Many Americans see China only as a problem for the US. In fact, it’s a vital cog in the global economy, and the more we know about what’s going on there, the better we can deal with it.
On this week’s WhoWhatWhy podcast, we talk with Timothy Heath, a senior international defense researcher at the RAND Corporation working on matters related to China. Prior to joining RAND, he served as the senior China analyst for the United States Indo-Pacific Command China Strategic Focus Group. And before that, he worked as an analyst for the office of naval intelligence and served in the US Army in Bosnia.
Heath talks of the broader context of the current protests over lockdowns. While COVID-19 is the presenting issue, the problem, in his view, goes to the heart of China’s failing health and welfare system, and its inability to maintain sustainable economic growth.
The fundamental dilemma, as described by Heath, is that the Chinese government has to balance its primary goal of the survival of the Chinese Communist Party with economic policies that would invigorate the Chinese economy but also pave the way to a more open, creative, and less repressive society.
Heath details China’s failure to develop a professional service sector, the folly, and danger, of the country’s ever-growing real estate bubble, and the efforts of the Communist leadership to drive greater internal consumption.
As for the US response to all this, he talks of the need to coordinate our military, strategic, and national-security actions regarding China. At the same time, he points out the futility, indeed the self-defeating nature of the policies espoused by the current anti-China crowd in Congress. Heath also exposes the myth of the US decoupling from China.
Full Text Transcript:
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Jeff Schechtman: Welcome to the WhoWhatWhy podcast. I’m your host, Jeff Schechtman. Winston Churchill once referred to the former Soviet Union as a riddle wrapped in a mystery inside an enigma. He was looking for some key to understanding that nation. Today the Soviet Union is no more and Russia is nothing but transparent in its aggression. Today, it’s China that is that riddle.
As China has risen, we seem to always be looking for a similar key, a kind of unified field theory of China that will enable us to better and more simply understand the nation and its billion people. The problem is it seems to be a nation and a people who thrive on contradiction, a yin and yang such that for almost every analysis there seems to be an opposite analysis.
China is like the story of the blind man and the elephant, where each part you touch gives you a different picture of the whole. Its mammoth scale, both urban and rural, makes it so hard to see it in totality. Today, we are seeing protests and the bravery of protesters not seen since Tiananmen Square. China’s economy is weakening, its demographics are working against its progress, its leadership is becoming more regressive, and even the sanctity of some of its business relationships is under question.
Here to talk about all of this and provide some perspective on the events taking place in China, I am joined by Dr. Timothy Heath. Timothy Heath is a senior international defense researcher at the RAND Corporation on matters related to China. Prior to joining RAND, he served as a senior analyst for the US Pacific Command China Strategic Focus Group.
He worked as an analyst for the Office of Naval Intelligence and served in the US Army. He has over 20 years of experience researching and analyzing military and political topics related to China. He’s fluent in Mandarin and is a graduate of George Mason University and the George Washington University. It is my pleasure to welcome Dr. Timothy Heath here to the WhoWhatWhy podcast. Tim, thanks so much for joining us.
Dr. Timothy Heath: My pleasure.
Jeff: It is great to have you here. Well, the world seems to be focused on the protests that are going on in China now with respect to the COVID lockdowns. It does seem that this is part of a much larger picture — that regression in China, that lockdown, it’s not just about COVID, but even with respect to business, with respect to entrepreneurs and the economy, that this is part of something that’s been going on for the past several years. Talk a little bit about that broader context.
Timothy: Sure. So China, which experienced decades of phenomenal growth, is running into some serious headwinds. The problem is that the old model of growth — industry-based, export-based growth — is simply unsustainable, and the Chinese are having a real difficult time transitioning to a much more sustainable model of growth. We’re seeing symptoms everywhere that the old game is up, and that the government is having a harder and harder time keeping growth growing and maintaining social stability.
