You might feel a little prick
The increasing impact of China in the last generation is just staggering and seemingly accelerating every day. If you’re in the market for oil, minerals, arable land, equities or debt, you’re bidding against Chinese government-sponsored entities with a $1 trillion warchest. And the list of markets where China is a key player grows every day. Whether you’re filling up your gas tank or trading credit default swaps, China’s decisions impact your pocket book.
On Monday, George Friedman and his team at Stratfor are releasing the second in their series of Geopolitical Monographs, called The Geopolitics of China. I’ve received an advance copy of the report below.
Contemporary China is an island. Although it is not surrounded by water (which borders only its eastern flank), China is bordered by terrain that is difficult to traverse in virtually any direction. There are some areas that can be traversed, but to understand China we must begin by visualizing the mountains, jungles and wastelands that enclose it. This outer shell both contains and protects China.
Internally, China must be divided into two parts: The Chinese heartland and the non-Chinese buffer regions surrounding it. There is a line in China called the 15-inch isohyet. On the east side of this line more than 15 inches of rain fall each year. On the west side annual rainfall is less than that. The bulk of the Chinese population lives east and south of this line. This is Han China, the Chinese heartland. It is where the vast majority of Chinese live and the home of the ethnic Han, what the world regards as the Chinese. It is important to understand that over a billion people live in an area about half the size of the United States. (…)
The problem of China, rooted in geopolitics, is economic and it presents itself in two ways. The first is simple. China has an export-oriented economy. It is in a position of dependency. No matter how large its currency reserves or how advanced its technology or how cheap its labor force, China depends on the willingness and ability of other countries to import its goods — as well as the ability to physically ship them. Any disruption of this flow has a direct effect on the Chinese economy.
The primary reason other countries buy Chinese goods is price. They are cheaper because of wage differentials. Should China lose that advantage to other nations or for other reasons, its ability to export would decline. Today, for example, as energy prices rise, the cost of production rises and the relative importance of the wage differential decreases. (…)
The center of gravity of China is that it has become the industrial workshop of the world and, as such, it is totally dependent on the world to keep buying its goods rather than someone else’s goods. (…)
The second part of the problem derives from the first. Assuming that the global economy does not decline now, it will at some point. When it does, and Chinese exports fall dramatically, Beijing will have to balance between an interior hungry for money and a coastal region that is hurting badly. It is important to remember that something like 900 million Chinese live in the interior while only about 400 million live in the coastal region. When it comes to balancing power, the interior is the physical threat to the regime while the coast destabilizes the distribution of wealth. The interior has mass on its side. The coast has the international trading system on its. Emperors have stumbled over less.
