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The Big Cycle of China and Its Currency

(2023-01-14 06:55:37) 下一个

Chapter 6: The Big Cycle of China and Its Currency

https://www.linkedin.com/pulse/chapter-6-big-cycle-china-its-currency-ray-dalio/?

Ray Dalio Ray Dalio  Founder, CIO Mentor, and Member of the Bridgewater Board

Preface: Several people told me that it is risky for me to write this chapter because the US is in a type of war with China and emotions are running high, so many Americans will be angry at me when I say complimentary things about China, many Chinese will be angry at me when I say critical things about China, many people on both sides who disagree with something I say will be angry at me for saying it, and many in the media will distort what I say.  However I can’t not speak openly out of fear of reprisals because the US-China relationship is too important and too controversial to be left untouched by people who know both of these countries well, and for me not to speak honestly about this situation would cost me my self-respect. 

On Thursday September 24th, I’ll be releasing the follow-up chapter to this one, which is about US-China relations and wars. Unlike the prior chapters that have been on the past, that chapter is about the most important things that are going on between these two countries now. If you find this chapter on China’s history interesting, you’ll find the next one even more so.  

What I am passing along here is just the latest iteration of my learning process.  My process is to learn through my direct experiences and through my research, to write up what I have learned, to show it to smart people to have them attack it in order to stress test it, to explore our differences, to evolve it some more, and do that over and over again until I die.  So this study is the product of my having done that for the past 36 years up until now.  It is incomplete, it is right and wrong in ways yet to be discovered, and it is provided to you to use or to criticize in the spirit of helping us together find out what’s true.   

This chapter is about China and Chinese history brought right up to this moment.  It is meant to convey where the Chinese are coming from.  The next chapters are about US-China relations and wars that are extensions of the backgrounds covered in the last two chapters and this chapter.   

My Background

Though I’m no expert on Chinese culture and the Chinese way of operating, I have had numerous direct experiences with China over nearly four decades, I have done extensive historical and economic research about China, and I have a US and global perspective that has been gained because of my need to make practical macroeconomic bets.  That has given me an uncommon perspective of where China has been and what’s going on with it now that might be helpful to those who haven’t had such an extensive exposure. 

More specifically, the perspective I am passing along to you here has been gained from 36 years of interfacing with Chinese people about Chinese and world issues (mostly economics and markets in China and the world) and from doing a lot of research.  Through my experiences and by getting to know some of China’s top leaders, in addition to learning about Chinese economics and markets, I learned a lot about Chinese culture, how it operates today, and how it has evolved over thousands of years: from notions of how family members and others should behave with each other to Confucian thinking and neo-Confucian thinking, and through various dynasties and modern leaders to the lessons these events provide about how leaders should lead and how followers should follow.  These typical Chinese values and ways of operating are what I’m referring to when I say “Chinese culture,” which I have seen manifested over and over in my experiences and my research.  For example, from my personal experiences I could see how Lee Kuan Yew, the Prime Minister of Singapore, and Deng Xiaoping, the leader who initiated China’s reform and opening up, were connected by Confucian values coexisting with capitalist practices so that they together could explore how China could have a “socialist market economy with Chinese characteristics.” 

Over the last couple of years I have also undertaken the study of Chinese history as part of my study of the rises and declines of empires and their currencies in order to learn the timeless and universal principles about how empires rise and decline and to help me understand how the Chinese, especially their leaders, who are greatly influenced by history, think.  I did this study by researching deeply with the help of my research team and triangulating with the some of the most knowledgeable Chinese, American, and non-American scholars and practitioners on the planet.  While I can be pretty sure about my impressions of the people and things that I had direct contact with (which makes me a lot more certain about the assertions I am making about the Chinese than about the Dutch and British empires I described earlier in this book), I of course can’t be as certain about the people and circumstances that I haven’t had direct contact with.  So my thoughts about them (e.g., especially historical figures such as Mao Zedong) are more conjecture based on the extensive research I have tapped into.  

Over my 36 years of experience with China, I have come to know many Chinese people from the lowest to some of the highest in rank in an up-close and intimate way, and I have experienced China’s recent history just as I have experienced America’s.  As a result, I believe that I see both the American and Chinese perspectives pretty well.  I will do my best to convey them here.  I urge those of you who haven’t spent considerable time in China to get rid of any stereotypes you might have of the old “communist China” and to look past the pictures that are often painted for you by biased parties who also haven’t spent much time there, because they’re wrong.  I urge you to triangulate whatever you are hearing or reading with people who have spent lots of time in China working with the Chinese people.  As an aside, I think that the blind and near-violent loyalties and media distortions that stand in the way of thoughtfully exploring different perspectives are a frightening sign of our times.

To be clear, I’m not ideological and I don’t choose sides ideologically.  For example, I don’t choose an American side or a Chinese side based on whether it aligns with American, Chinese, or my own ideological beliefs.  I’m practical like a doctor who approaches things through logic and believes in what works well through time.  My study of history and my thinking about cause/effect relationships are what have led me to my beliefs about what works well.  What I believe is most important in making a country work well was laid out in 17 different measures of strength at the beginning of this book and more narrowly in the eight measures I have been referring to regularly.  So, when I look at China, it is through the lens of these factors that I am judging it.  I also try to see their circumstances through their eyes.  The only thing I can do is beg for your patience and open-mindedness as I share what I’ve learned with you.   

This chapter is a continuation of our look at the leading empires over the last 500 years, starting with the Dutch and British empires in Chapter 3, and the US Empire in Chapter 4.  In this chapter, we will touch on China’s long history and the thinking that it has produced, we will briefly review its decline from pre-eminence in the early 1800s to insignificance early in the 20th century, and we will more carefully look at its recent emergence from insignificance to its near comparability to the world’s leading empire today—and its likelihood of becoming the most powerful empire in the world not many years in the future.   

In earlier chapters we saw how the Dutch and then the British each became the richest and most powerful reserve currency empire and then declined into relative insignificance in cycles that were driven by timeless and universal archetypical cause/effect relationships.  Then we saw how the United States replaced them as the dominant world empire broadly following the same archetypical cyclical patterns driven by the same archetypical cause/effect relationships.  We saw how some of its eight key powers rose and declined (i.e., education, economic competitiveness, shares of world trade and output), while others continued to excel (innovation and technology, reserve currency status, financial market center), and we looked at how a number of the other key drivers (e.g., money and debt cycles, wealth/values/political cycles, etc.) are transpiring in the US.  In this chapter we will study China’s way of looking at its past and bring us up to this moment with the aid of objective statistical measures that help paint the picture objectively.  As in the US chapter we will cover the older history superficially; the 220 years up until 1949 in a bit greater detail; and the last 40 years, when China evolved from relative insignificance to become a great rival power to the United States, in the most detail.  That will complete our examination of the rises and declines of the leading empires over the last 500 years.  Then, in the next chapter, we will look at US-China relations and wars as they now exist, and in the concluding chapter of this book, “The Future,” we will try to squint into the future.  

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China’s Giant History in Brief

Anyone who wants to have a fundamental understanding of China needs to know the basics of China’s roughly 4,000-year history, the many patterns that have repeated in it, and the timeless and universal principles that the leaders of China have gained from studying these patterns—even though getting that basic understanding is quite an undertaking.  China’s history is so complicated and there are so many opinions about it that I am confident that there is no single source of truth, and I am especially sure that I’m not it.  Still there is a lot that knowledgeable people agree on, and I have found many scholars and practitioners, both Chinese and non-Chinese, who have valuable bits that make the exercise of trying to piece them together—along with other bits of history like statistics and written histories—very valuable as well as damned fascinating.  While I can’t guarantee that my perspectives about China are the best ones to believe, I can guarantee that they have been well-triangulated with some of the most informed people in the world and are presented here in an exceptionally forthright way.  Here it is in brief. 

China’s civilization with its highly civilized behavior has a long and continuous history that began about 4,000 years ago.  I can’t possibly recount the extensiveness of it because there are far too many dynasties from the Xia Dynasty around 2000 BC (which lasted about 400 years and was highly civilized and known for creating the Bronze Age) through over 1,000 years of various dynasties to Confucius around 500 BC (whose philosophy greatly influenced how the Chinese behave with each other to this day), to the Qin Dynasty (which united most of the area we now call China for the first time in 221 BC), then through the highly developed Han Dynasty (which developed governance systems that are still in use today) that lasted from around 200 BC to around 200 AD, and then a number of other dynasties until the Tang Dynasty in 618.  While I scanned China’s history from the Xia Dynasty[1]  through the year 600 AD (i.e., just before the remarkable Tang Dynasty), I looked at most of the dynasties since then more carefully to see the patterns.  I wrote up my study of them that I will share later.  I will now focus very briefly on the post-600 AD period.  

In the chart below I plotted the same overall power gauge that I showed you in the first chart but applied only to China from 600 AD until now.  It conveys how powerful China was relative to other empires in the world over that time frame.  While there were many more dynasties that existed in various parts of the country and various other slivers in time, I didn’t show them in this chart because that would have produced too much detail for the really big picture to come through.  As you can see, for most of that time China was one of the world’s most powerful empires, with the notable exception from around 1840 until around 1950 when it went into a steep decline.  As shown, around 1950 it started to rise again, at first slowly and then very rapidly, to regain its position as one of the two most powerful empires in the world.  

