Few intellectually honest observers would consider the attitude of the WHO perfect, so there’s a quasi-consensus when it comes to that. This changes, however, and leaves ample room for controversy and even conspiracy theories once we move on to analyzing the “reasons” dimension. More specifically, WHY was the World Health Organization wrong?

Broadly speaking, there are two main categories as far as potential answers are concerned:

1. It was wrong for political reasons, in an effort to help China and continue receiving Chinese funding, in other words the WHO experts released information they knew was wrong because they were politically motivated to do so
2. It was wrong simply because this is how the scientific method works when analyzing a virus you don’t have all that much in the way of experience with. There are bound to be errors along the way, especially at the very beginning. It’s what (ironically) makes the scientific method imperfect yet at the same time better than the alternatives, the fact that scientist learn from errors and bounce right back until the truth is discovered

Needless to say, it’s answer #1 which tends to lead to various conspiracy theories about the wealthy China which somehow “bribed” the WHO so as to further its agenda when it comes to on the one hand silencing those who wanted to spread the word about the virus initially and on the other hand, excessively praise China’s handling of the COVID-19 problem later on.

As far as the latter is concerned, it is indeed undeniable that the World Health Organization took things (way) too far when it comes to Beijing, including even terms such as “openness to sharing information” (which are downright ludicrous) used by Director-General Tedros. WHO critics are quick to point out this propaganda-driven intellectual bribery as they see it, whereas WHO defenders claim that in the absence of such flattery, China would have been even more opaque.

At the end of the day, there is no way to “know” with respect to such motives but what we do have more than enough of are money-related numbers which make answer #1 seem downright peculiar. Why? Simply because WHO financing numbers do anything but paint the picture of a World Health Organization that is dependent on China… on the contrary.

If anything, the WHO can be considered ultra-dependent on the United States, with position number one in terms of 2018-2019 financial contributors being occupied by the US (with a grand total of $893 million) and position two being occupied by the US billionaire Bill Gates’ foundation (with a grand total of $531 million).

China is not even in the top 10, with positions 3 to 10 being occupied by the United Kingdom ($435 million), GAVI Alliance ($371 million), Germany ($292 million), Japan ($215 million), UNOCHA ($192 million), Rotary International ($143 million), the World Bank ($133 million) and the European Commission ($131 million).

While it is true that China’s contribution went up over 50% (52%, to be more precise) since 2014, it did so from a less than impressive starting point and as such, China’s 2018-2019 contribution represented a less than impressive $86 million, over ten times less than that of the United States. If anything, this tends to suggest a narrative involving a WHO that would have been incentivized to do the exact opposite, paint China in a negative light so as to please its largest donor by far (the United States) rather than alienate it (which is what ended up happening, with the US deciding to cut World Health Organization funding, a devastating blow which risks representing a humanitarian disaster in light of the fact that the WHO has responsibilities which go well beyond COVID-19, many of which involve some of the world’s most vulnerable nations).

In the aftermath of the United States’ decision to cut WHO funding, it is almost certain that funding from China will improve but there is absolutely no way it can improve to the tune of nine figures yearly. As such, the entire conspiracy falls flat on its face when confronted with the previously mentioned numbers: why on Earth would China conspire against its largest contributor by far in an effort to please a contributor that isn’t even in the top 10?

As a conclusion, it is vital to point out that devastating mistakes are inevitable when dealing with a threat as new and therefore improperly understood as COVID-19, it’s how the scientific method works (learning from mistakes, building on the shoulders of giants, etc.), a scientific method that while imperfect, lead to us having the very Internet and gadgets used by many of today’s uninformed individuals to spread conspiracy theories that are the exact opposite of scientific.

China made significant mistakes, especially early on, and will most definitely end up paying for them. The WHO made its share of mistakes as well, many of which are quite frustrating in nature. But stating that there is some sort of mystical chain of causality which revolves around the WHO making mistakes because China made mistakes that needed to be covered up for propaganda reasons makes absolutely zero sense from the perspective of even basic logic and is therefore an attitude that goes against everything the ChinaFund.com team stands for. As dangerous as it is to be a “China cheerleader” who sees everything coming from Beijing through rose-colored glasses, embracing the exact opposite extreme is certainly not the way to go either.

What went wrong?

What was done right?

How should the authorities handle similar situations in the future?

What can be done right away so as to improve the potential outcome of similar situations down the road?

The list of questions could go on and on, with one important question representing the proverbial elephant in the room, a question pertaining to the country in which the COVID-19 calamity had its origins: how did China handle the situation?

For the most parts, there are two easily identifiable trains of thought at this point in time:

1. On the one hand, we have China’s supporters who more or less victoriously claim that China has handled the situation in an impeccable manner, as illustrated by the low number of both cases and casualties compared to the West and the controlled manner in which the economy was re-opened
2. On the other hand, we have critics who claim the exact opposite, especially when it comes to the manner in which China has initially handled the coronavirus problem, a manner which revolved around secrecy to the point of even silencing the doctor(s) who dared talk about the problem publicly. Furthermore, the same observers are usually quick to point out that there are valid reasons to let’s say not blindly trust Chinese data pertaining to case numbers and casualties, with them usually suspecting that the actual numbers are much higher

What does the ChinaFund.com team believe?

Ironically, that both “sides” are partially correct.

