China Capitulation Part 3 – revealing fundamental flaws that stop China from being a truly great nation

In the past decade, there are suggestions that China is on its way to surpass the US as the world’s preeminent superpower. Some even claim that China is the country the world will follow.

People who believe this cite these points:

• The Chinese economy has grown rapidly while the West stagnated
• The perception that the Communist Party of China sets a long-term plan for growth shows commitment and foresight
• The Chinese society is orderly while the West is divided over clashing ideologies and political views
• China’s increasing influence in foreign affairs, including the Middle East and Africa.
• The world’s dependence on China’s exports and Australia’s dependence on its resource imports
• The substantial rise in foreign investment into China.

These qualities are present in a superpower. But it’s not sufficient. A nation isn’t great because of the image it gives, but in what it actually is.

This is where China’s image is a big illusion, with cracks revealing quickly.

China internally is in greater malaise than its ruling party and both the state-owned and foreign media make them to be.

I’ll use this analogy to convey my point. China’s image is best reflected by its netizens posting their selfies using filters. You may have seen those images of Chinese girls with flawless skin and model facial features. However, they may hardly resemble what they posted online. They may even be ten years older, more wrinkly, or worse, a creepy man!

Today’s article will explore some fundamental flaws that hold China back from being, and even becoming, a great nation it wishes to be. It’s an ugly truth. But beyond the truth, there are investment opportunities within.

A polarised mindset that affects
behaviour and societal order

There’s a Chinese saying that others give you respect when earned, while you can bring shame upon yourself.

It’s self-explanatory. Others can decide whether they respect you for who you are. You can’t demand it. Yet, your poor decisions and character can bring you shame and derision.

The irony lies in that the Chinese rulers and intellectuals hang onto ‘The Century of Humiliation’ and weaponise that grudge by spurring a jingoism in the populace. Even as China rises since the economic reform and entry into the global markets, they waste no time in making their alleged perpetrators feel guilt and a sense of owing.

This mindset can lead to cognitive dissonance. On one hand, they’ll often deride Western ‘white ghosts’ (gwailos) as being imperialistic, racist bullies. On the other, they’ll copy their technologies and information, prefer western-made goods over domestic ones (think milk powder, food, wines, Ugg boots, vitamins, make-up, etc), and ditch a Huawei phone for an iPhone in a heartbeat.

Not all Chinese have this ‘small man/woman’ mentality. After all, traditional Chinese culture built itself on Confucianism and Taoism. It values introspection, humility, and restraint. What we see manifesting today is a consequence of The Cultural Revolution, when Maoist revolutionaries repudiated these philosophies. This ideology viewed traditional qualities as bourgeoise, corrupting, and weak.

Thus, you have a divided Chinese thinking. One that seeks to puff its chest out and puts image over character. The other is one of restraint, self-reflection, and deference.

While the Chinese society hasn’t lost much of their hard-working and stoic nature, what drives this nature may come from opposite motivations. The ruling party’s hardline and uncompromising governance style further create social tension. This has led to many migrating out of China, if they’re able to do so.

This leads me to the next fundamental flaw.

Tied at the neck and hip – confounded
by collectivist thinking

A free-thinking society has historically fostered creativity and faster development. It facilitates new ideas and innovation. We’ve seen that happen over time. Empires flourished in different places and times. But those where the rulers do not unduly impose their will on the people made greater impact. The flourishing of democratic thought in Athens in the Classical Period, the Renaissance, and the Victorian Ages are a few examples.

After the disastrous Great Leap Forward, former Chairman Mao attempted to divert blame for the famines. He delivered a speech in 1956 stating ‘let a hundred flowers bloom, let a hundred thoughts contend’. His intentions were the opposite. This speech began a campaign of repression and retaliation against anyone who criticised Mao and the Communist Party. It was an insidious fishing strategy culminating in The Cultural Revolution that stamped out dissent, consolidated power and eliminate ideological opponents.

