Shanghai Letter
China is quietly confident it can weather the rapidly unfolding geoeconomic competition with the United States. But behind the bravado, Chinese economy is in one of its most fragile states of the last forty years.
It’s great to be back in Shanghai and Jiangsu - the engines of the Chinese economy and entrepreneurship.
China is quietly confident that it can weather the storms ahead – especially the rapidly unfolding geoeconomic competition with the United States. Beijing is doubling down on technology investment and acceleration – it is in a hurry to test and deploy sovereign capabilities in the areas where the dependency on the US is still high (for example in semiconductors).
Trade diversification - long pursued by China’s current leadership - is paying off. But Trump's tariffs are accelerating it to the extreme, threatening to overwhelm the markets at the heart of China's diversification strategy – European Union, for example. China is also learning to deal with the high-risk political and economic volatility of its new trade allies in the Middle East, South America, Russia and Africa (see my comments to the report by Lisa Visentin, North Asia Correspondent at The Sydney Morning Herald and The Age “On the China-Russia border, trade is booming as Xi and Putin pull closer”).
China's progress in mass and rapid testing, adaptation and deployment of new technologies, particularly in advanced manufacturing, renewable energy and electric vehicles is far more impressive than most Western analysts let you believe. It's a revolutionary experiment that China tests on itself with a high success rate. These are the industries where China is prepared to define the future and undo the American global economic exceptionalism. The news last week that China’s leading EV maker BYD outsells Tesla in Australia by more than six times should not come as a surprise.
But behind the confidence, I find the mood on the streets subdued. It feels like China is at the end of one marathon, facing the prospect of another starting tomorrow. The dynamism is still omnipresent, but the forceful energy is missing – at least to an outsider.
The fatigue could be partly explained by the fact that China is entering a mature stage of its growth. Demography, ageing and the resulting pressures on social and health services; slower economic pace; the world less open to China and China less eager to be open to the world; evolving limits of China’s export, infrastructure and property-driven development model – these are wicked policy problems, unimaginable in complexity and scale to most Western policymakers and analysts.
Add to it an escalating competition with the United States across all domains of power. It is true that China has been readying itself for it for at least a decade. But Trump has arrived at a time when the Chinese economy is in one of its most fragile states of the last forty years. China is burdened by internal contradictions and ever-growing risks of decoupling. The economy is resilient, but the property, tariffs, provincial debt and technology sovereignty pressures are dragging it down. There is a risk that it will drag the segments of the Australian economy along with it – as China’s steel demand continues to fall, putting pressure on Australian miners.
The signs of decoupling are everywhere. China broadly accepts that its direct exports to America and high-value imports are facing a growing wall of tariffs, restrictions and sanctions. It is less prepared to the curbs in mobility and flow of talent and knowledge between the two nations. Trump’s unfolding crackdown on Chinese students and scholars at American universities causes the most emotive response in China. It’s understandable – the policy and rhetorical attacks are undoing decades of deep and broad academic linkages from which both countries and people have significantly benefitted. Importantly, it further shrinks an already dangerously narrow space for engagement – including between the next generation of Chinese and American students, scholars and leaders. I hope Australia will not follow this path: with the right risk controls and clear-eyed strategies, Australia-China education and research engagement can thrive and contribute to both countries.
Beyond the economic and geopolitical pressures, China is getting on with life. We often forget that like most of us, China - its leadership and its people - is pre-occupied with domestic issues: housing, jobs, health and education. Geopolitical upheaval is acknowledged and sometimes debated, but the worries and joys of the ‘here and now’ prevail. There is no denying that China’s remarkable achievements in infrastructure, energy, digital services and access, education and health are making life for its citizens much easier and more enjoyable than at any time in the recent Chinese history. In its next stage of growth, China is attempting to make these accomplishments more widely available and shared across the country’s social layers and geographies.
The joys of progress in China are often tempered by rigid and unescapable ideology and a relentless competition. Digital worlds provide an escape from it, but the respite is temporary. Watching Shanghai metro passengers glued to their smartphones is a reminder how unsurpassed China is in creating, harnessing and getting lost in digital realities – the realities shaped by culture, economics, society and technology infrastructure which are very different from our own. It is yet another reason why studying and engaging with China has never been more important.
I am leaving Shanghai impressed and worried. Impressed – as always - by China’s enduring quest for modernity and progress, but with a nagging worry that the futures that China and the West (and Australia within it) are imagining and building will be increasingly incompatible and disconnected from each other. The next five years will be critical in testing Australia’s plan to straddle both worlds.
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Image: Author’s own