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Over 10 years, Xi Jinping has methodically amassed power. Beginning with an unprecedented consolidation of military support, Xi then launched his ‘Tigers and Flies’ campaign, sidelining his political rivals along with officials accused of corruption. Over many years he patiently laid the groundwork to elevate Xi Jinping Thought to match the official stature of Mao Zedong Thought, and edge out Deng Xiaoping Thought, in the CCP’s ideological pantheon. He then overturned international commitments regarding Hong Kong, and brought that free-wheeling and Westernized city to heel with the introduction of a new security law. At the last 19th Party Congress in 2017, Xi tossed aside Deng’s “hide-and-abide” (韜光養晦、有所作為) approach to international relations and gave a triumphalist speech, announcing that China had not only arrived on the world stage but that it deserved central position on that stage. With the outbreak of the Covid-19 epidemic, Xi used sharp-elbow tactics to block scientific investigation into its origins in China and ordered sweeping zero-Covid lockdowns to highlight his government’s ability to take more effective action than was possible for democratic governments in the US and the West.  The Winter Olympics were meant to be Xi’s star-turn to demonstrate — more to the Chinese people than to international audiences (many of whom undertook diplomatic boycotts of the Games because of oppression of Uyghurs in Xinjiang and other issues) — that he was a flawless and unrivalled champion.  He even went so far as to claim that the authoritarian system he presided over represented a superior form of democracy to Western liberal democracy.

Chinese President Xi Jinping during a show commemorating the 100th anniversary of the founding of the Communist Party of China

Along this path to unrivalled power in China, Xi first jettisoned the system of collective rule by the Standing Committee of the Politburo which Deng had put in place to guard against recurrence of unbridled rule by any one individual, epitomized by the last years of Mao’s rule.  Longer term, Xi’s aim in amassing power has been to discard the limit of a president to two five-year terms, another safeguard Deng put in place and which he himself observed.

The announcement of leadership for the next five-year term will happen at the CCP’s 20th Party Congress in Beijing this autumn. At that meeting, Xi is widely expected to be named for a precedent-shattering third term. This will mark a historic high-point for Xi. His systematic consolidation of power has been designed, in part, to create an air of inevitability about this outcome. While his selection is still overwhelmingly likely, a number of significant fissures have appeared in recent weeks which crack this façade of total control.

ZERO-COVID

While undoubtedly successful in limiting the number of infections, hospitalizations, and deaths in the first two years of the pandemic, Xi’s Zero-Covid policy has created a raft of problems for China more recently, most notably during the highly-transmissible omicron phase. While incidences of infection, hospitalization and death have been dropping worldwide, they have been surging in China, with the number of confirmed cases more than quadrupling from mid-February to mid-March of this year. Elderly citizens are especially at risk due to their low rates of vaccination and hospitals have already become overwhelmed, due in part to the low number of hospital beds on a per capita basis in China. While it can be argued that the Zero-Covid policy ‘bought time’ for the development of vaccines, Xi’s championing of the locally developed Sinovac vaccine and his refusal to permit the use of more clinically-effective vaccines developed in the West, has blunted that advantage somewhat since the Sinovac vaccine is notably less effective against the omicron variant. The Zero-Covid policy has also meant that there is practically zero immunity in the Chinese population as a result of exposure to the virus as it becomes endemic worldwide. If SARS-COV-2 can be compared to a flame, China’s population is like a vast field of tinder. Finally, the economic and social costs have become glaringly apparent with the lockdown of an entire province, Jilin, in the northeast and the of Shenzhen and Dongguan – China’s two largest manufacturing hubs for information and communications technology (ICT) — in the south.

While Xi will, with considerable justification, continue to claim credit for his “triumph” over the coronavirus, China is by no means out of the pandemic woods and the setbacks of the last month make his strident claims ring more hollow, both internationally and domestically.

REAL ESTATE

In September last year, Chinese real-estate development firms began to feel the severe discomfort of a massive hang-over following years of real-estate speculation partying.  The problems were most evident in real-estate giant Evergrande but soon spread to a host of other significant players in the field such as Fantasia, Modern Land, China Property Group and Xinyuan Real Estate Group.  At the institutional level, the problems hitting the $5 trillion sector were the result of a unique PRC nexus of aggressive real estate development, lax banking, and local government incentive structures.  More simply, the problems resulted from “unrestrained borrowing, expansion as an end-in-itself, and corruption.”  