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Over most of last 1,400+ years most dynasties were very powerful, civilized, and cultured.  Under the Tang Dynasty, China expanded its borders extensively and experienced a cultural flourishing; in the Northern and Southern Song Dynasties (from the 900s to the 1200s), China was the most innovative and dynamic economy in the world; in the Ming Dynasty (1300s to 1600s), China was a great power that enjoyed an extended wonderful period that was both very prosperous and very peaceful; and in the early Qing Dynasty (1600s to 1700s), China had its maximum territorial expansion, governing over a third of the world’s population while having an extremely strong economy.  Then in the early 1800s and through the first half of the 1900s, China lost its power while European countries, and especially the British Empire, gained theirs.  The shift of relative wealth and power from Asia to Europe from around 1800 until recently, which created one of the biggest wealth and power shifts in world history in which China was uniquely weak, should be considered an anomaly rather than a norm.  This evolution and the lessons this history provides are very much in the minds of Chinese leaders and are especially interesting to me.  

In the chart above, note the cyclical ups and downs.  The reasons for them are mostly the reasons I explained in my description of the archetypal Big Cycle—because of the gaining and losing of the most important strengths and weaknesses in cyclical and mutually reinforcing ways.  (My more detailed descriptions of the rises and falls of these dynasties will be given to you in Part 2 of this book, which covers the major cycles of the major empires and dynasties covered in this book in greater depth.)  Notice that these dynasties’ Big Cycles typically lasted about 300 years.  Within each of these were the different stages of development and the things done by emperors to bring the dynasties from one stage to the next, and the reasons for setbacks and declines.  In other words, there are many lessons embedded in these histories.  That is why Chinese leaders study history to learn lessons that help them plan for the future and deal with the cases at hand.  Believe me, the lessons learned from these histories are now guiding Chinese leaders’ decision making.  What was especially interesting to me was to see the patterns of the archetypal Big Cycle go back much further in history and be described in such detail because China’s continuous history is so ancient and so well-documented.  It has also been interesting to see what happened when the Eastern and Western worlds met each other and interacted from the 17th through the 19th centuries and how, as the world has become much smaller and more interconnected since then, the Chinese and Western Big Cycles affected each other so that they are now one of the biggest influences on both these two regions and the entire world.

Probably the most important thing I learned from studying hundreds of years of history carefully and thousands of years of history more superficially in a number of countries is to see things very differently than I did before I did this study.  I found shifting my perspective in this way to be similar to going to a much higher level in Google Maps because I could see contours of history that I never saw before.  I also could see that the same stories played out over and over again for basically the same reasons, and I learned timeless truths about how the really big movements take place and how to deal with them better.  Besides affecting how I view things, I see how studying so much history up to the present has greatly affected how the Chinese think relative to how Americans think.  From living in the United States, which is a country that has about 300 years of history (because Americans think their history began when settlers from Europe arrived) and from living in a country that isn’t as much interested in looking at history and the lessons it provides, I can see that the perspectives of Americans and the Chinese are very different.  

For example, to Americans 300 years is a very long time.  For the Chinese it is very recent.  While having a revolution or a war that will overturn our systems is unimaginable to an American, it is inevitable to a Chinese person (because the Chinese have seen that they have always happened and the Chinese have studied the patterns of why they have happened).  While most Americans focus on particular events, especially those that are now happening, most Chinese, especially their leaders, see evolutions over time and put what is happening in the context of them.  While Americans fight for what they want in the present, most Chinese strategize how to get what they want in the future.  As a result of these different perspectives the Chinese are typically more thoughtful and strategic than Americans, who are more impulsive and tactical.  I also found Chinese leaders to be much more philosophical (literally readers of philosophy) than Americans leaders.  If you read their writings and their speeches, you will find this to be true.  Philosophies of how reality works and how to deal with it well are woven into their thinking, which is expressed in their writings. 

For example, in a meeting with Liu He soon after he had his first negotiation session with President Trump, he conveyed his concerns about the possibility of US-China conflict.  Liu He is Vice Premier of China responsible for economic policy and also a member of the Politburo.  We have known each other for many years, during which we have had informal conversations about the Chinese and world economies and markets.  Over those years we came to develop a friendship.  He is a very skilled, wise, humble, and likable man.  He explained that going into his meeting with Trump, he was concerned about how it would go, not because of the trade negotiations, which he was confident didn’t have any issues that couldn’t be worked out, but because he was concerned about the worst-case scenario where tit-for-tat escalations could get out of control and lead to more serious consequences.  He referred to history and gave a personal story of his father to convey his perspective that wars were so harmful and the damage could be worse if we had another war today.  He focused on the World War I example.  We exchanged views on long-term cycles in history and his belief in the concept of a community with a shared future for humankind.  He talked about reading the Tao Te Ching by Lao Tzu and Critique of Pure Reason by Immanuel Kant, and how he realized that he should do his best, and then the outcomes would take their course.  From there he gained his calmness.  I told him that I shared that perspective.  I told him about the “Serenity Prayer” and suggested meditation to him as a way of helping to obtain that perspective. 

I tell this one story to share with you one Chinese leader’s perspective on the risk of wars and to also give one example of the many interactions I’ve had with this leader and of the many interactions I’ve had with many Chinese leaders and Chinese people in order to help you see them through my eyes and also to help you see the issues through their eyes.

To understand how Chinese people, especially Chinese leaders, think and what they value, it is as important to understand their history and the values and philosophies that have resulted from generations experiencing that history and reflecting on it.  Their history and the philosophies that have come from them, most importantly their Confucian-Taoist-Legalist-Marxist philosophies, have a much bigger effect on how Chinese people, and especially Chinese leaders, think than America’s history and its Judeo-Christian-European philosophical roots have on Americans’ thinking.  That is because the Chinese, especially their leaders, pay so much attention to history to learn from it.  For example, Mao, like most other Chinese leaders, was a voracious reader of history and philosophy, wrote poetry, and practiced calligraphy—e.g., I was told by an esteemed Chinese historian that Mao read Comprehensive Mirror in Aid of Governance, the mammoth 294-volume-long chronicle of China’s history that covers around 16 dynasties and 1,400 years of Chinese history, from around 400 BC to 960 AD, and the even more mammoth Twenty-Four Histories several times as well as numerous other volumes about Chinese history and writings of non-Chinese philosophers, most importantly Marx.  I’m told that his favorite book was Zuo Tradition, which focuses on political, diplomatic, and military affairs in a “relentlessly realistic style”[2] in the period from 722 BC to 468 BC, because the lessons it offered were so relevant to what he was encountering.  He also wrote and spoke philosophically.  If you haven’t read anything he wrote and are interested in how he thought, I suggest you read “On Practice,” “On Contradiction,” and of course The Little Red Book, which is a compendium of his quotations on a number of subjects, which I only had time to skim but was impressed by.  It is interesting and informative in ways that are relevant today.[3]  

As a result of their longer history and their more intensive studying of it, the Chinese are much more interested in evolving well over much longer time frames than Americans, who are much more interested in making quick hits—i.e., the Chinese are more strategic than Americans, who are more tactical.  The arc that Chinese leaders pay the most attention to is well over a hundred years long (because that’s how long good dynasties last) and they understand that the typical arc of development has different multidecade phases in it, and they plan for them.  For example, the first phase, which occurred under Mao, was when the revolution took place, control of the country was won, and power and institutions were solidified.  The second phase of building wealth, power, and cohesiveness without threatening the leading world power (i.e., the United States) occurred under Deng and his successors up to Xi.  The third phase of building on these accomplishments and moving China toward where it has set out to be on the 100th anniversary of the People’s Republic of China (PRC) in 2049—which is to be “a modern socialist country that is prosperous, strong, democratic, culturally advanced, and harmonious,” which would make the Chinese economy about twice the size of the US economy[4]—is occurring under Xi and his successors.  Nearer-term goals and ways for getting toward these goals are set out in nearer-term plans like the Made in China 2025 plan,[5] Xi’s new China Standards 2035 plan, and the usual five-year plans.[6]  

Chinese leaders don’t just plan and try to implement their plans; they set out clear metrics to judge their performance by and they achieve most of their goals.  I’m not saying that this process is perfect because it isn’t, and I’m not saying that they don’t have political and other challenges that lead to disagreements, including some brutal fights over what should be done, because they have them (in private).  In summary what I am saying is that they have much longer-term and historically based perspectives and planning horizons, they bring those down to shorter-terms plans and ways of operating, and they have done an excellent job of achieving what they set out to do by following this approach.  By the way, I have coincidently discovered over many years that my studying history, looking for patterns, and dealing with tactical decisions has had a similar effect on how I see and do things—e.g., I now see the last 500 years as recent history, the most relevant arcs seem about 100+ years long, and the patterns I observe from taking this perspective are very helpful to my anticipating how events are likely to transpire and informing me about how I should be positioned over the coming weeks, months, and years.  

