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Gordon Chang: Prediction of China’s Collapse

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Acclaimed Asia expert Gordon Chang talks with Opportunist’s Managing Editor Leslie Stone about his books, his thoughts on President Xi Jinping’s recent visit and why he still believes China’s collapse is coming.

ChangCoverGordon Chang lived and worked as an attorney in Shanghai and Hong Kong for nearly two decades, during which time he gained an insider’s perspective of what life is like there. Today, he writes extensively on China, Asia and nuclear proliferation and is a columnist at Forbes and The Daily Beast, a blogger at World Affairs Journal and co-host of the syndicated “John Batchelor Show” on ABC Radio Networks on Wednesday evenings. His writings have also appeared in The New York Times, Wall Street Journal, Barron’s, International Herald Tribune and National Review, among others. Sought after for his opinions and interpretations, Chang has given briefings at the Central Intelligence Agency, State Department, National Intelligence Council and the Pentagon. He has also spoken to industry and investor groups and at universities and think tanks and appeared before the House Committee on Foreign Affairs and the U.S.-China Economic and Security Review Commission. His many TV guest-appearances include CNN, Fox News, CNBC, MSNBC, PBS, BBC, nuclearcoverBloomberg Television and “The Daily Show” with Jon Stewart.  A graduate of Cornell University and the Cornell Law School, Chang also served two terms as trustee of the university.

In his book The Coming Collapse of China, Chang maintains that the Communist Party of China is the origin of much of the country’s problems and predicts the imminent doom of the Chinese political system. His second book, Nuclear Showdown: North Korea Takes On the World, addresses the origins and implications of North Korea’s nuclear threat and proposes a solution.

Opportunist: Where did you get the idea to write The Coming Collapse of China?

Gordon Chang: I always wanted to write a book as a kid but never really had anything to say. When my wife, Lydia, and I were in Shanghai I decided there was something interesting I could actually write about. It started when we moved to China in August of 1996 and I heard my wife on the phone saying, ‘Mom, China’s not Communist anymore.’ I remember agreeing with her, but as we worked and traveled around China, talked to people and saw things I realized the system Mao Zedong put into place survived much more so than we thought. Even my clients, who would stay at the Grand Hyatt in Pudong, Shanghai, would say to me, ‘China’s not Communist anymore.’ I realized they had collapsecovermisperceived what was going on and I decided to write a book to change that impression. My wife pushed me to write the book. She’s incredibly supportive and the person I turn to for advice. I couldn’t have done it without her.

Opportunist: Has the collapse already begun?

Gordon Chang: My prediction about the collapse was premature, but I think I was right about what was going to happen. China is in the early stages of crisis for which leaders cannot get out of. Solutions aren’t possible in the political system if they won’t change. It could be a long, drawn-out failure or it could be quick. I love the Discovery Channel and shows about space and the analogy that comes to mind is horizon is the point in space beyond which an object cannot escape a black hole. China has passed the horizon. I cannot see where they can escape a crisis, which will lead to the failure of the regime. They can slow it down but can’t change direction. This is going to be the most important development of our time and it is going to change everything.

Opportunist: When the Chinese economy, purportedly the largest in the world, falters what kind of repercussions can we expect around the world?

Gordon Chang: Right now it’s the second-largest economy. Virtually everybody assumes it will become the largest, but I don’t think it can. Chinese leaders cannot change the downward trajectory. The most they can do is slow the rate of descent. They are losing their ability to affect the economy, and when they no longer have that ability I think it will go into free fall. I think the Chinese economy can sort of stave off the inevitable for a year or two but when it falls it’s going to fall very hard.

Opportunist: Won’t that cause widespread panic?

Gordon Chang: Obviously there is the panic factor. Look at what happened about six weeks ago when the news out of China affected the markets and investors lost $2.2 trillion globally. On the other hand, China is less important to the world than most people think. We hear that China is the engine of global growth, but it’s not. A country has to buy the goods and services of other nations in order to create growth elsewhere. The Chinese, through predatory policies, take growth from elsewhere. When that falls apart and China ends up in a black hole, I don’t think the world will have that much of a problem. We will see growth elsewhere—quite possibly more growth than before—in Vietnam, Bangladesh, India, Mexico and the United States. If it weren’t for the panic, I would say that China’s failure will have very little effect on the rest of the world.

Opportunist: China’s yuan recently reached its strongest level since it was devalued by the People’s Bank of China two months ago. Was it wise for China to manipulate its currency?