On the one hand, China’s supporters are right when stating that China handled the crisis better than Western nations if we are to refer strictly to the quarantine measures and the manner in which they have been implemented. From the draconian nature of those measures to the compliance level of the average population (far better than that of Western citizens, for reasons which range from culture to… well, fear), China most definitely out-did the West from any imaginable dimension.

The results are crystal-clear, with a country of 1.4 billion individuals managing to contain the COVID-19 spread very well, keeping the total case number in 5-digit territory and the number of deaths in 4-digit territory. To put it differently, the number of deaths as a percentage of the population number has been multiple orders of magnitude higher in the West, especially when it comes to countries such as Spain and Italy. Realistically speaking, this containment scenario represents one of the few instances in which authoritarianism generates better results than freedom.

However, please note that this “praise” of China only refers to the post-quarantine measures and most definitely not to the manner in which the crisis was initially handled. Moving on to also analyzing the latter, China’s critics are most definitely correct when pointing out that the absurdly opaque manner in which the issue was initially managed left much to be desired. The situation was, plain and simple, swept under the rug initially until things reached a point as of which that was simply no longer possible. Had Beijing acted in a more decisive manner sooner, case and casualty numbers would have been even lower domestically as well as abroad.

How much lower would they have been abroad, realistically speaking?

That is difficult to state because unfortunately, Western governments have not treated the manner with adequate professionalism even after it became apparent. Europe was the epicenter after China and when it comes to Europe, indeed, a more than valid case could be made that if the Beijing authorities would have communicated better and warned European officials much sooner, a far better response could have been organized.

What about later epicenters such as the United States?

This is where things get tricky because the US had ample time to prepare, yet the Donald Trump administration remained passive. From the top US immunology expert Anthony Fauci who was initially quite skeptical that coronavirus issues would represent a problem for the American continent to especially President Donald Trump who rather aggressively downplayed the problem initially, opportunities to do a much better job were lost time and time again. While Europe can indeed claim that it might have not had enough time to prepare and that things would have been substantially different if Beijing would have displayed more transparency sooner, the position of the United States and other countries which were affected later on tends to be much less credible in this respect.

Finally, it is also worth pointing out that not just China but the Asian continent as a whole had much more in the way of let us call it experience with epidemics. The West less so, and this became apparent rather quickly, with reactions from officials in even the most developed of nations on a per capita basis (Sweden, Belgium and the list could go on and on) ranging from denial to downright scientific ignorance and a dangerous failure to adapt to data as it keeps coming in.

At the end of the day, a common sense conclusion would be that while a valid case could be made that Asia in general as well as China in particular have handled the situation better than the West, all countries involved need to engage in honest post-factum analysis because there are deadly “sins” on absolutely all fronts which need to be addressed. From transparency to reaction times, from supply chain complexity to political ramifications, now is the time to put everything on the table because while nobody can predict the future, this much is certain: pandemics are not going away anytime soon and humanity cannot afford to be as ignorant next time around.

Why?

To understand Taleb’s perspective, it makes sense to underline the core differences between black and white swans.

Nassim Taleb likes using the so-called turkey analogy so as to make it clear what black swans are. He recommends imagining a turkey that is fed regularly by its owners day after day, week after week. The more time passes, the more reasons the turkey has to believe that the humans in question are its friends… until one day, come Thanksgiving, where everything changes, needless to say.

In contrast, we can think of white swans as essentially slow-motion train wrecks. Or, in other words, situations that anyone with an analytical mind realizes are coming. Situations that are looming, if you will. They might not manifest themselves today, tomorrow, next week, next month or even next year… but we can be fairly close to certain that they are coming.

Can we predict when?

Realistically speaking, no.

But while we cannot predict with amazing accuracy when a white swan is likely to unfold, we are fairly certain that it WILL unfold sooner or later. The same cannot be stated about black swan events.

Simply put, Taleb has repeatedly explained that pandemics are known risks and that it is not a matter of if but rather when they will unfold. For this reason, Nassim Taleb himself and those who share his worldview would definitely not consider the COVID-19 outbreak a black swan event. On the contrary, he would roll his eyes whenever coming across an expert who uses that term to describe them.

Do we have to embrace Taleb’s way of seeing things?

Of course not.

At the end of the day, while the term was undoubtedly popularized by him, he was hardly the first thinker who came up with it and therefore, opinions with respect to what black swan events actually are differ.

The ChinaFund.com team however does tend to agree with his perspective.

In our view, it would be fairly naïve to state that nobody could have seen a pandemic coming… the thought itself seems ridiculous in light of the fact that to refer to the United States for example, Barack Obama himself created a department which was supposed to be in charge of preparing for large-scale epidemics, a department which was scrapped under President Donald Trump… but that is, perhaps, a topic for a future article.

Suffice it to say that there was and is no shortage of experts, from epidemiologists to statisticians who specialize in hedging when it comes to risks of this nature. Unfortunately, what is true is that the authorities have drastically downplayed the potential consequences of these pandemics and as such, haven’t been amazingly generous when it came to allocating capital to departments which specialize in tackling the issue or toward the accumulation of adequate stockpiles (masks, medical suits, disinfectants, etc.).

As a bit of an “easy to relate to” analogy, all we have to do is conduct a bit of research on how much capital has been allocated toward nuclear deterrent-related goals on the one hand and how much has been allocated toward fighting (potential) pandemics on the other… the numbers speak for themselves and they paint a more than obvious picture of under-preparedness when it comes to the latter.

