China To Washington: You'd Better Be 'Careful'

The Obama Administration’s plans to “refocus” attention on the Asia Pacific region has the Chinese military responding with a warning. The Ministry of Defense said that the United States needs to be “careful in its words and actions” as it shores up our ties to allied governments across Asia. But it’s China that better be careful.

Protests in China

For all of those who believe that Cold War major military platforms such as navy ships, fighter aircraft, bombers, and a nuclear arsenal are relics of the past, just look at where China is choosing to invest its military resources. Clearly, given their commitment to developing an advanced military, China is not going to be simply content with being a dynamic economic power. It wants to be a geopolitical player, too.

But while I am generally concerned about growing Chinese strength and confidence around the globe, we need to keep in mind that China has its internal problems, too. Indeed, they are not the economic superpower that is so often portrayed in the media. State capitalism, capitalist communism, whatever you want to call their system, is not sustainable. Something will have to give.

China is a fragile country internally. Chinese local governments are heavily in debt. How much? It’s impossible to know, because financial accounting is so bad, but it’s believed to be at least $1.7 trillion and could be substantially higher. At the same time, China has gone into debt by spending large sums of money on infrastructure projects. But one Chinese banking official says that only 1/3rd of those projects will generate enough cash flow to pay for interest on the debt. In other words, the debt problem is likely to get larger.

At the same time, Chinese real estate prices are expected to fall by us much as 25%. Sound familiar?

At the same time, China has serious internal problems. Not only is there widespread reported corruption, there has been continued domestic unrest. Unlike the Occupy Wall Street movement, which seems to be populated by a large contingent of professional revolutionaries and naive rich kids, unrest in China comes from workers and farmers fed up with corrupt communist officials lining their pockets. Chinese authorities have been able to keep a lid on things because the economy has been doing so well. But if growth slows, expect more vocal demonstrations (for a terrific summary of China’s challenges this year, check out this piece in The Diplomat).

Yes, the U.S. economy has been in rough shape. Debt is high, and we are reorienting our military strategy to focus more on Asia. But remember: we remain a free country, and China retains its authoritarian (in some instances even totalitarian) features. Look at history and you will discover that our side usually wins. You can’t tell people that they are free to choose their breakfast cereal but not their political leaders. The Chinese model is not sustainable in the long term.