China Center Program Manager Shane Leary joins Miles Yu to discuss the root causes of China’s faltering economy. They then talk about a new agreement between Japan and the United States to develop hypersonic missile intercept systems. Finally, Miles examines the state of espionage practices between the US and China, with attention to China’s spy networks abroad, and the CCP’s latest efforts to revitalize the informant system of the cultural revolution at home. Follow the China Center's work at https://www.hudson.org/china-center
China Center Program Manager Shane Leary joins Miles Yu to discuss the root causes of China’s faltering economy. They then talk about a new agreement between Japan and the United States to develop hypersonic missile intercept systems. Finally, Miles examines the state of espionage practices between the US and China, with attention to China’s spy networks abroad, and the CCP’s latest efforts to revitalize the informant system of the cultural revolution at home.
Follow the China Center's work at https://www.hudson.org/china-center and subscribe to our newsletter China Digest.
Miles Yu:
Welcome to China Insider, a podcast from Hudson Institute's China Center.
Shane Leary:
It's Tuesday, August 15th, and we have three topics for today. The first is the struggling Chinese economy, and what China would need to do to set itself back on the path of economic growth. Second is a new agreement between the United States and Japan to jointly develop new missile technology to counter our adversary's hypersonic capabilities. And third is the latest development in the spy war between the United States and China. Miles. How are you?
Miles Yu:
Very good, Shane.
Shane Leary:
Wonderful. For our first topic today, I'd like to discuss something we've talked about quite a bit already, which is the Chinese economy, and as we've noted, it's suffered immensely over the past year. Whereas some expected a post pandemic rebound, this certainly has not materialized, and with declining trade and foreign investment, a struggling housing market, which makes up 1/5 of the PRCs economy, and now deflation, which is increasing the value of the debt already burdening Chinese citizens, businesses and municipalities, analysts are seeing little reason for optimism. These problems themselves are compounded by a much more staggering and long-term issue that is the devastating demographic issues as a result of the one child policy. I'd just like to throw out some numbers for our listeners to put this in perspective. According to The Terry Group, which conducts actuarial studies, 14% of China's population is over 65 years of age today that's up from 5% in 1990 and predicted to rise as high as 30% by 2050. They estimate China could lose an average of 7 million working age adults each year by the next decade. China not only has an aging population, but a shrinking one. In 2022, the population shrank for the first time since 1961, and the Terry Group predicts that they are on pace to lose nearly half of their population by the beginning of the 22nd century miles. Can you shed some light on the PRCs situation? How bad is it really, and do you see any way for them to dig themselves out of this hole?
Miles Yu:
The demographic challenge that you just cited is just one tip of the iceberg. China's problem is not just demographic. China's problem is this command economy dictated by the Chinese Communist Party. It believes that if the party waves his finger and the economy will magically improve, that magic finger is no longer working and that's why the China economy is in a downward spiral and going down very fast, and the Chinese Communist party is running out of ideas. You mentioned the inflation. Inflation actually is not the problem. It's deflation, the other way, and prices are dropping. That’s normally not a very good sign because that means that the Chinese customers stop spending once the spending stops and then you have a huge surplus of products produced by factories, which basically the factories will have to bankruptcy many times. So that's basically the problem.
China's economy is not growing. It's basically retracting that also is manifested in China's dramatic decrease in its export. Right now in July, China's export has dropped by 14% more than 14%, and import is declining as well by also double digits. Their net result is the incredibly exploding unemployment rate, youth unemployment rate, which is the most alarming. This youth by definition is the age group between 16 and 24, this is the most productive labor force. Chinese youth unemployment rate ranges between 20% to 40%, and that's worse than most of the third world countries. Traditionally, the local economy, the sub nation governments can save itself from all kinds of financial, economic woes by heavily speculating on land because China's socialist country land is owned by the state, but the government, but now China's real estate industry has been collapsing for nearly a year now. So there is a terrible surplus of houses nobody wants to buy, and those who have speculated heavily on the real estate, they could not get rid of what happened in their hands. They're mostly under the water, so to speak.
