Issue Briefs

Could China take a “Middle Kingdom” approach?

Could China take a “Middle Kingdom” approach?

June, 10 2019

Martin Hutchinson

“Our Celestial Empire possesses all things in prolific abundance and lacks no product within its own borders” wrote the Qianlong Emperor to King George III through Lord Macartney in 1793. That turned out not to be true for Qianlong and his immediate successors, and China’s history over the next two centuries was an unhappy one of missed opportunities. But now that China has trained infinite numbers of its best and brightest in Western colleges, and transferred the best Western technology licitly or illicitly to itself, could the Qianlong approach work today?

China then and now

The Qianlong Emperor (1711-99, ruled 1733-96) was not irrational – indeed, he was in general one of the wisest Emperors China ever had. China in 1820 had on Angus Madisson’s estimate a GDP of $229 billion 1990 dollars, about 33% of the world’s total, with about 36% of the world’s total population at 380 million. It was thus poorer than average, but not much poorer. Thirty years earlier, its population was lower, and we can guess that its proportion of world GDP was close to the same level, and its per capita GDP around the world average, as we know the years following Qianlong’s retirement in 1796 were ones of economic decline.

Britain, the pipsqueak country whose representative George, Lord Macartney was refusing to kowtow to the Emperor, had only $36 billion 1990 dollars in GDP in 1820, less than one sixth of China, and a population of only 20 million, one eighteenth of China – in 1793 it had been even more relatively insignificant in both respects.

Resist contacts with the West

Qianlong had his own reasons for rejecting the further contact and trade links Macartney was offering. He was 82 years old and knew his son, later the Jiaqing Emperor, would be unable to manage the difficult transition Western contact would bring (indeed a further British Embassy, in 1816 after the Napoleonic Wars had of ended, was refused even a meeting with Jiaqing).

But in the long run, the decision to forego further contacts with the West was disastrous for China. Indeed, Britain had already developed new technologies China lacked (one reason it was three times as rich, per capita), as Britain was at the start of its historic industrial take-off –a transformative phenomenon that China would have neither the trained people nor the technologies to match.

Illicit trade only

Because of Qianlong’s decision, Anglo-Chinese trade over the next half-century was illegal and left to the drug lords of the East India Company. Chinese opium imports, paid for in silver bullion, were highly damaging to China both socially and economically and led to the Opium Wars of 1838-41 and to a succession of “Unequal Treaties” negotiated on a very different basis from the civilized relationship of equals that had been offered by Macartney.

China today

In terms of population and GDP, China is in a weaker position now than in 1793, accounting for only 14.9% of world GDP and 18.4% of the world’s population. It is thus smaller relatively in terms of both GDP and population than in 1793 and, as in 1820 but possibly not in 1793, is still somewhat poorer than the world average. At first sight, therefore, Qianlong’s strategy of “Middle Kingdom” isolation makes less sense today than it did for Qianlong.

However, when you look more closely, China has major strengths today it did not have in Qianlong’s time. It has ensured that its best and brightest young people are educated in top Western colleges, where they display an outstanding work ethic. Thus, now within China there is an awareness of the latest technologies that was entirely missing from the mandarins comprising Qianlong’s educated class. Second, because of an energetic, if not always scrupulous, technology transfer from Western companies to China, Chinese companies are highly capable in the world’s leading technologies and indeed in many sectors are cutting-edge.

Back to the Middle Kingdom policy of isolation?

A Qianlong policy of isolation is entirely compatible with China’s traditions and would greatly reduce the political contamination from Western societies and the friction with the United States and other Western economies. It must therefore be an attractive possibility for President Xi Jinping. Indeed, if he were able to pursue an isolationist strategy successfully, he could put himself in the position of Emperor Qin Shi Huang, the unifier of China (221-206 BCE) and founder of a civilization and governmental system that lasted in a continuous form for 2100 years until the deposition of the Xuantong Emperor Pu Yi in 1912.

