INTERVIEW | Gordon Chang: U.S., China Have Reached Tipping Point

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Trump meets Xi at the G20 leaders summit in Osaka, Japan — US President Donald Trump and China's President Xi Jinping. REUTERS/Kevin Lamarque

U.S. President Donald Trump and Chinese President Xi Jinping

(First of Two Parts)

The respected American scholar on Asian affairs Gordon Chang recently visited Tokyo to provide his insights into America’s relationship with Japan and the impact of ongoing developments in East Asia on the Japan-United States alliance.

Chang’s appearance tied into the annual J-CPAC, the Japanese Conservative Political Action Conference, held August 31-September 1. The prolific author, scholar, and opinion leader has more than 15 years’ experience living and working in Asia, primarily in China and Hong Kong, giving him not only a theoretical but an empirical and experiential edge in analyzing Asian affairs.

After one of his J-CPAC sessions, Chang sat down with JAPAN Forward for an exclusive interview.

In one of your J-CPAC talks you said, “Right now we’re at a consequential time in history where things could go really wrong.”

The U.S. and China. What is really critical right now is that, in the U.S., we are no longer willing to ignore dangerous and unacceptable Chinese behavior.

When we thought that China was moving in the right direction, we were trying to engage Beijing, to get China integrated into the international system, and we ignored a lot. Americans, I think, not only were tolerant and indulgent, but again they were oblivious.

[Now] it’s at a tipping point. The Chinese have pushed America too far. It’s not just [U.S. President Donald] Trump. Anyone who is president of the U.S. would be forced into taking actions that would anger Beijing.

And also, Beijing right now, I think, is in real trouble. They have not only the friction with the U.S., but they have a crumbling economy, and of course they have Hong Kong. And that is really an indication of a political system that is now facing multiple crises.

China could solve its problems, but the solutions are politically unacceptable to [Chinese President] Xi Jinping. They could deal with Hong Kong, they could deal with their economy, they could deal with the U.S. There is no magic to any of this. But those things that are necessary to solve their problems, Xi Jinping just won’t do, for various reasons.

Xi Jinping is recentralizing the Chinese economy. What are some of the things that he could do?

Well, what did [former Chinese premier] Deng Xiaoping do with the Chinese economy? He opened it up. You started to see the development of a private sector.

Xi Jinping is going the other way. During his tenure as general secretary, he has throttled not only foreign companies, but also domestic, Chinese, private entrepreneurs. The state sector has advanced, the private sector has retreated. This is a recipe for disaster.

It doesn’t take a rocket scientist to figure out that this is exactly the wrong thing to do.

Xi Jinping could stop persecuting domestic Chinese private entrepreneurs, he could stop persecuting foreign companies, he could cut back on subsidies to state enterprises. He could give up the whole Maoist ideology that he has, but he’s not going to do it, because that’s his core belief.

Didn’t Xi recently shut down the Unirule Institute?

That caught a lot of people’s attention because Unirule had always advocated liberal, reformist-type solutions. And although people ignored it, nonetheless the government let it be. And then, [the government] just closed it up. Xi is going back beyond a state-dominated economy, which they have already, to a full state economy. So, of course, it’s not going to work.

Is Hong Kong an Achilles Heel? Is there a Tiananmen moment coming on?

It’s not going to be Tiananmen. Tiananmen was where the People’s Liberation Army slaughtered Chinese citizens. You had these wide, broad boulevards. It was tank country. They could roll the armor into Beijing and do what they wanted.

Hong Kong is not tank country. It favors the defender. If they roll in the People's Armed Police or the People’s Liberation Army, these kids are going to cause great casualties. There will be great casualties on both sides. There will be open warfare.

Just a week ago, the kids were taking petrol bombs and throwing them at the Hong Kong police. Just imagine what happens when these kids go to the third floor of a building and throw the petrol bombs down on the APCs (armored personnel carriers) or congregations of Chinese troops. They will cause casualties. There are going to be a lot of Chinese boys and girls going home in body bags.

Now, there will be a lot of Hong Kong blood spilled, but it won’t be Tiananmen. It will be high casualties on both sides.

This is going to be like Afghanistan. You’ve got a population that doesn’t want the Chinese there. Just imagine — the Hong Kong police have guns. Do you think that those guns are going to stay in place? Maybe, maybe not. The kids are going to have explosives, they’ve got a lot of gasoline, and they may get guns from sympathetic Hong Kong policemen.

