively in order to meet their future obligations to an aging generation. Germans will tell you exactly the same thing.
One Belt-One Road
So China is proposing to take over Eurasia and make it a Greater Eurasian Co-Prosperity Sphere or in their language, One Belt-One Road. This is a trillion-dollar investment program. Three years ago, this looked like one more propaganda exercise by Chinese leadership that could not find its way to the sanitary facility. It was launched with great fanfare, a lot of publicity, nothing seemed to be happening.
But now a great deal is happening. There are now two rail lines going from China to Iran, which cut the cost and time of shipment to Iran in half. There is a fast train from Beijing to Istanbul. It goes through a Caspian Sea ferry to Baku and Azerbaijan*, then on to Tblisi in Georgia, and then to Kars in eastern Turkey, and then to Istanbul. It also cuts the time in half.
*For more on Azerbaijan, see Svante Cornell’s lecture on the Armenia-Azerbaijan Crisis.
We wonder, looking at Turkey, why Turkey seems to be impervious to threats, menaces, bribes or whatever we try to offer them to keep them in the Western alliance. Turkey now is profiling itself as the Western economic province of China, and among other things, you can see they are behaving on the matter of the Uyghurs, which was a sore point between Turkey and the Chinese for quite some time.
The other thing that the Chinese are doing a Turkey, which is a good segue into another aspect of Chinese plans, is transforming the Turkish broadband system. Mobile broadband is having a transformational effect politically and economically that very few people anticipated until very recently. For my sins in the past, I did some development economics. I did some work in places like Mexico, Nicaragua, Peru, Russia after the fall of Communism.
The main thing one notices about so-called developing countries is that most people sit around doing very little most of the day. You work this subsistence plot. You sit in a market stall, swat flies, and wait for someone to come along and buy a liter of cooking oil. You do not pay taxes, you work off the books, you scrape out a living. 30 or 40 percent of economic life is the so-called informal economy. Official labor participation rates are abysmal. People are locked in a cycle of poverty.
What mobile broadband has done is to reach into the capillaries of emerging economies and locate the entrepreneurs, the talent, give them access to a world market platform, and increasingly give them access to micro-finance. And the entrepreneurial genius who created this model in China, where it is most advanced is, of course, Jack Ma of Alibaba, now as big as Amazon. Jack Ma is joined-at-the-hip; he is the Siamese twin of Xi Jinping.
There are two sides: there is a bright side and a dark side to what Big Data and mobile broadband do. You have entire villages in China, which are working for one person who figured out how to make a product and sell it on the Alibaba platform, and you have something called ant finance and a number of other micro-finance platforms, which are making small loans to businessman all over China, something the banking system, state banking system, does not do.
State banking system is basically a bucket full of cash with a shovel, which is used when a state-owned enterprise comes by. And this is transforming the capillary level of China. The most important thing that China has managed to do that no other so-called emerging economy has done in the past – well, Korea has done, it has emerged – is to mobilize the human capital of its citizens, make the whole world available to them.
But because the Chinese have successfully protected their intranet, the Great Wall of China, there is a dark side to this as well. All the data that Alibaba and Tencent and the other great internet organizations in China collect is, of course, at the disposal of the Ministry of State Security. The greatest telecom communications equipment provider in the world is now Huawei, founded by a former officer in the Chinese Signal Corps.
A couple of years ago as an anecdote I wanted to get a tour of Huawei headquarters, and to do that I had to find some unsuspecting Latin American ambassador to take the tour, so I could tag along as the escort and we were shown the Huawei exhibition hall, which is a three-hour extravaganza. It looks like two wings of the Smithsonian.
We came to a wall, an enormous wall several times the size of that screen, which the city of Guangdong, map with lots of points of light. They said very proudly, ‘Every one of those is every smartphone in the city and we can correlate the location of the smartphone and its movement with online searches, online shopping, Facebook, about Facebook, WeChat postings, and so forth.’
