Or, to be more precise, up until this point at least, such situations have resulted in military escalation more often than not… but not always, and therein lies the nuance we are trying to address. Graham Allison started with the Peloponnesian war which took place between 431 and 404 BC and revolved around the rising Athenians on the one hand and the Spartans who were worried about the ascension in question on the other. Needless to say, the end result was anything but peaceful.

Time and time again throughout history, such scenarios manifested themselves and as explained in Graham Allison’s “Destined for War” book, war was the ultimate outcome in 12 of 16 conflicts that have been identified and studied. As such, if we are to adopt a tunnel view approach and see things thoroughly through the lens of historical precedents, we would have no choice but to acknowledge that war represents the most probable outcome, with the situation developing that way in 75% of the previously mentioned conflicts.

That perspective is, however, quite a bit shortsighted in our view.

Why?

Simply because aside from knowing what happened with the past and having a firm grasp on historical arguments, it is at least equally important to… well, think critically.

This critical thinking correlated with a meaningful understanding of current events will reveal that the closer to the present we venture, the more war-averse society has become. As such, the ascension of the USSR led to the Cold War rather than a hot conflict, with the end result being represented by the implosion of the USSR… economics rather than missiles, in other word. The same way, we have the strong ascension of Germany as a case study and, of course… drum roll, please, that of China.

Why is society less war-tolerant at this point in time?

For a wide range of reasons, for example:

1. The fact that as fields such as reporting or photography advanced and the average person was on the receiving end of war-related images which were anything but glorious and triumphalist (on the contrary, they made it clear that the “truth” of war is closer to dying of diarrhea than covered in glory), the idea of going to war as a propaganda tool lost its luster quite a bit
2. The fact that the means have changed dramatically in our nuclear age and as such, a potential nuclear World War III could literally end in minutes… for all parties involved. To put it differently, we are in a Mutually Assured Destruction framework as of the Cold War, with nuclear powers understanding all to well that one cannot exactly “win” a nuclear war, unless we attribute a remarkably cynical connotation to the term “winning”
3. The fact that never before in human history has the worldwide economy been so interconnected. Therefore, a more than valid case could be made that while nuclear wars would be clearly be in Mutually Assured Destruction territory, wars in general would be in the realm of let us call it Mutually Assured Economic Destruction territory. To put it differently, there would be so much to lose on the economic front, leaving all other dimensions aside, that going to war makes considerably less sense in 2020 and beyond than in the past

As can be seen, these are just three examples of more than pragmatic reasons, with us not even appealing to humanity or using words such as “kindness” or variation thereof. Simply put, there are so many disincentives associated with hot conflicts at this point in time that the equation is anything but appealing from a strategic rather than humanitarian perspective. Add the latter dimension to the mix and even more so… it just doesn’t make sense.

However, we do need to understand that nothing is set in stone and peace should not be taken for granted. For example, reason #3 revolves around globalization and as the post-pandemic situation makes clear, quite a few actors are let’s just say strongly re-considering globalization and instead, are opting for more or less isolationist approaches under the guise of addressing the issue that supply chains are overly complex and that when situations such as medical equipment shortages emerge (as was the case this year), countries that are over-reliant on China and other exporting nations stand to lose.

The same way, if there is anything history has taught us, it’s that the proverbial masses aren’t exactly always textbook examples of level-headed thinking. As such, if confronted with perhaps an economic crisis that is devastating enough, the status quo could conceivably be altered to such a degree that the idea of rallying against a common enemy becomes appealing, whether or not the arguments in question are logically or factually coherent.

Our conclusion is therefore straightforward: in 2020 and beyond, arguments which revolve around the Thucydides Trap and various alternatives make considerably less sense than a few decades ago because the proverbial rules of the game have changed. From Mutually Assured (Military) Destruction to Mutually Assured Economic Destruction, there is more than enough in the way of disincentives for the ChinaFund.com team to state that we have valid reasons to not necessarily be optimistic but at least not be morbidly pessimistic. As always, however, it is wise to never say never in the oftentimes murky world of geopolitics and as such… we won’t. Instead, our team will monitor geopolitical developments carefully and do its best to keep readers and especially clients meaningfully informed.