While the PRC Government claimed this week that the real-estate free-fall has been “stabilized,” pricing data from real estate developers across the country continue to show sharp deterioration. Also this week, Evergrande announced a further delay in sharing its plan for restructuring and for paying back bonds and other financial obligations.  The government has strong reason to put on a brave face while throwing up a curtain of opacity around the problem.  Property-related industries account for more than 30% of China’s economic output.  Continued problems in the sector could drag China’s growth below the optimistic, post-pandemic official target of 5% growth, a minimum level which must be maintained in the years ahead for China to escape the ‘middle income trap.’ More immediately, it risks alienating an important swath of the urban public, 80% of whose household wealth is tied up in real estate and who see their property values plummeting. (A particularly aggrieved segment of this population are buyers who have paid up front to the developers, as is common in China, for a property not yet built and for which construction has halted indefinitely while values continue to slide).

While Xi has voiced loud promises to not let the bottom fall out of this sector and to support homeowners currently caught in the fallout, there is little evidence on the ground of these promises translating into reality.  Meanwhile, the situation risks alienating the public and sowing dissent among officials.

‘COMMON PROSPERITY’

As measured by the Gini coefficient, China ranked fourth in the world in 2022 for greatest wealth disparity and inequality (after South Africa, Namibia and Sri Lanka). While Deng Xiaoping had announced famously in the late 1980s that “to get rich is glorious” and to “let some get rich first,” the extreme degree of inequality persisting in China four decades later is a source of growing social and political concern. The heady days of 10% growth have long ago disappeared and Chinese who thought they would be boarding on a later rail-car in the national train of prosperity now worry that the train may have departed, stranding them on the platform.

To counter this source of social unease, Xi unveiled with great fanfare in 2021 a policy of ‘Common Prosperity.” Writ large, this policy was meant to cement Xi’s place — side-by-side with Mao and with Deng slightly in the background – in China’s pantheon of modern heroes.  In this telling, Mao was the one who roused China to throw off its ‘Sick Man of Asia’ bondage to foreign imperialists and to stand up. Deng contrived a transitional stage of capitalist-style wealth-creation for enough Chinese that China could attain wealth and power (富权). It was left to Xi to complete this project of national rejuvenation, by reinstituting a Marxist “Common Prosperity’ for all Chinese and returning China to the center of the world stage.

Without getting into either the ideological weeds (such as Xi’s ‘Dual Circulation’ strategy) or deep into the tangle of economic measures (e.g., restrictions on overseas listings by Chinese companies, user-data and other controls put on Chinese Big Tech firms, clampdown on student test-prep and video game commercial sectors, etc) which Xi embraced in 2021 to advance his Common Prosperity agenda, the general effect was felt quickly and keenly in the form of abrupt economic slowdown. In the first quarter of this year, the Common Prosperity program has been ‘walked back’ by numerous party officials who have emphasized that it represents a historic project more than an immediate project. Premier Li Keqiang, in his lengthy speech to 3,000 deputies at the opening of the National People’s Congress earlier in the month, mentioned Common Prosperity only one time. For educated Chinese — who have been skillfully parsing official pronouncements closely ever since the Cultural Revolution for clues about where the country is headed — this lack of visibility and endorsement for Xi Jinping’s signature program represents a remarkable degree of push-back for Xi by top-level leaders.

UKRAINE

Chris Buckley’s report in last Friday’s New York Times traces the contours of what is potentially the most damaging crack to appear in Xi’s carefully-crafted, monolithic façade of power and control.  The article details the war of words that has erupted on the Chinese internet following the warning delivered by a respected scholar and politically-connected insider, Hu Wei, to the effect that China “risked becoming a pariah if it didn’t denounce Russia’s invasion of Ukraine.” As was covered in last week’s post and as continues to play out this week, Chinese officials have contorted themselves by claiming to be neutral and wanting peace while following Putin’s lead in not calling the ‘special military operation’ either a war or an invasion, in not objecting to Russia’s violation of Ukraine’s sovereignty and territorial integrity, and in amplifying Kremlin disinformation about U.S. bio-military labs in Ukraine. 

