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The London Brief - July 4th, 2022

The London Brief

July 4th, 2022

According to a study published in October 2017 by Pew Research, there’s a division of opinion in many countries today on whether states are more effectively governed by “experts” or elected officials. In advanced economies, young adults are more likely than older people to prefer technocracy to democracy. The study found that in the U.S., 46 percent of those aged 18 to 29 would prefer to be governed by experts compared with 36 percent of respondents aged 50 and older.

This is sort of what Xi is offering. As he recently said, “Meeting the people’s aspirations is the goal of all our work. What the people desire the most are a better life, a bigger apartment, more business start-up opportunities, better education for kids and better elderly care.” His idea is that an authoritarian government can provide these elements better than democracy.

Cold War II

This leads us to a very pessimistic dinner I attended with Matthew Pottinger who served for four years on the National Security Council, specializing in China affairs. He has on the ground sources, a great network of contacts and is a fluent Mandarin speaker, so I found him insightful, although maybe I’m a bit less bearish.

His view is that Xi Jinping is much more of a totalitarian dictator like a Mao or Stalin, whereas Deng Xiaoping, Jiang Zemin and Hu Jintao were more like a Brezhnev, who had more of a check on their power from the wider oligarchy. There is a chart in China that shows Mao as a mountain peak, Xi as another peak and everything in between are placeholders. Xi Jinping Thought is actively promoted amongst party cadres, similar to Mao’s Red Book. Xi has commandeered all the tools of power including the party discipline committee, regulatory bodies, the Palace Guard, senior military officers, the public security apparatus, the propaganda department and the appointments committee. He has purged two million party members who were considered reformists. Senior military officers who had opposed Xi have been ‘suicided’. One third of private tech companies are now controlled by the Chinese state. Another one-third have been criticized and are worried about their future. Due to COVID, it has been hard for people to leave China, but he is seeing a brain drain of venture capitalists who are taking advantage of the break in the Shanghai lock-down to flee the country to Australia, Singapore, Canada and the U.S., often leaving great amounts of wealth behind. Venture capitalists he speaks to believe things will get worse after the Party Congress. Over the next five years, Pottinger expects there to be little innovation in China as the entrepreneurial class loses motivation. A chart posted on Wechat showed how in 2017 the Top 5 Chinese tech companies equalled Apple’s market cap; today it now takes the Top 50 (as an aside, the poster of the chart is now permanently banned from Wechat).

Xi was skilful in his rise, becoming a ‘mirror’ to key families such that they would think he was on their side, and becoming a bridge between factions. However, his primary support base is the ‘red aristocracy’, a group of descendants from the original revolutionaries. There is a picture he procured that shows a recent reunion of 100 of them with Xi. They are powerful, and no one in the West knows much about them. These aristocrats believe they are entitled to power and more qualified than the ones before them. They constitute a separate category. Xi looked down on Jiang Zemin, who was adopted by a revolutionary, and Hu Jintao, who rose from the Youth League. Xi believes these factions and the reformers will destroy the party. He created Common Prosperity to subordinate the tech entrepreneurs and the private sector who were not on board with the program.

Pottinger believes Xi and Putin are becoming more aggressive and acting now as they see this time-period as an inflection point in human history, and an opportunity for China and Russia. He procured documents from the National Defence University, which has texts on Xi Jinping Thought and are prohibited from foreign consumption. The books note the party’s goal is to erase American power, noting that the West is a failing system. The current balance of power system is not stable and there is a need for a new world order. Europe is in chaos and America is in decline, so now it’s China’s turn to lead.

Investments in China are unlikely to be rewarding. Xi has contempt for consumer facing technologies. Instead, he wants hard tech including semiconductors, quantum computers, satellites, space related technology and materials. They have “solved” gaming and private education by effectively shutting these industries down. Tech companies have been forced to hire thousands of party members. The top party member and board member at Alibaba is a former security official. This official sent a document to State Council that he has veto power over everything. After Didi’s IPO, the Minister of State Security moved into Didi’s offices with a full house of staff. After my dinner, Xi emerged from his isolation late last week to promote this self-reliance in technologies. He said, “if every city, every high-tech development zone, every science and technology company, and every scientific worker can firmly promote science and technology innovation centred on the development direction determined by the state, then we will definitely be able to achieve our established goals.” This is party speak for his over-arching goal to make China the world’s most powerful country by the centenary of the PRC in 2049.

As a result of these political changes, Western investment into China has stalled and companies are actively diversifying. Investments are growing in India and Mexico. Capital investment is going back into the EU and the U.S. The U.S. is constraining the flow of high technologies to China.

Ultimately one of China’s goals is to control Taiwan. If Taiwan falls, then Pottinger believes Japan and South Korea would go into states of emergency, which would effectively turn these countries into authoritarian regimes as they pass emergency measures that kill opposition. Korea may end up being more reactive than Japan in this regard, but they would ultimately copy Japan.

If Putin or Xi were to die, this could help change the direction of travel we are headed, but Pottinger believes we will be more actively decoupling in 2023. This is already taking place to an extent, but the market will acutely start to notice, particularly as it will likely continue to heighten inflation pressures.

Totalitarianism also leads to weird missions. The Economist reported for instance that China believes sexual orientation can be socially engineered. According to Darius Longarino of Yale University, “The party is afraid that forces outside its control had been changing the cultural landscape so much that it was going to change the sexual orientation of China’s youth.” Now it wants to make young people, “normal” and “healthy” according to its vision. Conversion therapy is still legal. This involves hypnotism and electric shocks to “cure” homosexuality. China also banned BTS and K-pop for looking too feminine.

At any rate, there seems to be a big geopolitical battle ahead. I’m a little more optimistic that there is still some opposition in China. And there have also been bank failures in regional areas. Pottinger felt that the party would be able to smooth this over and that information has been suppressed on the bank runs, but it there does seem to be active Internet conversations on these local banks within China. The impacts of zero-COVID policies in the regions is further deteriorating the economic situation. This could give opponents an opportunity to fight back. But the probabilities seem to favour Pottinger’s views. It’s hard to predict the direction of travel and outcome given the divisions in democratic nations including a second presidential run by Trump in 2024. Buckle up.

End Note

About 90% of U.S. flags and fireworks for July 4th are imported from China. If the U.S. is more actively decoupling from China, it might be hard to get these things, so stock up now and for American readers, Happy July 4th.

Omar Sayed

Cobham, Surrey

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