Gordon Chang, Speaker
The guest speaker at our Weds, Sep 27th meeting was Gordon Chang, well-known for his writing in the New York Times, The Wall Street Journal, The International Herald Tribune and much much more. 
        more info, Gordon Chang's speech & photos inside.

About Gordon Chang

Gordon Chang's writings on China and North Korea have appeared in The New York Times, The Wall Street Journal, the Far Eastern Economic Review, the International Herald Tribune, Commentary, The Weekly Standard, National Review, and Barron's.. He has spoken at universities and institutions around the US and the World.

Gordon G. Chang is the author of Nuclear Showdown: North Korea Takes On the World, released by Random House in January 2006. Showdown focuses on nuclear proliferation in general and the North Korean crisis in particular. His first book is The Coming Collapse of China (Random House, August 2001).

He is a columnist at The Daily Beast and a contributor at Forbes.com. He blogs at World Affairs Journal.

 
Following is the text of his speech:
 
The Rotary Club of New York
Union League Club
New York City
September 27, 2018

Trump and China: War or Peace in Asia?

There are many tussles in Asia these days. Today, we will start with the “trade war.”

If there is only one thing you can remember from today’s talk, let it be this: Whether you call it a “New Cold War” or something else, we Americans find ourselves in an all-encompassing struggle with the Communist Party of China.

And if you can remember two more things: I suggest these. First, we did not start this fight. Second, unless we lose our nerve, we will prevail.

On the first point—who started the struggle—we have to remember a succession of American presidents, going back to Nixon, had made the success of China’s Communist Party a goal of American foreign policy.

China rose extraordinarily fast—much faster than it would have—because the U.S., with its engagement policy, actively worked to assist China.

That policy was misguided not because it was generous—it was—but because it emboldened and legitimized the worst elements of the Chinese political system, many of whom wore uniforms and stars on their shoulders.

Trump, unlike his four immediate predecessors, is not particularly concerned about the welfare of the Communist Party.

And unlike two—and maybe three—of his three immediate predecessors, he is not trying to manage American decline.

Trump asserts American power and, as we all know, is trying to Make America Great Again.

I think, despite the catchy slogan, America has always been great. And because it has been great and powerful, China cannot win a long-term struggle with us, something Chinese officials and academics appreciate.

We start with the trade tiff. The U.S., as we all know, has imposed tariffs on $250 billion of Chinese goods.

The Trump administration did so not as some means to protect American companies against cost-efficient Chinese competitors, as many analysts seems to believe, but as a remedy for the theft of U.S. intellectual property.

China is stealing hundreds of billions of dollars of U.S. IP each year.

That is the conclusion that one will arrive at after reading the U.S. Trade Representative’s 215-page report issued this March and the 2013 report and its 2017 update of the Commission on the Theft of American Intellectual Property, the Blair-Huntsman Commission.

We cannot allow that theft to continue. If we cannot commercialize our innovation, we do not have an economy of the future.

A third of the value of the S&P 500 is derived from tech companies, and that will be 40% in about five years.

Beijing has backed us into a corner. We have got to defend American tech.

And we have the means to do that. We have overwhelming power over China.

Today, we will talk about five reasons why we can prevail.

First, last year America’s merchandise trade deficit with China was $375.6 billion. Trade deficit countries don’t have to worry about trade friction as they have little to lose.

Second, the U.S. does not have an economy geared to selling goods and services to China. China, however, has an economy increasingly geared to selling things to America.

China’s merchandise trade surplus with the U.S. last year accounted for a stunning 88.9% of its overall merchandise surplus.

Third, we are so much bigger. The American economy last year produced $19.39 trillion of gross domestic product. China claimed its 2017 GDP was $12.84 trillion but that was almost certainly exaggerated. Beijing said it had 6.9% growth that year.

Do not believe that. Let’s look at 2016 for guidance as to the accurate growth rate in recent years. In 2016, while Beijing claimed 6.7% growth, the World Bank, in a chart released in the middle of last year, estimated it to be 1.1%. And the 1.1% figure, which is shocking to many, is close to the single most reliable indicator of Chinese economic activity, total primary energy consumption. In 2016, that metric was up 1.4%.