Perhaps the main takeaway is therefore this: as intellectually stimulating as it may be to think about and prepare for black swan events, it might not be the worst idea in the world to take a close look around and try to identify white swan ones as well. Whether we are referring to medical situations that tend to be cyclical in nature such as pandemics, geopolitical tensions that keep building up, environmental issues or anything else, it is crucial to understand that blissfully ignored white swan events can be just as devastating as black swans that nobody could have possibly seen coming.

From political leaders to even renowned experts such as Anthony Fauci (who, back when the coronavirus was a strictly Chinese problem, explained why he believed that a spread to the United States was an extremely low-probability scenario), there is a robust list of people who were caught off-guard and at the end of the day, other than learning from past mistakes, there is little real-world utility associated with thinking about what happened and cannot be undone.

Instead, the rational approach always revolves around letting the scientific method prevail, a scientific method which does not revolve around the idea that scientists are flawless but rather on the exact opposite: that they frequently make mistakes and there is nothing inherently wrong with that as long as they respond in a quick and honest manner to instances where it becomes clear that a certain hypothesis has been empirically validated or invalidated.

As such, just like Anthony Fauci jumped back on his feet and focused on his work with the US task force in charge with tackling the COVID-19 problem, society as a whole needs to follow suit rather than try to play an ultimately useless blame game. Should we call it the “Chinese virus” as Donald Trump recommend? Or, on the contrary, should we suspect that the US is somehow behind all of this, as some Chinese officials suggest? Neither, as both are false problems which ultimately do little else other than keep us from tackling the true elephant in the room: the pandemic from a medical perspective and what happens next from an economic as well as geopolitical one. As always, the ChinaFund.com team is here to help readers and especially clients do just that.

Before continuing, it is worth pointing out that derivatives are in no way “good” or “evil” in and of themselves, they are merely tools, just like a blade isn’t good/evil either (a surgeon can use one to save a life, a psychopath can use one to take a life). It ultimately all depends on the manner in which they are used or, in some cases, abused.

For example, a Chinese farmer might prefer to “sell” next season’s rice crop to someone at an agreed-upon price of $x per unit which he knows enables him to be profitable rather than wait it out and only sell when he has the rice. The same way, the buyer probably considers $x a good price and doesn’t want to wait until next year either, because he thinks the price will go up… there we have it, an example of a “good” derivative if you will, one which enables farmers to lock in decent prices and buyers to pull the proverbial trigger if/once they find a price they consider acceptable.

On the opposite end of the spectrum, derivatives can be abused in a manner that ends up putting the very sustainability of the financial system at risk, as the Great Recession made clear, with that particular situation revolving around:

1. People taking out mortgages to buy homes
2. Those mortgages being sold by the bank to an investment bank
3. The investment bank creating packages of mortgages called Mortgage-Backed Securities and selling them to investors
4. In light of the fact that investors are those who lose out if people stop paying their mortgages in this new framework, some of them have taken out a form of let’s call it insurance, Credit Default Swaps. In a nutshell, an entity such as a major insurance company sold investors Credit Default Swaps and essentially promised to reimburse them if people default on their mortgages and their Mortgage-Backed Securities take a hit

Some consider this a fairly straightforward risk management scenario, similar to our Chinese rice farmer but more complex.

However, the Great Recession has proven that this was not the case because all parties involved ended up engaging in unsustainable behavior:

1. Seeing that real estate prices went up, people got greedier and greedier, taking on unsustainable levels of debt to buy exuberantly priced real estate
2. Banks and investment banks found themselves in a moral hazard situation because given the fact that they simply sold the mortgages like hot potatoes to someone else, the incentive to be very careful when handing out loans was just not there. As such, so-called NINJA loans (no income, no job and no assets) emerged, with pretty much anyone with a pulse “qualifying”
3. The entities involved in providing Credit Default Swaps, despite hiring some of the world’s brightest mathematical minds to create what they considered to be bullet-proof models, got greedy as well and, frankly, their models didn’t meaningfully account for scenarios involving mortgage defaults on a massive scale

The rest, as they say is history, with banks as well as insurance companies ultimately having to be bailed out via coordinated actions by governments and central banks due to the “systemic risk” involved or, to put it differently, the risk that the financial system would grind to a halt in the absence of decisive action.

Fast-forward to the present and on the one hand, we have market observers who are voicing concerns with respect to the increasing popularity of for example Collateralized Loan Obligations, which are similar to Mortgage-Backed Securities but backed by corporate loans (as a fact worth including in the equation, it is important to note that Chinese corporate debt has skyrocketed in recent years) rather than mortgages. On the other hand, we have those who re-assure them and state that lessons were learned after the Great Recession and that everything from lending standards to the structure of the products themselves has been fine-tuned.

Who is right?

It is impossible to know with absolute certainty but the ChinaFund.com team always advises caution and as such, we believe the threat represented not by derivatives themselves (again, they are merely tools) but rather by the mis-use of derivatives should not be taken lightly.

In China as well?

We would say ESPECIALLY in jurisdictions such as China, for reasons we have outlined through previous articles as well and which revolve around the fact that since China is not (yet, at least) considered a safe-haven jurisdiction but rather a risk-on one, capital would be quick to flee in the event of a derivative-generated nightmare scenario.