The COVID restriction is actually a symptom also of a broken welfare system. It’s ironic that China, which began as a communist state, promising all sorts of welfare benefits to its people, today is a country with a really weak and frankly broken welfare system, a health care system that’s completely inadequate, deep inequality. And it is these social welfare aspects that are really a major driver of this extreme COVID policy that’s proving politically unsustainable.
Jeff: You talk about the unsustainability of export growth and the weakening of the economy. Given that, why has the government, particularly over the past four or five years, been so aggressive in cracking down on entrepreneurs and on various business efforts inside China, people like Jack Ma and others who could have contributed to China’s continuing economic growth?
Timothy: In China, politics reigns supreme. As important as growth is, the Chinese Communist Party, or CCP, ultimately cares most about staying in power. So when any entrepreneur becomes extremely wealthy and powerful and starts to demonstrate some degree of independence or autonomy from CCP rule, that becomes a problem for the government, and they will prioritize suppressing or disciplining these companies over supporting them and the profits that they bring.
So Jack Ma and various other entrepreneurs who were getting wealthy and powerful and hinting that they disagree with government policy, they crossed the red line and were crushed, frankly, as a result.
Jeff: Is this a fatal flaw in the Chinese system, the sense that politics will stomp out even entrepreneurship?
Timothy: It could well be. At the end of the day, China desperately needs innovative companies in order to create industries that will create high-paying jobs, just like we do. And this is proving politically difficult to tolerate because innovation requires some degree of independence of thought, creativity, questioning, skepticism of the way things are being done. And these values are not necessarily consistent with this authoritarian mode of governance.
Jeff: Talk about the broader economy in China. And certainly, it is facing a crisis of demographics; this crisis is a result of a real estate bubble. To what extent are these real economic problems that could have far greater consequences in China?
Timothy: They are big problems. So everybody remembers a few decades ago virtually everything in your house was made in China: clothing, shoes, toys. Well, the issue is that at least some of those jobs are leaving China owing to the normal process of wage increases and cost increases. So what China should do if it’s following — and, in fact, the government says they want to follow — the experience of every other major industrial countries, as you shed those jobs, you move up the value-added chain and start carrying out industry and advanced manufacturers, and you switch over to a larger service sector that features well-educated people and professional jobs.
The problem is the Chinese simply are struggling to do both of the latter. They have plenty of low-wage service sector jobs, but they simply do not seem capable of building a robust middle-class and educated workforce that can do higher-end services and manufacturing. So that means, increasingly, China relies on government spending and property to drive growth. And we’re seeing that rising property values after a certain point simply become unsustainable. It is a bubble.
And it’s a huge political problem for China because, given the lack of alternatives for investment, most regular people put all their money in real estate. So as this sector deflates, it’s threatening to wipe out the savings of large numbers of Chinese people. Not only that, the other part of their growth is construction and investment in infrastructure. Well, they have built out everything that’s useful and are now spending money building empty buildings and construction projects that have no real utility, and this is actually extremely wasteful.
And yet, if they stopped doing that, the other sectors are just too weak to drive growth. And that leads China in the spiral of putting more and more money, frankly, into debt, pumping up sectors that are unproductive and wasteful, and diminishing prospects for long-term sustainable growth.
Jeff: Given that China holds so much of US debt, what consequence does that have?
Timothy: An issue with China holding US debt— it is a massive amount, but you have to think about this. If the Chinese decide to unload all that debt, first off, that’s going to hurt them tremendously because as they start unloading it, the value of that debt will rapidly plummet. And China, all the savings, the money that they’ve accumulated will be devalued quickly.
The other problem is they have to find buyers. China owns such a large portion of US debt that it’s hard to see who in the world would be willing to take all that. So it’s a real challenge. In a way, as others have pointed out, it’s like a loaded gun aimed at two people. China can threaten the US with unloading debt but, at the same time, it will hurt China tremendously if it decides to try and do that.
Jeff: But given this philosophy that you talked about earlier that China looks at internal politics above all else, what can they do that’s beneficial for their own internal politics that supports the CCP but at the same time addresses some of these serious economic issues?