So what China has done is resort to what communists can do very well. That is to take money from the rich without regard to any property protection at all. So right now, China, where the money is right now in China is hospitals, for example, health industry and the immigration consultancy. Those firms that get a lot of people invested in the United States, for example, and get an immigration visa and Chinese government is now going after those sectors, hospitals, they want to go back to 20 years to basically look at everybody's books and they just rest. The largest immigration consultancy boss in Shanghai that would have impact upon thousands and thousands of rich people who have immigrated to the west over the last decades or so. President Biden actually said the other day in Iowa during a fundraiser, he said, the Chinese economy is a ticking time bomb.
He was right, and he also said that bad guys tend to do bad things, so when economy is in trouble, on top of that, president Biden also issue a long-winded executive order strengthening our export control of chips and other high tech technology through China. Decoupling is happening very fast, and the foreign investment in China's flow has slowed down dramatically. Western tourists, most of them hold their travel plan to China, and I think the American tourists to China dropped something like 90%. In other words, the Chinese economy is in terrible, terrible shape, and it's all the doings of the Chinese Communist Party itself.
Shane Leary:
I mean, you've painted a picture here in which you have a disenchanted young population that doesn't want to work. The government has eroded the trust of not only businesses in China, but outside of China. You have this trend of foreign investment pulling out of imports and exports decreasing. What would it take for China to dig itself out of this situation and get back on track towards growth? Is there anything they themselves can do?
Miles Yu:
First of all, China must really, really make a huge effort to change China's non-market economy status. That is to rely market, not on the party bureau decisions because they're not really market driven, and the secondly is very important. That is to enact immediately constitutional protection of property rights. In China, you can make money, but the government can come in and seize all of your wealth without any problem because it's legally sanctioned for the Chinese government to take all your wealth away. Unless China does the two things, then I don't see any real hope for Chinese economy to actually go back to the health to be merged with the international free Market trading system. If you do the two things that I just suggested, that would lay the foundation for the communist parties demise because it would change the regime fundamentally
Shane Leary:
Turning to defense, it's been reported that this week the US and Japan will announce an agreement to jointly develop an interceptor missile to counter the hypersonic warheads produced by China, Russia, and North Korea. This is expected to be announced during Prime Minister Kishida's visit with President Biden this Friday where Biden will host President Yoon of South Korea and Prime Minister Kishida for a leader summit at Camp David to discuss increasing military cooperation and developing a crisis hotline. Miles. Could you speak a bit about the significance of this new cooperative effort on missile technology between the US and Japan?
Miles Yu:
The Japanese-American security cooperation is of profound geopolitical significance. That's because Japan has gone far ahead of the United States in terms of being alert on China's ambition, global ambition, starting with the regional ambition. Any military action China takes in East Asia is a fundamental challenge to Japanese national security. What China would do to Taiwan is exactly what China might do to Japan itself. Based that realization. Japan has changed completely in the last half a year. Its defense posture that would include Japan, get rid of its traditionally very conservative defensive posture and focusing on instead developing counterstrike and preemptive capabilities. That would include obviously the missile defense system, which is the essence of the current US-China joint action you just mentioned. It's a very important part of the Japan global strategy, and American is obviously very happy about that. It's not just a symbolic US Japan defense move. It has real teeth to it, particularly facing the missile threat from China and North Korea. The missile defense is of absolutely utmost importance for a country like Japan that's too close to the source of the threats because the time to respond to income missiles were very limited because of geographic proximity, so that's why it's going to jointly develop missile interceptors against hypersonic missiles coming from China and coming from North Korea. After this, you might see similar joint development programs between the United States and India, even between United States and Vietnam.
Shane Leary:
In the background of this agreement is this leader summit with South Korea, Japan and the United States. South Korea and Japan are two countries that have in the past had their differences. How significant is this summit as a step forward in deepening the ties between the two countries in particular in cooperating with the United States on security issues?