Before continuing with this article, we would strongly recommend reading our post about recessions from a Chinese perspective, an article which can be accessed by clicking HERE. As explained in the article in question, the effects of even relatively “mild” recessions can be systemically relevant due to the fact that… well, we are in unprecedented territory when it comes to a wide range of market conditions: the previously mentioned economic interconnectedness, record-low interest rates for a prolonged period of time, financial markets that have become dependent on swift action by central banks and the list could go on and on.

For a graphical representation of this phenomenon, simply take a look at any chart that depicts GDP growth over in the US and you will see that the Great Recession represented a mere blip on that chart. In other words, that one seemingly minor GDP growth blip was enough to risk bringing about the end of our financial system.

On the surface, it seems downright tempting to analyze a potential upcoming recession by looking at it through a Great Recession or even Dot-Com Bubble lens. In other words, assuming there will be a deflationary event, followed by central banks doing more of the same (lowering interest rates further and injecting money into the system via more or less unorthodox monetary easing programs) and then a relatively straightforward asset price recovery across the board… business as usual in other words.

The ChinaFund.com team firmly believes this would be an extremely dangerous attitude to have for a wide range of reasons, such as the fact that Alan Greenspan did not properly tackle the root causes of the Dot-Com Bubble and instead, simply opted for the relatively straightforward option of “bribing” the market with low interest rates, an option which “fixed” the asset price decrease issue but inflated an even bigger bubble, the real estate one. When that burst, Ben Bernanke essentially decided to do the same by kicking the can down the road for another cycle rather than tackling root causes. Except that this time, the market demanded more and as such, lowering interest rates was no longer enough… money had to be injected into the system to the tune of $85 billion at the height of QE, with other nations following suit. Is it really wise to assume that “more of the same” will keep representing a strategy that works?

Even if we were to assume that central banks will always get it right, can all problems be tackled by them? While a central bank can lower interest rates and inject money into the system, it cannot handle a worldwide pandemic for example… it cannot get factories re-opened, it cannot easily re-ignite spending (the velocity of money) and the list could go on and on. In other words, the limits of central banking interventionism will eventually become obvious.

The main message we are trying to get across is that it might be wise to have a contingency plan for situations in which “status quo“ central banking actions either no longer work as intended or, worse yet, backfire and trigger a worldwide depression.

Could this phenomenon have China as its epicenter?

Sure.

Could it have the United States as its epicenter?

Once again, of course.

At the end of the day, it matters little where it starts in the context of our deeply interconnected worldwide economy. What matters is that eventually, we will have to deal with not just relatively mild recessions that are kept in check via aggressively dovish central banking policies but rather with an out of control spiral into depression territory.

How would things unfold?

We do not know.

How would China be affected?

We do not know.

As disconcerting as this may sound, the brutally honest truth is that in light of how unprecedented today’s market conditions are, nobody actually knows how a potential worldwide depression is likely to unfold.

Don’t we have the 1929 Great Depression as a comparison?

To a certain degree, yes. However, comparing today’s deeply interconnected economy to its 1929-era counterpart is most definitely a strategy that has its limits. As such, while there will most likely be common denominators, expecting the unexpected is the operative attitude when dealing with unprecedented market conditions.

Why write this article, then?

Simple: to get you to think about this scenario… now.

Not a week from now, not ten months from now. The best time to prepare for scenarios of such magnitude is right now and by at least thinking about how a worldwide depression would affect you and/or your organization, you are automatically miles ahead of the average market participant.

What we can offer as a quick tip would be this: embrace your incompetence when it comes to predicting the future, don’t hide from it by seeking a false sense of security in strategies offered/sold by one guru or another. Accept the fact that you do not know what will happen, accept the fact that those who claim they do are nothing more than charlatans and put together a robust strategy that enables you to land on your feet under a wide range of scenarios.

