A Time of Maximum Danger

The situation with China must come to a head because they need it to

In The Art of War, Sun Tzu advises an army always to leave the enemy a route of escape (or at least let them believe there is one) because once he is cornered, they will fight more viciously. But what if your enemy puts himself in a corner, and there is no means of escape acceptable to him?

Two events in the past week make me believe such is the situation in China. The first is that Xi Jinping has broken with modern Chinese tradition and essentially coronated himself a Chinese Emperor for life as he granted himself a third Presidential term…the first leader to do so since Chairman Mao. Additionally, he has ousted all potential, reform-minded party rivals and surrounded himself with hated and/or inexperienced leaders.

The second story is that during a discussion around a potential Chinese invasion of Taiwan at the Atlantic Council event last week, Chief of Naval Operations Adm. Mike Gilday said, “It’s how the Chinese behave and what they do…[s]o when we talk about the 2027 window, in my mind, that has to be a 2022 window or potentially a 2023 window.”

So why have we reached a point of maximum danger with China? Because despite how much we hear about China supplanting the US as the next primary powerbroker in geopolitics, the reality is that China is in an extraordinarily precarious position and has reached a crossroads. I believe the Communist Party’s hold on power is reaching a crucial turning point for which there are two paths forward - accept a type of perestroika as the Soviet Union did, but earlier in the cycle with the possibility of saving itself (which the Soviet’s could not) or tighten its grip…with the reappointment of true-believer Xi as President, they have chosen the second path.

This crossroads has come about for various demographic, economic, and geopolitical reasons, which I will spell out.

Demographics

Let’s start with the Demographics of China.

An analysis of a country’s population can be done through a “population pyramid,” which shows the distribution of a country’s or region’s population broken out by age on the x-axis and sex on the y-axis. I will use the population pyramid of Africa as an example:

Populationpyramid.net

The ideal form of a population pyramid looks like a Christmas Tree, which is precisely what you have in Africa’s chart above. A huge bottom (meaning the population is more heavily distributed in favor of young people) with relatively even branches on both sides (roughly evenly between men and women). This tells us that Africa will likely have a thriving population over the next several generations, which is precisely what the population curve looks like.

Now lets look at the US:

Not as optimal, but this often occurs when countries reach the point of economic prosperity. Family planning becomes more desirable and common. However, this will not likely lead to a dire situation for the US because of our robust immigration policy. If native-born Americans aren’t having as many children, that can be supplemented by increased immigration.

Suppose we were able to account for the people living in the US who are unaccounted for in our census (illegal immigrants, primarily). In that case, I suspect the bottom of this chart would look much fatter since most people coming across the Mexican border are younger migrants looking for improved economic opportunities.

Now, let’s look at China:

For a country with minimal immigration and a vast social safety net (they are Communist, after all), this chart is disastrous; accordingly, the population chart is devastating.

China will reach peak population within the next 5-10 years before starting a precipitous decline, reaching under 1.1B people by 2100. This may sound like many people, and it certainly is, but it’s all relative. China’s population has not been that small since 1985. From 1950-2030, China’s population compound annual growth rate (CAGR) will be 1.2%. The CAGR will drop to -.5% from 2030 to 2100, with no fundamental belief that the figure will turn around. Why?

First, it’s hard to turn things around quickly when dealing with numbers of this scale. Secondly, while China’s “one-child policy”  may have been understandable (though morally reprehensible) when it was put in place in 1980, it was kept in place for far too long. Likely acknowledging the unfavorable demographic shift, a two-child limit was set in 2015. By 2021, all limits were removed; however, this is a classic “too little, too late” situation. By having the one-child policy in place for 40 years, there were essentially 3-4 generations of Chinese citizens who knew nothing other than one child in the house. They didn’t have siblings, their friends didn’t have siblings, their parents did have siblings, and their grandparents didn't have siblings for the children born towards the end of the policy. Understandably, this would create a new norm in society that is not so easily changed by government diktat. Look at the birthrates in China:

macrotrends.net

Not only has the birth rate collapsed from 46.1 births per 1000 in 1950 to 10.9 per 1000 in 2021 (a staggering drop of over 75%), but the UN predicts that it will continue to decline to as low as 8.8 per 1000 people…or an additional 20% birth rate decline by 2100. As a point of reference, the US has 12 babies per 1000 people (declining to 10.3 in 2100). So not only does the US have a higher birth rate, it is falling slower than China.