Timothy: Its economy is worsening. What they need to do and what they’ve been trying to do is, again, succeed in this high-tech sector. This is why Huawei is so important to the Chinese. This is why projects like China 2025 are really important. They are trying to dominate their frontier technologies and all the consumer and industrial manufacture that could come out of dominating those sectors.
That is the main game plan. At the same time, they are trying to, although unsuccessfully, build up wages domestically so people can consume more and they can increase the role of consumption in driving growth. Right now, it’s extremely low. It’s like 30 percent or 40 percent, which means they have no choice but to either rely on spending government debt or on exports to drive growth. And that’s why if you look at Amazon, a lot of stuff is still made in China; not as much as before, but a lot of stuff. The government is subsidizing a lot of those manufacturers because, again, that just adds more debt. It’s not a very sustainable way to grow.
Jeff: How does all of this impact China’s geopolitical position — its outreach to other nations in Asia, and its geopolitical standing in the world?
Timothy: Well, certainly the grim — I shouldn’t say grim, but the less optimistic — prospects for China as its economy decelerates are going to take some of the shine off whatever appeal China may have had when the US had its share. And we still have obviously quite a few of our own share of issues. But, compared to China, the US looks relatively more attractive for a lot of people.
It is still much more dynamic as an economy. It is frankly much more stable, despite all our political issues and polarization. So I think this more difficult economic outlook for China will hamper their appeal. At the same time, even with all these drawbacks, their economy is expected to grow at 3 percent, conservatively, for years on end, which is still a relatively high growth rate. So their economy will get bigger, there will be opportunities for trade partners, and China will continue to be attractive to people.
I think the other implication of this economic outlook is the Belt and Road initiative, which is this ambitious effort to integrate the infrastructure and trade networks of countries in Eurasia and Africa primarily. That will become more important for the Chinese government because they need outlets for these construction firms and these export markets, owing to their inability to create a sustainable domestic market.
Jeff: Does the US need some kind of grand strategy for dealing with China, not unlike the containment strategy that we had towards the Soviet Union during the Cold War, or are we best just letting events evolve and see where it takes China at this point?
Timothy: Well, I do think there is a role for industrial policy of some sort, mainly because the Chinese are resorting to all sorts of subsidies, frankly, and other government interventions to help their companies out-compete the US. So if the US government just stands back and allows the economic competition to play out, then our companies will be at a severe disadvantage.
We saw this play out with Huawei, where the Chinese companies grabbed a large share of overseas markets because their prices were so low, owing to government subsidy, that it was very difficult for Western companies to compete. And losing those markets carries political implications and diplomatic implications and security implications.
If our allies, as did happen— many of our allies start including Chinese equipment in their telecommunications infrastructure, then their own security could face greater risk. So there is a role I think for the US government to figure out policies and plans to help our companies compete in a fair way. There’s definitely a role for diplomacy, for government to be involved in ensuring that the fundamentals of America’s society and economy are well-known to the world so that we continue to maintain our influence.
And militarily, of course. We need a strategy to ensure that our military forces do not lose their advantage or allow the Chinese to gain insuperable advantage anywhere. So I think certainly there’s some role for strategic planning and forethought in how to maintain America’s standing and manage the challenge from China.
Jeff: And what does that military strategy look like? Do we need to be focused exclusively on what might transpire in Taiwan, or do we need a broader rethink of military strategy in the world and particularly as it relates to China?
Timothy: Well, Taiwan is an important potential flashpoint. So ensuring military preparation in that theater is definitely important. But there are a lot of other dimensions to this competition with China. And not only that; the US has security threats in other parts of the world. Think of the Middle East, where there are very important oil reserves vital to the global economy. The US still has an interest in making sure that their supplies are not threatened and that area remains stable.