Miles Yu:
The cornerstone of peace and stability in Northeast Asia is a tripartite alliance system between United States, Japan and South Korea. This has been the case for several decades. However, China is able to play one against each other. Mostly they use history issues, use the historical spot between South Korea and China to play the South Korean card. They almost succeeded until the South Koreans wake up to its own security environment and try to amend the differences between Seoul and Tokyo. And Japan obviously has been very receptive to that. This alliance can also pave way to an entirely new nature of lion system in East Asia and beyond. Right now, US, Japan and South Korea, they have a bilateral mutual defense arrangement, but not multilateral. Eventually, I think the three countries, including Philippine will come together to form some NATO-like multilateral collective defense arrangement. That would be very ideal. That would be much, much more deterrent to Chinese aggression in Asia Pacific, and I don't think that day is going to be very far because the South Korean president, the Japanese Prime Minister, Australian Prime Minister have said repeatedly that what might happen to Taiwan is tantamount to what might happen to their own countries. So that's why there is a common threat. If there's a common threat, then there is a common defense.
Shane Leary:
For our next topic, I'd like to switch to what could be called a budding spy or espionage war between the United States and China. Just this past week, an employee of a Chinese defense firm was arrested by the CCP accused of supplying core information to the CIA. They claim he was explicitly trained and hired by the Central Intelligence Agency before returning to mainland China to report back to CIA personnel with sensitive military and technological information. Some commentators are calling our attention to the significance of PRC officials explicitly naming the CIA and calling out the us, whereas they would normally use vague language like foreign agents or certain countries. This is of course only the latest in a series of similar episodes In June, we had the controversy over the spy base in Cuba, which miles you were quick to point out had been operating for decades despite the official statements of the White House.
We had the infamous spy balloon, which traveled over the continental United States before being shot down in February of this year. And we've also seen China crack down on US corporations operating in mainland China, raiding the offices of several US corporations in April and detaining employees temporarily under accusations of espionage. Are we seeing an escalation of this sort of activity or has espionage between the two countries remained rather consistent? And second, could you just speak a bit about Chinese overseas intelligence capabilities and networks vis-a-vis the United States and how each stacks up against one another?
Miles Yu:
It is actually very funny because China hyped up this arrest of alleged, say a spy China has been conducting espionage all over the world. I mean, their spy network is massive and comprehensive all over the world. You talk about escalation. The only reason why this seems to be an escalation is because the West has struck back. Just about a week ago, the United States charged two US Navy sellers for selling sensitive classified information to Chinese military Chinese spy agency. This is basically China wants to counter the arrest is alleged corporate Chinese businessman selling information to the Americans. The information was very vague. There's a name, but there is only surname. We don't know exactly what he did. It's a no issue. China right now is becoming a national security state with the extreme paranoia. The paranoia is about the US led CIA operated color revolution to overthrow the Chinese communist regime.
And this paranoia is manifesting itself everywhere. Even during the April Xi Jinping and Putin joint statement in Moscow, their major concern is about the western countries conducting color revolution in their political orbit. That's why China enacted counter espionage law that took effect about a month ago. And there are basically, by definition, according to that law, every Westerner is by default a suspect in some kind of espionage by scheme. And they also force corporate entities, including foreign corporate entities like HHBC and Walmart in China to study Xi Jinping thoughts. Its brainwashing, right? This is required. What China is trying to do right now is try to recreate an informant culture like the great cultural revolution of 1960-70. In other words, they would encourage citizens to term their friends and relatives to their authorities for profits. Two weeks ago, the Chinese Ministry of State Security put out a announcement announcing the reward of 500,000 Yuan. That's about 70,000 US dollars for information leading to the arrest of any foreign spy that's created a lot of incentive.
This is basically a backsliding into the bad old days of Mao. So with the high-tech development, this could be much worse. I see this as the logical development logical corollary to the Chinese governance of the Communist Party. So there's nothing surprising to me. But again, we don't know exactly how the Chinese society is going to turn out if everybody's turn into some kind of informant. Just the other day, there was a son in his early twenties turn his father to the authorities for having made some anti-CCP remarks at home. So this is just very terrible.
Shane Leary:
It is terrible. Well, miles, I think that's all the time we have for this week. Thank you for taking the time to speak with me and I look forward to speaking with you again next week.
Miles Yu:
Great Shane, I look forward to seeing you next week.
Shane Leary:
Thanks for listening to this week's episode of China Insider. For Chinese Language listeners, be sure to check out our monthly Chinese language episodes. And for those who prefer written analysis, subscribe to our weekly newsletter. China Digest, the best place to stay up to date on miles analysis and the latest news on China. As always, you can stay up to date on the China Center's activities at www.hudson.org.