As argued last week, this has the potential to grow into a strategic blunder for China with significant geopolitical fall-out. It may affect not only Xi’s ambitions to retake Taiwan – the last territorial piece in his China Rejuvenation plan – but to bear long term costs for China as a rising power in the Indo-Pacific region and for its standing in the world at large.

None of this is to suggest that Xi will not get his third term as President this fall. It is only to say that the carefully-cultivated blooms of infallibility and inevitability are now off the XJP rose.

Xi has been in power for less than half of Putin’s tenure (18 years as President and 4 years as the power behind the throne for Medvedev) but there are doubtless people in Zhongnanhai wondering to themselves, post-Putin’s invasion, whether Deng didn’t get it right with his moves to limit the untrammeled exercise of power by an individual leader.

“We are in competition with China and other countries to win the 21st century,” Biden said on April 28th. “We are at a great inflection point in history. We have to do more than just build back better. … We have to compete more strenuously.”

Image Courtesy of the Financial Times

The question we are examining today is what does “compete more strenuously mean.” I’ll be identifying four distinct fields in which heightened competition is likely to come to the fore but first some context and disclaimers.

The first point to note is that, in President Biden’s own words, some partial answers are already clear. Biden has made clear that he sees this 21st century competition as one between the US and its democratic allies on the one side versus Xi, Putin and other autocratic leaders on the other side. in other words, the heart of the competition is democracy versus autocracy. What Biden has also made clear involves timing, that the competition will not be joined in earnest until the U.S. has emerged from the worst of the COVID-19 pandemic and largely revitalized the performance of the U.S. domestic economy.

Two caveats are also in order. The analysis provided below is strictly my own. The Biden administration – under Kurt Campbell, deputy assistant to the President and  coordinator for Indo-Pacific Affairs at the National Security Council — is currently directing an assessment under which cabinet-level departments and some agencies are re-viewing their policies and procedures as they relate to China. These departments and agencies will be reporting their findings to the White House later this year at which point Kurt Campell, his senior director for China Laura Rosenberger, and their staff will be synthesizing these inputs and articulating an updated “whole of government” policy towards China. (This process is consistent with the ‘get our house in order now’ before focusing on generational competition with China, as referenced above.) Clear answers to the question we’re examining today likely won’t be rolled out by the Administration until that process is complete.

In the meantime, the single best open-source for a quasi-authoritative readout of Biden’s thinking on what heightened US- China technology competition will look like may be the Penn Biden Center. While I am affiliated with Fox Leadership International under the School of Arts and Sciences at Penn, I want to make clear that this blog post does not draw on any information from that source.  This is my analysis and I bear sole responsibility for any deficiencies.

So, on to the substance …

At the broadest level, the U.S. needs to up its game in four areas of traditional strength to respond more effectively to the 21st century tech challenge from China:

Field 1:   Industry Sector Focus

NASA’s manned mission to the moon and DARPA’s role in the creation of the internet are the most storied examples of U.S. Government success in mid-wiving new high technology industries.  What has changed since those early post-war successes is the subsequently accelerated pace of technology innovation and development in the Fourth Industrial Age.  In fields as diverse as semiconductor design and fabrication, 5G telecommunications, artificial intelligence and robotics, quantum computing, EV batteries and biotechnology, U.S. government policy is currently nowhere near as focused in positioning its support role as is China.  What is called for is not a return to 20th century “industrial policy” (and its poor record of picking company-level winners and losers) but a new, 21st century approach to policy support to better prepare eco-system support for the emergence of entire new industries.    

