CHAPTER 12 THE BIG CYCLE RISE OF CHINA AND THE RENMINBI
Emotions have been running so high between the US and China that many people have urged me not to publish this chapter. We are in a kind of war, they say; any complimentary things you write about China will alienate US readers, while criticism of China will infuriate the Chinese—and the media will make things worse by distorting everything you say. That's probably true, but I can't not speak openly because the US-China relationship is too important to be left unmentioned by anyone who knows both countries as well as I do. To not speak honestly would cost me my self-respect.
I'm not afraid of criticism; I welcome it. What I am passing along here is just the latest iteration of my learning process, which is to develop my perspectives through direct experiences and research, to write up what I learn, to stress test it by showing it to smart people, to explore our differences if and when we have them, to evolve my thinking some more, and do that over and over again until I die. While this study reflects nearly 40 years of doing just that with China, it is still incomplete; it is right and wrong in ways that have yet to be discovered, and it is provided to you to use or criticize in the spirit of finding out what's true.
This chapter is focused on China and Chinese history; the following chapter is on US-China relations. What I hope to provide in this chapter is a better understanding of where the Chinese are coming from—of how they see us and themselves as a result of having lived through their history. While I'm not a scholar of Chinese culture and the Chinese way of operating, I believe that my numerous direct encounters with China, my historical and economic research, and my US and global perspective give me a unique sense of its past and present. After you read this, you can decide for yourself whether or not that's true.
China's culture, by which I mean its people's innate expectations about how families and communities should behave with each other and how leaders should lead and followers should follow, evolved over thousands of years through the rises and falls of its many ruling dynasties and the development of Confucian and Neo-Confucian philosophy as well as other beliefs. I have seen these typical Chinese values and ways of operating manifested over and over again; for example, in the economic and leadership approaches of two men: Lee Kuan Yew, the former long-time prime minister of Singapore, and Deng Xiaoping, who initiated China's reform and opening up. Both combined Confucian values with capitalist practices, in Deng's case creating a "socialist market economy with Chinese characteristics."
Over the last couple of years, as part of my study of the rises and declines of empires and their currencies, I have also undertaken a study of Chinese history to help me understand how the Chinese think—especially their leaders, who are greatly influenced by history. I began my research with the year 600, just before the Tang Dynasty.1 While I can be pretty certain about my impressions of the people and things that I have had direct contact with, I of course can't be as certain about those I haven't. My thoughts about historical figures such as Mao Zedong are based on facts gathered, experts' thinking gathered from conversations and books, and conjecture. What I can say is that between my own experience, the efforts of my research team, and my extensive triangulation with some of the most knowledgeable China scholars and practitioners on the planet, I have a high degree of confidence in my conclusions.
Since my first trip to China in 1984, I have come to know many Chinese, from the lowest to the highest in rank, in an up-close, personal way, and I have experienced their recent history as directly as I have experienced America's. As a result, I believe that I understand both the American and Chinese perspectives pretty well. I urge those of you who haven't spent considerable time in China to look past the caricatured pictures that are often painted by biased parties and rid yourself of any stereotypes you might have that are based on what you thought you knew about the old "communist China"—because they're wrong. Triangulate whatever you are hearing or reading with people who have spent a lot of time in China working with the Chinese people. As an aside, I think the widespread media distortions and the blind and near-violent loyalties that stand in the way of the thoughtful exploration of our different perspectives are a frightening sign of our times.
To be clear, I'm not ideological. I don't choose a side on an issue based on whether it aligns with American, Chinese, or my own personal beliefs. I'm practical; I approach things like a doctor who relies on logic and cause/effect relationships and believes in what works well through time. The only thing I can do is beg for your patience and open-mindedness as I share what I've learned with you.
I laid out the factors that I believe are most important to a country's health when I discussed the 18 determinants at the beginning of this book. Of those, I highlighted eight measures of power: education, competitiveness, innovation/technology, trade, economic output, military, financial center status, and reserve currency status. When I judge China's strengths and weaknesses, it is through the lens of those factors. I also try to understand China's circumstances as the Chinese themselves do, through their eyes.
To refresh your memory, this chart shows the relative standing of the world's leading countries as measured in indices that measure eight different types of power. In examining the rises and declines of the great empires since 1500, I looked at each of these measures. I will now do the same for China, briefly conveying the long arc of its history while diving into its highlights in a more granular way.
Breaking this rise down further, the following chart shows the eight measures of power for China between 1800 and the present.