To that effect, the ChinaFund.com team would be happy to help. If we had a working crystal ball (hint: nobody does), we would love nothing more than to identify the correct scenario and go all-in. In light of the fact that it is impossible, the next best thing is aiming for robust diversification through a portfolio that consists of meaningfully uncorrelated assets. It is the hardest possible road to take and therefore… well, most likely the correct one.

Through this article, we will do just that.

After the People’s Republic of China was established back in 1949, one would have perhaps expected an ideological love story between China and the USSR to manifest itself. And, indeed, there were without a doubt quite a few common denominators which acted as somewhat of a foundation, whether we are referring to resentment toward imperialism or a quasi-shared vision of what the future should look like ideologically speaking.

However, as is pretty much always be the case and as explained ad nauseam here on ChinaFund.com, China tends to ultimately adopt its own version of various systems and Marxism-Leninism did not represent an exception. Perhaps most importantly, Mao’s China didn’t have what Stalin considered to be a proper proletariat or, in other words, the USSR wasn’t necessarily thrilled about China’s implementation of Marxism-Leninism. Practically speaking, however, it would have been next to impossible for the predominantly rural China to put forth a proletariat that Stalin would have approved of.

Let’s just say that while both parties were well aware of the many common denominators that existed as well as the fact that they shared common adversaries, a sometimes hard to define form of mutual resentment was more than apparent. Still, formally speaking, things were presented as downright peachy up until the mid-50s, when the (in)famous Sino-Soviet split took place (more specifically from 1956 to 1966, the start of the Cultural Revolution).

The main problem(s) revolved around the de-Stalinization of the Soviet Union, with Stalin’s successor (Nikita Khrushchev) making it clear that it was time to embrace a more moderate paradigm. He denounced some of the various mistakes that had been made during the Stalin regime (the cult of personality around the paramount USSR leader, an excessive reign of terror, inflexible foreign policy and generally-speaking excessive ideological rigidity) and believed a geopolitical balance needed to be reached, a balance which revolved around the peaceful (well, as peaceful as possible) co-existence of the communist world and the proverbial West.

As those of you who are at least moderately familiar with Mao Zedong’s philosophy (especially during the first part of the Mao regime) know, he wasn’t exactly thrilled about this newly found USSR flexibility. If you haven’t by now, we would recommend reading our article on Mao Zedong for a more detailed perspective as to what made him tick. Mao believed the USSR was displaying unforgivable signs of weakness and even accused them of revisionism, claiming that only China was properly respecting the Marxist-Leninist ideological status quo.

The Sino – Soviet split ended up being a robust geopolitical present for the United States.

Why? Simply because the geopolitical landscape was no longer bi-polar, with an almost completely unified communist dimension and the West being die-hard adversaries. In this tri-polar reality that emerged (the United States, the USSR and China), various opportunities presented themselves for the United State to exploit the not necessarily newly emerged but definitely newly cemented resentment between China and the USSR.

Ironically enough, conditions were starting to manifest themselves which led to warmer relationships between China and the US. Perhaps a textbook example to that effect is represented by Richard Nixon’s 1972 Beijing visit, a visit which paved the way for much more robust future Sino-American cooperation, especially after Deng Xiaoping took over.

As far as the Mao Zedong equation is concerned, this much is certain: some degree of mutual frustration existed right from the beginning, with Stalin considering China a let’s call it sub-optimal implementation of Marxism-Leninism. China itself was realistic about its less than stellar economic situation, with Mao Zedong making it clear that China doesn’t consider itself a First or Second World nation and, instead, was trying to “brand” itself as the leader of the Third World. While these frustrations were at the very least officially speaking kept in check at the beginning of the PRC – USSR saga, they emerged in full force after the death of Stalin and Mao’s criticism of the Khrushchev approach.

