Gordon Chang: On the Hong Kong Protests, Chinese Economy, Trade War, & Trump’s New Tariffs

August 6, 2019 Updated: August 30, 2019

In the first live stream episode of American Thought Leaders đŸ‡ș🇾 on Aug. 5, we sat down with Gordon Chang, author of “The Coming Collapse of China.” Chang lived and worked in Hong Kong and China for over 20 years, including as a Partner in the international law firm Baker & McKenzie in Hong Kong.

We discuss the escalating Hong Kong protests, the US-China trade war, President Trump’s new tariff threat, weakening of the renminbi, and how the Chinese Communist Party is on the verge of disintegration.

Jan Jekielek: Gordon, wonderful to have you on American Thought Leaders.

Gordon Chang: Thank you so much, Jan.

Mr. Jekielek: So, Gordon, a lot is happening in China on this very day that we have you here. We’ve got the Renminbi going down. We’ve got China’s big banks trading at record lows. We’ve got people in the streets, the beginnings of a general strike. We’ve got the tariffs increasing by 10 percent. All of this is happening at once. Gordon, can you help us make sense of this?

Mr. Chang: This is a time, I think, when Xi Jinping, the Chinese ruler, he just [has] no other good options. And so what he’s doing right now is lashing out. So, for instance, although he no longer has the Hong Kong portfolio on the Politburo Standing Committee. He once did. And what we are seeing today is the logical conclusion of his hard-line policies. This is important because Xi has no one else to blame for this. He has unprecedented power, which means he’s also got unprecedented accountability. And so he’s got to [at] this time come up with a good solution, or his enemies are going to come out of the woodwork and harm him.

And we’re seeing this also with the trade war. People are starting in Beijing to say “Who lost America?” because for decades Chinese leaders pushed Americans around, and Xi Jinping right now is meeting a President Trump who is not cooperating. So we’ve got a lot of things occurring right now, and I think China’s in one of these very fragile states–it can really lash out at us.

Mr. Jekielek: So the beginnings of this general strike, can you give us a bit of a sense of how we got here?

Mr. Chang: Carrie Lam, who’s the Hong Kong chief executive, has pushed forward an extradition bill, and this bill would expand the number of jurisdictions to which Hong Kong can extradite people to. And one of those additional jurisdictions is the People’s Republic [of China]. This was extremely unpopular. Of course it was unpopular. It would be unpopular with the pro-democracy forces, but it was also unpopular with the business community in Hong Kong. And the reason is that they were worried that their business partners in Beijing, or wherever, would then start to use this extradition bill to pull them into the mainland where, of course, there’s no rule of law, there’s no fairness, there is no justice. Also, it allowed–and people didn’t understand this–it allowed the freezing of assets prior to extradition. This is really horrible stuff.

So what it did was it united society. We saw, for instance–and I know this is going a little bit long but just to get a sense of where we are–in April, pro-democracy activists were thinking of not even calling for a demonstration, but they did and they got 130,000 people on the streets. That was completely unprecedented. So what they decided to do was in the middle of June, on June 9, they were going to have another one, which was like a million protesters, which just completely stunned people. And then the following Sunday, the 16th, you had 2 million people in the streets. Beijing was not going to relent. They wanted this extradition bill. It was just at a point where it pushed Hong Kong society too far. It was that tipping point where people said, I’ve got to defend my homes. And that’s why we’re seeing very little criticism of violent demonstrations by most Hong Kong people because they’re not focusing on the violence, Jan. What they’re focusing in on, of course, is Carrie Lam and Beijing and police tactics.

Mr. Jekielek: So there’s rumors that the PLA is actually going to come into Hong Kong. And I wonder if you could tell me, do you think there’s truth to this, one, and two, what are the ramifications?