So they know where everybody is, who they are with, and what they have done, and what they have said at all times. Plus, they have got cameras every hundred metres or so, which do very effective facial recognition, so if you happen to be holding someone else’s smartphone, they will figure that out quickly enough, which gives the Chinese Communist Party, without any doubt the cruelest dictatorship in modern history, totalitarian social control capabilities that the likes of a Hitler or Stalin could not have dreamed of.
Overthrowing this entity is not an easy proposition. I do not know where one begin and I would not undertake the task. We are dealing with an entity, which is not going to be cowed politically where a few Op-Eds about dissidents or human rights are going to have much of an effect. This is not Poland with a subsidiary Catholic Church or a Hungary. It is a very different entity. It is a society with no subsidiary hollowed out except for the Communist Party.
Catholicism in China
There is a Catholic Church in China. It is tiny. It is split into a Catholic Patriotic Association, [which is] controlled by the state, and a very small underground Catholic Church. You do have perhaps a hundred million Chinese who consider themselves in one way or another to be Christian, and they are tolerated as long as they meet in homes and form no visible organizations, so they tend to be very low-profile. For that reason, it is extremely difficult to gain an overall profile of what the content of Chinese religious life is.
You have many people who identify as Christians who have never had a Bible, and many who are deeply learned and profound but we only have anecdotal evidence about that. That might be over the very long term a soft underbelly of Chinese culture, but it is something we can only speculate about and in the horizon of any viable strategy, I do not believe will be a factor.
Electronic Payment Systems
So, this chart shows the percentage of population owning a smartphone. Turkey and China are right there around 50 percent. China has become a cashless society effectively. You know, a few years ago the Apple store in Hong Kong had the cash counting machines that drug dealers use, and people would come from the mainland with suitcases full of cash and they go down the cash counter machine and walk out with a hundred iPads, take them back to the mainland and sell them. Not anymore. Ali Pay and other electronic payment systems have largely eliminated cash. This is the core of the anti-corruption campaign, which is enormously successful because it is technology-driven. The government can track every transaction because they are electronic.
The most important appointment that came out of the Chinese Party Congress – in the view of our China editor at Asia Times, Jeff Pao – was the elevation of Ye He, who was the reform czar under under Xi Jinping, the author of the now famous document called, “A Proposal For Supply-Side Structural Reforms in the Chinese Economy.” What do these reforms look like?
In the case of Turkey, Turkcell is now in a joint venture with Huawei to help the Finance Ministry eliminate cash payments by 2023. Broadband and physical transport are hard wiring Turkey into the Chinese economy. That is why the West has lost leverage in Turkey. Iran with its two rail lines going to China, they have always believed in dependent on the Chinese economy for many years, that is also a problematic consideration.
What kind of pressure would sanctions effect on Iran given their dependence on China? Russia has quadrupled or quintupled its oil exports to China over the last four or five years, mainly at the expense of Saudi Arabia. Russia would be bankrupt without the Chinese favoring oil imports from Russia. Russia has been an incredibly important adjunct to China.
One of the things China does not have, culture has not favored it, is a foreign intelligence service to speak of or a diplomatic service. In China, if you meet somebody in the Diplomatic Service who has lived abroad, speaks four languages, at ease of Western culture, you know for sure he is the ne’er do well brother-in-law of some party official who did not think it was worth putting him up the fast-track of the People’s Liberation Army or the regional party organizations. It is a dumping ground for people who are not that important, so the Russians with their great expertise in Turkey, in the Caucasus, and Persia and so forth, their excellent intelligence service, language capabilities are a critical adjunct for China.
No Coming Bankruptcy
Now, is China going to go bankrupt? I have been reading articles about China’s debt and debt problem and so forth. I think many of the reports we have had have been a quick first cut and superficial. I am a banker, and the question bankers want to know is what is the collateral? If there is a loan, what is behind it? The debt to the leverage ratio of a company is less important than its underlying carrying capacity.