To achieve isolation, China must reduce its dependence on trade, reorienting its export industries to the domestic market, while securing sources of raw materials, notably oil, that are not available domestically. The export industry reorientation will be greatly helped by the revival of protectionism in the United States and its continuance in the EU. China’s export industries, while highly cost-competitive in general, will not be able to compete against a tariff wall not faced by other Asian producers.

Nevertheless, at present China can make the great majority of manufactured goods at the highest technological levels, at costs competitive in the world market. In that sense, Qianlong’s boast is once again true (which it would not have been 20 years ago, when China did not have a world-class manufacturing capability in automobiles, for example).

Can China become self-sufficient?

Under Xi Jinping, China has already been giving considerable thought to its ability to remain self-sufficient in raw materials, through its “Belt and Road” initiative. This strategy, if successful, would allow China to use its financing capability to dominate weak emerging market countries, in return for locking up supplies of scarce resources. By this means, Chinese resource scarcities in areas such as oil and iron ore can be overcome, without the need to engage fully in global trade markets with Western economies. Dominating weaker neighbors to obtain raw materials was historically a key feature of Middle Kingdom economic management.

There would thus seem no reason why a Middle Kingdom economic strategy would not work in the short-term. China has $3 trillion of liquid foreign exchange resources, so any resulting balance of payments difficulties could be overcome, while China continues to develop its domestic economy and increase the wealth of its own citizens. Innovation would continue, and the Chinese domestic economy could be optimized, to the benefit of its inhabitants. Any bottlenecks could be overcome by using China’s near-monopoly of global rare earths production, which would enable it to barter those scarce resources for any scarce resource it did not already control.

Problems down the road

The problem for a Chinese Middle Kingdom strategy would arise in the longer term. Without the steady flow of Chinese students attending Western colleges and Western intellectual property being diverted into Chinese hands, there would over time arise Western innovations to which Chinese companies did not have access.

Without such access, there would be a serious risk that over time the Chinese economy would degenerate into the Soviet Union economy circa 1970. The Soviet Union inherited a base of world-class manufacturing developed in the last years of the Tsars. It gained further know-how and intellectual property from its collaboration with the West in World War II. But once the Iron Curtain came down in 1946, the country’s socialist system was unable to sustain the pace of innovation needed to keep up with the West. Thus by 1970 the Soviet economy was seriously backward and becoming more so until its new system –after the total collapse of the Communist state– was finally opened to capitalism in the 1990s.

Convert China to free market capitalism?

In order not to repeat the mistake of Qianlong, therefore, China must convert entirely to free-market capitalism and probably some sort of democracy. If it maintains its current nominally Communist system, with the state having control over a high percentage of assets and intellectual activity, then a Middle Kingdom strategy will make it hopelessly sclerotic. With no new ideas coming in from outside, and the state and state-controlled companies stifling innovation domestically, China would have replicated Qianlong’s mistake: it would have created a system that was unable to keep up with the Western pace of technological advance.

Real self-sufficiency must be based on an innovative economy

However much Xi Jinping might be attracted to a Middle Kingdom strategy, therefore, he will have to give up Communism and embrace the free market to get it. Only in that way will China be able to use the superb technological skills level of its current Western-educated elite to produce blossoming innovation.

With capitalism and a weak state (such as Qianlong had – the Chinese state of 1793 controlled very little of the economy or of society) a Middle Kingdom strategy is highly feasible in modern China. Given the size of its population, its economy and its technological base, China would develop its own unique technological advances that it could trade for Western advances which it had missed.

“Tremblingly obey and show no negligence” ended Qianlong’s 1793 letter to George III. Not being mad at the time he received the letter, George III rose above the insult. Doubtless Xi Jinping is tempted to write in similar terms to President Trump – but he should probably resist the temptation!

This article was originally published on the True Blue Will Never Stain

Martin Hutchinson is a GPI Fellow. He was a merchant banker with more than 25 years’ experience before moving into financial journalism. Since October 2000 he has been writing “The Bear’s Lair,” a weekly financial and economic column. He earned his undergraduate degree in mathematics from Trinity College, Cambridge, and an MBA from Harvard Business School.

The views and opinions expressed in this issue brief are those of the author.