Excellence in research has gone hand in hand with dominance in key commercial technologies. Chinese companies are world leaders in drones, mobile payments and 5G network equipment. Chinese consumers’ habit of conducting every aspect of life via smartphones has generated data with an extraordinary density, and cheap Chinese labor allows the data to be laboriously labeled. These two factors, combined with dual government subsidies, give China a head start in the race to train artificial intelligence systems.
China’s venture capitalists are impressive. They’ve learned the art of disruption from the experts of Silicon Valley: The best Sand Hill Road outfit is Sequoia Capital; The best China outfit is Sequoia China. American and American-educated venture capitalists have set up several other firms on the mainland. Sinovation Ventures, a leading supporter of AI, is led by Kai-Fu Lee, a graduate of Google, Microsoft, Apple and Carnegie Mellon’s PhD program.
All of this recently prompted Eric Schmidt, former Google CEO, to warn that the United States could lose the tech race to China. Since this could involve military technology, a loss could pose an existential threat. But the Chinese leadership faces even more profound challenges.
Economic growth in China is expected to be just over 3 percent this year. That’s much less than the official target of 5.5 percent; it’s downright humbling compared to China’s performance a decade ago, when annual growth was about 8 percent. Boosters will attribute this slowdown to idiosyncratic obstacles. But the hooks as a whole point to the big picture. An authoritarian system reaches its limits.
The first catch is Covid-19. China has made a proud political decision not to import foreign vaccines and is therefore imposing draconian lockdowns at the first sign of an outbreak. Shanghai, Shenzhen and dozens of other cities have been subjected to economically ruinous lockdowns that have polluted global supply chains (and imposed food shortages and other hardships on millions of people). In the western border town of Ruili, residents were banned from leaving their homes for 119 days between March 2021 and April 2022, Bloomberg Businessweek recently reported.
The second catch is real estate. Again, China has made a policy choice not to encourage private consumption, as it is seen as irrelevant to the Communist Party’s pursuit of national greatness. The result is statist distortions that encourage unhealthy growth.
In the first decade of this century, China manipulated its exchange rate. This boosted exports, but also led to an unsustainable trade surplus, the recycling of earnings into mountains of US financial instruments, and finally an uneasy sense of dependency when Wall Street exploded in 2008.
The Communist Party’s next ploy was to order banks and local governments to fuel a construction boom. This also boosted growth, but replaced unsustainable foreign bond buying with unsustainable domestic debt. In fact, the country’s largest real estate developer has defaulted. Vacant home buyers are furious. A mortgage boycott has spread to more than 100 cities. House prices have fallen for 12 months in a row. With real estate driving more than a quarter of the economy, another slump threatens as the sector collapses.
The third hook casts a cloud over China’s tech strength. Also for political reasons, China cannot tolerate tech titans aspiring to become Elon Musk-style influencers, listing their companies on foreign stock exchanges or founding companies that help Chinese students apply to colleges abroad. So it went against a lot of them. That will not encourage the next generation of technologists to set up businesses in China.
And then there’s the demographics. In 1979, in another bout of statist hubris, China’s leaders imposed a strict one-child policy that led to sex-selective abortions, a gender imbalance, and a fertility rate that plummeted even faster than it would have if China followed the standard would be a model for a developing country. Far too late, the government recognized the fuse it had lit and eventually moved to a two-child policy in 2016. Last year, in a panic, the government announced a three-child policy along with childbirth promotion programs. Fertility shows no signs of improvement.
None of this is good news – for China or the rest of the world. Russia has recently shown that a power in decline can be more dangerous than a power on the rise, and the combination of scientific power and economic dysfunction is a frightening cocktail. There is not much the West can do to stop China from being China. But at least it can prepare itself.
