How to Deal with China

The Economist, 24.03.2021

Last week China slapped down democracy in Hong Kong. The imposition of tight mainland control over the territory is not just a tragedy for the 7.5m people who live there, it is also a measure of China’s determination not to compromise over how it asserts its will. After the collapse of the Soviet Union in 1991, liberal values were ascendant around the world. The challenge from China will subject them to their greatest test since the early days of the cold war. What is more, as the economy of Hong Kong also shows, China is more tightly coupled with the West than communist Russia ever was. This presents the free world with an epoch-defining question: how should it best secure prosperity, lower the risk of war and protect freedom as China rises?

Hong Kong defies those looking for a simple answer. China has cut the share of directly elected legislators from 50% to as low as 22% and will require that they are vetted for “patriotism”. It is the culmination of a campaign to squash liberty in the territory. The leaders of the protest movement are in exile, in prison or intimidated by a security law imposed on Hong Kong in 2020. Censorship is rising and Hong Kong’s judiciary and regulators will face pressure to show their fealty. On March 12th the G7 group of democracies condemned China’s autocratic clampdown, which is a breach of the country’s treaty obligations. China’s diplomats replied with bombastic denials.

You might think the death of liberalism in Asia’s financial centre, which hosts $10trn of cross-border investments, would trigger panic, capital flight and a business exodus. Instead Hong Kong is enjoying a financial boom. Share offerings have soared as China’s leading companies list there. Western firms are in the thick of it: the top underwriters are Morgan Stanley and Goldman Sachs. Last year, the value of US dollar payments cleared in Hong Kong, a hub for the world’s reserve currency, hit a record $11trn.

The same pattern of political oppression and commercial effervescence is to be found on the mainland. In 2020 China abused human rights in Xinjiang, waged cyber-warfare, threatened its neighbours and intensified the cult of personality surrounding President Xi Jinping. Another purge is under way. Yet when they talk to shareholders about China, global firms gloss over this brutal reality: “Very happy,” says Siemens; “Phenomenal,” reckons Apple; and “Remarkable,” says Starbucks. Mainland China attracted $163bn of fresh multinational investment last year, more than any other country. It is opening the mainland capital markets to foreigners, who have invested $900bn, in a landmark shift for global finance.

Moreover, the pull China exerts is no longer just a matter of size—although, with 18% of world GDP, it has that too. The country is also where firms discover consumer trends and innovations. It is increasingly where commodity prices and the cost of capital are set, and is becoming a source of regulations. Business is betting that, in Hong Kong and the mainland, China’s thuggish government is capable of self-restraint in the commercial sphere, providing contractual certainty, despite the lack of fully independent courts and free speech. Though China’s best-known tycoon, Jack Ma, has fallen from political favour, foreign investors’ stakes in his empire are still worth over $500bn.

All this is a rebuke to the West’s China policy of recent decades. When Western leaders welcomed China into the world trading system in 2001, many of them believed that it would automatically become freer as it became richer. When that did not happen the Trump administration tried coercion, tariffs and sanctions. Those have failed, too—and not only in Hong Kong. America has led a three-year campaign against Huawei, a firm it accuses of spying. Of the 170 countries that use its products, only a dozen or so have banned it. Meanwhile, the number of Chinese tech firms worth over $50bn has risen from seven to 15.

One response would be for the West to double down by seeking a full disengagement with China in an attempt to isolate it and force it to change tack. The cost would be high. China’s share of world trade is three times that of the Soviet Union in 1959. Prices would rise as Western consumers were cut off from the world’s factory. China makes 22% of global manufacturing exports. Western clusters that rely on China would face a shock: tech in America, cars in Germany, banking in Britain, luxury goods in France and mining in Australia. Banning China from using the dollar today could trigger a global financial crisis.

Such a price might be worth paying if an embargo were likely to succeed. But there are many reasons to think that the West cannot penalise the Chinese Communist Party out of power. In the short run, if forced to take sides, many countries might choose China over the West. After all, China is the largest goods trading partner of 64 countries, against just 38 for America. Instead of isolating China, America and its allies could end up isolating themselves. In the long run, unlike the oil-soaked Soviet Union, China is big, diverse and innovative enough to adapt to outside pressure. It is testing a digital currency, which could eventually rival the dollar as a way to settle trade. It aims to be self-sufficient in semiconductors.

At least an embargo would encourage China to protect human rights, some will say. Yet isolation tends to strengthen the grip of autocratic governments. Cut off from commercial, intellectual and cultural contact with the West, ordinary Chinese will be even more deprived of outside ideas and information. The day-to-day contact of 1m foreign-invested businesses in China with their customers and staff, and 40,000 Chinese firms abroad with the world, is a conduit that even China’s censors struggle to contain. Students and tourists engage in millions of ordinary encounters that are not intermediated by Big Brother.

Engagement with China is the only sensible course, but how does it avoid becoming appeasement? That is the challenge facing the Biden administration, which held a summit with China as we went to press. It is at the heart of strategic reviews like the one Britain has just unveiled.

It starts with building up the West’s defences. Institutions and supply chains must be buttressed against Chinese state interference, including universities, the cloud and energy systems. The creaking American-led infrastructure behind globalisation—treaties, payments networks, technology standards—must be modernised to give countries an alternative to the competing system China is assembling. To keep the peace, the cost to China of military aggression must be raised, by strengthening coalitions such as the “Quad” with India, Japan and Australia, and bolstering Taiwan’s military strength.

Greater resilience allows openness and a tough stance on human rights. By articulating an alternative vision to totalitarianism, liberal governments can help sustain the vigour of open societies everywhere in a confrontation that, if it is not to end in a tragic war, will last decades. It is vital to show that talk of universal values and human rights is more than a cynical tactic to preserve Western hegemony and keep China down. That means firms acting against enormities by, say, excluding forced labour from their supply chains. Whereas Western amorality would only make Chinese nationalism more threatening, principled advocacy of human rights sustained over many years may encourage China’s people to demand the same freedoms for themselves.

China’s rulers believe they have found a way to marry autocracy with technocracy, opacity with openness, and brutality with commercial predictability. After the suppression of Hong Kong, free societies should be more aware than ever of the challenge that presents. They now need to muster a response—and to prepare their defences for the long struggle ahead.

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