So our team at Asia Times broke down the balance sheets of the 300 top companies in the Shenzhen 300 Index, that is the closest thing China has to an S&P 500 index, and we discovered that two-thirds [of] the total debt is attached to infrastructure companies. The biggest is Petro China. The others are rail companies and metal companies, power development, nuclear power, including the financials, a couple of airports.
This is China’s infrastructure, which includes now close to thirty thousand kilometers of high-speed rail, which is an enormous productivity booster. Now, there is a lot of inefficiency obviously, but it is not the same thing as the great American bubble of 1998 to 2008 where foreign money bought American mortgages, American mortgages financed house speculation by households, house speculation was used to artificially boost consumption. So the problem we had was financial distress in the population itself. This is debt backed by infrastructure, which has a productivity-enhancing effect.
Why did this happen this way? Well, one of the oddities – I do not want to go through the details of this. If I have got some data, I would be glad to send you if you talk to me afterwards, but if you look at the debt ratios in China versus almost any other country in the world, you see this huge corporate debt component, very small government and household debt components compared to everyone else.
The Tax System
China until very recently had effectively no tax system. There is no personal income tax. They had what is called the corporate tax, which is just a top-line tax. Recently, they adopted a value-added tax being introduced. That is being corrected. But in the meantime if you wanted to build the infrastructure- oh, and they did not have a domestic bond market to speak of.
So in the U.S. you issue bonds and you raise tax revenues down to tax revenues. You borrow money against tax revenues. Those mechanisms simply did not exist in China. They are now being built rapidly, so to get the infrastructure built, the Chinese government simply told the state banks, ‘We are printing money. Give that money to state companies,’ so it shows up as a ballooning of corporate debt.
Internal Bookkeeping, not a Debt Crisis
That is an inefficiency in the structure of the Chinese economy, which is one of the many things that the Xi Jinping regime will address in the course of the reforms, but it is not a financial crisis. The hedge fund community is littered with corpses of people who shorted China, believing it was a crisis.
Before I get to the the R&D stuff, just as a quick aside, China lost a trillion dollars worth of reserves 2015, 2016, and the papers were full of reports, saying there is a massive run out of Chinese assets. Chinese are panicking. China is going to go bankrupt. What the papers did not report, but the Bank for International Settlements Economics staff documented in great detail, is that while the Chinese government was losing a trillion dollars of reserves, Chinese companies, mostly state-owned companies, were paying down a trillion dollars worth of foreign debt.
It was simply an internal bookkeeping transaction and it was undertaken because the Chinese had let their currency appreciate for years, so it was to the advantage of the corporation to borrow in dollars, use the proceeds in RMB, and then pay the dollars back at a more favorable exchange rate in the future. But the Chinese were the very fast drives of the dollar in 2015. The Chinese had to turn that around, so you had to turn around this super tanker of a balance sheet and replace the dollar debt with local currency debt.
And so anyway, a lot of very poor, superficial analysis has been done on the Chinese economy, but also some really excellent work. For example, as I mentioned by the Bank for International Settlements. The data and the analysis are out there if you look for them. Unfortunately, the gullible and lazy reporters of the mainstream media who give us most of our daily feed do not bother to do their homework.
So, China now has R&D at 2% of GDP. What does that go into? Well, they have got the fastest supercomputers in the world. They have a functioning quantum satellite. In other words, a quantum link between satellite and earth means that if there is any attempt to interfere with a signal, for example, to eavesdrop on it, it immediately destroys the signal. It self-liquidates. Chinese scientists had a conversation over the satellite link with a French counterpart.
Massive investments in supercomputing, also investments in things like surface to ship missiles, which may or may not be able to take down an American carrier. We probably do not want to find out. [China has] diesel-electric submarines of the kind the Germans have had for a long time that can lurk on the bottom in batteries, and at this point are virtually undetectable. [They have] hypersonic missiles designed to defeat not only THAAD or Patriot or other systems that we currently have, but systems that we might develop in the future. [They also have] satellite-killer missiles and a range of things to make themselves impregnable.
