A weakened China badly needs a truce with the West

Climate talks are back on again. The US decarbonisation chief John Kerry is to meet his counterpart (and friend) Xie Zhenhua before Cop28 in Dubai. This pair is the critical axis in world climate politics. Nothing else matters.

Both sides are seeking a way out of today’s destructive impasse. US Treasury Secretary Janet Yellen said it would be madness for the US to try to decouple from China, or to force countries in the Indo-Pacific to pick sides. “We have no interest in such a divided world and its disastrous effects,” she said.

Yet it is an unequal, one-sided courtship. The Chinese economy is in trouble – the US economy is not. America may be pushing its fiscal luck (so is China). It may be riding for a fall. But right now it is in rude good health.

US output of both oil and gas will hit fresh records this year, further entrenching America’s position as the world’s largest full-spectrum exporter of energy. Cheap power, the Chips Act, and the tax credits of the Inflation Reduction Act are together leading to massive revival of the American industrial base.

Unemployment is near half-century lows. Productivity is on fire, rising at an annual rate of 3.5 per cent and 4.7 per cent over the last two quarters, perhaps a sign that America’s ultra-flexible labour markets are harvesting the gains of AI.

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The US can handle the interest rates of 5.5 per cent that go with this economic strength. China cannot. The People’s Bank (PBOC) is struggling to manage imported monetary spillovers from the Federal Reserve, and is being forced to keep policy too tight in order to stabilise the yuan and prevent capital flight. This is causing stress in the Chinese money markets. Short-term lending rates hit 50 per cent in late October before the PBOC intervened.

Property firms with dollar debt are popping one after another. Country Garden and Evergrande have defaulted on offshore bonds. CreditSights says Chinese developers have defaulted on three-fifths of their entire dollar liabilities of $US175 billion.

The Communist Party elites believed their own rhetoric after the Lehman crisis in 2008. They mistakenly thought it was the death knell of American capitalism, and a vindication of Chinese state-control over credit and the banking system.

We can now see that it lured China into the middle-income trap. The episode tempted Beijing to cling to an obsolete development model at the very moment when China needed to open up, as other Asian tigers had done before.

Extreme zero-Covid was the last straw. It shut the window altogether on China’s chances of an economic sorpasso before its demographic crunch hits in earnest.

If the US was bending over backwards to defuse tensions with China, it would not have imposed its latest devastating curbs on exports of advanced chips. The semiconductor gap with the West has been narrowing. It is about to widen again.

China has no access to the “extreme” ultraviolet lithography (EUV) needed to miniaturise chips below seven nanometres, de rigueur for quantum computing, advanced weaponry, and the AI revolution.

Only one company in the world makes these machines – ASML in the Netherlands, with components from California – and it will be years before China can make its own. By then the contours of the world’s digital ecosystem will be set.

Yes, there is a global black market for Nvidia’s A100 AI chips at a stiff premium of $US20,000 each, but this cannot feed the technological needs of a superpower, and it is becoming harder to circumvent the curbs.

It has been evident since January that Chinese modernisers want to patch up relations with the West, before the balloon incident poisoned the mood again.

Economic plenipotentiary Liu He assured the world’s rich in Davos that the Maoist madness of recent years was over. The political purge of China’s tech barons had run its course. The leadership was eager to restore the money-making bonhomie of the golden years.

“We must let the market play the fundamental role in the allocation of resources. Some people say China will go for the planned economy. That’s by no means possible. China’s national reality dictates that opening up to the world is a must,” he said.

Most China veterans doubt that anything of substance has changed. “It is purely tactical. Xi Jinping has not changed his views on China’s global dominance in the 21st century,” said George Magnus from Oxford University’s China Centre.

“He wants self-reliance because foreign companies are impure. Everything must be made in China, for China. This is the Leninist mindset,” he said.

Xi Jinping’s signature plan has fizzled to nothing.

One can overstate signs of appeasement. Global Times still offers a daily diet of wolf warrior invective. The Central Committee last month issued a 12-point blueprint for the economic integration of Taiwan with the Fujian province, a move seen as a precursor to annexation by some in Taipei.

Nevertheless, the world is at an inflection point where long-standing assumptions can suddenly break down. I suspect that Vladimir Putin can feel the tectonic plates rumbling beneath his feet. His visit to Beijing in mid-October barely concealed mounting differences. There was no repeat of “friendship without limits” this time.

Kommersant reports that Putin got nowhere with his plan for the Power of Siberia 2 gas pipeline from the Yamal peninsula to China. Xi Jinping keeps procrastinating. Meanwhile, China’s energy group ENN has locked in a 20-year contract with Cheniere to import liquefied natural gas from the US.

Xi Jinping is not going to abandon Vladimir Putin, but he may downgrade his awkward confederate. Putin’s war in Ukraine has dragged China into a costly confrontation with Europe that it did not want, undercutting Xi’s efforts to split the West by playing off Europe against America.

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The Silk Road is discredited as a Trojan horse. Italy has withdrawn. So have the Baltic states. The German city of Duisburg is trying to forget that it ever became infatuated. “We’ve sobered up,” said the Duisburg port chief, Markus Bangen.

For China it has been the culminating failure of a $US1 trillion quest for global influence that has left a trail of bad debts and white elephants. Total Silk Road investments have collapsed to $US5 billion a year. Xi Jinping’s signature plan has fizzled to nothing.