Gordon Chang: What they’ve done since Aug. 11 is allow it to depreciate for a couple of days. I think China was taken aback by the global reaction and realizes it almost triggered a panic. So what it has done since then is support the value of the currency. The Financial Times reported at the end of August that China was spending $20 billion a day supporting their currency. I don’t know exactly what happened in September, but their burn rate was very high. The reason was they had always influenced or determined the value of their currency in their domestic market and made sure it cannot deviate more than 2 percent on either side of the daily midpoint. The burn rate could easily increase as the Chinese people and foreigners lose confidence in the central bank’s management of the currency. What is fascinating is for the first time ever the PBOC has been intervening in foreign currency markets to make sure their renminbi in foreign markets has a value close to the onshore rate. That takes a lot of money. I don’t know the exact amount they’ve been spending, but it’s probably more than they’ve been willing to admit. China is heavily intervening in the domestic stock market and can buy every single share of every public listed company if they want. When it comes to the renminbi, the only way is to sell something they cannot print. In other words, they have to sell foreign currency and that’s primarily the dollar. However, they could run out of the dollar if things go sideways for them as they defend their currency.

Opportunist: What will this mean for Chinese companies such as Alibaba Group?

Gordon Chang: Alibaba is going to get hurt, and really bad. What companies like Alibaba and JD.com [Jingdong Mall] have been able to do really well is take sales away from bricks-and-mortar locations, so online growth has been phenomenal. But the guy who runs JD.com doesn’t think he’s a rock star like Jack Ma does. [Laughs] Certainly, compared to the rest of the economy, online consumption is going to increase as a percent of GDP because it’s not as bad as everything else. My sense, though, is that online consumption is growing as an absolute number but not by leaps and bounds. Eventually, what is going to happen is online retailers are going to hit a limit. There is only so far they can go in taking sales away from bricks-and-mortar. The hope for the Chinese economy is that it will become consumption-led. In a theoretical sense that is right but consumption doesn’t drive growth—it’s the result of growth. Because the rest of the economy is so bad the Chinese people won’t have money to buy in larger volumes, and that will hit Alibaba and other retailers. Alibaba also has unique problems that JD.com doesn’t have. It has a larger model and, as a result, there is a much larger portion of fakes on Alibaba’s platforms. So, eventually brand owners are going to make sure that Alibaba doesn’t sell as much in the way of fake and counterfeit goods. That is not going to be good for their GMV or gross merchandise volume, which is how they measure their size and performance.

I have never been a believer in Alibaba. I didn’t drink the Kool-Aid. We are seeing the company return to earth right now. It is poorly managed in one sense. Its diversification strategy is much harder to understand than Tencent Holdings, which has been trying to monetize its social media base and has been successful. Alibaba made purchases that just don’t make sense and a lot of those haven’t panned out. Things are going to catch up to Alibaba and they will be a lot worse. Stock analysts saw a $350 price target for Alibaba and I just thought that was absurd. Indeed, right now we see the stock languishing. The worst is yet to come because it’s limited by China. It hasn’t been able to expand beyond China and it will succeed or fail based on Chinese consumption, which will begin to stagnate and contract along with the rest of the economy.

Opportunist: North Korea warned just last month that it was ready to use nuclear weapons against the United States and other ‘hostile forces’ if they continued their ‘reckless hostile policy’ toward Kim Jong-un’s regime. Do you believe that was an idle threat or should we be worried?

Gordon Chang: They make a lot of idle threats but they can be very threatening. They clearly are hostile to most of the international community. They have nuclear weapons and long-range missiles. The Chinese gave them weapons; that makes them a threat. The regime has an ideology that makes it internally stronger. When people are destitute they don’t have the means to resist or think about destroying a regime because they spend their time trying to scrape together a living. Kim Jong-un hasn’t consolidated power despite what the American intel community thinks. They can easily fail, but they are a more viable prospect than the People’s Republic of China. The Chinese people don’t believe a one-party system is appropriate for modernized society and they can do things which have revolution implications. We saw that in 1989 in Tiananmen Square. The regime almost failed. The Soviet Union fell in a benign manner with very few lives lost. A Chinese failure will be much bloodier. North Korea will eventually fail. I don’t know how—it could just be some generals shooting each other or it could be worse. I think North Korea has a more viable political system than China does.

Opportunist: Do you spend much time in mainland China?