What is China Preparing For?
Now, one important caveat about Chinese military spending is shown by the difference between how they equipped a ground soldier and how they equip their space forces and missile forces. The United States spends, last I checked, something over a $100,000 dollars, maybe $110,000, $120,000 dollars to equip a single infantryman. Chinese spend about fifteen hundred dollars, twelve hundred, fifteen hundred dollars. That is basically a Kalashnikov rifle, pair of boots, couple spare uniforms, and that is it. Chinese have no grab attack aircraft, nothing like the Warthog, nothing like the Russian Frog, simply not in the inventory.
Chinese are not preparing for a land war. The only land where they could conceivably fight might be with India or Vietnam. That really does not fit into their objectives, but they want to absolutely dominate the South China Sea, make Taiwan entirely dependent on them, and control everything around them.
South China Sea
One of the companies that we took public at when I was at Reorient Group in Hong Kong was Kwangji Science, which was run by a bunch of materials PhDs from Duke. I walked into the office of the chairman and he had his iPhone out, and he said I want to show you something. He showed me a little map of the South China Sea with lots of triangles. I said, “That is cool. What are those triangles?” He said, “That is the location, speed, direction, and condition of a motor of every ship in the South China Sea, so we can distinguish a fishing trawler from a destroyer.” “How do you do that?,” I said. Balloons.
They have some very strong materials they developed, so they put up high altitude balloons all over the place with coaxial cables. They can monitor the South China Sea. If God forbid we had a war with China and we each take out of each other’s satellites, the U.S. military is blind. Chinese have a much more primitive but robust technology covering their entire coast. So, that is what we are talking about in terms of R&D.
Chinese Higher Education
In the United States, roughly six or seven percent of undergraduates major in engineering. In China, it is 33%. Chinese produce twice as many STEM PhDs as we do now and four times as many STEM undergraduates. Now, granted the quality of the Chinese educational system is spotty. Remember that the Cultural Revolution leveled the universities. They had to be rebuilt from scratch, but in the view of many, the better schools are as good as ours.
Then you have some crappy diploma mills at the bottom of the pile, but I urge you to go on the internet and simply look at the equivalent of a New York Regents Test for graduating high school seniors in China. I know a little math and it made me sweat. I guarantee that if that were the standard test for Americans, there would be a 1/10 of 1% competency rate.
Now, in America where do we stand? Well, there is a lot of R&D. Plenty of people doing R&D to try to find a better breakfast cereal, but federal R&D is a good proxy for hard science, long-range R&D, and that was in the Reagan administration of blessed memory, roughly, you know, close to about 0.8 percent of GDP and it has fallen by half to about 0.4 percent of GDP.
Remember in the 1980s, we had corporate laboratories. We had GE, RCA, IBM, Bell Labs. None of them exists anymore. They have all been shut down. The National Labs are, you know, shadow of themselves. We have got plenty of people at universities doing things but we do not have the kind of concentrated industry-science relationship, which holds these things together. And there is a relationship between this and productivity, which I do not want to get into.
Where is the money going in the U.S.? Well, there is tons of money going into software. This is venture capital commitments, but nothing going into computers, peripherals, semiconductors, telecom, networking. Why do not we invest in capital intensive high-tech manufacturing? Because every venture capitalist out there is scared witless of the Asians, who subsidize this stuff. They are afraid they will get crushed, so we invest in apps, capital-lite stuff. We have got a trillion dollar valuation on an app to search for used cars. We have got 120 different dating sites. We are geeks in a new roman empire.
Now, what do we do about it? We are gonna have to do subsidies. I am a free marketer. I am a supply-side. I am a free trader. This is war. War you do things differently. War you put the subsidies- you put them in the hard science, hard-R&D. Let businesses take the risk but the Defense Department may have to do direct investments in some industries.
