CONFUCIAN CONTRADICTIONS

 

The 21st century will belong to China.  Demographics tell us that, and so have most economic analysts.  China itself has been boldly stating its intention to be the leading nation in technology development, capital markets and global trade.  And before recent slumps in Chinese GDP growth, it sure looked like that was an easy call.  But 2019 has not been kind to the forecast of the rapid and inevitable rise of China to global leadership, and it all comes down to some longstanding and intractable contradictions.

Contradiction #1:  China wants to be the leading supplier of hardware to facilitate the transition of the global economy to the 5G data and voice transmission.  Critics in the West argue that large Chinese enterprises are entirely enmeshed with China’s totalitarian regime, and accordingly cannot be relied upon to not use installations of this critical technology in foreign nations in a manner that compromises the economic and political security of those nations.

Not so, says Huawei, China’s leading provider of hardware to enable the 5G transformation, in response to the efforts by multiple Western nations to ban its equipment from their 5G networks.  But then Meng Wanzhou, a senior executive of Huawei who had enjoyed Permanent Resident status in Canada until 2009, is arrested in Vancouver on a warrant and extradition request issued by the US government based on allegations of breaches of the US trade embargo of Iran.  The arrest is executed in compliance with a longstanding treaty in place with the US, and Ms Meng was quickly granted bail and released on the condition that she remain in Vancouver pending an extradition hearing.  This condition can be assumed to be more inconvenient than oppressive given that Ms. Meng is able to continue to reside in either of the two $5+ million dollar residences that she and her husband maintain in Vancouver.

Shortly after this event, the Chinese government chose to appeal the sentence given to a Canadian citizen previously convicted of a drug offence in China, which was quickly concluded and upgraded to a death penalty conviction.  In addition, two Canadian citizens, Michael Spavor and Michael Kovrig, were arrested and continue to be held with limited consular access on vague charges of espionage. It appears that skeptical Western governments had it wrong; it is Huawei that appears to have undue influence over the Chinese government, not the opposite.  Nothing to worry about there.

Contradiction #2:  China wants the access to capital that accrues to the host country of a global financial centre, and it obtained just that in 1997 when the UK ceded control of Hong Kong.  “One country, two systems” was the promise of the accord that enabled that transfer.  But the Executive Branch of the Territorial government quickly ceased to be controlled by the Hong Kong electorate, and the populace has long been on alert for the other shoe to drop.  It finally did with the introduction of legislation that would permit Hong Kong residents to be transferred to the mainland for the prosecution of offences, easily the most critical tool of economic and political control by the Chinese state.  The fragile mutual trust that allowed the Hong Kong financial markets to operate successfully since 1997 appears to be irreparably damaged, and China must now choose between either backing down to maintain the support of global capital markets or brutally demonstrating to the rest of Chinese society that demands for democratic niceties will not be tolerated.  I’m not feeling good about which way that one is going to go.

Contradiction #3:  Xi Jinping wants Chinese products exported across the globe.  Donald Trump wants US products exported across the globe.  Both men want to do so while protecting domestic employment and running trade surpluses, which is pretty much impossible to achieve for both of the world’s two largest economies.  Donald Trump is imposing tariffs to reduce access to its huge consumer market to force better access for US exports to China.  Xi Jinping is using currency devaluation to obviate the tariffs (most recently) and deny Chinese consumers the benefit of imported goods (both now and for the last many years).  Neither approach bears any resemblance to free trade but looks more like economic imperialism.  If the two biggest economies can’t support global free trade, we will all be worse off.

Global economic leadership is not as easy as the Americans used to make it look.

Contact Us

Visit us

11 King Street West, Suite 1600
Toronto, Ontario M5H 4C7

Get in touch

call +1 (416) 309-7557
email info@taoasset.ca

Follow us

Our Location