China’s Lessons and Its Ways of Operating

The Chinese culture developed as an extension of the experiences the Chinese had and the lessons they learned over the millennia.  They were set out in philosophies about how things work and what ways work best in dealing with these realities.  These philosophies made clear how people should be with each other, how political decision making should be done, and how the economic system should work.  In the Western world the dominant philosophies are Judeo-Christian, democratic, and capitalist/socialist.  Each person pretty much chooses from these to come up with the mix that suits them.  In China, the main ones were Confucian, Taoist, and Legalist until the early 20th century when Marxism and capitalism entered the mix.  The most desired mix to follow has historically been the emperor’s most desired mix.  Emperors typically study Chinese history to see how these have worked and come up with their own preferences, put them into practice, learn, and adapt.  If the mix works, the dynasty survives and prospers (in their parlance it has the “Mandate of Heaven”).  If it doesn’t, it fails and is replaced by another dynasty.  This process has gone on from before history was recorded and will go on as long as there are people who have to decide how to collectively do things.  

While I can’t do these philosophies justice in a couple of sentences each without digressing too deeply (though I will go into them more deeply in Part 2), here is the best I can do:

  • Confucianism seeks to bring about harmony by having people know their roles in the hierarchy and know how to play them well starting from within the family (between the husband and the wife, the father and the son, the older sibling and the younger sibling, etc.) and extending up to the ruler and their subjects, with them bound together by benevolence and obedience.  Each person respects and obeys those above them, who are both benevolent and impose standards of behavior on them.  All people are expected to be kind, honest, and fair.  Confucianism values harmony, broad-based education, and meritocracy.  
  • Legalism favors conquest and unification of “all under heaven” as soon as possible by an autocratic leader.  It believes that the world is a “kill or be killed” jungle in which the strength of the emperor’s central government and strict obedience to it must exist without much benevolence given to the people by the emperor/government.  The Western equivalent is fascism.  
  • Taoism teaches that the laws of nature and living in harmony with them are of paramount importance.  Taoists believe that all of nature is composed of opposites and that harmony comes from balancing them well—yin and yang.  This plays an important role in how the Chinese seek the balance of opposites.

Of these, Confucianism and neo-Confucianism have been the most influential through time, usually with some Legalism thrown in, up until the early 20th century when Marxism gained favor with Mao and then with his successors.  I will briefly explain Marxism when we get into the 20th century.  Naturally all of these have been very fleshed out and have evolved over time, along with the ways that the emperor and government operate.  

All of these Chinese systems from the beginning of recorded history were hierarchical and non-egalitarian.  I was told by one of the most senior Chinese leaders, who is also a highly informed historian and an extremely practical top policy maker, that the core difference between Americans and the Chinese is that Americans put the individual above all else and the Chinese put the family and the collective above all else.  He explained that Chinese leaders seek to run the country the way they think parents should run the family—from the top down, maintaining high standards of behavior, putting the collective interest ahead of any individual interest, with each person knowing their place and having filial respect for those in the hierarchy so that the system works in an orderly way.  He explained that the word “country” consists of two characters, “state” and “family,” which represents how the leaders view their roles in looking after their state/family—like strict parents.  So one might say that the Chinese government is run from the top down (like a family) and optimizes for the collective while the American approach is run from the bottom up (e.g., democracy) and optimizes for the individual.  (These differences of approach can lead to policies that those on the opposite side find objectionable, which I will explore in more detail in the next chapter.)

As far as how the governance structure works (i.e., who reports to whom in the hierarchy within the central government and how that extends down to interactions with regional and local governments), that has evolved over thousands of years and many dynasties into well-developed approaches that I won’t get into because the digression would be too great.  However what is clear is that there are well-established structures in which the emperor has ministers who are responsible for different domains that extend down to interacting with the provinces and municipalities via a large bureaucracy, and, at the same time, there have always been lots of fights to keep and get control of power by the emperors and the people who report to them.  I was told by Zhiwu Chen, who is one of the most highly respected contemporary Chinese scholars, that 37% of emperors died unnaturally and that more often than not they were killed by the people around them or others in political struggles.[7]  Politics in China has traditionally been brutal.

Geographically China is basically one giant plain surrounded by big natural borders (mountains and seas) with a giant population in that plain.  For that reason most of China’s world was within those borders and most wars were for control of it and were fought within those natural borders, mostly between the Chinese themselves, though sometimes between foreign invaders and the Chinese. 

As far as wars and the philosophies about them are concerned, the goals have traditionally been to ideally win wars not by fighting but by quietly developing one’s power so that it is greater than the opponent’s so that one can then show it and have the opponent capitulate without fighting. There is also the extensive use of psychology to influence the opponents’ behaviors to produce the desired results.[8] Still there have been numerous violent wars inside of China over the dynasties, though there haven’t been many outside of China.  Those that were outside China were for the purpose of establishing China’s relative power, security, and trade, not for occupation.  Scholars believe that China’s lack of significant expansion of its empire outside of China is because the land mass of China is so large that controlling it has been more than enough to handle, because it is has largely been self-sufficient in resources, and because they have preferred to maintain their culture with a purity that is best achieved through isolation.  Unlike other great empires that have conquered and occupied other countries, it was relatively uncommon for China to occupy distant states.  Traditionally the Chinese have preferred to enter into relations with empires outside their borders in a manner that is similar to what one might expect from the previously mentioned philosophies—i.e., with the parties knowing their places and acting accordingly and with their places determined by their relative powers.  For example, if China is more powerful, which was typically the case in its region, the less powerful states typically paid tribute to China with gifts and favors and in return typically received guarantees of peace, recognition of their authority, and trading opportunities.  These subordinate countries typically maintained their customs and experienced no interference in how their countries were run.[9]                                                              

As far as Chinese money, credit, and the economy are concerned, the history is very long and complicated and went through the full range of money/credit/economic systems and cycles that were described in Chapter 2 and its appendix, so what happened in China is basically the same as what happened all around the world through the millennia, though exactly when and exactly how is a bit different.  More specifically, inside China like outside China there were the various types of monetary systems used and currencies issued by all sorts of entities with all the systems operating in the ways I described.  Within China, the currency most used through the millennia was metal (mostly copper), and debt cycles like those described in Chapter 2 took place for the same reasons (i.e., debts created buying power so providing them made people feel richer and raised the economy and wealth and were allowed to grow to become much greater than the amount of money needed to service them and the amount of money grew much faster than the amount of goods and services that it could buy).  In these big debt cycles there were stable periods when debt growth wasn’t excessive, bubble periods when debt growth was excessive relative to levels that could be sustained, debt crisis periods when there wasn’t enough money to service debt, and printing of money periods in which money was printed to alleviate the debt crises, which produced hyperinflations.  Internationally (and sometimes domestically) silver was the main metal currency used, though gold was also sometimes used.  As for the economy’s changes, the system went from being primarily agricultural and feudal through many manufacturing incarnations such as the Bronze Age and the Iron Age, including various approaches to trading with foreigners/barbarians (most importantly through the Silk Road), which built a rich merchant class that produced cycles of big wealth gaps and the wealthy having their wealth taken away from them.  Throughout China’s history private entrepreneurial businesses were sometimes allowed, which typically also produced wealth and wealth disparities that led to redistributions of wealth and the businesses and other assets being taking over by the government.  These also occurred in big cycles.  For example, there were an untold number of changes in approaches created and destroyed for the building and the dividing of wealth.  Consistent with China being an intelligent and industrious society, there were many technological inventions created that moved the economy forward.  They occurred in the archetypical ways that were described in the earlier chapters.  While most things were the same, there were some different monetary and economic tendencies in China.  For example, there was a strong tradition of using copper coins, even after China invented paper money in the 9th century and up until the introduction of the yuan in the late 19th century. 

The following charts convey some information about how Chinese money and credit passed through these cycles.  As I explained in Chapter 2, “The Big Cycle of Money, Credit, Debt, and Economic Activity,” there are three basic types of monetary systems in which 1) money has intrinsic value (like gold, silver, and copper coins), which I call a Type 1 monetary system, 2) money is linked to assets that have intrinsic value, which is paper money that can be exchanged for gold or silver at a fixed price (a Type 2 monetary system) and 3) money that is not linked to anything, which is called a fiat monetary system (a Type 3 monetary system).  As explained, these have historically changed from one to another as the weaknesses of each become intolerable.  The diagram below conveys an ultra-simplified picture of how these currency systems have rotated through China’s history since the Tang Dynasty.[10]  In fact it was much more complicated than this as different parts of China often had different currencies and at times coins and ingots from other countries (e.g., Spanish silver dollars in the late 16th century) that changed more frequently than what is conveyed in the chart.  Still the chart is broadly indicative and meant to show that they had the full range of monetary systems that worked essentially the same as elsewhere in the world, most importantly with the cycles of hard money leading to debt problems leading to the abandonment of hard money leading to high or hyperinflations leading to the return to hard money. 