Yes, even if the scenario in question once again has its origins in the United States because as counter-intuitive as it may seem, even a US-originated calamity will impact China more due to the fact that the US is considered a safe-haven jurisdiction and China isn’t. As unfair as this may seem, the situation is what it is and hiding from reality is never a strategy worth embracing.

Time and time again, the ChinaFund.com team has made it clear that doing well in China is predicated on a meaningful understanding of the pros and ESPECIALLY the cons related to this jurisdiction. And on the con side, it just so happens that China is not yet perceived by markets as a safe-haven jurisdiction and until that changes, your strategy needs to account for this more than vital fact. For more in-depth analysis and hands-on help with the strategy you or your organization are putting together with respect to China, the ChinaFund.com team is at your disposal.

For example, if a country is overly indebted, the market will ultimately punish it in one way or another. The same way, if a country is experiencing demographic decline problems which put pressure on its long-term economic growth potential, the market will ultimately punish it in one way or another… the list could go on and on.

However, “ultimately” is the operative word because human beings tend to be terrible at predicting the future and as such, it is impossible to know when the market will eventually re-establish balance. Moving on to the “how” dimension, while it is possible to at least put forth an educated guess with respect to how you believe the market is likely to punish a certain economic actor, it is a difficult endeavor but nonetheless, not impossible.

So, HOW can the market punish a nation?

Broadly speaking, there are two options:

1. The “hard landing” scenario which involves a brutal and rather quick shakedown, for example a deflationary crash which wipes out “paper wealth” quickly by generating an asset price collapse (with the Great Recession being an obvious recent global example to that effect) or an inflationary spiral which involves the currencies of a certain nation taking a major hit rather quickly (for example, the 1997 Asian Contagion which started in Thailand and as the name suggests, ended up spreading to other nations)
2. The “soft landing” scenario which involves let’s not say death by a thousand cuts but rather pain/correction by a thousand cuts. Perhaps the most (in)famous example of this nature is represented by what started out as Japan’s lost decade and turned into Japan’s lost decades (plural), lost decades which came as a result of Japan’s major demographic problems, with the aging of its population and depressed natality levels representing a negative force which acts as an anchor, hindering economic growth and bringing about sub-par economic development over a period of not years but yes, downright decades

Which option would be more likely in China’s case?

Once again, we can consider two broad approaches which start with different underlying ideas:

1. In light of the fact that China represents the world’s #2 economy in nominal terms, some experts believe there are more than enough forces at play which will act in a manner conducive to a soft landing scenario. Why? Simply because in light of the record-breaking global economic interconnectedness we are experiencing, pretty much everyone can be considered a stakeholder in this equation. To put it differently, if China were to experience a hard landing, it would be childish at best and reckless at worst to assume it can be “contained” and that no contagion will be generated. While nothing is 100% certain, the ChinaFund.com team is as close to being 100% certain as possible that a Chinese hard landing would bring about a global financial crisis. Therefore, a valid case could be made that the international community will do everything in its power to aid China with respect to avoiding anything that even resembles a hard landing, not due to its magnanimous nature but rather because other nations need ample time to prepare and want to avoid being caught off-guard
2. In light the fact that China still isn’t what one could call a fully developed nation in every sense of the word (as indicators such as its less than stellar GDP per capita make clear), however, we need to take the very realistic possibility into consideration that China could lose market access (relatively) quickly. To put it differently, while Japan (with its ~250% public debt to GDP ratio) was granted the luxury of being allowed to drag its proverbial feet for not years but decades, the market might not be as “kind” to China. This scenario is definitely not impossible because while nations and leaders might want to do everything possible to avoid a hard landing, individual investors might decide to panic sell nonetheless to enough of a degree to make a hard landing unavoidable

Which scenario would be better for China?

While we have pretty much established that for other nations, a Chinese soft landing would be preferred, opinions differ when it comes to China itself. There are experts who believe a hard landing could lead to bitter but necessary medicine being administered to the Chinese economy and that after drawing the line, China would be better off this way as opposed to dragging its feet throughout multiple years of mediocrity… this would most likely be an approach “recommended” by those who strongly believe in letting market forces prevail, for example strongly right-leaning economic thinkers such as libertarians. On the other hand, there are also experts who believe this “bitter but necessary” medicine would be too much to handle for an over-leveraged (especially at the corporate level) China and as such, that a soft landing scenario would represent a better solution.

As always, the ChinaFund.com team believes in having all bases covered and would therefore strongly recommend preparing for both outcomes, with the main goal revolving around putting together a strategy that enables you to land on your feet under a wide range of scenarios. Betting the proverbial farm on just one horse is never an approach we’d recommend and on the contrary, we consider it anything but conducive to longevity as an investor/trader… call us old-fashioned but we firmly believe in acting with the big picture in mind and happily put our expertise at the disposal of clients who share our belief system as well as values.

Is that true? To put it differently, is socialism with Chinese characteristics perfectly in line with let’s say Marxist-Leninist values?

Not quite!