Field 2:   Funding for Innovation & Regulation of Foreign Acquisitions

Despite the recent trend-line of falling investment in basic research in the U.S. and increasing levels of basic research investment in China, the fact remains that China is still no match for the U.S. in terms of the breadth, depth and quality of its basic research or of the commercial potential of the developments it spins off.  This is readily apparent in cutting-edge fields like advanced semiconductor design and gene therapy.  In these fields, China can’t put a home-grown team onto the field but instead tries to snap up foreign talent and fledgling foreign companies in hit-or-miss hopes of leveraging that into a domestic breakthrough.  Committee on Foreign Investment in the U.S. (CFIUS) and other related government entities need more focus on the dynamics underpinning tomorrow’s industries and less on yesterday’s. Likewise, less silo-ing between basic research and commercial development is urgently needed.

Level 3:   Rule of Law

Perhaps no societal field offers greater contrast between the U.S. and China than the field of law and legal practice.  The U.S. system of case law based on precedent stretches back to the time of the Saxon Kings of England (with very occasional admixtures from the Roman system of law more common to Continental Europe).  As enshrined in the U.S. constitution, ours is the rule of law, not the rule of men (or women).  While the Chinese Communist Party (CCP) has borrowed legal ‘parts’ from a wide variety of sources since 1949, the legal system it has assembled from those parts is principally designed to serve the interests of the governing party rather than to protect inherent rights of its citizens or its private companies.  It is rule by law, rather than rule of law, as was vividly demonstrated with the imposition of the new security law in Hong Kong in the summer of 2020. Despite the slowness and costs associated with it, the U.S. legal system provides a level of predictability and protection for investors and businesspeople which can’t be matched in China.  We can expect to see the Biden Administration act to shore up the foundations of this legal system following the strains put on it by the previous administration.

Level 4:   Wellsprings of Economic Vitality

Two of the deepest sources of support and revitalization for technology innovation in the U.S. are immigration and our capital markets.  Immigration brings a steady stream not only of young and eager workers but also on occasion transformational business talent such as Sergey Brin and Elon Musk. Our capital markets spread risk over a broad pool of investors and investment vehicles, incentivize iconoclastic thinking and efficiently channel capital to the points of likely greatest return.  While China has through its tax policy been impressively building an investment-led structure for its markets, the efficiency and speed of execution of the U.S. capital markets can’t be matched in China.  In broad view, China currently tries to leverage its centralized leadership and ‘command economy’ model to try to neutralize this U.S. advantage as well as hoping to ride the momentum from its high-growth domestic macro-development over the last four decades (and the internationalization of that development model over the last ten years). How China fares in field of competition in the years ahead as it emerges from its fast-growth phase of development and collides with a dire demographic imbalance will be one of the more consequential questions of the early 21st century.

Editorial Note:  Upcoming posts in the TEA Collaboratives T-series on technology topics will pick up and expand on some of the topics identified above.  Our focus in this Technology Competition sub-series will mostly fall under the industry and innovation topics identified above but we will also have occasional invited guest experts to delve more deeplly the legal and capital markets topics.  Also, it’s important to note explicitly that the viewpoint expressed in this post and other future posts in the series are obviously a perspective from the U.S.-side.  We will present the ‘emic’ view (as seen through the eyes of Chinese government planners and officials) separately through our A-series (Ambitions) posts which appear on Fridays.  

As a final note, the Technology Competition sub-series posts introduced in today’s post will alternate on Mondays with our TECH-tonics sub-series posts (which focuses exclusively on issues associated with the micro-electronic supply chain fault-line between the U.S. and China passing through Taiwan).  In any given month, we’ll be producing in alternating fashion two posts in the TECHtonics and and two poss in the Tech Competition sub-series.

The COVID-19 pandemic holds lots of lessons for addressing the climate change challenge.  I’ll tackle the knottiest set of lessons — those concerning differing global responses, U.S. partisan cleavages, the psychology of risk and individual choice, and the ethics — in an upcoming post.

For now, I will simply set out a list of ten major impacts which the COVID-19 pandemic has brought to the climate change mitigation effort.  Four negative, four positive, and two ‘the jury is out.’

FOUR NEGATIVE IMPACTS

 

POACHING, LOGGING & PROTECTED AREAS LOSS

The impacts of COVID-19 — reducing mobility, leading to job cuts, and diverting world attention — have made the work of guarding against poaching, illegal logging and other threats to protected areas much more difficult to accomplish. Endangered specie and protected areas are suffering as a direct consequence.  Possibly, enhanced satellite surveillance and monitoring may be put to greater use in the future to help deal with this problem.