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The chart below shows inflation rates going back to 1750, which reflects the changing value of money.  The periods of relatively stable inflation early on were largely the result of China using metals (silver and copper) as money.  Instead of a central currency being printed, raw weights of metals were exchanged as money (i.e., there was a Type 1 monetary system).  When the Qing Dynasty broke down, provinces declared independence and issued their own currencies through their silver and copper and valued by their weights (i.e., the Type 1 monetary system was retained), which held their value which is why, even during this terrible period, there was not an exceptionally high level of inflation measured in this money.  However debt (i.e., promises to deliver this money) grew in the 1920s and 1930s, which led to the classic debt cycle in which the promises to deliver money far exceeded the capacities to come up with the monies to deliver so there was a default problem, which led to the classic abandonment of the metal standard and the outlawing of metal coins and private ownership of silver.  As previously explained, currencies are used for 1) domestic transactions, which the government has a monopoly in controlling and can get away with them being fiat and flimflam, and 2) international transactions, in which case the currencies must be of real value or they won’t be accepted.  As a rule, the better money is that which is used for international transactions.  The test of the real value of a domestic currency is whether or not it is actively used and traded internationally at the same exchange internationally as domestically.  When there are capital controls that prevent the free exchange of one’s domestic currency internationally that currency is more susceptible to being devalued, which is also why one of the standards for being a reserve currency is that there are no capital controls on it.  So, as a principle, when you see capital controls being put on a currency, especially when there is a big domestic debt problem, run out of that currency.  

In China in the mid-1930s two currencies existed—one that was fiat paper that was used domestically and one that was gold and silver that was used for international payments.  The fiat paper one that was used domestically was printed abundantly and devalued a lot, even as the government issuing it controlled less and less territory as it lost the civil war, which is why we see the hyperinflation shown in the chart during that period.  Remember, as a principle, get out of fiat currencies during debt crises and wars because they will be printed a lot to fund debt payments, which will lead them to be devalued and to high or hyperinflation.  As shown in the chart below, after the turbulence of World War II and the civil war, in December 1948, the first RMB was issued as a fiat currency that was kept in limited supply to end the hyperinflation.  In 1955 a second issuance of RMB was made, and in 1962 a third was issued.  From 1955 to 1971 the exchange rate was fixed at 2.46 to the US dollar.  From 1972 through the late 1970s, China did a better job of restraining money and credit.  You can see another round of high inflation from the late 1970s to the early ’90s.  It was caused by the global devaluation of money against gold in 1971, global inflationary pressures, China phasing out its price controls, easy credit, and lack of spending controls among state-owned enterprises.  In 1996 convertibility was allowed for current account items but not for the capital account.  From 1997 until 2005 the exchange rate to the dollar was kept at 8.3.  In 2005 the peg with the dollar was ended.   

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The charts below show the value of Chinese currency in dollar terms and in gold terms since 1920, plus the inflation and growth rates over this period.  The history for the currency rates is so fragmented before that that it is not worth referencing.  As you can see, there were two devaluations, one at the setting up of the new exchange rate in 1948, and a series of devaluations from 1980 until the early 1990s, largely aimed at supporting exporters and managing current account deficits,[11] which led to the very high inflation during that period.  As shown, growth was relatively fast and erratic until around 1978, then fast and much less erratic since 1978 until the recent brief plunge due to COVID-19.  

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Generally speaking the very long and volatile history of markets and economies has given the Chinese, and especially Chinese economic policy makers, the same sort of deep and timeless perspectives about money, debt, and economies as they have for other history.  However, that is not totally true.  While it has given most Chinese a strong desire to save and an appropriate sense of risk that innately drives them to save in safe liquid assets (e.g., cash deposits) and tangible assets (e.g., real estate and some gold), most Chinese investors have limited experiences in some riskier assets such as equities and risky debt, so they can be naïve in these areas, though they are learning very fast.  When it comes to policy makers understanding how money, credit, monetary policy, fiscal policy, and the economy work, and how to restructure bad debts, I have found China to have great perspective and to be world-class.  

Now let’s look a bit more closely at China’s history from 1800 until now.  

From 1800 until Now

To bring you up to date to where we are now, I want to superficially look at the post-1800 period until the beginning of the People’s Republic of China in 1949, then look at the Mao period until 1976 a bit more closely, then look at the period of Deng Xiaoping (from 1978 to 1997) and his successors up to Xi Jinping (in 2012) more carefully, and then look at the period of Xi Jinping up until now.  Then we will look at US-China relations more closely.  We will do all that in about 20 pages.  

To begin, I will draw your attention to the eight measures of power that I showed you before for other countries and for China since 1800.  It is shown in the chart below.  Notably, unlike the cycles for the Dutch, the British, and the American empires that we looked at before, which went from their rises through or into their declines, the cycle that we are examining for China goes from its decline at first into rising most recently.  While in a different order, as you will see, the same forces were behind China’s decline and rise as were behind the other empires declines and rises. 

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As conveyed, the low point in these eight measures of power—i.e., education, innovation and technology, competitiveness, military, trade, output, financial center, and reserve currency status—was in the 1940-50 period.  Since then most powers—most notably economic competitiveness, education, and military—improved gradually[12] until around 1980 when China’s economic competitiveness and trade took off.  Since then until around 2008 growth was very strong with debt growth being in line with economic growth.  Then the 2008 financial crisis came along and China, like the rest of the world, used a lot of debt growth to stimulate its economy so debts rose relative to incomes, Xi Jinping came to power, improved China’s debt management, continued innovation and technology, more boldly expanded globally, and encountered greater conflict with the US.  As shown in this chart China is now a leading power in trade, military, and innovation and technology, and its relative powers in these areas are increasing quickly. While China is still highly competitive economically in world markets, its rate of improvement in this area is slowing.  At the same time China remains a lagging power in its reserve currency and its financial center.  

While these indices are broadly indicative, they aren’t precise because each of these powers can’t be precisely measured.  For example, as far as the power of its education system is concerned, while our index rises at a fairly brisk pace it fails to fully capture the relative improvements in China because this measure is made up of average levels of education as well as total levels of education.  This is best conveyed in the table below, which shows some of the most important stats in this index.  As shown, while the average education level in China is considerably below the average education level in the US, the total number of highly educated people is significantly higher in China than the United States.  For example, the total number of college graduates in science, technology, engineering, and math is about three times that in the United States (see table below). At the same time there are reasons to believe that the average quality level of education isn’t as high, especially at the college level.  For example, there is only one Chinese university—Tsinghua University, which is No. 36—that appears in the top 50 universities in the world, while 29 American universities do.[13]  This picture in which the average of something in China is below the average of the same thing in the United States but the total in China is greater than the total in the US is because the average level of development in China is less while the Chinese population is over four times as large as the American population.  That comes across in a number of stats. For example, while the United States is militarily stronger in total all over the world, the Chinese appear to be militarily stronger in the East and South China Seas area, and there is a lot that is unknown about both countries’ military powers because they are kept secret. For this reason and for other reasons these measures of power are broadly indicative rather than precise. 

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The Decline from 1800 until 1949

In brief, the post-1800 decline happened when a) the last Chinese royal dynasty (the Qing Dynasty) became decadent and weak at the same time that b) the British and some other Western capitalist countries became strong, which led the British capitalist-colonialists and a number of other foreign capitalist-colonialists to increasingly take control of China economically, at the same time that c) the financial and monetary system broke down under the burdens of debts that couldn’t be paid and the printing of money that caused the collapse in the value of money and debt, at the same time that d) there were massive domestic rebellions and civil wars.[14]  That severe Big Cycle decline in which all the major strengths were in mutually reinforcing declines continued from around 1840 until 1949.  The end of World War II in 1945 led to the repatriation of most foreigners in China (except for Hong Kong and Taiwan) and a civil war to determine how the wealth and power would be divided—i.e., a war between the communists or the capitalists—on the Chinese mainland.  This over 100-year-long period of decline, which the Chinese call the “Century of Humiliation,” was a classic case of the archetypical Big Cycle decline occurring due to a number of the classic weaknesses existing, leading to mutually and self-reinforcing declines adding up to the big decline.  It was followed by the classic case of a Big Cycle upswing in which the new leader wins control, consolidates power, and begins building the basic structures that are passed onto subsequent generations, who build on their predecessors’ accomplishments.  

More specifically, in the 1800s, the British East India Company and other merchants wanted tea, silk, and porcelain from China because it was extremely lucrative to sell back home.  However, the British didn’t have anything that the Chinese wanted to trade for so they had to pay for these goods in silver, which was a global money at the time.  The British paid out of their savings but were running out of this money, which led the British to smuggle opium into China from India which they sold for silver which was used to pay for the Chinese goods.  The Chinese fought to stop these sales, which led to the First Opium War in which the technologically superior British Navy defeated the Chinese in 1839-42 and led the British to impose a treaty on the Chinese that gave the British and other powers control of China’s main ports (most notably Shanghai, Canton, and Hong Kong) and eventually led to the loss of large parts of northern China to Russia and Japan and the loss of what we now call Taiwan to Japan.  The Qing government borrowed from foreigners to fight internal rebellions and owed huge reparations from these wars.  Reparations, especially out of the Boxer Rebellion (a Chinese rebellion against foreigners in 1901) created a huge liability—17,000 tons of silver equivalent—which was structured as around a 40-year debt.  The foreign powers were able to use tariff income on the ports they effectively controlled as a guarantee of the debt.  The Qing government, starved of financial resources, faced many uprisings over the couple decades following the Opium Wars and spent down their saving to finance fighting them.  That combination of 1) not having strong leadership, 2) not having sound finances, 3) having internal rebellions that undermined productivity and were costly in money and lives, 4) fighting foreigners, which was costly financially and in lives, and 5) experiencing some big disruptive acts of nature produced the mutually and self-reinforcing decline known as the “Century of Humiliation.”  

