Napoleon Bonaparte, the emperor of France and military expert who conquered much of Europe, once made the following observation: “There lies a sleeping giant. Let him sleep! For when he wakes, he will shake the world.” Napoleon was talking about China, and his observation was amazingly accurate. Even more remarkable is that it was made more than two centuries ago.
No one can deny that China is awake and shaking the world. It has the largest population and the second largest economy. It also has one of the most powerful militaries, more foreign exchange reserves than any other country, is the largest producer of gold, and has the largest reserves of rare earth metals - substances crucial for making many high-tech items.
That’s not all. China also is one of only a handful of countries that have safely landed their rockets on the Moon. And it is believed to be developing a large variety of state-of-the-art weapons and producing them in great quantity - including what one US admiral called “dazzling” weapons for use against satellites in space. By anyone’s measure, it has become an economic and military superpower that is flexing its muscles in Asia and beyond.
And yet, despite these enormous strengths, China also has an Achilles’ heel - in fact, it has two - and they’re starting to show. Those are economic and demographic. The way China deals with these will affect global tensions, trade, and other important issues - possibly for years to come. Almost certainly, America will be impacted one way or another.
The China Card
China has made huge strides in modernizing its economy and building new infrastructure. Millions of jobs were created during this process. Some of them, in technology and manufacturing, produce high-value goods and pay enviable salaries. However, many more offer low salaries or middle income at best.
Overall, Jim Rickards, an investment banker, economist, and author, is not especially impressed. “China remains reliant on assembly-style jobs and has shown no promise of breaking into the high-income ranks,” he says. “A cheap labor pool and infrastructure investment are not enough to do that. They need applied technology to produce high-value products. This explains why China has been so focused on stealing US intellectual property.”
In his view, China remains a fundamentally poor country that has little chance of improving the standard of living of their citizens beyond their current level. And this presents a serious challenge to the Chinese Communist Party (CCP), which rules the country.
According to Rickards, in order to remain in power, the CCP has to do more than simply provide people with jobs, goods, and services; it also has to raise their standard of living. If it fails to do that, social unrest could break out - unrest so widespread that it could threaten the survival of the CCP and drive President Xi Jinping and his government from power.
A solution seems obvious: All the Chinese government has to do is borrow enough money to boost the economy and create more quality jobs.
But China already has so much debt that “Adding more would be counterproductive,” he says. “In fact, it would slow the economy and call into question China’s ability to service its existing debt.”
More economic problems are the last things China needs. Rickards believes their banking system is essentially insolvent. Moreover, it is also experiencing a real estate bubble. Up to half of the CCP’s infrastructure investments are a complete waste. Finished projects, including skyscrapers, train stations, sports arenas, and even cities, remain vacant and brand new. “The CCP has driven growth with excessive credit, wasted investment and Ponzi schemes, and now it is facing a dilemma with no good way out.”
The Missing Millions
Economic woes usually are visible, while others, such as demographic problems, are not. But this does not mean they are not real or serious - and China has that, too.
Even back in 1980, it had a humongous population, growing every year and straining vital resources. The government decided to curtail population growth by limiting the number of children families could have to one. They were certain this would solve the problem, because on average families need 2.1 children to maintain the population.
The solution was worse than the problem. The Chinese have a cultural preference for boys over girls. When the one-child policy was implemented, many people used pre-natal tests to determine the baby’s gender. As many as 30 million baby girls were killed immediately after birth. This slowed population growth, but it also created a major demographic problem, as now there are some 30 million more men than women.
“They will never marry,” says Rickards, “and likely will be the least talented, poorest, and prone to alcohol, drug abuse and violence.” China now allows families to have three children, but reversing the demographic damage will take decades. Meanwhile, their manufacturing, exports and employment are being hurt.
China’s economic and demographic problems have nothing in common with each other. However, if the CCP feels threatened by worsening economic problems, it could bring them together to stay in power.
The 30 million people, who are of military age, could be turned into a formidable army. They would sacrifice little of their personal lives and give up few financial opportunities. The Chinese Government would have a powerful new bargaining chip simply by implying the 30 million would be turned into a military force, intimidating countries near and far without ever doing anything.
Is this already happening? Could this be one of the reasons the CCP has become so aggressive toward so many of its neighbors?
The most obvious ways countries fight is with tanks, planes, and missiles. But they can also use trade, currencies, pharmaceuticals and even food as weapons. Thirty million unattached men of military age could be an even more powerful tool in the CCP’s arsenal.
Let’s hope this conjecture has no basis and that somehow a solution is found for China’s unprecedented demographic problem. If not, the political tensions and dangers we see today will be nothing compared to what lies ahead.