 

SUSTAINABLE TOURISM

The Travel & Leisure Industry has been perhaps the single most hard-hit industry sector as a result of the COVID-19 pandemic.  As a new start-up, the Sustainable Tourism sub-sector has felt this impact particularly hard.  Many Sustainable Tourism operations are in underdeveloped or developing countries and run by local cooperatives which don’t have access to capital resources to sustain them.

 

CIRCULAR ECONOMY & WASTE MANAGEMENT

Circular economy refers to design solutions that repurpose waste from every point in a system so that is can be reused, optimizing the system from an efficiency and sustainability standpoint. Factories and entire cities are working to implement circular economies.  The logistics of waste management is a key link.  As you’ll know post-COVID if you’ve tried to recycle plastic bags at your market, that link in the cycle is currently broken.

 

ENVIRONMENTAL ACTION MOBILIZATION

Humans are hard-wired for connectivity and, while online methods of mobilization allow for greater efficiency and scale, they lack the impact of people gathering together … both from the standpoint of the participants and the observers of the activity.  Countless environmental action events have now been cancelled due to COVID-19.  Even the COP26 meeting to review progress on the Paris Accord has been postponed a year.

 

 

FOUR POSITIVE IMPACTS

 

REGENERATIVE URBAN GARDENS

Along with baking and at-home yoga, urban gardening is one of the activities which has seen a huge spike since COVID-19 forced us to stay closer to home.  This is a hugely positive development since urban gardens have shown — through programs such as the Philadelphia Horticultural Societies Growers Alliance — that they transform neighborhoods. Food deserts become locales with healthy food while improving the quality of the air.

 

15 MINUTE CITY CONCEPT

As  Financial Times and Treehugger have described, the 15-Minute City concept is “having a moment” thanks to COVID-19.  Developed by Professor Carlos Moreno at the Sorbonne in Paris and based on the Lazaretto model developed in Milan during a 16th c. plague, the 15 Minute City plan is to “offer services and quality of life within the space of 15 minutes on foot from home,” the same time a commuter might have waited on the platform for a train.

 

MORE INCLUSIVE LOCAL CLIMATE ACTION PLANS

Among the many things which the COVID-19 pandemic has made painfully obvious is that fact that certain disadvantaged and at-risk communities take a disproportionately heavy hit.  One bright side from this realization is that Sustainability Offices throughout the country are dusting off their city’s Climate Action Plan and reimagining them with a more inclusive vision.  I don’t know if this effort is yet underway in Philadelphia but it should be.

 

IMPACT ON SOCIAL IMPACT INVESTING

COVID-19 initially had a disruptive effect on social impact investing, but that disruption has been overcome.  Perhaps because the pandemic has highlighted vulnerabilities in our maximally-efficient economy (and maximally-stressed work-lives) ideas and innovations for more balance and resiliency in work- and life-styles are popping up.  Social impact investing is watering the growth of those new ideas.

 

TWO ‘THE JURY IS STILL OUT’ IMPACTS

 

AIR QUALITY

The shutdown of economic activity and drastic reduction in the use of fossil fuels has of course led to a short-term amelioration in air quality, as the twin maps of China clearly shows.  But the jury is out on the critical question of what will happen as activity resumes.  Will economic pressure cause backsliding to abundant and cheap carbon fuels or will the Resiliency Lesson from our experience from the pandemic be learned?  We know that areas with worse air quality suffered more from the virus.

 

INFLECTION POINT – YES OR NO?

We can enlarge the air quality question to the environment as a whole.  Our efforts now to revive economic activity can either be rote or be reimagined.  There are lessons which the pandemic has taught us about our interdependence and about what is most important in our lives.  Will we apply what we have learned to recharging our economy in ways that are more resilient and regenerative or will be fall back on old habits? The answer will reverberate across coming generations.

 

These last two impacts are complex, still-evolving and extremely important.  I will return to each in a future post.

For now, stay safe, healthy and involved.

 

 

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