They are going to be like water, melt into the buildings, so they’re going to kill a lot of Chinese. The Chinese are going to kill a lot of people in Hong Kong. But this is not Tiananmen, it’s not a one-sided slaughter. It’s going to be high casualties on both sides.

China will need hundreds of thousands of people to control Hong Kong. And every time they take troops out of Hong Kong, they’re going to have to reinsert them.

Do you see any possibility of a synchronized uprising in some of the concentration camps in East Turkestan?

That’s really hard to see. What you can see, though, is that people in mainland China do not sympathize with the people in Hong Kong. Very few.

But I think that what Xi Jinping is worried about is not that there will be sympathy demonstrations on the mainland. What he’s worried about is contagion — that people on the mainland will see the Hong Kong people resisting and then the people on the mainland will bring up their own grievances. “I don’t care about those people in Hong Kong. They’re spoiled brats. But I don’t like the idea that someone is building an incineration plant.”

That was what happened in Wuhan the first week of July. You had a large number of Chinese protesting over a two-day period. Wuhan was isolated, but if you have four or five Wuhans going on at the same time, then Xi Jinping has a problem.

Xi Jinping and Russian President Vladimir Putin are saying a lot of the same things — that the liberal world order is finished and it’s time to move back to authoritarian regimes.

Totalitarian. People say China is authoritarian, but, no, it’s semi-totalitarian and it’s moving back. You have a social credit system, you have concentration-like camps, you have the full measure of the coercive state. So, I don’t think you can say that it’s authoritarian anymore.

Putin and Xi Jinping say that we are in terminal decline. No, I think that Russia and China are in decline. They are fortunate that democracies have not gotten together, that Trump is not a Reagan, but in a couple of months, when Trump is really angry, he’s going to be Reagan.

How does Trump fit into all of this?

Trump is undermining the Chinese economy at a critical time. A lot of people say that the Trump tariffs are not having that much of an effect on China. I can accept that argument. Most of China’s economic problems are self-inflicted. But what Trump’s tariffs are doing is coming at a time when China is in trouble anyway. It’s like the proverbial straw on the camel’s back.

China is not growing at the 6.3% pace that they claim for the first half of the year. The Chinese economy has deteriorated since 2018 — if you look at the numbers, especially for June, it’s near-disastrous for China.

Also, China is accumulating debt much faster than it’s producing nominal GDP. It’s completely unsustainable at this point.

[The Chinese authorities] have controlled, for some time, borrowers, lenders, courts, everything, so they can do things that are unsustainable, and they can sustain them for a long time, but eventually everything catches up.

The reason is that the Chinese economy — in the Chinese political system — they will do things to prevent the normal adjustment that you would see in an economy. You can do that, and they do it until it no longer works. And when it no longer works, then the economy goes into freefall.

It’s going to be the biggest story of the decade, or of the century — when the Chinese economy fails, it’s going to really, really fail.

Structural Pitfalls for the Chinese Economy?

Now, most people think that when the Chinese economy slows down, it will be just like Japan after the Bubble — decades of recession, or recession-like stagnation. That’s what smart people tell you about the Chinese economy.

I could be wrong on this, but I think the alternative is that you have a sharp adjustment downward. When these guys run out of tools, it’s just going to fail.

Just think about this. In 2018, China’s M2, the broad gauge of the money supply, was something like 203% of GDP — as Beijing claimed it. Now, that GDP claim is exaggerated. But let’s say you accept it for the moment. China’s M2 is 203% of GDP. In comparison, the U.S.’ M2 was 69% of GDP in 2018. This is a more normal economy.

China has been blowing up its economy by creating all sorts of debt. As I said, they can get away with it, and they have for longer than I thought, but eventually you are going to lose confidence.

Right now you are seeing the renminbi (RMB) fall through the seven-to-one level. If China were to not go through these daily fixings and maintain the two-percent band or the four-percent band, and if they were not to have capital controls, then the RMB would become a worthless currency.

We saw this in 2015 and 2016, when each year you had a net capital outflow of at least a trillion USD. Then they put a stop to it at the end of 2016 by going into draconian capital controls, even more draconian than they normally were. And they did a lot of stuff off the books.

They stopped net capital outflow, but this is a confidence-driven issue. I think what will eventually happen is that confidence will break. When confidence breaks, there’s nothing that Beijing will be able to do.

(Watch for part 2 of this interview in mid-September 2019.)

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