So we need to ensure we have a military that can protect our interests there, that keeps shipping lanes free from attack by pirates or other non-state actors. We have allies around the world who depend upon, or who at least certainly benefit from, US military assistance. So to the extent we hope to maintain our network of alliances and partnerships — which is one of America’s greatest strengths, frankly — we should make sure we invest in the capabilities to meet those missions as well.
Jeff: Do we have to acknowledge China’s sphere of influence in Asia?
Timothy: I don’t even think that is feasible or necessary given the fact that the Chinese struggle to maintain influence over their own neighbors like Japan, India, Vietnam, Taiwan, South Korea. This is not a neighborhood like America faces. America’s very blessed with a neighborhood of relatively modest-sized countries, or at least countries that do not have any antagonism with the US — and therefore with a pretty benign security environment. We do have some sphere of influence.
China faces a really difficult security environment. It has a lot of neighbors who are frankly hostile to China, do not trust China, and refuse to be submissive towards China. So at this point, the US doesn’t even have to do— it’s almost like, regardless of the US position, China is not going to really have a so-called sphere of influence in the way that countries may have had in the 19th century, when they’re surrounded by weaker submissive neighbors.
Jeff: Given that, given the lack of sphere of influence, given the economic problems that we talked about earlier, what should be our concern with respect to China, given all the problems that they come with all by themselves?
Timothy: Well, certainly, we have an interest in deterring China from acting rashly and looking for outlets to ease internal pressure. So deterring China from attacking Taiwan remains important, but at the same time, it’s really not in our interest to let China fail. China is our largest trading partner. And the prospect of a Chinese meltdown, what that might mean for the world, in terms of just refugees and humanitarian issues — and again, it’s a country with hundreds of nuclear weapons — that’s not in our interest to have some scenario like that play out.
So I think it is really in our interest to find a way to actually continue to cooperate with China on issues where we do have some shared interest. Trade or certainly climate is an issue we have plenty of room to work. Together with North Korea, another issue where we have similar concerns. So there are opportunities to cooperate with China. Even as we pursue our own competitive policies to protect America’s economic growth prospects and the security of our allies and partners, I think that this is going to require a nuanced and complex strategy that balances cooperation with competition.
Jeff: What should we make of these current protests? Should we be overly concerned about them? Should we be overly focused on them? Is this something that the Chinese government is doing an effective job of putting down at the moment?
Timothy: Well, they can put it down because right now it’s still relatively modest in scale. Reports are several thousand, maybe tens of thousands of people, which sounds large until you realize China is a country of 1.4 billion people. These are concentrated in urban areas. Xi Jinping has a firm hand on the security forces and the military. And importantly, and unlike Tiananmen Square, there is currently no evidence that the elites and leadership are divided in the way they were in that past crisis.
The government seems supportive of Xi Jinping’s authority, and he has not really faced any resistance that we can tell from the outside in cracking down. I think it is significant though. These are the largest protests since Tiananmen Square. The protests show that discontent is growing and that the Chinese government has real challenges in maintaining just basic social stability. And this is going to be I think a growing problem for the Chinese as the economy continues to decelerate.
Jeff: What actions can you imagine the Chinese taking to respond to this?
Timothy: We’ve already seen the government announce that they are easing off some of the most extreme or the tightest security measures. Certain cities have, for example, ended lockdowns or scaled them back. So I think what we will see is some combination of crackdown on people who are calling for Xi Jinping to step down — for example, those guys are going to be locked up and we may never hear of them again, unfortunately — but they will combine that with measures to ease off some of the restrictions to try to take some of the pressure off the populace.
This is a pretty common Chinese response. They do a combination of crackdown and easing up on unpopular measures, but the fundamental issues that are driving this policy are not resolved. So it’s unlikely that China will end zero-COVID until those issues are resolved. And those issues are the fact that the elderly population is under-vaccinated and that the Chinese have not developed an mRNA vaccine and to date refuse to accept Western mRNA vaccines.