We are now growing at a 4% clip, and China is growing about, say, 3%. So the U.S. economy is not only bigger than China’s, it is growing faster.

Bigger combatants have an edge, especially when the gap is this large.

Fourth, the American economy, for all its faults, is stable. China’s economy is heading, perhaps slowly but nonetheless surely, to a systemic debt crisis, perhaps the biggest in history.

Let’s put aside concerns about China’s reporting of GDP growth for the moment. Even if its numbers were accurate, the country faces a predicament that one day has to turn into a crisis of some sort.

China has been accumulating debt faster than it has been growing. When hidden debt is taken into account, the country is now incurring maybe one-and-a-half times as much debt as it is producing nominal GDP, even if the official GDP figures are accurate.

We all know that no economy can continue to create debt faster than GDP indefinitely. China can, of course, get away with this longer than other countries. Beijing tightly controls borrowers, lenders, markets, courts, everything.

At some point, however, there must be an adjustment. That is just common sense.

And here is something else that is commonsensical: That adjustment has to be large because it has been delayed for so long. It has been delayed because Beijing technocrats dictate outcomes. Because Chinese technocrats had the power to prevent corrections, they did so. Because they did so, the underlying imbalances became larger. Because the underlying imbalances are now larger, the inevitable correction must now be severe.

Downturns, which the Communist Party hates because it is politically insecure, are essential. They allow adjustments to be made while they are still relatively minor. The last year-on-year contraction in China’s gross domestic product, according to the official National Bureau of Statistics, occurred in 1976, the year Mao Zedong died.

So China’s next downturn will surely be historic. Chinese leaders will prevent adjustments until they no longer have the ability to do so. When they no longer have that ability, their system will go into free fall. When it goes into free fall, the economy will . . . you get the idea.

As Michael Pettis of Peking University points out, the difference between China’s situation today and prior debt crises in other countries is that in those prior crises the imbalances were not as large and debt were not at such high levels.

We cannot be far from that critical point when the adjustment occurs.

And that is not my prediction. Last October, Zhou Xiaochuan, when he was head of China’s central bank, publicly raised the possibility of a “Minsky Moment” in China, the moment when asset values collapse. It is also the prediction of the Chinese people.

China’s people obviously think something bad is coming. Survey after survey show that about half of China’s wealthy plan to leave their country.

And money is leaving too. According to Bloomberg, net capital outflow in 2015 was $1.0 trillion. In 2016, that number increased, say, to $1.1 trillion.

In 2017, that number dropped to about zero not because the Chinese turned confident but because Beijing decided it would join the ranks of the banana republics and institute even more draconian capital controls, many of them off-the-books.

Yes, China is moving away from Deng Xiaoping’s reform and opening up.

Xi Jinping, the Chinese ruler, decided that his economy will be state dominated. So Beijing these days is exercising greater control over markets, is adding state subsidies, is relying more on state industrial policy, is engaging in increasingly predatory behavior to cripple foreign competitors, is taking stakes in private companies—and sometimes gobbling them up completely—to gain control, is extending Communist Party cells in businesses of all kinds.

This is the opposite of reform. If Xi Jinping continues along this path—and he shows few signs of stopping—we will soon see a modern form of a Maoist economy. That’s continuation of a trend now more than a half-decade old.

All of this is unsustainable, so it will not last. The path he is taking China failed before and will fail again.

The Chinese, in short, are in no position to resist the U.S. in the long run.

And now we arrive at the fifth reason why we can push China around. Chinese companies are vulnerable to American government enforcement actions.

We will talk about two of them.

The seven-year ban the Commerce Department imposed on ZTE, the embattled telecom company, for violating North Korea and Iran sanctions, was a death sentence. Until it was modified, the ban shook not only China’s tech sector but its political system as well.

And by the way, the Justice Department has instituted a criminal investigation of China’s Huawei Technologies, the pride of the Chinese tech sector, for the same sin, busting Iran and North Korea sanctions.

In the past, American administrations let Chinese companies get away with everything. No more. Now, we are going to see how long China, under scrutiny and held accountable, lasts.