After Deng Xiaoping took over and the infamously ideologically rigid Gang of Four was arrested (click HERE for more details on the Deng Xiaoping regime), China started embarking on a far more Realpolitik-oriented diplomatic journey, with economic growth being the main goal everything else revolved around. As Deng famously pointed out, China no longer cared if the (geopolitical) cat was black or white… as long as it caught mice.

Fast-forward to the present and as we all know, the USSR collapsed under its own weight, whereas “communist” China survived. But the “communist” dimension is a bit tricky to tackle because while China is indeed run by the Communist Party of China, it ended up embracing more than a few market-oriented reforms. As such, “socialism with Chinese characteristics” (a concept we have dedicated an entire article to, one you can access by clicking HERE) is the more appropriate term, with it being highly debatable if Marxism-Leninism has survived at all as far as these two entities are concerned.

To end with a reminder, we have dedicated an article exclusively to the relationship between China and modern-day Russia, an article you can read by clicking HERE, as mentioned at the beginning of this article. Let’s just say that today’s dynamics tend to be governed by more pragmatic geopolitical or economic goals rather than ideology-related concerns. In other words, as tends to usually be the case when analyzing today’s China, Realpolitik prevails.

What does this have to do with Macau?

Simple. All you have to do is tell the previously mentioned people that Macau’s gambling industry is the #1 one worldwide and that despite having a population of less than one million, its gambling industry is seven times larger than that of Las Vegas: the quasi-universal eyebrow raises you will be on the receiving end of should make it clear just how deep the gap between perception and China-related economic realities is. You might have noticed the “*” which has been used on two occasions and this is because Macau and Hong Kong are two so-called “Special Administrative Regions” or, in other words while they do not have complete political autonomy, they have varying degrees of autonomy on multiple levels, especially autonomy with respect to economic and administrative matters.

As such, Macau ended up becoming one of the world’s most prosperous regions, even occasionally hitting position #1 globally when it comes to metrics such as GDP per capita by PPP (Purchasing Power Parity). With its impressive HDI (Human Development Index) and the 4th best life expectancy worldwide at this moment in time, this highly urbanized region represents a fascinating economic case study.

To provide a bit of non-economic context, it is worth noting that geographically speaking, Macau is located in southern China, on the west of the Pearl River estuary and is surrounded by the (in)famous South China Sea. One should not lets its size of slightly below 33 km2 or the population of roughly 667,000 be misleading, Macau is definitely an economic force to be reckoned with.

Moving away from geography, one might argue that the “history” of Macau started in 1557, when the Ming Dynasty leased this territory to the Portuguese Empire so as to act as a trading post. China still firmly dominated the region up until 1887, when it was forced to grant Portugal perpetual colonial rights, a Portugal which would remain “in charge” of the region up until 1999, when Macau was returned to China. One of the many humiliating concessions China had to make after losing the Opium Wars, in other words.

Fast-forward to the present and Macau is prospering, with a nominal GDP of over $50 billion. We can consider it the world’s #83 economy, which may not seem impressive in the absence of the previously-mentioned geographical context but once we factor in its small size and population… let’s just say reasons to be impressed start popping up.

In a nutshell, Macau has managed to achieve economic success through its status quo service sector (capitalist) economy, thanks especially through gambling and tourism. This is sometimes a blessing, sometimes a curse, as Macau can most definitely be considered dependent of gambling revenue in light of the fact that almost 80% of its yearly government revenue is generated from gambling activities and at this point in time, these activities account for almost 50% of Macau’s GDP (down from a peak of 60% in 2013).

Furthermore, a lot of this revenue comes as a result of its favorable geographic position or, to put it differently, in light of the fact that gambling is illegal in nearby Hong Kong and mainland China. “Diversification” is most definitely a word Macau has become less and less familiar with. For example, the fact that manufacturing-related exports accounted for almost 37% of Macau’s GDP in 1985 and represent less than 1% nowadays speaks for itself.

Socio-politically speaking, while Macau has one of the highest GDP per capita levels worldwide, it is also a “leader” when it comes to inequality and various other forms of economic discrepancy. All in all, we can definitely consider this jurisdiction both fascinating and complex.