Unlike the cycles for the Dutch, British, and American empires, which began with their rises and were followed by their protracted declines, China's cycle over the past 200 years was a long decline followed by a rapid rise. Though the order is reversed, the same forces drove the cycle. Seven of the eight powers hit their lowest points in the 1940–50 period. Since then, most of them—notably, economic competitiveness, education, and military power—improved gradually until around 1980, when China's economic competitiveness and trade took off. That was right after Deng Xiaoping's open-door and reform policies began. That is no coincidence. From my first visit to China in 1984 until about 2008, debt growth was in line with economic growth, which was very strong. In other words, extremely rapid improvements were made without loading the economy up with debt. Then the 2008 financial crisis came along and China, like the rest of the world, used a lot of debt to stimulate its economy, so debts rose relative to incomes. When Xi Jinping came to power in 2012, he improved China's debt and economic management dramatically, continued growth in innovation and technologies, strengthened education and the military, and encountered greater conflict with the US. China is now roughly tied with the US in being the leading power in trade, economic output, and innovation and technology, and it is a strong and quickly rising military and educational power. It is an emerging power in the financial sector but is lagging as a reserve currency and financial center. We will explore all of this in more detail later in the chapter, but in order to understand China's present we first need to wade into its tremendous history.
CHINA'S GIANT HISTORY IN A TINY NUTSHELL
Anyone who wants to have a fundamental understanding of China needs to know the basics of its history, the many patterns that repeat within it, and the timeless and universal principles that its leaders have gained from studying those patterns. Getting even a basic understanding of Chinese history is a considerable undertaking. Spanning some 4,000 years, it is so vast and complicated, and has inspired so many different and sometimes contradictory interpretations, that I am confident that there is no single source of truth—and I am especially confident that I'm not it. Still, there is a lot that knowledgeable people agree on, and many scholars and practitioners, both Chinese and non-Chinese, have shared valuable insights with me. Trying to piece together all that I have learned has not only been a valuable experience for me but also a fascinating one. While I can't guarantee that my perspectives are the best, I can guarantee that they have been well-triangulated with some of the most informed people in the world.
China's civilization began around 2000 BCE with the Xia Dynasty, which lasted about 400 years and is credited with bringing the Bronze Age to Asia. Confucius, who developed the philosophy that most influences how the Chinese behave with each other to this day, lived from 551 to 479 BCE. The Qin Dynasty united most of the geographic area that we now call China around 221 BCE and was followed by the 400-year Han Dynasty, which pioneered governance systems that are still in use. The Tang Dynasty came to the fore in 618 CE.
This chart applies to China the same overall power gauge that I showed you in the chart of great empires, covering the more than 1,400 years between 600 and today. With the notable exception of the period from around 1840 to 1950, when it experienced a steep decline, China has historically stood among the most powerful empires in the world. As it emerged from civil war, it began to rise again, at first slowly and then very rapidly. Today it is second only to the US and is poised to surpass it.
Most of the dynasties that ruled China over the course of this time span were as cultured as they were powerful. (I only name the most prominent in the chart; there were many others.) Each of these dynasties has its own fascinating story, but to do those stories justice would take far more space than can fit in this chapter.
The Tang Dynasty (618–907) is considered by many Chinese to be a high point of Imperial China. The Tang came to power after a prolonged period of disunion and civil war, which had culminated in China being reunified by the short-lived Sui Dynasty, which immediately preceded the Tang. The dynasty was established by a father-son pair of strong leaders—with the son, the Tang's second Emperor Taizong, being especially notable. They not only militarily unified China, but also established a stable government system and policies that were highly effective, producing quality education, excellent development of technologies, international trade, and diverse ideas. Taizong was a great revolutionary leader who was able to consolidate power, build a great dynasty, and transition well so that the dynasty remained strong without him. A period of great prosperity lasted about 150 years, with a particularly strong military that helped the Tang control valuable trade routes in Central Asia. By the late 700s, however, the Tang slipped into decline for the classic reasons: the quality of governance fell, fragmentation over economic and values gaps led to a weakened and corrupt central government (which, combined with internal conflict, led to a series of rebellions), its finances deteriorated, and natural disasters increased in impact.
Then came the Northern and Southern Song dynasties (960–1279), during which China was the most innovative and dynamic economy in the world. The deterioration of the Tang Dynasty led to its own period of civil war and disunion in the 900s. Out of this conflict the Song Dynasty came to power under the rule of Emperor Taizu in 960.