It is easy to see how that period had an important role in shaping Chinese leaders’ perspectives—e.g., why Mao saw capitalism as a system in which companies pursued profits through imperialism (i.e., through the controlling and exploiting of countries, the way the British and other capitalist powers did to China) in a way that enriched greedy rich people while exploiting workers.  After all this is what happened to China over the prior 100 years, and the world in the 1930-45 period was in one of the most extreme wars between the “rich capitalists” and the “working class communists.”  It was interesting to me to see how Mao’s view of capitalism differed from my view of capitalism because his experience with it was so different from mine, though both of our views about it were true.  Because capitalism provided me and most others I knew, including immigrants from all over the world, with enormous opportunity, America was both fair and a land of opportunity in which one could learn, contribute, and be rewarded without boundaries.  I was from a working-class background and always admired and appreciated the hard-working people who worked together to be productive and the motivated entrepreneurs innovating and working with devoted workers to convert their dreams into realities that the whole society benefited from.  This experience of my trying to see something (capitalism) through both my eyes and through Mao’s eyes was another reminder for me of how important radical open-mindedness and thoughtful disagreement are in order to find out what is true.  That desire led me to study Marxism a bit so that I could imagine how it made a lot of sense to Mao and others as a philosophy.  My inclination up until then was to think of it as at its best obviously impractical and at its worse possibly an evil threat, yet I was ignorant about what Marx actually said.  

Enter Marxism-Leninism

My desire to see Marxism-Leninism through Mao’s and other Chinese leaders’ eyes, and my realization that as a capitalist interested in economics I needed to understand it better, led me to study it more carefully, which altered my perspective of it.  As mentioned, before I examined it, I assumed Marxism was a dysfunctional resource allocation system in which resources were theoretically distributed “from each according to their abilities, to each according to their needs” but failed to produce much because of a lack of incentives to be inventive and efficient.  I didn’t really understand what dialectical materialism was, and I didn’t realize that Marx was a brilliant man whose thoughts were worth better understanding.  It was the process of needing to understand what Mao and those who succeeded him, especially Xi now, found appealing in this philosophy that led me to dig more into Marx’s writings.  

Marx’s most important theory/system is about how evolution takes place.  It’s called dialectical materialism.  “Dialectical” refers to how opposites go together to produce change, and “materialism” means that everything has a material (i.e., physical) existence that interacts with other things in a mechanical way.  Marx had disdain for theories that were not connected to reality and that didn’t produce good change.  So I wondered how Marx, a very practical man who believed that philosophies could only be judged in the successes and failures they produced, would have diagnosed communism’s near-total and universal failures and changed his thinking and modified how communism worked using his dialectical materialism approach to do that.  

In a nutshell dialectical materialism, Marx’s system for producing change, is a systematic way of observing events transpire and influencing them by watching and influencing “contradictions” of “opposites” that produce “struggles” that, when resolved, produce progress.  Marx meant it to apply to everything.  The conflict and struggle between the classes that is manifest in the conflict between capitalism and communism is just one of many such conflicts. 

Thus far that sounds right to me—i.e., that 1) contradictions/opposites produce struggles and that having these conflicts and reflecting on them and trying to struggle through them well is a process for making progress, and 2) there is a struggle between “classes” that is manifest in the conflict between capitalism and communism.  As you will recall, I believe that conflicts produce struggles and that having conflicts and struggling through them produces progress and I consider the conflicts between the classes (i.e., the “haves” and the “have nots”) to be one of the three most important forces in driving history.  You will recall that from studying history I have come to believe that the three most powerful forces that have been behind the rises and declines of empires are 1) the money/debt/capital market cycle, 2) the internal wealth/opportunity/political gap cycle, and 3) the external power(s) challenging the existing power(s) cycle, which is somewhat similar, though I believe there are about 17 important factors in total.  In any case, I don’t think that these two main points about dialectical materialism by Marx are wrong.  

Whether in his words or mine, in the 1930-45 period these forces were in the decline/conflict phases of their cycles, which led to revolutions and wars around the world that brought the two big ideological approaches—capitalism and communism—into conflict which shaped the landscape of the 20th century.  These forces that Marx was referring to were the big things that affected China throughout Mao’s lifetime.  As always happens, these forces of decline ran their courses and new domestic and world orders began.  More specifically, the external war ended in 1945, which then led to the new world order being created and foreign forces leaving most of mainland China.  Then China had its internal war, which was between the communists and the capitalists that ended in 1949 and led to a new domestic order, which was communism under Mao.  Put yourself in Mao’s position during the 1900-49 period, and imagine him reading what Marx wrote and think about his actions during that period and in the post-1949 period.  It makes sense why Mao was a Marxist and pursued his version of Marxist policies and held the established Confucian approach to harmony in disdain.  

As far as ideological inclinations for Chinese people and Chinese leaders more generally, Confucianism, Marxism, and some strict Legalism were all are part of the mix.  Note that all of these emphasize the importance of knowing one’s role and place in the hierarchy and playing that role in the designated way, so being that way is deeply rooted.  Democracy as we know it doesn’t have any roots in China.  Capitalism on the other hand existed in China (as did revolts against it) and is currently growing, though it grows like a productive beast that is kept under the government’s control. 

I will start by very briefly summarizing what happened between 1949 and now, and then delve into each of the different phases that took China from then to now.[15]  

The Rise from 1949 until Now

Though a bit of an oversimplification, we can think of China’s evolution from 1949 until now as occurring in three phases from 1) the Mao phase from 1949 until 1976 to 2) the Deng and Deng’s successors phase from 1978 until 2013 when Xi Jinping came to power, which led to 3) the Xi Jinping phase from 2013 until now.  Each phase moved China along the long-term development arc so that accomplishments were made in each phase that the subsequent phases built upon.  In brief these phases transpired along this arc as follows:

  • From 1949 until 1976 Mao (with his various ministers, most importantly Zhou Enlai) a) consolidated power, b) built China’s foundation of institutions, governance, and infrastructure, and c) ruled China as a communist emperor until he died in 1976.  During that period, he ruled China for the workers and against the capitalists, he kept China in isolation from the rest of the world, and he followed a strict communist system in which there was government ownership and tight government bureaucratic controls over everything.  Immediately following the deaths of Mao and Zhou Enlai, there was a power struggle in 1976-78 between the hardliners (i.e., the Gang of Four) and the reformists that Deng Xiaoping won, which led to the second phase.  
  • Deng (with his various ministers) ran China directly or indirectly until his death in 1997.  During that phase China moved to a more collective leadership model, opened up to the outside world, introduced and developed capitalist practices, and became much stronger financially and more powerful in other ways that didn’t appear threatening to the United States and to other countries.  During most of Deng’s tenure the primary enemy of China was Russia, so he viewed building a symbiotic relationship with the United States as helpful geopolitically.  Economically the relationship was symbiotic because the US bought items that were attractively priced from China and the Chinese lent back to the Americans a lot of the money they earned to make those purchases.  As a result, the US acquired US-dollar-denominated debt liabilities to the Chinese, and the Chinese acquired dollar-denominated assets owed to them by the Americans.  After Deng’s death his successors Jiang Zemin and Hu Jintao (and those who led China with them) continued in the same directions so China continued to quietly become richer and more powerful in fundamentally sound ways that did not appear threatening to the US.  In 2008 the global financial crisis led to greater tensions over wealth in the United States and other developed countries, increased resentment at job losses that were going to China, and increased debt-financed growth in all countries including China.  That, and the development of China that began to appear more threatening, started to change the relationship.  
  • Xi Jinping came to power in 2013 presiding over a richer, more powerful China that was becoming overly indebted itself (though its debt was internal debt) and increasingly at odds with the United States.  Xi accelerated economic reforms, took on the challenge of trying to contain debt growth while aggressively reforming the economy, and supported the building of leading technologies and going global.  He also became more proactive in reducing the gaps in educational and financial conditions and in protecting the environment and consolidating political control.  As China’s powers grew and Xi’s bold objectives (e.g., the Belt and Road Initiative and the Made in China 2025 plan) became more apparent, especially after Donald Trump (a populist/nationalist who was elected largely by appealing to those who were suffering from the loss of jobs) was elected president, US conflicts with China rose in a way that was analogous to the rise of Japan and Germany to challenge the then-existing powers in the 1930s.  

Let’s look at these a bit more closely.

Phase 1, 1949 to 1976: The Mao Phase of Building the Foundation

Mao and the communists won the civil war and started the People’s Republic of China in 1949 and quickly consolidated power.  In 1949 Mao was a philosopher-revolutionary who was leading a class war of workers against the capitalists, had won the revolution, and was in the position of being the de facto emperor of China (titled “president and chairman of the Central Military Commission”) and Zhou Enlai became his prime minister (titled “premier”) in pursuit of the overarching mission of ruling the country on behalf of the proletariat.  To do that he turned to Marxism-Leninism and away from Confucianism.  He also dealt with the practical aspects of building a government to take care of basic services.  The new government quickly repaired transportation and communications and nationalized the banking system, which it put under the new central bank, the People’s Bank of China.  Needing to bring down inflation the new central bank tightened credit and stabilized the value of the currency.  The government nationalized most businesses and redistributed agricultural land from large landowners to those who farmed the land.  It also created “public institutions” for “education, science, technology, and public hygiene.”  No matter whether one worked or not, one got a basic pay.  There was no merit-based pay.  The protections that these guaranteed basic incomes and benefits provided everyone were collectively called “the iron rice bowl.” These changes created a stable economy but little motivation beyond the commitment to the mission of motivating workers.  But Mao was on his way to achieving his first goal of having China’s mainland free of foreigners, shifting wealth and power to the proletariat led by him, and establishing basic institutions to govern.  In other words, he focused primarily on building a new internal order. 

