• Carrick Ryan

I don't fear a strong China, I fear a weakened China...

The term “Creative Destruction” refers to a concept of international economics which was initially identified by Austrian economist Joseph Schumpeter. As he put it, Creative Destruction was the “process of industrial mutation that continuously revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one".

What this ultimately means is the ability of an economy to innovate. Put simply, if someone comes up with a more efficient way of doing something, whether it be an invention or new process, then the economy will recognise that innovation and pick it up, and the old way of doing things will die out.

This seems rather obvious in a free society with a rule of law, yet it is a state of affairs most developed economies work hard to preserve through antitrust laws and enforcement bodies like the ACCC. It is imperative that no person or company holds such a monopoly over an industry that no newcomer can compete, even if they were to come up with a better or cheaper alternative. Competition in any industry doesn’t just benefit consumers, it ensures persistent innovation as every competitor fights for its market share.

It is with the basic understanding of this concept that the mirage of Chinese economic growth evaporates, because for Creative Destruction to function there needs to exist a number of environmental facets which are inherently inconsistent with an authoritarian dictatorship.

Creative Destruction relies on the understanding that power can be challenged. That multi-national companies like Kodak, Nokia, and Block-Buster will be powerless to prevent their usurpation by new start-ups with brave ideas. For the biggest innovations to even get off the ground usually requires investment from capitalists willing to take reasonable risks, but even they are at least safe in the knowledge that they are participating within a legal system that enforces property rights (especially intellectual property) and the avenues of legal recourse are open to (almost) anyone.

What exists in China is a society in which challenging the status quo of anything is reacted to with suspicion. The rich and powerful are almost indistinguishable from the State, so why would the State want to encourage any circumstances that threaten to shake the existing power structures?

Undeniably, China’s economy over the past twenty years has grown beyond what anyone could have imagined, however it is not unprecedented. Stalin’s industrialisation of Russia, turning a largely agrarian rural back water into an industrial powerhouse by brutal force, led to a post-war economic growth that largely out stripped anything seen in the West. However, what was achieved was done so not off the back of innovation, invention, or creativity… it was catch up. By industrialising a nation that had for centuries been occupied by peasants, the economy naturally grew rapidly. By the 1980’s however, the reality that Russian society was never going to promote entrepreneurs, and as a result would always be lagging behind the West in terms of innovation and efficiency, triggered the handbrake on the Soviet economy. Gorbachev’s “Perestroika” (economic liberalisation) in the mid 1980’s was a desperate attempt to remedy this, but because its success necessarily required some form of accompanying political liberalisation (“Glasnost”), the rolling ball of revolution was let loose and inevitably forced the collapse of the Soviet Union only five years later.

China’s economic liberalisation has been unquestionably more successful than Gorbachev’s, perhaps in no small part because China has not included any accompanying political liberalisation to accompany its economic liberalisation. Far from making China more democratic, Xi has used China’s economic growth as grounds to solidify his power, effectively eliminating any chance of his removal from his position until his death.

But the phenomena being witnessed currently in China should not be compared to Gorbachev’s flailing attempt to save the Soviet economy in the 1980’s, but instead compared to the dramatic industrialisation that preceded it.

Providing manufacturing jobs to hundreds of millions of Chinese citizens that would have otherwise worked as peasants has inevitably created a consumer class that did not exist before. Mass urbanisation and infrastructure spending has created a nation of over one billion people with the framework of an economy that mirrors that of the US… except for those core differences I discussed earlier.

While the multi-national corporations that dominate the Chinese economy may look comparable to those that dominate any Western economy, the fact these companies are largely State owned, or at the very least funded by State owned banks, means the chances of any young innovator challenging the dominance of these companies in China is negligible… if not outright dangerous. A good way of finding yourself in legal trouble in China is to threaten the wealth of the powerholders. There are no reliable property laws in China, and the legal system is clearly in no way independent. In China, if you are not powerful, you are powerless.

The evidence of just how in trouble China is can be seen by posing one really simple question; when was the last true consequential innovation or invention to come out of China?

Certainly China routinely grabs headlines for refining or implementing Western inventions faster or on a grander scale than anywhere else in the World, but this should not be confused for creating that innovation. There is a reason why the theft of intellectual property by China remains one of the most significant foreign policy disputes for so many countries. Deprived of the ability to create ideas, they have committed themselves to stealing them.

This is a society that is famous for its historical ingenuity that consistently pre-dated Europe. Yet since it has existed in a State of authoritarianism, there is not only no motivation for independent and brave thinkers, there is every motivation to think as little as possible.

So what will become of China when the economic stagnation that rocked the Soviet Union in the 1980’s inevitably avails itself on 1.4billion Chinese?

A lot will have to do with who is in charge.

Reigniting the economy will likely require a similar liberalisation that Gorbachev attempted. The issue is, we all know how that ended.

President Xi will see an economic decline as an existential threat to the control of the CCP, however if the most obvious lever to pull also poses an existential threat to his power then the avenues of recourse become more troubling.

Currently, China has little real motivation for unsettling the global economy. It is a manufacturer that benefits from stability and wealthy countries consuming.

But faced with potentially millions of Chinese citizens unhappy with the economic state of affairs, the temptation to distract the populace with a great patriotic venture will be, I fear, irresistible.

Xi has cultivated the “Wolf Warrior” culture among his diplomats, he has promoted a new aggressive form of patriotism within Chinese popular culture… at what point does Xi decide that his existential struggle must now become his Nation’s.

This is why I do not fear China now, as it continues to grow stronger (albeit more slowly than the year before). I fear China when it is wounded and looking for who to blame…

The current state of affairs as they exist in China is unsustainable. Growth will cease soon (if it hasn’t already). At this point, the Chinese State will be faced with two courses of action that I believe will dictate the fate of the 21st century. They will either liberalise… or expand… We should be doing everything we can (if there is anything we can do) to ensure it is the former…

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