A second less obvious issue is the male/female split of the population. The sex split among humans is amazingly consistent across civilizations at 105 male births vs. 100 female births (or 52.5% male), or I should say, it WAS surprisingly consistent. Since the 1980’s we have been able to determine the sex of children in the womb via ultrasound. In primarily agrarian societies, this led to the rise of “sex-selective abortions” (side note - if you want to find the REAL “war on women,” check out the stats on this). China’s one-child policy put this into overdrive.

The consequences of son preference and sex-selective abortion in China and other Asian countries, 2005

From a study done in 2005, there is not a single Chinese Province that had the expected male/female distribution. Refer to the population pyramid above. You’ll see that few age groups have the predicted distribution (particularly in the younger age groups), with all more heavily weighted toward men. A percentage point or two difference may not seem like much, but when you talk about billions, they make a big difference.

For example, if we take the 20-24 age group from the population pyramid, the male/female split is 53.4% or .9% men above the expected rate. This translates to 770,000 fewer females than expected in just that age group. This is certainly not nothing.

Ultimately there will be fewer women for men to marry and with whom to start a family. Women will be able to “marry up” since higher-status men naturally need to find a lower-class mate if they want to get married. Where does this leave the lower-status males in society? Nowhere good…either for them or society as a whole. These men will likely have higher rates of anti-social behavior and higher rates of violence.

So, the long-term demographic trends for China are concerning. How about their economy?

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Economy

It’s difficult to talk about anything surrounding China’s economy without mentioning the policy crown jewel of Xi’s Presidency, the “Belt and Road Initiative,” or BRI. How important is the BRI to Xi? Though it is hard to get specifics, it is estimated that the BRI will involve approximately $1.3T of Chinese funding by 2027 and touch nearly every continent and subcontinent globally.

The BRI is, ostensibly, about helping emerging (see – poor, mostly uncreditworthy) economies develop their infrastructure to prepare them for future growth while utilizing Chinese funding and technical know-how. However, the reality is that China wants to turn these countries into indentured servants when they cannot pay back their loans through a debt trap scheme.

It’s hard to get a good view into many of these deals, as most of them are contractually done in secret, but since there are contracts with 149 countries to date, the details of some have leaked out. For instance, China has its hooks deep into Sri Lanka. Between 2000 and 2020, China provided Sri Lanka with $12B in loans for infrastructure projects; mind you, Sri Lanka’s entire GDP is $87B. Let’s look at one project in particular; the Hambantota Port project.

The port was very lightly used, with hardly any of the port being utilized for shipping containers, but rather for trans-shipment of vehicles, which is a much less profitable business. Accordingly, the port was operating at a significant loss (while also re-paying $1.7B in loans to China, or about $100M, annually). They couldn’t make it work, so what did they do? They signed a 99-year lease with China for them to operate the port. As all non-black markets banking entities in China are operated under the auspices of the Communist Party, this port is now de facto Chinese territory. Why did China make a loan with a high probability that it would not get paid back?

According to the Hindustan Times:

It appears that Hambantota was initially a part of a string of strategic locations that China wanted to develop without any consideration for feasibility. The money spent on the Hambantota Port is in no way commensurate with the massive investment/loan that has gone into the project.

This is a perfect example of debt trap politics. Let’s say China wanted to put some military ships and personnel there…would Sri Lanka be able to do anything to stop it with their significant debt obligations hanging over their heads? Unlikely. With their recent debt default thanks to the green nihilists at the World Economic Forum (sorry, I had to get that one in), they couldn’t possibly be in a worse negotiating position.

Now multiply the Sri Lankan situation many times over. How many of the 149 countries will default on China’s loans? Suppose the structure of the loans is similar to Sri Lanka’s. In that case, many will, and the Chinese government will likely set up similar, geopolitically friendly “bailouts” with those countries as well…which, of course, allows them to install a military presence.

While this section isn’t about the BRI, it’s essential to understand how it plays into China’s broader economic challenges…of which there are MANY.

How is China’s economy overall? It’s hard to say, mainly due to China blacking out its most recent GDP numbers (experts say they will badly miss their already reduced growth of 5.5%), along with many other key metrics. How bad must the situation be if they are blacking these out?  

Also, according to Forbes, “Chinese banks, anticipating huge loan losses, have taken dramatic steps to enhance their loan loss reserves, tapping China’s bond markets for some 30 percent more funds than they did last year." Much of the trouble stems from Chinese real estate development firms, which comprise 29% of China’s GDP.