While China under Mao was isolationist, it wasn’t long before the new government found itself in a war.  As explained in the last chapter, in 1945 the new world order divided the world into two main ideological camps—the democratic capitalists led by the United States and the autocratic communists led by the Soviet Union—with a third group of countries not aligned to either side.  Many of these nonaligned countries were still colonized, most notably by the declining British Empire.  China was clearly in the Soviet-led autocratic communist camp, following a Marxist-Leninist approach with a bit of strict Legalism in the mix and opposing Confucianism.  In 1950, soon after Mao won the revolution and began the PRC in 1949, he and the Soviets signed the Treaty of Friendship, Alliance, and Mutual Assistance to cooperate and come to each other’s aid militarily.  

As mentioned in Chapter 4, at the end of World War II Korea was split, with the Russians having control of the north and the Americans having control of the south, divided at the 38th parallel.  In June 1950, guided by Stalin/the Russians, the North Koreans invaded the South.  Initially the Chinese weren’t involved in the fighting as they were preoccupied by their own challenges and didn’t want to be drawn into a war.  The United States, in conjunction with the United Nations, responded to the invasion by bringing its forces into the fighting and then taking the fighting into North Korea, which is on the Chinese border.  The Chinese viewed this as a threat especially since the American General Douglas MacArthur made clear that he would attack China.  China couldn’t have the United States on its border or in its territory, so China had to fight.  China, like most countries, was very sensitive about having enemies on its borders.  Though the Soviets and the Chinese had a pact to support each other, Stalin didn’t want to go war with the United States and so he didn’t provide China with the military support it expected.  Though the Chinese were ill-prepared for a war against the much greater American power, which had nuclear weapons that China didn’t have, the Chinese entered the war and pushed the US and UN troops back to the previously established border.  This was the first great challenge to Mao and China and was considered a great victory by the Chinese.  Given China’s history with foreigners Mao/China understandably wanted extreme isolation within its sovereign border and was able to achieve that.

Economically from Mao’s founding of the PRC in 1949 until Mao’s death in 1976, the Chinese economy grew at a rather good average annual rate of about 6%, with an average annual inflation rate of just around 1-2%, and the Chinese acquired around $4 billion in foreign exchange reserves, so it improved moderately but remained poor.  This happened with a lot of volatility. More specifically:  

  • Between 1949 and 1952 the new government consolidated power and eliminated opposition.  This included wiping out the elites such as the landlord owners of agricultural lands, which included killing many of them.  Deng Xiaoping led that move in the southwest and was praised by Mao for doing it well. 
  • Through most of the 1950s to consolidate power Mao undertook programs to identify capitalists (called “anti-rightist” campaigns) and either disable, imprison, or kill them. 
  • Between 1952 and 1957, with the help of the Soviets, industrial production grew at 19% per year, national income grew at 9% per year, and agricultural production grew by 4% per year.  The Chinese government built industrial facilities and imported lots of equipment from the Soviets.  It also reformed agriculture by creating cooperatives to achieve economies of scale by having farmers work together.  These were highly productive years.  However during this period, after Stalin's death in 1953, Nikita Khrushchev came to power, criticized Stalin and his policies, and alienated Mao, which led to these Chinese and Soviet leaders openly criticizing each other, which began a period of reduced Soviet support.  
  • Around 1960 the Soviet Union shifted from an ally to an enemy and withdrew economic supports.  
  • From 1958 through 1962, due to a drought, economic mismanagement from the top-down mandated attempt to become an industrial power called the Great Leap Forward, and reduced Soviet economic support, the economy contracted by 25% and an estimated 16-40 million people died of famine.  Industrial output fell by 34% and fell by 12% more in 1962.[16]  All parties agree that it was a terrible period, though there is some disagreement about how much it was terrible because of terrible management by Mao versus terrible because of the other causes.
  • The economy recovered and went to new highs from 1963 to 1966.  Then came the Cultural Revolution.  

As is classic in all cycles, internal political challenges to Mao’s leadership and ideology arose.  These internal political battles had traditionally been extremely brutal and risky for the supreme leader.  As mentioned earlier, I was told by an esteemed Chinese scholar that 37% of Chinese emperors died in office from unnatural causes and about half of these were because of people close to the emperor.  

In 1964 Khrushchev was overthrown by a coup in Russia, and political and ideological struggles were on Mao’s mind (and everyone else’s).  Mao’s Legalist and Marxist inclinations made him a brutal fighter for power and for the proletariat, so to deal with this threat to his power Mao fostered a political revolution to “purify class ranks” called the Cultural Revolution.  It was to purge political and ideological opponents and to reinforce “Mao Zedong Thought.”  It went from 1966 until 1976, though was most violent roughly between 1966 and 1969.  Mao won the political/ideological battle, purging his rival Lin Biao who was accused of a botched coup against Mao; he died in a plane crash and “Mao Zedong Thought” was written into the constitution.  The Cultural Revolution curtailed education and cost or damaged millions of lives.[17] These conditions further undermined education and slowed advances in the Chinese economy, especially in the late 1960s.  By the early 1970s the situation began to stabilize under the operational leadership of Premier Zhou Enlai, and the economy grew at around 6% per year.  In 1969 there was a border war between China and the Soviet Union, which wiped out a Chinese battalion.  During this period there was also a political struggle between “the Gang of Four” hard-core Maoists and moderates who favored reforms (most importantly Zhou Enlai and Deng Xiaoping).  

1971 was a year of great change in China.  In 1971 the Cultural Revolution was producing great turmoil and Mao’s health continued to decline.  That contributed to Zhou Enlai playing an increasing leadership role from the background, which led to him, in 1973, being elected a “vice chairman of the Communist Party,” putting him in the position of appearing to be Mao’s successor.  Also in 1971 China was threatened by the Soviet Union, which was militarily much more powerful and shared a 2,500-mile border with China, leading to increasing border threats.  In 1975, after the US withdrew from Vietnam, which shares a 900-mile border with southern China, Russia built an alliance with Vietnam and moved in troops and arms.  Mao had a geopolitical principle to identify the main enemy, neutralize the enemies’ allies, and draw them away from the enemy.  Mao identified the Soviet Union as China’s main enemy and recognized that the Soviets were in a war with the United States that hadn’t yet turned hot but could.  That led him to make the strategic move of approaching the US.  Henry Kissinger quoted Chinese officials as saying, “The last thing the US imperialists are willing to see is a victory by Soviet revisionists in a Sino-Soviet war, as this would [allow the Soviets] to build up a big empire more powerful than the American empire in resources and manpower.”[18]

I also know that Zhou Enlai, a reformist, had wanted to build a strategic relationship with the United States for decades because a close Chinese friend of mine, Ji Chaozhu, who was Zhou Enlai’s interpreter for 17 years and interpreted in the first Kissinger-Zhou Enlai talks, told me that that was the case.[19]  China wanted to open a relationship with the United States to neutralize the Russian threat and in the hope that would enhance its geopolitical and economic position.  Because in 1971 it was especially clear that it was in the interests of both China and the United States to build a relationship, they both made overtures to establish relations.  In July 1971 Henry Kissinger and then in February 1972 Richard Nixon went to China to open relations, and in October 1971 the United Nations recognized the Mao-led communist Chinese government and gave China a seat on the Security Council. During Nixon’s February 1972 visit, Nixon and Zhou Enlai signed an agreement (the Shanghai Communique), in which the US stated that it “acknowledges that all Chinese on either side of the Taiwan Strait maintain that there is but one China and that Taiwan is part of China.  The United States government does not challenge that position.  It reaffirms its interest in a peaceful settlement of the Taiwan question by the Chinese themselves.  With this perspective in mind, it affirms the ultimate objective of the withdrawal of all US forces and military installations from Taiwan.  In the meantime, it will progressively reduce its forces and military installations on Taiwan as the tension in the area diminishes.”  In US-China relations, the reunification with Taiwan stands out as the most consistently contentious issues with the promise of reunification often offered and then pulled back from the Chinese. 

After these 1971-72 moves of rapprochement and appeasement, US relations with China and trade and other exchanges began.  

1976 was momentous because that was the year Zhou Enlai died (in January 1976), Mao Zedong died (in September 1976), and China faced its first generational change.  