Gordon Chang: No. I went there twice in 2013. I am in Hong Kong now and before the end of the year I will be going to Macau. I think things are getting a little dangerous in the mainland for a number of reasons, especially for someone like me. The crackdown on dissident voices is much worse under Xi Jinping. Coming here this trip the plane was almost diverted to an airport in China. China has been jailing a lot of people recently and this situation could get worse for foreigners. I am certainly not important enough for the regime to give a hard time but at the same time, if I don’t have to test things why do it?

Opportunist: President Xi Jinping’s recent visit was heralded by the White House as an opportunity for China and the United States to expand relations on a host of ‘issues of mutual interest.’ Do you believe President Xi Jinping’s visit and his meeting with President Obama were successful or was it basically a PR move?

Gordon Chang: Primarily PR. It was a big win for the Chinese and big loss for us. What was important for the Chinese was the South Lawn welcoming ceremony, the 21-gun salute and state dinner. Images were broadcast back to China to show the U.S. respected Xi Jinping, and I don’t see where our president was able to get the Chinese to move in directions they wouldn’t otherwise. It’s good they have a climate deal, but China is producing less carbon emissions anyway so that was not a great accomplishment of American diplomacy. And the Chinese were able to defer any effective action in cyber theft.

Opportunist: Former President Nixon’s visit to the People’s Republic of China in 1972 marked the first time a sitting president visited the PRC. How have relations between the United States and China changed since then?

Gordon Chang: They have certainly evolved but the underpinnings of engagement are still in place. At one time the U.S. had effective Chinese diplomacy, meaning we got things we needed. This hasn’t been true since the end of the Cold War. We have maintained an engagement policy that permitted the Chinese to become aggressive and belligerent and have failed to impose costs to China for that. I think that will change and fairly soon, largely because China is doing things the rest of the world won’t tolerate. Certainly what we are seeing in the South China Sea, where they are trying to prevent freedom of navigation, these are things the U.S. cannot ignore. We need to see policy where we start to impose costs on China, and I hope we do it before things go really wrong. After the Scarborough Shoal standoff in the first part of 2012 and their subsequent pressure on other Philippine islands, they thought aggression works. This could be very bad. I am not saying China is the Third Reich—it’s clearly not—but the dynamic we see is the same as in the 1930s when western countries would not attack an aggressor. We have allowed the Chinese to become villains. The Chinese are villains. They have always had policies which were inconsistent with the international system. We have permitted them to become aggressive and engage in destructive behavior so we bear responsibility for decreases of security in East Asia. Whether we like it or not, the United States is the ultimate guarantor of peace in East Asia. We haven’t followed through so we are seeing unnecessary deterioration there.

Opportunist: Donald Trump has been boasting about his aptitude for foreign policy, especially with regard to China—going so far as to say China would ‘be in trouble’ if he were elected. What are your thoughts on that?

Gordon Chang: I think Trump has the right attitude in the sense that our policies towards China have been misguided and we haven’t negotiated good arrangements with China. That is not to say a ‘President Trump’ would be more successful in dealing with China, although he may very well be. I certainly agree with his approach. If implemented well, it would have a beneficial effect. But I don’t know whether Trump as president himself would be able to implement his approach well. At this point it’s unknowable. It has to be more than just bluster; you have to have an effective policy. The policy approach the U.S. adopted since Nixon’s visit is no longer working. It’s not only misguided, it’s dangerous. Trump’s approach is better. But, again, that is not to say ‘President Trump’ would be effective.

Opportunist: If you could ask each of the 2016 presidential candidates a question, what would it be?

Gordon Chang: That’s a good question. I would ask: ‘What is the most important security challenge or threat to the U.S. and what would you do about it?’

Opportunist: What’s next for you, Gordon? Do you have any other books in the works right now?

Gordon Chang: No. Things are changing much too fast for book form. Someday I may write another book, but not at the moment. I am going to continue writing about the Chinese economy and society and North Korea. It’s a tough enough job trying to stay current. That is important because it forces me to learn and relearn all the time—especially with China changing faster than any other society on earth. It takes a lot of effort to keep from falling seriously behind, which is the reason I am not writing a book.

LesphotoLeslie Stone is an award-winning writer, editor and journalist with more than two decades of experience covering business, finance, real estate and lifestyle issues for newspapers, magazines and online publications. Originally from Virginia, she currently resides between Florida and Michigan. Follow Leslie on Twitter: @lescstone.

 

Follow Gordon Chang on Twitter: @GordonGChang

Learn more about Gordon Chang at gordonchang.com
Watch Gordon Chang on “The Daily Show” with Jon Stewart

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