Before elaborating, let us start by making it clear that as the name suggests, Marxism-Leninism is a combination between the classical ideology of Karl Marx and Friedrich Engels (classical Marxism) and the ideology of Vladimir Lenin (Leninism). In a nutshell, it “sells” (intentional capitalist irony) the idea that in light of the many contradictions inherent to capitalism, the future of the world will inevitably involve socialism and ultimately communism. As such, Marxist-Leninists believe that the death of capitalism would bring about widespread socialism (with the state taking over means of production) and that in the end, society would be so prosperous that the state would no longer even be required, with communism representing that final stage. As one can tell, communism never actually existed based on this “definition” (especially the stateless society dimension) and as such, even the USSR would (still) be considered socialist by Marxist-Leninist standards.

Moving on, it is important to note that “things are different in China” was a concept one can consider valid right from the beginning of the People’s Republic of China and as such, Marxism-Leninism “evolved” into Mao Zedong Thought, with Mao and key CPC members putting together an ideological framework which revolved around Marxism Leninism with… you’ve guessed it, Chinese characteristics.

Fast-forward to the present with the “Chinese characteristics” dimension in mind and we cannot help but notice that socialism with Chinese characteristics seems strangely incongruent if we are to compare it to the spirit of Marxism-Leninism.

What happened?

To be more specific, was Marxism-Leninism abandoned as of the Deng Xiaoping days, with China deciding to embrace market economy elements and reforms with the goal of tapping into the global economy and eventually catching up with the West?

It depends on whom you ask:

1. Ask any rational outside observer and he will quickly point out that socialism with Chinese characteristics embraces far too many capitalism-oriented aspects for it to be considered let’s say a true descendant of Marxism-Leninism
2. Ask Chinese ideological purists (from the infamous Gang of Four to modern-day thinkers) and they will agree, stating that China has committed the mistake of diverging from its Marxist-Leninist values and aiming for economics growth at all costs… with, according to this group, the costs in question revolving around China essentially losing its ideological identity
3. Ask Communist Party of China officials and they will say the exact opposite, that socialism with Chinese characteristics represents an evolution of Marxism-Leninism or if you will, an adaptation of this ideological framework to modern-day Chinese realities. Officially speaking, these values have not been abandoned, with leaders such as Jiang Zemin pointing out that Mao Zedong Thought and Marxism-Leninism must never be eliminated from the equation

Who is right?

From a strictly formal perspective, CPC officials are indeed correct. The more one reads official documents/statements and analyzes the verbiage dimension, the more one tends to conclude that indeed, CPC officials still very much believe in Marxism-Leninism values. There has never been a formal inflexion point, a moment as of which the status quo in terms of official narrative changed in a fundamental manner.

Moving on to the real-world dimension, is would be a significant stretch of the imagination to state that today’s China is built in a manner which reflects Marxist-Leninist values for a wide range of reasons, for example:

1. The fact that in some instances, China can be considered more of a capitalist nation than some Western countries. When it comes to let’s say the official or unofficial barriers to entry dimension for Chinese citizens (much less so for Westerners who are interested in doing business in China, although things have been changing from that perspective as well), it is oftentimes easier to start a business in China than in let’s say excessively regulated European countries
2. The fact that the revolutionary approach to geopolitics has been all but abandoned, with China diligently establishing itself as a soft power and pragmatically stepping in whenever it makes sense rather than trying to bring about ideological revolutions in other countries. The exact opposite of the Cultural Revolution framework, if you will
3. The fact that the Chinese population became more and more willing to not just tolerate but downright look up to entrepreneurship, with figures such as Jack Ma becoming “economic rock stars” and asked to speak at important events rather than being considered exponents of corrupt imperialistic thinking or proverbial enemies of the revolution
4. The fact that China has been, once again since the Deng Xiaoping days, willing to not just cohabitate with the West but actually learn from it, something let’s say Mao Zedong would have considered unacceptable, especially in the earlier days of his rule

… the list could go on and on.

All in all, the Marxist-Leninist dimension represents perhaps a textbook example when it comes to the contradictory nature of how things sometimes work in China, a remarkable divergence between what officials state and what the reality of 2020’s China looks like.

As an entrepreneur who is interested in establishing a presence in China and/or an investor who would like to gain exposure to Chinese assets, these nuances represent the difference between meaningfully “getting” China and being taken to surprise time and time again. Should you be in need of assistance so as to avoid the latter scenario, the ChinaFund.com team would be more than happy to put its 13-year experience at your disposal and is only a message away.

Managing such situations is always a Herculean task, even when we are referring to ultra-responsible governments which do their best to maintain harmony, through a carefully orchestrated independence which doesn’t end up affecting the sovereignty of the nation. Again, even when the very best of “peaceful” intentions exist, it can be difficult to find the right balance between pleasing both groups.

When it comes to China, not only were the best of intentions not there, the exact opposite is true, with very aggressive measures such as a centrally-facilitated Han Chinese migration to Xinjiang from the fifties up until the seventies exacerbating already-problematic tensions. Add the persecution of minorities to the equation and we have a deadly cocktail, with on the one hand, a minority which resorts to extreme measures such as terrorist attacks (from the 1997 Urumqi bus bombings to the 2014 Kunming attack) and on the other hand, the state responding in a very aggressive manner.

Are China’s concerns baseless?

Of course not, with terrorists threat fears being legitimate indeed, especially in light of the fact that anti-state movements are supported by terrorist organizations such as Al-Qaeda.

Have China’s aggressive responses been wise?

No.