Mr. Chang: I think that this is certainly going to be the last resort for Xi Jinping because Hong Kong is not armored car country. And the PLA (People’s Liberation Army) or the People’s Armed Police would be in a quagmire because you’ve got kids who are willing to die. This would be an awful situation, horrific. But I think Xi Jinping might do it. And the reason he might do it is if he feels that the Hong Kong protests are creating a contagion of inspiring people on the mainland to protest–people in the mainland don’t sympathize with Hong Kong people at all. But that’s not the point. The point is that Hong Kong people by pushing Carrie Lam around are giving inspiration to people in China that they could do the same thing. And especially at a time when the Chinese economy is in severe trouble, I think that [inaudible] conceive Xi Jinping thinking that this is an existential issue for the Communist Party. And so although he doesn’t want to do it, he very well may because he feels that the existence of the Communist Party is at stake.

Mr. Jekielek: So there were even people I remember at the airports basically welcoming the mainlanders in and saying, “Hey, we’re protesting here,” almost in a deliberate effort to let the mainlanders know what’s going on.

Mr. Chang: They were at the arrivals hall, and that was an important point. Also, you see the demonstrators at one of the rail terminuses, and they use AirDrop, the iPhone app to send protest posters to arriving Hong Kong tourists. So these kids are really quite clever. They’re smart, and they know how to get to Xi Jinping. And that’s why right now we have a situation which is well beyond the control of Carrie Lam, certainly beyond the control of Beijing.

Mr. Jekielek: So you mentioned the economy being in a precarious state. I know this is a bit of a story as to how we got here. There’s decades of realities that maybe a lot of people didn’t know about. And then there’s what’s happening now–the Trump administration’s approach to China. Can you tell us a little bit about why the economy is in such a precarious state? Maybe a little bit of background and then into the current situation?

Mr. Chang: Beijing has reported a 6.3 percent growth for the first half of this year. But I don’t believe that. In December, you had a professor at Renmin University in Beijing. He said, look in 2018 the Chinese economy was going to grow at most 1.67 percent, might even contract. Beijing eventually reported 6.6 [percent] for the year. But when you start looking at the underlying numbers for June, you can point to it, you can make the case that the economy is already getting smaller. This was going to happen regardless of the quote unquote trade war because China’s just … Xi Jinping’s belief in a state dominated economy. This was going to slow down the economy anyway. This is the antithesis of reform. This is going back to something that Mao might even find familiar with. Xi Jinping was pushing out the foreign companies. He was going after the domestic private entrepreneurs and piling on debt like crazy. So China right now, even if you believe their inflated GDP claims, it’s creating five-and-a-half times as much debt as nominal GDP. So then you have president Trump come along and say, look, we’re not putting up with Chinese theft of intellectual property anymore. You have the Section 301 tariffs, Section 301 of the Trade Act of 1974 as a remedy for IP theft. So a lot of bad things are happening for the Chinese economy at the same time, and that’s why I think you’ve got a Xi Jinping who is lashing out because he doesn’t see any alternative. He’s really trapped.

Mr. Jekielek: So the big four, I mean, giant banks–I think they control like $14 trillion in assets or something among them–are trading at record lows right now. And that seems to be corresponding to this 10 percent extra tariffs and also this general strike and everything. What is having the impact on this? Why is this happening right now?

Mr. Chang: Got too much debt. China has been floating this economy with lots of money. So, for instance, their M2, the broad gauge of money supplies about 203 percent of Chinese GDP as reported, and that’s inflated. For the sake of comparison, U.S. M2, 69 percent. What China has done is really just pushed out enormous amounts of money since 2008 to avoid the downturn. And so right now it’s just … it had to happen some time, and now is the time. So you have these big banks, they’ve got too much debt. If you didn’t have the capital controls, you would see them trading at even lower multiples or no multiples at all. This system would just fall apart, I think.

Mr. Jekielek: So this is, basically, the stimulus that America did in 2008 but 10x or 20x or something. Is that what you’re saying?

Mr. Chang: It’s incredible what they did. So just to give you an example, in 2008, they had an economy which … actually was less than one-third of the size of ours as China reported it, which is probably an exaggeration. What they did in the next five years was they created an amount of credit that was about equal to the amount of credit in the U.S. banking system. So these are crazy numbers. I mean there are all sorts of statistics about cement production, all the rest of it. China, Korea, basically produced, what, 6.6 billion tons of cement or something like that from 2011 to 2014, and that compares with like 4.5 billion tons, which the U.S. consumed in the entire 20th century.

