In this issue of The Institutional Risk Analyst, a long-time reader and occasional source emerges from the shadows of corporate silence during a garden leave to opine on the West’s view of China. “Ricardo” is a corporate finance and risk officer who has decades of experience in New York, China and Korea. He may state the obvious for long-time students of Asia, but for many in the financial markets these views are a revelation. Could it be that narratives in the mainstream media about China are not entirely accurate?

The IRA: What is one of the larger misconceptions people have of China?

Ricardo: To start, contrary to common views, China is inherently weak. This doesn’t mean that China is not dangerous or aggressive, but they are not strong. Points:

• China is resource poor - it cannot feed its large population with its modest arable land, and must rely on importation of food-stuffs.

• China is energy poor – apart from poor quality high-sulfur coal, it lacks hydrocarbon deposits and radioactive fuel for reactors and must import to meet its growing energy needs.

• China suffers from horrible demographics – exacerbated by 40 years of ‘one child policy’.

• China is disliked by its neighbors – having fought armed conflicts with every one of its neighbors in the past 120 years – including skirmishes with Communist Vietnam, and the USSR.

• China has internal instability with minority populations in their western provinces, and among the young in the cities.

• China boasts fratricidal internal politics – as showcased via the Bo Xi Lai events.

• China is poor at basic research and the generation of new, cutting-edge intellectual property. China’s industrial policy is to steal and copy, not create.

• China is not an open, modern, 21st century pluralistic society that attracts talent from around the world – rather they remain closed to outsiders in almost every organizations senior ranks.

China’s senior leadership knows this. Weakness drives their political decisions. And it’s critical for understanding China’s actions.

The IRA: So what explains what we see and read in the news about China as a rival and economic and military threat to the United States?

Ricardo: I suspect Xi Jin Ping and the Chinese Communist Party (CCP) elite are following the centuries-old tactical advice of Sun Tzu’s Art of War: “Appear weak when you are strong, and strong when you are weak.”

When we look at China’s actions through this lens, the One Belt Road initiative, recent naval build-ups in the contested Spratly Islands, ‘new alliances’ granting the Chinese navy access in far flung ports in India and Africa do not suggest a strong China projecting power, but rather a weak China that is falsely projecting strength, where it cost effectively can, to mask internal weakness.

The IRA: Why would China want to appear strong at all?

Ricardo: This is the second key point, namely, that China’s visible (first-order) external foreign policy actions are orchestrated to address a hidden and more important (second-order) internal agenda, namely maintaining internal social stability in the face of mounting political and economic pressures. The bluster reported by western media is purposely masking the weaknesses that China does not want outsiders to see.

The IRA: Policy makers do not seem to speak of a ‘China that is weak’?

Ricardo: I am certain Sinologists inside the beltway are aware of China’s ‘inherently weak’ position, but I doubt few domestic Western interests, economic, political or military, etc., are served by espousing such at the present time – no, a strong China that we must actively counterbalance, is probably the preferred narrative. And again, this is not saying that China is not a rival in certain spheres, like control over advance technologies, but we need to clearly understand our opponent if we are to properly plan and respond to their actions.

The IRA: So what happens next, in Hong Kong? With China’s currency? In the trade war with the Trump administration?

Ricardo: In simplest terms, China will do whatever is in the immediate best interest of maintaining internal stability for the majority of its population (and by default political power for its elites in the CCP). Or, in other, more familiar words to finance professionals, similar European Central Bank Chairman Mario Draghi, China will do: ”whatever it takes.” China leaders do not want to lose the Mandate of Heaven, nor do they want to see any return of chaos. As to those specific issues – Hong Kong, renminbi and trade – each probably deserves it’s own discussion.

The IRA: To be continued. Thanks Ricardo.