We start with – Dr. Henry Kressel and I proposed this in The Wall Street Journal just after the election – start with a rule: sensitive defense goods have to be made in the U.S. under secure conditions, period. That is a gazillion percent tariff. How do you like them apples?
I do not care about tariffs on steel or aluminum. The Chinese want to get rid of that stuff anyway. Chinese would love us to be Brazil. Let agriculture, energy, and semi-finished goods and, of course, politically, a steel plant has more workers to give a speech in front of than a semiconductor fab plant, just not quite as sexy, so politically, it may not fit the profile quite as smoothly as some other things, but if we do not do this, we are going to lose.
Work with Allies in Asia
This One Belt One Road thing: well, lots of people hate the Chinese [government]. They are horrible, they are aggressive, they are nasty, they in-debt countries, they bully them. Well, what if we could get together with the Japanese, who have got more foreign assets than the Chinese and the Indians and compete with them.
The Indians and Japanese already have something called the Asian growth corridor, which is supposed to be [big] but it is tiny. If we got behind that in a three-way effort, we could offer the Chinese serious competition. And then stop Intel and other companies from getting access to the Chinese market by giving away the store. A lot of companies will not like that because it is good for their stock price in the short run. A lot of people are getting rich on the decline of the West, but there are some things more important than Intel’s stock price. A lot of people do not like it, but it has got to come down from the top.
My conclusion, ladies and gentlemen, thank you for your patience, is that we have done this before. We did it in World War II. We did it with a Kennedy moonshot. We did it with Reagan and the military buildup in the SDI. We know how to do it. A lot of the people who did it are still around. It is not that we cannot do it. We just have to determine that we want to do it and get it done. Otherwise, we are going to live in a world that none of us are going to be really pleased with. Thank you very much for your time.
I have a lot of neighbors who are Chinese Americans and they are on WeChat here, so two questions: one, is there any way that the Chinese government can track WeChat in America and two, I did not hear you say a word about North Korea and how that might factor into any of this.
For lack of time – I think North Korea is a case of the Chinese wanted to play arsonist and Fire Brigade at the same time. They have encouraged the North Koreans and given them some covert help, and then, you know, President Trump will go to China and tell the Chinese we need your help to deal with these nutcases. Xi Jinping will say well, we can help, but it will cost you.
Now, that is a dangerous game to play because say the Japanese decide to develop nuclear weapons. I can tell you the Chinese will not like that. They are very afraid of the Japanese, so it could backfire on them. It is a delicate game, but that is an example of the Chinese using well, they play Go. You surround the opponent with your pieces. You do not do obvious, dramatic moves. You play for the very long-term, very patient, very strategic, whereas we are impatient and tactical. They are playing Go, we are playing Monopoly.
Thank you for your time, for coming out here. This was fantastic.
Splitting Russia and China
But my real question is the Russian Far East and how Chinese view it. I personally think they view Russia, at least in the far-east, as kind of a quasi-vassal state. How do we get the Russians to wake up to the fact that China is not their friend and they are gunning for, I think, the Russian Far East.
Well, China is looking at everybody and thinking protein source, Russians included. No, the Russians simply do not have a population to dominate the Far East, so the Chinese it is not worth their fighting over it because long term it will fall into Chinese hands. The Chinese will not fight over it because long term it will be theirs just due to Russia’s population attrition.
How do you get the Russians to understand that? Well, I think there are a lot of things we could do with the Russians. That is a whole other presentation. I think we have mishandled it. I think you need a very big stick and a very juicy carrot at the same time.
We won the Cold War in large part because Henry Kissinger, god bless him, helped split – and Nixon – helped split China from Russia. And getting them back together again cannot possibly be in our interests, but given the fact that China dominates the raw materials demand side and Russia depends on raw materials, there is very little we can do in the short term to change that dependency that Russia has on China. So although in principle I agree with you, tactically, that is a much longer term kind of consideration. That is just the way the cards are dealt.