So these are just crazy numbers that Beijing has been doing. And you can keep the economy going for a little while, and especially when you’ve got a closed system where you control the borrowers, the lenders, the courts, banks, just everything. But at some point it catches up. I mean, economics is economics. You can defer problems, but you can’t avoid them all together. And what we’re seeing right now are these problems are getting to the point where Beijing has no answers for them. Whatever they do, they pile on more debt. It just ain’t working. And so you then have Trump come along and with the tariffs, as we talked about, it has really created this crisis of confidence in China right now.

Mr. Jekielek: So people are going to accuse the president of precipitating this crisis probably.

Mr. Chang: If you’re talking about the president of China, yeah, that’s probably right. I mean, China has been waging a low-level guerrilla campaign against the U.S. economy since the early 1990s or whatever.

Mr. Jekielek: Break that down for me. What are the components of that?

Mr. Chang: First of all, violating their trade obligations to us. First of all, in their bilateral agreements with the U.S., but then in the World Trade Organization, the Session Agreement, plus also just the theft of U.S. intellectual property. China steals hundreds of billions of dollars of U.S. IP a year. Some people say it’s only $150 billion. Some people say $600 billion. I mean, if you go through the U.S. Trade Representatives Report of March 2018 plus the updates for this year, or the commission on the theft of U.S. intellectual property, the Blair Huntsman Commission 2013 plus the number of updates, those all show that China is somewhere maybe, pick your number, $300 billion to $400 billion. This is a grievous wound because if we can’t commercialize innovation, we don’t have an economy of the future, and that’s what China’s going after, through their industrial policies, all the rest of it. So we didn’t have a choice. The only issue that historians are going to ask when they look back at our period is, why did it take so long for an American president to start defending the U.S. economy? So this is on us. The Chinese [communist regime] are villains, they’re criminals, all the rest of it. But, really, this is on us to protect our own economy.

Mr. Jekielek: Gordon, why did it take so long?

Mr. Chang: Well, we had this … I’m glad you asked. We had this notion of trying to integrate China into the international system. This goes back to Nixon’s famous 1967 Foreign Affairs article about you can’t leave the Chinese outside the global system to nurture their fantasies and hates. So the idea was you bring them in, they become enmeshed in this system of treaties, rules, conventions, norms. They become part of it. They have a stake in the system.

This was nice theory, it sounded great to the ear, but it didn’t take into account that this was a communist system. But the point is people then, the last couple of years have started to realize the Chinese are malign actors and something had to be done. It’s the tipping point. I think it should have occurred a lot earlier. We should have understood the essential nature of the Chinese system. But we’re Americans. We are very good at ignoring what people say about us, especially our adversaries, and so we didn’t react to some obvious threats. In the middle of May, Jan, you had People’s Daily run a piece from Global Times, therefore, by giving it the imprimatur saying, look, that China declared a people’s war against the United States. So we’re the enemy. In May, there was all sorts of these hostile propaganda blasts. We’re just totally oblivious to this. So this is our fault.

Mr. Jekielek: So if you believe Michael Pillsbury, “The Hundred-Year Marathon,” right, he was very much on the other side on the engagement, on exactly the side that you’ve just been describing. This war has been happening for decades.

Mr. Chang: It depends how far you want to go back. Clearly, Mao viewed the U.S. as an enemy, especially when he declared the People’s Republic in 1949, and, by the way, we’re coming up on the 70th anniversary of that this year. He sort of tempered that during the Cold War because he then saw Khrushchev as his immediate foe, but this was the nature of China’s system.

And now you have Xi Jinping dropping hints that China’s the world’s only sovereign state. This whole notion of Tianxia that goes back to the Imperial Period where the Chinese emperor ruled all under heaven, and now you have Xi Jinping talking like this. We have not been paying attention to that either. So in the Chinese conception of things we Americans are just subjects to the grand celestial Chinese court. We’ve got to wise up and understand what the Chinese, in fact, are saying about us.