From 1976 to 1978 there was a fight for power between the Gang of Four (hardline conservatives who fostered the Cultural Revolution) and the reformists (who wanted economic modernization and opening up to the outside world and were against the Cultural Revolution).  Deng and the reformists won, leading to Deng Xiaoping becoming the paramount leader in 1978.  There are always political fights about how to govern and who should have what powers.  They are especially brutal when the power transition process is not crystal-clear and abided by all the key players who have power.  Amid this political fighting there are different factions that both fight with the other factions and compromise to make decisions to govern.  For the governing system of an entity to survive (i.e., of a family, an organization, an empire, a dynasty) these factions must put the entity’s survival and prosperity above all else, certainly above any individual’s opinions and power, and reach compromises to achieve that sustainability.  That was the case in China at the time.  There were factions of leaders of the communist revolution who cared deeply about this new dynasty’s survival (i.e., the Communist Party’s survival) and were in the positions to make decisions about how it should be managed.  In the time between Mao’s death and Deng gaining the primary leadership role, a consensus among those powerful leaders was reached to give the interim leadership role to another senior leader (Hua Guofeng), who was a classic compromise choice in that he lacked the strength to be too offensive to most people and to retain the leadership position.  The more hardline Gang of Four faction, which was led by Mao’s wife, lacked skills, lacked broad support, and, with Mao gone, lacked the leader’s support, so they were quickly disposed of.  Deng, who was very experienced, committed to China’s communist revolution since its earliest days, and widely respected, was an obvious choice to either be a top administrator (i.e., premier) or a rival to Hua.  Over time broad support among senior party loyalists, especially the reformists, emerged for Deng to be the primary leader among equals, which led to his gradual ascendency.  

At the same time increased threats from Vietnamese and Soviet activities appeared.  In 1978 Vietnam and the Soviet Union signed an agreement to expand their military cooperation, which led to a Russian military buildup in Vietnam, and the Vietnamese government rounded up massive numbers of ethnic Chinese and put them into detention camps.  As a principle, when there is weak and divided leadership, especially during leadership transitions, enemies see this as a time of vulnerability in which there is increased likelihood that they will make an attack of some sort.  With the leadership transition going on in China and with the moves by Vietnam and the Soviets perceived as threatening, that was feared to be the case.

Phase 2, 1978 to 2013: The Deng and Deng Successors Phase of Gaining Strengths Through Economic Reforms and Opening Up Without Creating Threats to Other Countries

Deng Xiaoping became China’s paramount leader in 1978 at age 74 with a wealth of experience under his belt.  He was a “reformer,” so from 1978 until he died in 1997 Deng Xiaoping’s most important policies were conveyed in a single phrase: “reform” and “opening up.”  Reform meant “market reforms” which meant using the market to help allocate resources and to help motivate people, and “opening up” meant interacting with the outside world to learn, improve, and trade.  This led the Chinese Communist Party to start to bring capitalism into the mix[20] and open up to the outside world.  Deng knew that these two related directions—to greater “reform” and greater “opening up”—would make China stronger financially if it was not disrupted by the far more powerful foreign powers wanting to prevent the development of the weak China that he inherited, so the key was to pursue these directions in ways that benefited and didn’t threaten those foreign powers, most importantly the United States.  In 1979 Deng established full diplomatic relations with the US, which was consistent with his strategy to open up and reform China.  At the time China was extremely poor—per capita income was less than $200 per year—so China needed the improvement and was no threat to developed countries, especially the US. 

Early on, in February 1979, Deng invaded Vietnam with an assault that was similar to Mao’s intercession in the Korean War early in his term, in that it was to deal with the growing threat on China’s border and to make a clear display of China’s willingness to fight to defend itself.  After a one-month fight, China withdrew, contending that it made its point.  

Early on Deng set out a 70-year plan to a) double incomes and assure that the population had enough food and clothing by the end of the 1980s, b) quadruple GDP per capita by the end of the 20th century (which was achieved in 1995, five years ahead of schedule), and c) increase per capita GDP to the levels of medium-level developed countries by 2050 (at the 100th anniversary of the PRC).  Underpinning that goal was a plan to dramatically improve China’s education system.[21] He wanted to have a socialist market economy, which he referred to as “socialism with Chinese characteristics” that would be achieved by taking in all facts to “seek truth from facts.” He made that radical shift without criticizing Mao or Marxism-Leninism, which he believed meant shared prosperity.  Rather than seeing communism and capitalism at odds I am told that these seemingly opposing ideologies were seen through the lens of Marx’s dialectical materialism—i.e., believing that conflicting opposites naturally go together and that the conflicts between them and dealing with those conflicts naturally leads to resolutions of the conflicts, which produces progress along that long development arc.  I am told that he saw this coexistence of communism and capitalism as a necessary phase along a development arc toward the ideal communist state.  Also the continuity and the legitimacy of the government’s philosophy, while making big reform changes to make China richer and stronger, were very important, so the coexistence of communism and capitalism was clearly the right move for China.

Deng also reformed government’s decision-making structure.  More specifically he moved China’s government decision-making process from one that was dominated by a single leader (previously Mao) to one in which the Politburo Standing Committee made decisions using majority voting when consensus couldn’t be reached.  He also changed the system of choosing the Standing Members of the Politburo from the supreme leader personally selecting members to choosing them via consultation and negotiation with experienced party elders, generally drawing from the most qualified government officials.  In order to institutionalize his philosophy and how it would be implemented in this government, Deng shaped a new version of the Chinese constitution, which was adopted in 1982.  This new constitution also made a number of changes to facilitate the economic reforms and open-door policies that Deng wanted.  It established governance changes such as leadership term limits consisting of two five-year terms (10 years) and limiting the power of one leader by making decision making more collective.  The new constitution also provided for greater freedoms such as freedom of religion, freedom of opinion, freedom of speech, and freedom of the press.  These reforms later led to the first orderly and rule-based transition of power from Deng to others in the next-generation Politburo Standing Committee, at first led by Jiang Zemin, then led by Hu Jintao, with these transitions occurring via the prescribed 10-year term limits.  Each successive leadership team followed Deng’s same basic path of making China richer and more powerful by making the economy more market-driven/capitalist and by increasing China’s trade with and learning from those in other countries, with those in other countries feeling more excited than threatened by their interactions and trade with China.  

Reuniting China by regaining the territories that were taken away during the “Century of Humiliation” was also a very important long-term goal.  Progress was made by Deng along these lines when in 1984, after a lot of haggling with the UK, it was agreed that Hong Kong would return to Chinese sovereignty in 1997, with its “one country, two systems” approach.  Then in 1986 China reached an agreement with Portugal to obtain Macau’s return to Chinese sovereignty in 1999.  

In 1984 I had my first direct contact with China.  My direct contact since, along with the facts I’ve learned, has affected my perspective.  Because these interactions have been so valuable in helping me gain my perspective and would help you understand my perspective, I will refer to some of them when relevant.  At the same time, because I don’t want to be indiscreet, I won’t pass along information that I believe those who gave it to me wouldn’t like to have passed along, and I will avoid mentioning the names of any people now living.  

In 1984 I first visited China at the invitation of China International Trust Investment Corporation (CITIC), which was the only “window company” (which means the only company that was allowed to freely deal with the outside world), to explain to them how the world financial markets work.  The company was set up as an extension of Deng’s “reform and opening up” policies and was run by an old Chinese capitalist, Rong Yiren, who chose to stay in China even after his family business was nationalized.  CITIC was set up to learn about and experiment with dealing with the outside world and capitalism.  

China was very poor and backward then.  However it was immediately clear to me that its people were smart and civilized.  In this regard it wasn’t like most other undeveloped countries I was used to because the Chinese backwardness was due to the people simply not knowing about or having access to what was available in the outside world and because they were operating in a demotivating system.  For example, I gave $10 calculators as gifts to people, including the highest-ranking people, which they thought were miraculous devices.  At the time people couldn’t choose their careers or their jobs, they received no financial incentives for working well, all businesses (including small restaurants) were government-owned and bureaucratically run, there was no ownership of property such as one’s home, and there was no contact with what the world had to offer in terms of best practices and products. 

Because it was clear that the closed door was a barrier that led to two different economic levels to exist in China and in the developed world, it was clear to me that the removal of that barrier was just beginning that would naturally equalize their economic levels, like unconstrained water naturally seeking the same level.  It was easy to visualize that change happening.  I remember being on the 10th floor of CITIC’s “Chocolate Building,” giving a lecture and pointing out the window to the two-story hutongs (poor neighborhoods) and telling my audience that it would not be long before the hutongs would be gone and skyscrapers would be there in their place.  They didn’t believe me and told me, “You don’t know China,” and I told them they did not know the power of the economic arbitrages that would happen as a result of opening up.  That opening up was the biggest force behind the high rates of improvement that we saw over the last 40 years.  While the opening up created a great natural opportunity, the Chinese made the most of it and performed even beyond my highest expectations.  They did that by making and implementing Deng’s reforms, supported by uniquely Chinese cultural influences.  These reforms freed up the Chinese people to achieve the exceptional results laid out in Deng’s plan.  Globalization and the world wanting to include China in it also helped a lot.  The expressed goal at the time that I heard a lot of was to “break the iron rice bowl,” which was to not provide demotivating guaranteed employment and assured basic benefits and to replace them with more incentive-based compensation.  