And Chinese banks are vulnerable. These banks have been laundering money for the North Koreans. By doing so, they have violated American criminal statutes.

The Treasury Department on June 29 of last year designated Bank of Dandong, a Chinese bank, a “primary money laundering concern” under Section 311 of the Patriot Act. The designation, as a practical matter, sawed that bank off from the global financial system because it could no longer conduct business in dollars. About 39% of the world’s transactions are conducted with greenbacks according to Swift.

Bank of Dandong, however, is just a small-fry.

We know there are other culprits, such as Bank of China, one of China’s Big Four banks. This financial institution was named in a U.N. Panel of Experts report for 2016 for its participation in a conspiracy to devise and operate a money-laundering scheme in Singapore for North Korea, but it has almost certainly been involved in this dirty business in other locations.

And as big as Bank of China is—it’s China’s and the world’s fourth-largest bank as measured by assets—it is surely not the largest Chinese bank cleaning up cash for Kim. That honor probably belongs to China’s largest bank—and the world’s largest bank—the Industrial and Commercial Bank of China.

And what about China’s second- and third-largest banks? Yes, there’s evidence to show that they too are money launders for the North. Therefore, all four of China’s Big Four Banks have been implicated in this crime.

If Trump were to enforce U.S. law and declare one or more of these big banks a money-launderer, it would essentially kill off the affected institution. And a death sentence for a large institution might be a death sentence for the fragile Chinese financial markets, economy, and political system as well.

And Chinese banks are almost certainly still engaged in supporting China’s smuggling of commodities to and from North Korea.

China, for all its appearances, is still reliant on the United States. China cannot win a trade war with a willful U.S. president.

The U.S., in short, holds the high cards, a lot of aces.

So why are we fighting with the Chinese in the first place?

Many say or imply that we, the status quo power, are just jealous of China.

Great powers compete, and that is okay in my book. What is not okay in my book is that China is engaging in tactics that destabilize the international system.

The Chinese are grabbing territory from neighbors, closing off the global commons, proliferating ballistic missiles and nuclear weapons to North Korea, perhaps other places.

Chinese leaders, especially General Secretary Xi Jinping, are now asserting their right to do whatever they want, including injuring American service personnel and American diplomats, something they have done this year. That’s something we cannot allow.

All this is the result of a mentality in Beijing that is dangerous. Chinese officials and leaders are belligerent, arrogant, lawless.

And that brings us to President Trump’s U.N. General Assembly address on Tuesday. On Tuesday, his defense of the concept of sovereignty sounded strange, out of place.

Sovereignty, after all, has been largely settled since the Treaty of Westphalia of 1648, and today’s international system is described as Westphalian. The treaty is the foundation of today’s world.

Trump’s words, despite sounding out of place, were apt. They are apt when you consider the language that Xi Jinping has been using for about a decade.

During this period, Xi has been speaking as if he were a Chinese emperor, invoking imperial themes of tianxia or “all under heaven.” Chinese emperors took the view they were the only legitimate sovereigns under heaven.

Especially in the last two years, Xi’s language has become much more explicit. “The Chinese have always held that the world is united and all under heaven are one family,” he declared in his 2017 New Year’s Message.

And to make Xi’s position clear, in September 2017 Foreign Minister Wang Yi, in Study Times, the Central Party School newspaper, wrote that Xi’s “thought on diplomacy”— a “thought” in Communist Party lingo is an important idea—“has made innovations on and transcended the traditional Western theories of international relations for the past 300 years.”

Wang with his 300-year reference was almost certainly thinking of the Treaty of Westphalia.

Wang’s use of “transcended” indicates China’s ruler is contemplating a world without sovereign states other than China.

Ludicrous? Yes, but it’s hard to argue Xi does not think this way. China’s house scholars study the applicability of tianxia to today’s world. Xi’s words have been carefully chosen.

Trump on Tuesday called Xi out, and that was a good thing.

This is, whether we like it or not, an all-out struggle.

Of course, we all want peace with China, but unfortunately, it may not be up to us.


© 2018 Gordon G. Chang



 















 
Sponsors