I am delighted to meet you in person. I have two questions: one, with China’s economic penetration in Central Asia as far as Iran and Turkey, what impact do you think this might have on the instability and chaos in the Middle East? Well, that is one. Second, the U.S. has turned its back on the TPP, how serious of a blunder do you think that is?
Well, I do not think the TPP is going to help us at this point I think it is much more a matter of fighting economic war with the Chinese. They have got their greater co-prosperity sphere. We want to set up competition, so I think you should just sort of move on and adopt a different policy.
As far as instability, it is very hard to know. It is possible that the Chinese will exercise a moderating influence on the Iranians. The Chinese want to get rich, want to be powerful, and they want everyone to behave and pay them tribute. They do not want the minor tribes to war with each other and they have a 3,000, 4,000-year history of exterminating unruly barbarians, so they would certainly encourage the Iranians to cool it with the Israelis. They like the Israelis. They get along. They want Israeli technology. They do not want a war between Iran and Israel, for example.
On the other hand, all of this may very well embolden an Iranian regime which is increasingly desperate and strident, and the Chinese are very poor at managing foreign relations, so they may have quite different effects. Very hard to know. The world is being transformed so quickly that it is very hard to make a blank judgment. It is a great question.
Comments on some of the Chinese eugenics projects?
The Chinese are using their gene-splicing to be able to look at embryos and try to determine which are smarter, so parents can create a bunch of fertilized embryos and then decide which to plant later in the womb, and create the smartest kids in the world. How effective they will be I have no idea, but this is not an urban legend. This is real, they are doing it, and that is how they think. As I said it is a very cruel society. It is an absolutely ruthless meritocracy, which does not give any mercy to the hindmost.
Following Russia’s defeat by China in the 17th century, much of what is now Russian eastern Siberia, Russia’s Far East, became Chinese territory. When China was weak after the opium war, Russia took that land back in 1858 and 1860. We currently have a treaty that is designed to settle that border dispute for twenty years that is up in 2021. If you were China, what would you be asking Russia to renew that treaty?
Well, I think China wants Russia to be its cat’s paw in a number of strategic operations. It wants to make the Shanghai Cooperation Organization a successful competitor to NATO. It wants to harness all of Russian military technology to Chinese ends, and China has some significant gaps in their military profile, which the Russians have historically filled. For example, Chinese still cannot make a good jet engine. Their metallurgy is behind the Russians, so they use Russian jet engines. They only just got the S-400, which is important because with a range of several hundred kilometers, it can control the skies over Taiwan from land bases on the mainland.
They probably want the S-500 so they want the Russians to do their bidding and effectively be their vassal state. At a hundred year horizon, Russia’s population will have shrunk. Even though Russian fertility has actually recovered a good deal, the pool of women of childbearing age fell so quickly that a decline is inevitable, and that means that it will be the marginal areas like Siberia that lose the most population, so it will fall into Chinese hands. The Chinese do not have to fight for it. They are going to get it anyway.
Thank you for a tour de force. Can you square one circle for me? While seeing the paradox, they are perhaps the most strategic nation out there right now, but at the same time, you correctly demonstrated that they do not know how to foreign intelligence. They are rubbish at diplomacy. Why is that? Is it a lack of cultural empathy? How can they be uber strategic with the One Belt, One Road at the same time being third rate at intelligence and diplomacy?
All of Chinese culture has been to push inward, to take the periphery and force it inward and homogenize it with the single written language, with the ideograms. Because China had no interest in getting through, getting to the rest of the world – it reached its natural natural borders by about 700 with the Tang dynasty – they really did not have pressure to do so. China’s economic basis has always been agriculture. It has never been a colonial power like the British. The Emperor had an annual ceremony where he put his hand on the plough, which said the son of heaven himself is symbolically a plough. It is deeply embedded in Chinese history.