Mr. Jekielek: What are the implications of this devaluation of the currency? I mean, it’s been quite startling, I think, to everyone. The Dow is down I think 500 or even more points now.

Mr. Chang: When we started this interview it was probably down about 850 or something. Who knows what it is right now. It’s gyrated a lot in the last couple of hours. There’s a whole bunch of implications. First of all, this is really bad policy on the part of the Chinese. Got to remember that in 2015, 2016 they had maybe $2.1 trillion [to] $2.2 trillion of net capital outflow. They stabilized their currency and so they were able to staunch that which is a mortal wound if it were left to bleed.

So what does Xi Jinping done? Well, he’s now started to depreciate the currency. That’s going to lead to a loss of confidence. That’s going to lead to currency outflow. First of all, this is really the wrong policy. Conservative economists say, well no country has ever devalued its way to prosperity. But the point is this is something that could lead to a fatal outflow of cash for the Chinese. This is not some speculation. We just saw this in the middle of this decade. So that I think is the one thing.

Second of all, for us it means, yeah, now the Chinese have gone back to currency manipulation. They weren’t doing that for about a half decade because they were trying to defend their currency. So they were selling dollars. In other words, keeping their currency at an artificially high level. But now this has caught everyone’s attention, including the president of the United States with all his tweets today about currency manipulation. This poisons the political system. There is no trade deal. Probably no reprieves for Huawei technologies, the Chinese telecom equipment manufacturer. Trump had promised to give them reprieves from the Commerce Department’s Entity List, which, basically, is a death sentence or could very be close to a death sentence. It means no American company can license or sell to Huawei without a license, a waiver from the Commerce Department on the high-tech area. All these things are probably now off the table. China really needed that.

And to give you a sense of where things were: At the Osaka G20, end of June, Trump and Xi Jinping sit down, they have an interim deal. Chinese agree to buy U.S. agricultural products. We agreed to give them waivers for Huawei. This is a deal with all the benefits to China. None of them for us because the Chinese were going to buy ag[ricultural] products anyway, so we didn’t really benefit from this because if they didn’t buy from us, we would’ve sold to somebody else. The Chinese cannot even honor a deal that is entirely in their benefit which shows, I think, the dislocations in the Chinese political system. There are troubles there. We don’t know exactly what they are, but countries don’t make stupid decisions like this unless there’s something really wrong at the heart of their political system. So right now we’ve got to be very concerned that the Chinese can lash out, they can do all sorts of things. We don’t appreciate the risk.

Mr. Jekielek: So I keep thinking, it’s almost like they got entitled to basically taking advantage of the U.S. over so many decades.

Mr. Chang: Well, they pushed around American presidents for four decades, going back to 1972. We have up to now three instances where American presidents stepped in and saved Chinese communism. 1972 Nixon does that at the middle of the Cultural Revolution. And then you have, for instance, George H.W. Bush selling Deng Xiaoping after the Tiananmen Massacre. Don’t worry about our sanctions. We don’t really mean it. We have your back. That was horrible. And I believe that history will condemn George H.W. Bush for that. And then you have Clinton, 1999, the agreement between China and the U.S., which essentially contained the terms for China’s entry into the WTO. That was a really bad time for China. The economy was probably not growing or if it was growing, it was really low. You had all sorts of geopolitical problems for China. Clinton staved and rescued them. I was always very concerned that we were going to see rescue number four when Trump has a trade agreement with the Chinese. Now, I’m not so concerned because a trade agreement with China is really politically unpalatable. So I think at least for the moment, for the next several months, we can rest easy that we’re not going to do the fourth rescue.

Mr. Jekielek: So what is the impact on the U.S. economy of all this right now? We’re seeing the immediate impact, but what is the impact in the longer term?