Simply put, whenever a nation is dealing with delicate issues involving minority-majority relations, the last thing it wants to do is antagonize the entire minority by applying “one size fits all” or “guilty until proven innocent” approaches, which is exactly what China did.

How?

By implementing arguably the most 1984-esque surveillance system known to man, a system which revolves around:

1. Mass surveillance, with millions upon millions of individuals being constantly monitored. While it is true that such a status quo does tend to act as a strong deterrent and aggressive action can be inhibited, it is just as true that it generates long-term resentment among the segment of the population that did nothing wrong: the majority of individuals, in other words
2. Mass arrests, with China hoping that this asymmetrical display of force will once again act as enough of a deterrent. Unfortunately, the exact same principle that has been mentioned previously is valid in this case as well, with certain measures being effective as deterrents but perhaps equally effective when it comes to frustration build-ups
3. Human rights being all but ignored when it comes to China’s “re-education camps” which hold over one million Muslim minority members due to being perceived by China as potential terrorists which need to be re-educated. Needless to say, transparency is pretty much non-existent, with these camps being quasi-unilaterally condemned by the West
4. Seeking support from other authoritarian regimes, with 50 nations (in)famously writing a joint letter to the UN Human Rights Council President as well as the United Nation’s High Commissioner for Human rights so as to defend China, in response to the July 2019 document signed by 22 Western nations which condemned China’s actions
5. Inhibiting domestic criticism (with us dedicating an entire article to the freedom of speech dimension of China or lack thereof) and even resorting to more or less sophisticated retaliation methods when it comes to external criticism. In both cases, a combination between deterrents (punishing to the point of squashing any and all form of dissent) and let’s call them incentives (rewarding individuals and/or organizations that proverbially play ball) is used by Beijing

At the end of the day, it is difficult to believe that the Xinjiang situation will become less complicated anytime soon, in light of the fact that there just doesn’t seem to be enough (geo)political energy to alter the status quo.

On the one hand, China perceives the measures it has taken to tackle the Xinjiang situation as a display of force, one which makes it clear that those who oppose the regime in any way, shape or form will be harshly punished. On the other hand, despite severe backlash from the West, Beijing seems to have managed to secure enough geopolitical allies for the scale to be balanced yet again, at least from China’s perspective.

Why?

Because it can, in light of the fact that while nations such as Canada exist, which choose to willfully engage in less trade with China for reasons pertaining to issues such as human rights (with recent poll data indicating that 7 of 10 Canadians believe human rights should trump trade) in an effort to make it clear that there is more to geopolitics than the monetary dimension, other nations seem to be willing to fill that void.

Once again, why?

Perhaps because they have human rights issues of their own to deal with. Maybe because appeasing China puts more than enough trade-related benefits on the table for them to be willing to not just look the other way around when it comes to China-related human rights problems but actually defend China, as the previously mentioned UN example makes clear. What matters is that for a wide range of reasons, China managed and manages to garner enough support to counteract Western indignation and until that changes (with there being a distinct possibility that no changes occur at all), it would be excessively optimistic to assume the Xinjiang status quo will be meaningfully altered.

Why?

Simply because “today’s China” or if you will, China as envisioned by the Communist Party of China would most likely not survive if the proverbial foot were taken off the pedal in terms of authoritarianism. To put it differently, the Communist Party of China in general and the Xi Jinping administration in particular see human rights as not just a nuisance but rather an existential threat, for a wide range of reasons such as:

1. The fact that in light of not being a democracy, the government does not have the “blessing” of the population or to put it differently, the average citizen does not feel like he or she is contributing to the rule of the country, even if only through a vote that matters. As such, blame cannot exactly be shared between voters and politicians like with a democracy for the simple reason that extreme centralization of power inevitably brings about just as extreme centralization of responsibility. For this reason, frustration is bound to become systemically risky once let’s say a sustained period of economic slowdown is experienced and the authorities believe that inhibiting human rights at least enables them to keep thins under control… a very risky supposition but the status quo one nonetheless
2. The fact that there are no let’s call them release valves for the proverbial negative social energy that accumulates, release valves which would at least enable public anger/outrage to be eliminated from the system in a somewhat orderly manner. In the absence of such release valves, the first meaningful social crisis experienced by an administration such as the Xi Jinping one risks… well, being the last
3. The authorities, at least since the Deng Xiaoping days, believe in unleashing the productive capacity of China’s 1.4 billion population but don’t believe in unleashing the freedom of expression of the citizens in question (a topic covered through another article) due to fears pertaining to the potential of things spiraling out of control
4. It being difficult for China to keep everything in check as it is, despite the authoritarian surveillance state that has been built. Simply put, a wide range of citizens have proven to be more than creative enough to (relatively) easily bypass roadblocks such as the Great Firewall of China

For these reasons and many others, not only is China not willing to tone it down a notch (or two, or three!) but the exact opposite is valid, with the Xi Jinping administration imposing measures which make it clear that the preservation of authoritarianism represents a top priority, for example:

1. Eliminating term limits and enabling Xi Jinping to remain the paramount leader indefinitely
2. Creating a textbook cult of personality around Xi Jinping and “Xi Jinping thought”
3. Shutting down domestic critics, while rewarding domestic media outlets as well as “influencers” who play by (Communist) Party (of China) rules
4. Going after foreign critics as well, while also working on creating a strong external network which facilitates propaganda
5. Minority oppression, for example the 1984-worthy system that has been implemented in Xinjiang, where approximately 13 million Muslims (primarily Uyghurs, Turkish minorities and Kasakhs) are persecuted through anything from constant monitoring to “re-education camps for extremists”

Once again, the list of examples can continue but the bottom line is this: not only is today’s China in no way able/willing to take its foot off the pedal with respect to human rights, the exact opposite is happening.