China’s biggest real estate developer, Country Garden, recently said the market “has slid rapidly into a deep depression.” Evergrande Group, the second largest real estate developer in China, has been mired in a complete economic collapse since last December when they were officially declared in default after missing three consecutive bond payments. While I note just two examples, there are many financial challenges across the entire industry, leading to significant downstream effects, such as the aforementioned bank crunch and a major hurting on the steel industry, among others. However, the biggest concern for the government should be among the populace. To understand why this issue is so acute among Chinese citizens, it’s essential to understand how they purchase their homes.

In the US, home buyers typically pay a relatively small down payment and then take out 15 or 30-year loans for the bulk of their real estate purchases after they have moved in. In China, the situation is much different. Home buyers pay as much as 40% up-front and then take out a loan from a bank for the rest before the apartment is even built. Yes, in China, home buyers are essentially paying years in advance, in total, for a promissory note that the apartment will be made. A promissory note, by the way, that often accounts for 70% of their wealth (i.e., their life savings). This works, as long as it works, but what happens when the real estate developers are in default and can’t finish the property? Unfortunately, many Chinese citizens are finding that out right now, as many developers are either going under (Evergrande), defaulting on debt payments (Fantasia and Kaisa), or seeking debt relief, like the Shimao Group.

But the buyers will get their money back, right? Remember what I wrote about the bank’s concerns about loan losses? What money are the banks going to give back to the buyers? They don’t have any. So with developers missing deadlines by, in some cases, years with no end in sight and not getting their money back from the banks, many citizens are undertaking a “payment boycott” and stopping their payments to the already cash-strapped banks. And with estimates that these real developers delivered on only about 60% of the pre-sold homes between 2013-2020, this could be an existential crisis in China, both financially and socially.

A natural reaction from Westerners is, “well, their communists, so at least the Chinese government is there to back-stop the banks and real estate sector, right?” Except that’s not what’s happening, and we need to ask…why? The answer is likely three-fold. First, the government itself is cash-strapped and can’t bail them out. Second, the available funds are going to BRI. And finally, there are the ideological beliefs of their now dictator, Xi Jinping, who is a true-Communist-believer.

Politics

As mentioned in the introduction, Xi has manufactured himself a third Presidential term and ousted all his key political rivals. In doing so, he consolidated power and, in essence, attempted to name himself dictator for life. However, former professor and CCP advisor Cai Xia (now in exile in the US for criticizing Xi) believes that Xi’s recent actions are a sign of his weakness:

[…]But that success [gaining a third term] will bring more turbulence down the road. Emboldened by the unprecedented additional term, Xi will likely tighten his grip even further domestically and raise his ambitions internationally. As Xi’s rule becomes more extreme, the infighting and resentment he has already triggered will only grow stronger. The competition between various factions within the party will get more intense, complicated, and brutal than ever before.

At that point, China may experience a vicious cycle in which Xi reacts to the perceived sense of threat by taking ever bolder actions that generate even more pushback. Trapped in an echo chamber and desperately seeking redemption, he may even do something catastrophically ill advised, such as attack Taiwan.

Like any good leader knows, what do you do when you have trouble on the home front? Start a war.

Additionally, Xi is a student of the Soviet Union and particularly interested in what events led to its downfall. He saw the Covid-19 outbreak as tantamount to the Chornobyl meltdown and, whether correctly or not, Chornobyl as the final nail in the Soviet coffin. The lesson he took away from that event was that the Soviets were not harsh enough in their crackdown on information or the populace…thus you have the “zero-covid” policy, terrifyingly harsh lockdowns, and the complete censorship on Chinese social media sites we have seen over the past several years, despite what those lockdowns seem to be doing to China’s already fragile economy.

US

There are two main points I’d like to make here. One plays in China’s favor; the other has dramatically punished them.

The first is the lack of readiness of the US military. The concept since the start of the Cold War is that the US military should be adequately staffed and equipped to fight two wars at the same time. However, there is concern that we won’t be able to win one war right now, according to the Heritage Foundation.

From the Hertiage Foundation’s, Index of U.S. Military Strength

Consider this from the Hertiage Foundation’s, Index of U.S. Military Strength:

As currently postured, the U.S. military is at growing risk of not being able to meet the demands of defending America’s vital national interests. It is rated as weak relative to the force needed to defend national interests on a global stage against actual challenges in the world as it is rather than as we wish it were. This is the logical consequence of years of sustained use, underfunding, poorly defined priorities, wildly shifting security policies, exceedingly poor discipline in program execution, and a profound lack of seriousness across the national security establishment even as threats to U.S. interests have surged.

As I have recently written, I am highly skeptical of the military-industrial complex. However, our military’s sad state of readiness can only embolden Xi.