Besides brutal purges within the party, communities, colleagues and even family units participated in this persecution. Tens of millions died directly and indirectly, adding to the death toll caused by the mass starvation from famines and internal conflicts.

To this day, many in China either comply with the Party’s policies and thinking to rise in the ranks, or out of fear of non-conformity. The society’s morale is weak while trust between individuals, even within a family, is fragile. An environment like this does not cultivate innovation and development to its fullest extent.

Achieving its means to success
or self-destruction?

Despite this, proponents will argue that Chinese technological know-how and capabilities are on par or even ahead of its more advanced peers. That’s partly true, but China got there by imitation and outright stealing/plagiarism. Its reputation on this front is as legendary as it’s universally condemned. While achieving its ends, China has gained much criticism and caused other nations to be wary when doing business with it. Short of removing the ruling party or China experiencing a painful payback, it sees no need to change its ways.

For this reason, arguments that China is advanced enough to go its own way and not resort to such underhanded moves are at best wishful thinking.

For all the country’s economic and foreign relations accomplishments, China lacks honour and possesses base cultural values. It also treats its people with a mixture of contempt and fear. This paranoia contributes to its own undoing.

Those who criticise Western culture over past and present imperialism, colonialism, slavery, etc. have a tall order to say China has equal standing. Western society built itself up over time, despite its past sins but it is still well ahead of a country that is willing to sacrifice its own people’s welfare to stick it to whoever slights them. Such behaviour doesn’t project strength; but insecurity.

A country that teaches its people to vent at an enemy power by destroying foreign-owned assets in their own country (like what happened in 2012 over the Diaoyu/Senkaku Island dispute), at their own loss, is self-defeating.

Moreover, the Communist Party of China happily funds anti-western tycoons and organisations to undermine Western powers. Tech billionaires including Neville Roy Singham, academic institutions, NGOs and businesses self-funds or accepts funds from the Chinese government to inflict harm and divide Western culture.

What they can’t achieve above board, they’ll sabotage, infiltrate and imitate to catch up.

(While I said the above, this doesn’t excuse the Western nations that have and are doing the same. Just think how the Opium War started and what Hollywood has done to youths around the world.)

A caution to those who trust the red dragon

Before I wrap up this article, I want to make this final point.

While China holds many cards and will continue to do so, it’s by no means operating in the same bandwidth as the Western nations. Much of its image is an illusion. Moreover, its people risk their own lives telling you what’s happening within.

You’d hesitate to entrust your house keys or children with a neighbour that talks nice face to face, but you constantly hear cries of pain, thumping, and things breaking inside the house at all hours of the day.

Why would you think that China is going to play ball on your terms?

I recall my colleague James Cooper mention last week about the potential for the US and China to set aside their differences and enter more constructive business agreements.

While that’s possible, I would be on my toes about how long such a deal could last. You’ve seen how OPEC nations undercut each other after setting targets and they’re largely aligned ideologically. The US and China aren’t the same.

If you ask me, I’ll need to see it over a period of years to believe it. The outcome would be great, the world would be a better place.

However, I add that even if the scenario James highlights doesn’t happen, a resource boom is still on. The outcome doesn’t change – just what will spur it.

That’s because whether the US and China are cooperating or butting heads, there’ll be a race to secure more commodities to shore up their economies. Other countries will do the same because the unipolar world order is ending. Expect countries to establish their regional trading blocs, which will re-route trade patterns.

For now, I see commodities as a solid investment case.

Moreover, there’ll also be an intense contest to secure enough energy to build the digital infrastructure for the coming transformation as AI becomes integral to society.

For this reason, you may want to check out my colleague, Lachlann Tierney, who has a few small-cap recommendations focused on critical minerals and energy.

I hope you enjoyed my piece today. Stay tuned for next week’s article where I cover the growing fragility of the Chinese society, despite the government’s attempt to control every aspect of it.

For now, enjoy the upcoming weekend!