I have before me a one-century old issue of Foreign Affairs, a publication respectable even today. Published in April 1925, it has an article “Problems of Foreign Capital in China.” Going through it, one finds how a period of 100 years has not made a qualitative difference to Sino-Western relations. It talks of China as “a country of dense population, not only with a distinctive culture and a high degree of social organization, but already possessing a very considerable industrial, commercial, and financial development of its own.” As a result, “operated with even a minimum of efficiency, a railroad in China pays for itself almost from the beginning” as it passes through “a region already under intensive cultivation, and through towns which immemorially have possessed local industries” but using donkey, camel or wheelbarrow for transportation. The situation seems to be the same as in the 1990s when the world, even the traditional rival Japan, was shifting industries to China. There was no gestation period.

As narrated in the article, in 1925, China was peculiar among the less-developed economies of the world in attracting investment from various countries simultaneously. The Chinese government played off one foreign influence against another, using concessions distributed unevenly. As has happened in the 21st century, even in 1925, the conclusion was that these policies resulted in “a haphazard development, neither continuous nor consistent, often ignoring economic necessities in favor of considerations of immediate political expediency.” It resulted in “acute international rivalries” and “economic and political motives have interacted one upon the other and have become blended and confused.”

All this was written when Communist rule in China was still a quarter century in the future. Yet, the article said, “merging of individual interest with governmental interest” has resulted in a situation where matters, which elsewhere would be merely of commercial character susceptible to judicial determination, were “in China, matters of international political concern, for the settlement of which the ultimate recourse is to diplomatic action.” Therefore, the article concludes that in 1925, “the international status of the Chinese Government is determined and conditioned by its business contacts with individual foreign firms of syndicates, scarcely, if at all, less than by its formal treaties with other governments.” We remember that in 2021 when the US cracked down on Huawei and the daughter of its owner was arrested in Canada, China promptly arrested two Canadians and soon there was prisoner exchange. This blurring of distinction between statecraft and international trade, which first appeared in the world with the East India Company, has been now carried to great heights by Xi Jinping.

In recent times, there has been a deluge of political and military purges in China. Most of these involve accusations of corruption although the purges are selective and prompted by the fact that the accused had already become politically inconvenient. The large-scale corruption in the Chinese Communist Party is the result of a belief that since everybody is corrupt, one is safe as long as one is in the good books of the party leadership. This belief has led to unbelievable audacity with military generals filling missiles with water instead of rocket fuel. A century ago, the author of the article had said, “Without undue reflection upon the Chinese people, it may be recalled that their standards of public or corporate responsibilities as trustees have never been developed, as in the case of Western nations.” It adds, “Directors of corporations have not felt any inhibition upon their borrowing corporate funds for the purpose of speculation, in stocks or in exchange, for their personal profit. It has resulted that Chinese corporations have frequently ended in bankruptcy through some fluctuation in shares with which the corporation itself was in no wise concerned.”

In 1925, the author of the article lamented the then “prevailing political chaos in China, and the accompanying disintegration of administrative authority.” Yet, the writer was optimistic, “no one familiar with the fine qualities of the Chinese people can doubt that there will eventually be a reintegration of their national life. When that time comes, China will invariably pattern herself more and more closely after our Western World, and of course largely through the means provided by foreign capital.” This optimism had been more or less justified by the course of events since the time of Deng Xiaoping. China had developed almost all the characteristics of the capitalist world except adopting democracy. The economic growth of China was aided by Western capital as also by Western markets, the latter not having been foreseen earlier. Xi has reversed the trend to a large extent, transforming relations with the West from cooperation to confrontation. At home, he has tightened the noose around the private sector companies, domestic as well as foreign. Both these developments have inhibited fresh foreign investments and there has been some flight of foreign capital too. Real estate, which is the barometer for prosperity and consumer confidence in any society, has fallen victim to Xi’s whims who, by dictating ‘Three Red Lines’ for the real estate companies, choked their finances. This started the avalanche that has already destroyed the largest two companies of this sector, Evergrande and Country Garden. The falling demand of this sector has hit the supply chain too, with steel, cement, glass and wood industries becoming victims too.

In China, whether in the Imperial times, in the Nationalist times or in the Communist era, people have never mattered. When the emperors wanted to make the Great Wall, people died working on it and became part of it as it was considered a waste of effort to remove the bodies. Consequently, the Great Wall is also the longest cemetery on the planet. Even for the ‘laughing Buddha’ Deng Xiaoping, people counted for little as he ordered the massacre of students at Tiananmen Square. On June 9, 1989, just five days after the massacre, Deng gave a speech to the “Martial Law Units” at Beijing. He called the soldiers ‘sons and brothers of people’ and expressed sorrow for the death of soldiers during the events but did not express any regret for the tens of thousands of students who fell at the Tiananmen Square.

This indifference to people and exclusive focus on economic growth has created a China that produces for the rest of the world but its domestic consumption continues to be low in proportion to its GDP. Now, as the West is trying to restrict its import of manufactured goods from China, it is suffering from overcapacity. It is the only major economy where nominal growth of GDP is lower than real growth of GDP arrived at after adjusting price changes, indicating a deflationary situation. The relations with the West are highly strained and these are continuing only because of dependence on China. This is not a happy situation even for China; the import-dependent nations are boosting domestic production through monetary and fiscal support. The 1925 writer had said, “The way in which foreign capital meets its responsibilities in serving the needs of the new China will, more than any other factor, determine the solution of that greatest of all problems confronting mankind – the relationship that is to exist between the civilizations of the East and the West.” Sadly, after a century, not only that problem remains unsolved but another one has emerged; the relationship between China and the rest of Asia. It does show that China remains at the heart of geopolitical problems, with little contribution to show for helping with solutions. 

/ R N Prasher is a former IAS officer. The views expressed are his personal. /