Mr. Chang: For a short time, I think consumer products prices will go up a little bit. Because remember Trump’s initial tariffs on the first $250 billion or so of Chinese goods, those were on things where the Chinese were basically eating most of the costs. They were eating about 80 percent of the costs. This last trench of $300 billion, these are consumer goods. But the good thing about this, Jan, is that with this devaluation, that means China is basically eating the cost of these tariffs because the prices are going to go down in dollar terms. So that’s really good for us. Also, I think retailers … the big box retailers who are making these enormous margins, they’ll probably eat some of the costs. But the best news about this is that factories are leaving Chinese soil, which means that even at whatever costs U.S. consumers will bear in the short term, they’re not going to be burying them six to nine months out because those factories producing all of this stuff are going to be in Vietnam or Bangladesh or wherever.

So that’s going to be really good news because we’re going to reduce our vulnerability to China. And remember with all this commerce, we are feeding the Chinese war machine. You have these PLA generals openly boasting about killing Americans. So why are we trading with these guys? And by the way, it’s gone beyond just boasting because last year they temporarily caused those eye injuries to those two pilots of the C-130 over Djibouti. Also, you had the sonic attacks at the Guangzhou consulate causing brain injuries to our diplomats. We shouldn’t be trading with a country that is harming our people.

Mr. Jekielek: Well, never mind the human rights situation, right? With Xinjiang and with Falun Gong, with the Christians, with many groups, it’s reflective of the realities inside China or the attitude at least, right?

Mr. Chang: Yeah. Well, you have this broad-based attack on religion. I mean, it’s not just the Muslims in what the Chinese call Xinjiang and what the Muslims call Eastern Turkestan, but you have that in Tibet. Those are the same policies that are used against the Uyghurs, [which] were perfected in Tibet. And you have this unprecedented attack on Christians taking down houses of worship. Of course, the Falun Gong that goes back to 1999. But then–this is really stunning–Xi Jinping is going after non-Tibetan Buddhists who’ve always had free passes because it was considered to be like a quote unquote Chinese or local religion. So now they’re going after them. So this is a broad-based attack on faith, and we’ve got to understand that is against all of us, and all of us have a stake in making sure that Xi Jinping can’t prosecute this. So whether you’re talking about Muslims, Christians, Falun Gong practitioners, Buddhists, you name it, there is a war on faith.

Mr. Jekielek: So I’m going to read a couple of tweets that you did today, which I thought were quite provocative–

Mr. Chang: Just telling the truth, Jan.

Mr. Jekielek: I would like it if you could kind of explain a little bit more. The first one is, today, Donald Trump became a wartime president. Xi Jinping through various actions is now viciously attacking the United States. You’ve talked about some of these things already. Is there anything else that would make you … that feels like a very strong statement. And why today?

Mr. Chang: Today is because it’s become evident what they’re doing to the economy. They have, for instance, the currency manipulation we talked about, but also Xi Jinping apparently ordered all Chinese state enterprises not to buy U.S. agricultural products which is an attack on the U.S. economy. So now what we knew about has now come into the open when you take into account that they’ve been attacking our service personnel as we just discussed. They don’t believe that we’re a sovereign nation. The attack against the U.S. is across the board. And so I believe that Trump is a wartime president. This is a struggle that will define us.

I believe that when it’s over, there’s only going to be one standing. It’s either going to be the People’s Republic of China or the United States of America, but unfortunately, we can’t coexist. And we’re not driving this, Jan. Trump’s not driving this. It’s Xi Jinping who’s pushing everybody in a direction they don’t want to go. And we have to recognize the comprehensive nature of this challenge, and we’ve got to defend ourselves. That’s why Trump is a wartime president.

Mr. Jekielek: And you also said China–as my friend the esteemed professor Arthur Waldron says–is now disintegrating. Is that China? Is that the Chinese Communist Party? What’s disintegrating?

Mr. Chang: It’s the political system and the economy. The economy we know … it’s heading south and it’s going fast. We can see that in the currency. We can see in the desperation of what Xi Jinping is doing. But the most important thing is what we were talking about before, and that is there’s some very simple things that Xi Jinping should be doing. Clearly, in China’s interests he can’t do them, and that shows that there is disunity and disorganization and indeed disintegration of the political system. Xi Jinping, remember, because he has unprecedented or almost unprecedented power, therefore has almost unprecedented accountability. In the collective system, something went right. It was great. Everybody got credit, something went wrong, everyone sort of got the blame, which means nobody got the blame. But right now you’ve got one figure, which means that he can’t hide.