Deng was a very smart, eager learner who was helped by knowledgeable outsiders to produce China’s economic advances along its desired development arc.  He also directed his policy makers to learn from outsiders in the same way that he did.  That is how I and many others got invited there.  It is also why Deng turned to other world leaders, especially leaders of the “tiger countries” who were culturally aligned with China, especially to Lee Kuan Yew of Singapore, for advice.  I remember having a dinner with the head of China’s MOFTEC (which was their ministry of commerce) in Beijing in which he rattled off lots of details about things like how Singapore’s airport ran (e.g., how long a passenger had to wait to get his bags at baggage claim), how those in Singapore achieved such great results, and how China was going to implement those practices.  Many years later I had the opportunity to host Lee Kuan Yew at my house.  At that dinner, which included some other esteemed guests, we asked him what he thought about the different leaders at the time, what he thought about great past leaders, and what made great leaders great.  We were eager to get his perspective because he had known most of the greatest leaders for much of the last 50 years and was one of the greatest leaders over those 50 years.  He said that Deng was the greatest leader of the 20th century.  Why?  Because Deng open-mindedly learned and changed China to advance his people, he was smart and wise, he was extremely practical, and he delivered great results to his population of about a billion people...

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[1] When I decided to study China’s history to understand its patterns I wanted to begin with the beginning of advanced civilization and I couldn’t find its beginning because it went back so far.  I would have had to start more than 2,000 years before Christ and I wouldn’t have started at the beginning. I chose to superficially look at what happened around 2070 BC by looking at the Xia Dynasty, which brought us the Bronze Age, writing, and the stratification of society along political and religious lines.  I started to look a bit more carefully around 500-600 BC, so that I could start around the time of Confucius and Confucianism, and Lao Tzu and Taoism, which has shaped how the Chinese are with each other and with others.  Understanding them and their thinking is even more important to understanding Chinese thinking than understanding Jesus, Aristotle, and Socrates is to understanding Western thinking.  Then I quickly worked my way to the year 600 AD to just before the Tang Dynasty and looked more closely at what has happened since then, though my examination was still very superficial relative to what was there to study.

[2] John Wang, Tso-chuan, in The Indiana Companion to Traditional Literature, 805.

[3] I’d like to thank Kevin Rudd, former Prime Minister of Australia and current President of the Asia Society Policy Institute, for pointing me to these books and helping me understand Chinese politics.

[4] Because China has a population about four times the US population it only takes an income of half as much per capita to have twice as much in total.  There is nothing that I can see that stands in the way of China and the US having comparable per capita incomes with time, which would make China four times the size.

[5] The Made in China 2025 plan is for China to be much more self-sufficient in most areas and to be world leaders in high-tech fields including artificial intelligence, robotics, semiconductors, pharmaceuticals, aerospace, and automotive.

[6] In October they will come up with their 14th five-year plan and targets for 2035.

[7] Similarly I read an article by Yuhua Wang that said that about half the emperors left office unnaturally, and “of these unnatural exits, about half were deposed by the elites (murdered, overthrown, forced to abdicate, or forced to commit suicide)…The next category is death or deposition in civil wars; very few (seven) were deposed by (or in) external wars.“ He presented a table showing the reasons emperors lost power. These stats make clear that in the past the “biggest threat was friends within.” When I discussed the risks to the emperors and the people around them with a Chinese friend, he said that there is a famous Chinese saying about it, which is “to accompany the leader is to accompany a tiger.”

[8] If you haven’t read The Art of War I suggest you read it to get a flavor for what I am referring to.

[9] The China historian John Fairbank, in his excellent book The Chinese World Order, described relations with non-Chinese states as follows: “The graded and concentric hierarchy of China’s foreign relations included peoples and countries which we may group into three main zones: first, the Sinic Zone, consisting of the most nearby and culturally similar tributaries, Korea and Vietnam, parts of which had anciently been ruled within the Chinese empire, and also the consisting of the most nearby and culturally similar tributaries, Korea and Vietnam, the Ryukyu Islands, and, at brief times, Japan.  Secondly, the Inner Asian Zone, consisting of tributary tribes and states of the nomadic or seminomadic peoples of Inner Asia, who were not only ethnically and culturally non-Chinese but were also outside or on the fringes of the Chinese cultural area, even though sometimes pressing upon the Great Wall frontier. Third, the Outer Zone, consisting of the ‘outer barbarians’ (wai-i) generally, at further distance over land or sea, including eventually Japan and other states of Southeast and South Asia and Europe that were supposed to send tribute when trading.”

[10] I produced the diagram to apply this template to Chinese monetary history through working with Professor Jiaming Zhu.

[11] For instance, the devaluations in 1985-86 and 1993 came after a period of opening up trade and an expansion in Special Economic Zones. These openings created immense demand for foreign FX and imports to build production capacity—but it would still be a couple more years until those SEZs yielded much higher exports. That mismatch contributed to growing current account deficits.

[12] China began its nuclear-weapon research in the early 1950s and acquired nuclear-weapon capability in 1964.

[13] From US News & World Report: https://www.usnews.com/education/best-global-universities/rankings

[14] The massive Taiping Rebellion, one of the bloodiest wars in human history, which led to an estimated 20 to 30 million killed, along with other internal and external conflicts, caused giant fiscal crises that led to an issuance of debt.

[15] Though I’m no expert on Marxism the dialectical materialism process sounds similar to the process that I discovered works well for me by struggling with conflicts, reflecting on them, writing down the principles, and improving—and doing that over and over again in a never-ending evolutionary “looping” way.  Also, for reasons previously explained, it is my opinion that capitalism—an incentive system that rewards people who are the most inventive and productive and that has capital markets that allocate resources in ways in which people are rewarded for good capital allocation decisions and penalized for bad ones—will lead to a) more productivity over the long run (hence a bigger total pie), b) big wealth differences, and c) capital markets (especially debt markets) that become overextended and then break down and, when there is a capital market/economic breakdown at the same time, there are big wealth and values differences, which will lead to some form of revolution (i.e., there can be harmonious productive ones, though most have great conflict and are destructive before they are productive).  So, thus far the way Marx appeared to see things and the way I see things isn’t radically different, though what we would choose and what we would think should be done is probably radically different.  If you asked me a) whether I’d rather have what capitalism has delivered or what communism had delivered, and b) if I think the capitalist path we have seen is more logical than the communist path we have seen, I’d say yes to both questions.  On the other hand if you asked me a) if both the capitalist and the communist systems need to be reformed to make the pie grow better and to have it distributed better, and b) if Marx’s dialectical materialism approach to evolving and my 5-Step Process to evolving are broadly similar and the best ways of evolving well, I would also say yes to both questions (without getting hung up on how exactly these two approaches are different).  In other words I believe, and it sounds like Marx believed, that evolving from conflicts, mistakes, and the learning from having these is the best approach.  Also, as far as the wealth gap goes, we both see that it has been a big issue throughout history that can threaten all systems.  Lenin built on what Marx said to create a two-step process of building the state in which there is at first dictatorship by workers through “democratic centralism” in which there is a voting process of members of the party which would eventually lead to a higher communist state in which greater prosperity would exist, which is the second stage.  Mao liked the Marxist-Leninist approach in which the party represents the working people who rule over a socialist state that will achieve higher levels of development and eventually achieve communism in which there is common ownership of the means of production and social and economic equality.  In other words they believe that achieving the ideal of communism of “the distribution of wealth from each according to their abilities to each according their needs” comes at the end of a very long evolutionary process.  Deng Xiaoping reiterated this view that communism and the capitalism he was employing were not at odds in an interview with an American TV journalist when he said, “According to Marxism, communist society is based on material abundance…Only when there is material abundance can the principle of a communist society—that is, ‘from each according to his ability to each according to his needs’—be applied.  Socialism is the first stage of communism…We permit some people and some regions to become prosperous first for the purpose of achieving common prosperity faster...The first stage of socialism takes a long time…Despite the rich/poor divide, wealth in China is more evenly distributed than in any time in history…The CPC can see the gap widening and is taking action…”  Maybe that’s true and maybe it’s not.  Time will tell.  To me thus far capitalism—in China or anywhere else—is winning the competition.  However, nobody can argue that the Chinese mix of communism and capitalism has not produced remarkable economic results over the last 40 years.   

[16] https://www.jstor.org/stable/652030?seq=2#metadata_info_tab_contents

[17] Estimates of the death toll of the Cultural Revolution range from hundreds of thousands to 20 million.

[18] As quoted in Henry Kissinger, On China, 211.

[19] Ji Chaozhu was raised in the United States until he was a junior at Harvard.  His brother was close to Zhou Enlai and sent the brother and Ji Chaozhu to the United States to try to build good relations with Americans.  When the Korean War broke out he returned to China, became Zhou’s interpreter, and later served in the first Chinese delegation to the UN and later as China’s ambassador to England.  While he told me a lot that I won’t discuss to respect his privacy, I don’t believe that this is sensitive information.

[20] China started with market-based reforms and then moved on to what has been called “state capitalism” in which the state controls capitalism. Capitalism means private ownership of the means of production. It flourishes when there are well-developed capital markets that allocate resources, people are allowed to save by investing in these markets to make money, and users of the capital have access to it through the markets. The bigger the capital markets are and the more people are making money through ownership of the means of production, the more capitalism there is. However, unlike in many classic capitalist countries where state has very little ability to direct the activities of companies, in China the government has a lot of control over the companies which is what makes it “state capitalism.”

[21] Deng gave a speech in which he said, “Although I realized that it would be a tough job to be in charge of scientific and educational work, I volunteered for the post. China’s four modernizations will get nowhere…if we don’t make a success in such work.”

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