When you spend your entire childhood – I mean after the age of 11 or 12, if you know, working four hours a day, you can read 2,000 characters, perhaps. Is that right? Maybe 1,500 to 2,000 at age 11 means you can read a newspaper. To get to 10,000 characters, which is high literate – you do everything else. The ability to learn languages phonetically that we have in the West is something that has never been developed as part of Chinese culture. That Roman polyglot or Greek polyglot capacity was simply never part of the culture.
The Chinese feel so drawn, centripetal to their own culture that they simply do not like living anywhere else. When they go to other countries, they bring their own war teams, their own wheelbarrows, their own cooks, their own food. They do not mix with the locals because they feel out of sorts. On the other hand, Chinese who as individuals emigrate are some of those adaptable people in the world. The Chinese diaspora has been remarkably adaptable both culturally and economically, so it is a difficult contradiction to square.
Thank you for your insights Mr. Goldman. Do you think that China’s love-fest with Turkey has legs?
China-Turkish relations were at a low two or three years ago because the Chinese believed with some justification that the Turks were supporting Uyghurs who were moving in large numbers to Syria, fighting in Syria, getting trained as terrorists, a lot of them. There was a route that went from China to Southeast Asia through the Yunnan Province. They go to Turkish consulates. They present themselves as Chinese Turks, get Turkish passports. Chinese officials told me the Turks had fifty thousand blank passports at their consulates to service the Uyghurs. Whether that is true or not I do not know, but I think the Chinese actually believed that. They were very afraid of Uyghur terrorism.
Since then Erdogan has started behaving himself. He cracked on the Uyghurs in Syria and Turkey. He is not letting them travel back and forth. Without any fanfare, there been a very few reports in the media about this, Erdogan has completely acceded to Chinese demands, so Erdogan’s national interest, his desire to gain independence from the West, has trumped his ethnic solidarity with his Uyghur cousins and Islamic solidarity. That is simply the way it worked out. That is a decision the Turks made.
I just have a comment. I think unlike you, I met plenty of stupid Chinese officials, too many. I think in recent years some Americans developed a fear. From my perspective as an ethnic Chinese – I came from China as a dissident – what I see as the main problem here is that the Chinese, no matter how smart they are, lots of people lost their moral compass as well. I think the real danger Americans are facing is not how fast the Chinese develop. I actually do not worry that much, knowing China for so many years, the dictatorship has its own logic. I worry about us. While dealing with China, we have produced a lot of soulless people. That is what I really worry about.
Thank you very much for that comment. I deeply share your concern and if it were not for the fact that we have lost our moral compass, we would not be having these concerns at all to begin with, but I do. I certainly want trying to do the prosperous and to be at peace and to be secure. I do not think the United States should attempt to break Taiwan off from China. I think the One China policy simply is a banner of realism. I do not like it particularly, but I think that is the way the cards are dealt. I do not think we are going to get anywhere with Tibet, so I do not want to mess with that. I am all for China being secure in its borders.
However, it is like steel in 1870. If you are a European country and you do not have high quality steel mills, you cannot make cannon, you are dead militarily. If we lose our semiconductor industry, our edge in semiconductors, militarily, we become a second-rate power and that has all kinds of terrible consequences, which are almost impossible to predict apart from the fact will be a great deal poorer as well, so I am all for China being prosperous, but I deeply want America to have a technological edge that is tangible and keeps everyone afraid of us. I very much believe if you want peace, you prepare for war.
One of the vulnerabilities that has been apparent for a time has been China’s relatively little reserves of energy; a great day deal of coal, not very much else. There are 25 million cars that are produced there now running on essentially imported fuel. Well, they are turning coal into methanol. Well, they do have a huge potential for fracking, probably as large as the United States. Fracking takes a lot of water and one hears stories that water is at a premium and particularly in the northern provinces who just cannot afford. Is that really true? What do you hear about any plans of actual investment going into horizontal drilling and fracking in China’s energy?
It is not my field. It is an excellent question, I wish I knew more about it. From what I have heard, you would have to construct a pipeline from the sea to bring in seawater because where the shale deposits are located is mountainous and extremely dry, so there is not any water source ready to have.