I mean, he can crush his opponents, but he can’t argue about them. And I think what’s happening is we’re seeing his opponents come out and saying, you’re wrong on Hong Kong. You’re wrong on the trade war. You lost America, etc. So I think that essentially what you’re seeing is a political system that can’t do the right things. As I mentioned, this simple thing, buying U.S. ag[ricultural] products should have been a no brainer for Xi Jinping. He was getting all the benefits. He’s got reprieve for Huawei. This is the future of the 21st century is who controls 5G, who controls AI. You give a reprieve to Huawei. They’re winning already. So this makes no sense. I mean, just no sense at all. Because they had to buy those ag[ricultural] products anyway, so they might as well [have] bought them from us, but he didn’t do it. That’s disintegration when you can’t do the right things. This is folly—Barbara Tuchman—when governments go out and do things that undercut their own interests. That’s why I think that Arthur’s been talking about this. And I think he’s absolutely right. We’re seeing a political system that can’t function properly.

Mr. Jekielek: So what do you think is the right approach for the current administration and the U.S. government right now? In light of everything that we’re seeing.

Mr. Chang: To understand that there is only going to be the US of A or the PRC, not both. We’ve got to defend ourselves and we don’t want to do this. We don’t want to talk about it, but this is really the right approach that we have to oppose China across the board. We’ve got to stand for freedom and democracy. We’ve got to stand for the international system that China is attacking, this Westphalian system that Xi Jinping has been trying to undermine. This is across the board. We have to oppose them because this is where we defend our society.

Mr. Jekielek: OK, well let’s flip it around now. What would be the best way for Xi Jinping and indeed China to basically step out of this into the future in your view?

Mr. Chang: Very simple. Everyone’s been telling the Chinese this. End up with a free-market economy, elect your leaders. Not that difficult to understand. But that’s not the way that they see it. It’s unfortunate, and we should stop trying to persuade them. It’s unfortunate, but with Xi Jinping, you just have to push them over the edge of the cliff.

Mr. Jekielek: What are the next few steps that that could be done to precipitate that, to use a pun.

Mr. Chang: What we’re going to have to do is, first of all, on Huawei, is give them no reprieves, no technology transfers from the U.S. to China. And we should look to see if ZTE, which is that other Chinese telecom equipment manufacturer, has been violating the consent decree that we came to last year. I’m sure that it has. Marco Rubio, the Republican senator from Florida and Chris Van Hollen, his colleague, Democrat from Maryland, believed that ZTE has been doing things in violation of its consent decree. We should put that company in the ground as well.

It’s going to be hard for us. We’re going to have to suffer for it. But, unfortunately, we’re going to have to do this. It’s not like we want to because we just want to get along. I mean, this is the end of history. Everyone gets along. This is life-is-beautiful type of thing. This is what we Americans have bought into. But we have to go after the technology because that’s the most critical thing. This is where the future is, AI, fifth-generation of wireless communications, 5G… Whoever dominates these is going to dominate the 21st century. And we cannot allow China through predatory policies to subsidize Huawei and do all sorts of things, including stealing our IP, which China’s been using Huawei to do this. You’ve got to remember a very simple thing. 2017 National Intelligence Law of China says, every Chinese person and entity has to spy if requested by a relevant authority. That’s what these guys have been doing. We have to understand that this is a broad-based attack against the United States of America, our friends, partners, and more than that, the international system as a whole.

Mr. Jekielek: And, Gordon, we have about 30 seconds left. Any final words for the people of Hong Kong?

Mr. Chang: You’ve got to fight. Unfortunately, China will take away your freedoms. We know what they do with people in the mainland. You’ve got to fight.

Mr. Jekielek: Gordon Chang. Really excellent to have you on American Thought Leaders.

Mr. Chang: Thanks so much, Jan.

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