So until they can get their people vaccinated — the elderly, in particular, vulnerable people — with a good vaccine, it is going to be difficult for the Chinese to— and I don’t think they will be willing to end this zero-COVID policy.
Jeff: Among US politicians, there’s constantly a cadre that seems to be growing of those political leaders that want to be more aggressive with China. Talk a little bit about that and the dangers inherent in that.
Timothy: Well, it is definitely popular now to bash China, and there’s plenty of reasons to want to bash China. I mean, yes, Xi Jinping is an autocrat; he’s authoritarian; he’s a dictator. The political system is repressive. They are very regressive in their approach to human rights. The human rights situation appears to be worsening. What they’re doing in Xinjiang is genocide. They’re determined to wipe out the identity of an entire minority group and are uncompromising in their views about Xinjiang and Tibet.
Hong Kong has experienced and has been experiencing crackdowns and repression for a while. So all these are reasons for the US to be critical of Chinese policy and not endorse these inhumane and often cruel and often brutal policies and measures.
However, at the same time, China is an important country for America.
It is a top trade partner. We need China as a trade partner for our own economy. Our economy would take a massive hit if China’s economy disappeared or collapsed or something. And China is just too important in world politics to be ignored and to be treated purely as an adversary. We need their cooperation to deal with issues like climate change and to make the UN function at all.
Admittedly, the UN is not a really highly effective body, but the Chinese have a role in there, and cooperation with them can help us manage the growing number of problems around the world that we need help dealing with, these many issues. So I think for all the issues we have with China — and it is right to criticize them, and there’s certainly a space for competitive policies; deterrence remains important — there is still a very important role for cooperation on shared interests.
Jeff: When you hear this talk about decoupling as a policy, decoupling from China, what concerns you about that?
Timothy: Well, yes, there is going on right now a disengaging in select sectors of economic activity — mainly technology, where the US and the Chinese are building their own, I guess you could call them, technological ecosystems. And these are networks of technologies or communities of technologies that are dominated by one country or the other and there is less and less involvement of the other side.
This is driven, in part, by security concerns, but also, in part, by economic concerns. Both countries want a successful high-tech industry to help power growth, and the Chinese do as much as we do. Now, that disengagement should not be exaggerated because in many other sectors there is no decoupling going on. We are still selling huge amounts of agriculture, for example, to China, agricultural products. And the Chinese are exporting all kinds of smaller manufactured items. And we are still importing a lot of manufactured goods from China.
So there’s still a huge amount of trade going on. As I said, we are still the top trade partners of one another. So clearly, we are not disengaging our economies from one another, but in certain select technological sectors, there is this decoupling going on, and I think that will continue and is unlikely to be reversed.
Jeff: Should we have security fears with respect to China? There’s constantly talk of security fears, even with things like TikTok and the like.
Timothy: Well, I think the fear is driven by the fact that, in China, the Communist Party has supreme authority, and it is very secretive. By law, all Chinese companies are required to cooperate with security officials if asked to do anything. So you cannot rule out the possibility that any form of data collection that is available on technological products, if they’re made by the Chinese then that data can be handed over to the Chinese government.
And I think the concern is that anything that could be used for espionage purposes or sabotage, that will remain a vulnerability so long as this [government-tech] relationship remains in place — which it will always will, so long as the CCP remains in power. So I think it is reasonable for countries to take a harder look at the role of Chinese technologies and critical infrastructure and areas such as telecommunications, just to reduce their vulnerability to that possibility.
Jeff: Timothy Heath, I thank you so much for spending time with us today here on the WhoWhatWhy podcast.
Timothy: My pleasure. I really enjoyed talking with you.
Jeff: Thank you. And thank you for listening and joining us here on the WhoWhatWhy podcast. I hope you join us next week for another Radio WhoWhatWhy podcast. I’m Jeff Schechtman. If you like this podcast, please feel free to share and help others find it by rating and reviewing it on iTunes. You can also support this podcast and all the work we do by going to whowhatwhy.org/donate.