The second item to address is much more significant than the lack of reporting would lead you to believe. It is also a seminal moment here on my Substack because it is the first time I will give President Biden credit for something.

Earlier this month, the Biden administration implemented an executive order which puts major import and employment controls on the Chinese semiconductor industry. Semiconductors have been called the “oil of the 21st century” because they are a requirement for any electronic device…from phones, TVs, energy exploration, and modern defense systems. Without them, you’re screwed. And there have been significant advancements in this space, with semiconductors reaching the incompressible small size of five nanometers. (nm). For perspective, human hair is approximately one nm wide.

This is important because the executive order put in place significant hurdles for China even to get these advanced chips, much less manufacture them. The main restrictions set in place are:

1. A ban on importing any chips designed for AI purposes or the machinery required to develop such chips.

2. A ban on selling China the machinery required for high-end chip manufacturing.

3. A ban on specific Chinese companies from buying certain US technological products without allowing US inspection of the facilities

4. A ban on all US citizens from working for Chinese semiconductor companies

I am certainly no expert here, but apparently, China is freaking out about these restrictions, particularly the US citizen ban.

Jordan Schneider @jordanschnyc

THREAD: The US government's new export controls are wreaking havoc on China's chip industry. New rules around "US persons" are driving an "industry-wide decapitation."

Jordan Schneider @jordanschnyc

Long story short, every advanced node semiconductor company is currently facing comprehensive supply cut-off, resignations from all American staff, and immediate operations paralysis.

Additionally, economist Noah Smith wrote in his Substack Noahpinion:

As you might expect, the new export control regime focuses heavily on banning exports of these machines to China. A lot of this equipment is made in the USA. But importantly, it’s a lot easier to force foreign companies to go along with this sort of sales restriction than it is to prevent foreign individuals from working for China.

The most well-known and most important example of this is ASML, the Dutch manufacturer of EUV (extreme ultraviolet) lithography equipment, which at present is the only way to manufacture the very most advanced chips. So far, the U.S. has successfully pressured ASML to avoid selling China EUV machines, while unsuccessfully trying to get them to stop selling older tech. Now, under the new regime, the U.S. will probably have a much easier time keeping ASML tech out of China.

This is only step one, the next step is to get a global ban on semiconductor machinery and people in China, but it is an excellent first step. However, it is likely to be perceived as economic warfare by Xi, and from a technological standpoint, time is no longer on Xi’s side.

Conclusion

Between the catastrophic demographic changes on the horizon, a collapsing economy, an increasingly paranoid & authoritarian ruler, US military weakness & distraction, and economic warfare, I believe we have reached a point of maximum danger with China.

Chairman of the Joint Chiefs of Staff Gen. Mark Milley, told congress in June 2021, that China would not be prepared to invade Taiwan until 2027.

I don’t see it happening right out of the blue. There’s no reason for it and the cost to China far exceeds the benefit and President Xi and his military would do the calculation and they know that an invasion – in order to seize an island that big, with that many people and the defensive capabilities the Taiwanese have, would be extraordinarily complicated and costly. At this point in time – next 12 to 24 months – I’m not seeing any indicators warnings yet[.]

Between the catastrophic demographic changes on the horizon, a collapsing economy, an increasingly paranoid & authoritarian ruler, US military weakness & distraction, and economic warfare, I believe we have reached a point of maximum danger with China.

Chairman of the Joint Chiefs of Staff, Gen. Mark Milley, told congress in June 2021 that China would not be prepared to invade Taiwan until 2027.

I don’t see it happening right out of the blue. There’s no reason for it, and the cost to China far exceeds the benefit President Xi and his military would do the calculation, and they know that an invasion – to seize an island that big, with that many people and the defensive capabilities the Taiwanese have, would be extraordinarily complicated and costly. At this point– next 12 to 24 months – I do not see any indicators warnings yet[.]

However, a subsequent assessment from a year later, this past July, pushed the timeline to the end of 2024. Is this pulling in of the timeline because of a mix-assessment of where China was in its capability development? Was it because their desire for Taiwan has increased? I don’t know for sure, but I think their perceived need to take over Taiwan has increased significantly in the past 12 months for many reasons.

Of course, China imposes other fears than only taking over Taiwan, but that is undoubtedly the most pressing because of the potential downstream consequences and the unknown of how the western world will respond.

Concerns about China are not within the top five (ten?) concerns for anyone with all the other madness going on in the world right now (me included), but it is undoubtedly a much more significant threat many people realize. Hopefully, China believes they have an escape hatch from their current situation. Otherwise, things could get ugly and fast.

-Comstock