Can this status quo persist indefinitely?

No, which is why we have chosen to hedge by using the term “today’s China” rather than limiting ourselves to broadly referring to China.

It is important to understand that no matter how powerful an authoritarian regime may be, change is oftentimes forced upon it by the population. In this respect, China’s increasingly educated population represents a force to be reckoned with and the authorities find themselves between a rock and a hard place: on the one hand, the already slowed-down economic growth of China would risk grinding to a halt in the absence of proper progress in the education department but on the other hand, an increasingly educated population becomes far less willing to tolerate an authoritarian status quo.

At the end of the day, nothing is set in stone.

Might the political system of China end up changing pretty much overnight, as a result of a (geo)political or economic black swan event?

Yes.

Might there be a “velvet revolution” or if you will, a peaceful transition to a more human rights-oriented system at one point or another in the future?

Yes.

The ChinaFund.com team strongly hopes reality will bring about a path closer to the latter, one that enables China to embrace a system more in line with Western values in a peaceful manner. As hard to believe as such scenarios may be, pragmatism might end up prevailing once or if the authorities decide that there is no other way. Unfortunately, this hasn’t exactly been the norm when it comes to authoritarian regimes of the past but in light of the fact that we are in a 21st century framework with all that it encompasses, we have more reasons to be cautiously optimistic about the future, even if the present is anything but stellar from a human rights perspective.

1. Causes
2. Context
3. Coping mechanisms

With respect to causes, Western investors especially need to come to terms with the fact that… well, they’re not exactly in Kansas anymore and this time, it goes the other way around compared to the iconic movie we’ve borrowed the expression from. A lot of the privileges Westerners take for granted represent nothing more than a dream in certain parts of China and one of the consequences revolves around the fact that yes, competence tends to be harder to come by than in a more established jurisdiction.

Just a few examples of causes include:

1. A sub-optimal education system, with even basic literacy being anything but a given in certain situations, for example rural regions. While a lot can be said about Western education system and not necessarily 100% positive aspects, the fact remains that while the West has its share of problems, catering to the basics (illiteracy, for example) isn’t one of them. For more information on China’s education system, we would strongly recommend reading the article we have dedicated to this topic by clicking HERE
2. Let’s call them cultural issues such as corruption (covered through a dedicated article HERE), nepotism (covered through another dedicated article HERE) or, generally speaking, the fact that meritocracy isn’t put on a pedestal to enough of a degree (with us, yet again, covering meritocracy as well HERE)… all of this inevitably leads to jobs oftentimes being handed out based on criteria more in the realm of more or less petty interests than competence, a state of affairs that reverberates throughout China
3. The political dimension, one we cannot possibly hide from, with even key positions very frequently awarded in a non-meritocratic manner but this time, not as a result of corruption and/or nepotism but rather due to the sometimes excessive politicization of the administrative apparatus and other key sectors
4. Insufficient experience, with it being important to understand that China didn’t exactly flourish overnight after Deng Xiaoping’s famous Four Modernizations. It took not just years upon years but downright decades upon decades of efforts for China to end up where it is today, the world’s #2 nation by nominal GDP. Some things just take time and despite many shortcomings, one can analyze sector after sector in China (we do just that) and safely conclude that pretty much always, remarkable progress has been made compared to how things used to stand. It is equally safe to conclude that just like China is light years away from the West in terms of GDP per capita despite its impressive nominal GDP, it is also light years away in terms of competence in many respects but again, these things take time

To be a bit colloquial: know your turf.

Those who start businesses in China expecting sunshine and rainbows, with administrative processes at Western standards and high returns at Chinese standards, will be disappointed upon facing the realization that there is no such thing as a free lunch in the world of business and the same principle is valid for investors.

The West has had a decade and even century-long tradition of specialization and meritocracy. Therefore, even if not perfect, the various system and the people they consist of tend to seem… let’s say fine-tuned compared to their Chinese counterparts.

If you as an entrepreneur or investor end up bitterly disappointed by the fact that China tends to sometimes be rough around the edges when it comes to competence, a valid case could be made that you are more so to blame than China itself.

Why?

Simply because for decades, China has been chugging along nicely, what more could you ask of a country than decades upon decades where double-digit GDP growth was considered normal? Investors without a relatively firm grasp on economic history oftentimes fail to realize just how weak China actually was prior to the materialization of Deng Xiaoping’s reforms and just how much catching up was necessary.

To put it differently, it is anything but reasonable to judge a country that has experienced multiple streaks of double-digit GDP growth for not catching up to the West fast enough and therein lies the key to understanding the main message we are trying to get across when it comes to incompetence: yes, it can be aggravating and yes, it would have been ideal if China would have already been at parity with the West from this perspective.

However, this perspective is anything but realistic.

And in the spirit of just that, there is a reason why the ChinaFund.com team mentions time and time again how important it is to approach this jurisdiction with realistic expectations rather than projecting your ideal image of a country you’d like to invest in onto China and then being disappointed that in the real world, countries fail at living up to such exaggerated expectations.