That would be an enormous expense and the Chinese have to weigh that against, for example, building pipelines into Russia for oil and natural gas, which they are doing, and creating the pipelines through Pakistan to the Indian Ocean, which would give them better access to Iranian and Iraqi crude without the vulnerability of going through the Straits of Malacca.
So I think the Chinese tension is much more in energy security, replacing the existing routes and increasing their supply from Russia, than on fracking. They also, of course, have announced that they are going to eliminate the internal combustion engine entirely in China by 2030. I would not take that too seriously, but it is an important effort.
They are building nuclear power plants as fast as they can, several a year. That will not have a huge effect on their total energy output for several years to come, but at a 15-year horizon, it will make a very big difference.
Thank you. One footnote that is further alarming, they have a plan that is beyond the One Belt, One Road to build a grid that connects the entire world, including us.
But which way do you pay the tolls?
That is something to think about. The country is planning to connect the entire planet earth.
Thank you. I have a couple questions. What advice do you have for Trump for his trip to China to be successful? The CIA Director said the other day that now China’s President Xi Jinping is emerging from the 19th Party Conference in a position to have a credible capacity to do good around the world. I wonder if you could share that view.
Thank you for that. Thank you. Good for whom? Xi Jinping is a very capable leader and he is a Chinese patriot who is doing what thinks is best for his country in ways that in many cases, I found repugnant in the extreme, but I do not propose to criticize him. The Chinese are going to have to work out their own problems.
I think a Trump trap is being set for the United States, which is we will make a fuss about aluminum tariffs and steel tariffs and dumping and various other things. Chinese will kick and scream and negotiate and finally, they will give in, and Trump will have a great victory. We saved the American aluminum industry from Chinese dumping. We saved steel.
Chinese officials told me why does Trump want to save all the industries we want to get rid of? China is happy for us to be Brazil: semi-finished goods and raw materials, so I think that is how this is going to go, and I think if I were Trump, here is what I would tell Xi Jinping: for the last 30 years you and the Russians have told us it would be unacceptable for us to develop and implement a space-based anti-missile system because he would consider that a tenable change in balance of power. I would like to acknowledge the presence here of the distinguished political scientist Angelo Codevilla, one of the world’s experts on this. He may want to say something more about it.
I would say see Xi, we understand your concerns, but you loused up. You let the North Koreans get out of control. Everybody was relying on you and look what a mess you made of it. That leaves us no choice, so as soon as I come back, I am going to announce to the American people a Manhattan Project to develop a space-based anti-missile system to make the United States impregnable, and if you do not like it, go jump in a lake. That is right.
Thank you for this presentation. Many of us thought that the Soviet empire was going to last much longer than it did until the head of Soviet Ideology on the Central Committee announced that he had come to understand that Leninism was evil. In other words, a place no longer has a belief system to sustain it is one reason why it came down. Now, to what extent is that a factor in China? I know Xi is working hard to promote the Party ideology and his thinking. How vulnerable is it to a change such as that since it has been said for so many years that they are not using communism anymore?
That is the great question, and the riddle wrapped in an enigma is the status of Chinese Christianity. If ever a country were ripe for Christianity, that would be China. Look at the late Roman Empire with tribes migrating, disappearing, losing their national identity, losing confidence in their old gods. Well, China is a nation of migrancy, 600 million people have moved from countryside to the city. It is spiritually empty. Human beings do not do well in a spiritual vacuum.
But because the movement has been so subtle and so located, it has been a house church movement not an organized movement, it is extremely difficult to gather data on it. There is a recent book on Christianity in China, a good book, but entirely anecdotal. It is almost impossible to get real data on this, so that certainly could be a game-changer – that is not the right word for it – that could be the transformational change that would that would make China an entirely different place, but I have got no means to evaluate it. I have been trying to learn about it for years and you only hear anecdotes because with very good reason, Chinese Christians are keeping their heads down.