We firmly believe that in the long run, investors who have the wisdom it takes to set realistic expectations and the patience required to see things through properly will be more than generously rewarded. Those who fail to do that will likely give up and blame a jurisdiction for their own shortcomings, which is anything but a healthy scenario. Needless to say, ChinaFund.com is at the disposal of those who want to pick our brains so as to embrace a realistic perspective on… all things China.

Why?

Simply because the three phenomenon types mentioned previously and variations thereof risk affecting not just the best interests of the average consumer (being on the receiving end of competition-generated lower prices, superior products/services, etc.) but the very sustainability of a nation’s economic growth model by stifling innovation. Yes, some business owners would be able to remain in their proverbial comfort zones by let’s say bypassing competition but… well, everyone else would suffer.

What about China?

Contrary to popular belief, China’s antitrust legislative landscape is quite robust, with it revolving around the Anti-Monopoly Law or AML, adopted in 2007 (on the 30th of August, to be more precise) by the Standing Committee of the National People’s Congress and coming into effect in 2008 (approximately one year later, on the 1st of August). All People’s Republic of China market participants have to abide by the AML framework, with Hong Kong and Macau representing exceptions, in light of the fact that they have the status of Special Administrative Regions.

As mentioned in other articles, the AML does not represent China’s only anti-monopoly, anti-cartel and/or anti-collusion initiative, with past examples including:

1. The Anti-Unfair Competition Law of 1993
2. The Pricing Law of 1998
3. The Law on Bid Invitation and Bidding of 2008

… the list could go on and on, with more niche/specific examples.

However, the Anti-Monopoly Law does represent the first ever COMPREHENSIVE legal framework, one which views the entire situation as a whole and tries to essentially establish clarity as well as balance when it comes to anything that revolves around the idea of anti-competitive behavior, from various more or less murky agreements between business owners, to a financially potent player abusing his market position and mergers/partnerships which result in an entity so powerful that competition is inhibited. Again, “comprehensive” is the operative word, with existing legislation such as the previously mentioned three examples remaining in force.

What about the enforcement dimension, one oftentimes tricky when it comes to China?

Formally speaking, two regulatory bodies are in charge of overseeing monopoly-oriented activities:

1. The Anti-Monopoly Committee, or AMC, which is in charge of both shaping policy and coordinating enforcement
2. The Anti-Monopoly Enforcement Agency, or AEA, which (as the name suggests) focuses on the enforcement dimension through three agencies. The National Development & Reform Commission or NDRC tackles issues pertaining to prices, the Ministry of Commerce or MOFCOM overviews mergers and last but not least, the State Administration for Industry & Commerce or SAIC is in charge of enforcement with respect to anti-competition practices, anything from monopoly power situations to various agreements which inhibit innovation and the emergence of new competitors

Can the average Chinese also take action?

Indeed, even if the number of successfully seen through cases isn’t exactly overwhelmingly optimistic. Still, there is an intellectual property division in each and every major Chinese court and these divisions have also been put in charge of anti-competition cases. Again, the number of “textbook wins” isn’t exactly impressive but still, there are several noteworthy examples which involved significant damages being awarded to those who took their concerns to court.

Which activities are considered illegal?

For the most part, activities which revolve around:

1. Fixing prices of goods or altering them in a manner that isn’t conducive to facilitating competition
2. Deals between companies which revolve around them isolating a competitor or market participant by deciding to cease any dealings with the entity in question
3. Collectively agreeing to tone it down a notch when it comes to endeavors such as research & development investments
4. Dividing a market into sub-markets, with each competitor being in a de facto monopoly position when it comes to the segment it has been granted exclusivity to
5. Anything that has to do with setting production quotas which wouldn’t have existed in a competitive framework
6. Not competing on the marketing front, for example by synchronizing marketing campaigns in a manner that leads to none of the “competitors” gaining an edge by standing out

… the list could go on and on.

What are offenders risking?

In some cases, the penalties can be downright financially debilitating, for example 10% of last year’s total turnover for monopolistic behavior, agreements which are perceived as going against the AML being declared void and subsequent C&D orders being issued, the confiscation of income that is deemed to have been generated illegally… the list of examples could continue for quite a while.

Are the results compelling enough?

Simply put:

1. By Western standards… not quite, a state of affairs one can consider understandable in light of the fact that China has not yet had enough time to establish a proper track record, with not even 15 years passing since the first comprehensive competition-related framework has been adopted. As mentioned previously, laws did indeed exist prior to 2007 but nothing one can consider comprehensive enough to be satisfactory by Western standards
2. Compared to the past, most definitely. While it is fair to state that the legislative landscape seems decent enough (even by Western standards) but the enforcement dimension less so, it would be unfair not to acknowledge the tremendous progress which has been made over the years, with the Xi Jinping administration manifesting its willingness to meaningfully tackle issues past administrations have primarily addressed through rhetoric

As always, adjusting expectations is the name of the game and as an investor, let’s just say that judging more exotic jurisdictions (along with their comparatively greater wealth building potential) by Western standards would be… sub optimal, to put it mildly. Instead, it makes more sense to adopt a more realistic approach, one which revolves around acknowledging the progress that has verifiably been made but not deluding yourself into thinking that China can turn into a “fully Westernized” jurisdiction overnight.