As a bit of a conclusion, here is how things stand when it comes to Macau and what investors in China need to know about it:

1. Macau is a (relatively) independent region, quite independent when it comes to matters that pertain to its economy and less so if we are to refer to political independence
2. Its economy is more than robust on a per capita basis, thanks especially to gambling and tourism. However, this (over)dependence poses a potentially systemic risk, especially in light of the fact that at various points in the future, the current context which brought about gambling-related prosperity might end up being altered and also in light of the fact that it depends heavily on variables outside its direct control (for example, its quasi-nonexistent agriculture which makes Macau dependent on food imports)
3. Just like the other Special Administrative Region (Hong Kong) as well as regions such as Taiwan, it is interesting and at the same time important (in the spirit of conducting a thorough analysis) to observe the dynamic of the People’s Republic of China and the Communist Party of China when it comes to the relationship with let’s call them “tricky” jurisdictions

ChinaFund.com believes in being thorough and with that in mind, let’s start our analysis with the year 1841, when the United Kingdom ended up occupying the Hong Kong area during the First Opium War. Simply put, China was not all that eager to engage in massive trade with the British anyway and even more so, commerce with opium was generating a serious addition problem in China.

As such, the two parties ended up turning a commercial confrontation into an actual armed conflict. Unfortunately for China, it was in no way technologically sophisticated enough to be a match for the British and as a result, it was defeated and among other humiliating concessions, agreed to essentially hand over the island of Hong Kong to the United Kingdom forever through the (in)famous Treaty of Nanjing. As time passed, the British secured the two other Hong Kong regions as well, specifically the Kowloon Peninsula and the New Territories. Formally speaking when it came to the latter, the final Convention for the Extension of Hong Kong Territory of 1898 revolved around China “leasing” the New Territories to the United Kingdom for a period of 99 years or, in other words, until the 1st of July 1997.

Fast-forward to 1949, when the communists took over in China and… let’s just say the economic path of Hong Kong was remarkably different. Unlike China, which embarked on an ideologically rigid journey which would come with dire economic costs, Hong Kong embraced a totally new system, becoming a capitalist multi-cultural success story. In fact, an almost six-figure number of Chinese emigrated to Hong Kong so as to flee from communism during the early post-WWII days.

As time passed and the 1997 “deadline” got closer, a political problem emerged: what should happen to Hong Kong as of that point? This is because the previously mentioned treaty only refers to the New Territories (with it being worth noting that these New Territories account for most of Hong Kong’s surface), not to the other two territories. Needless to say, fragmenting Hong Kong was a less than desirable outcome and as such, diplomatic negotiations started as of the seventies.

These negotiations culminated with the “Sino-British Joint Declaration” treaty of 1984 (during the Margaret Thatcher administration), which stipulated that yes, the United Kingdom would “let go” of Hong Kong but on the other hand, China needed to commit to granting it a certain level of autonomy over a period of 50 years through what ended up being referred to as the “one country, two systems” approach.

On the one hand, Hong Kong was granted the status of Special Administrative Region, which means it has its own (limited) legal framework, the right to free speech and assembly (as illustrated by the recent protests) and so on. Unfortunately for Hong Kong, there is a limit to these rights because on the other hand, they cannot elect leaders directly. Instead, an “election committee” that consists of 1,200 members was put in charge of electing Hong Kong’s chief executive. To add fuel to what gradually became a fire, concerns arose over China’s increased interference in local politics, through (you’ve guessed it!) measures such as the previously mentioned extradition approach.

This ultimately begs the question: what is likely to happen in 2047, the year as of which China is no longer required to treat Hong Kong in the manner in which it started treating the region as of 1997, a manner negotiated as of the 70s and ratified through the 1984 agreement?

As the recent protests made clear, there is a remarkable difference between being legally allowed to alter the status quo and actually doing it, actually implementing measures which are anything but popular. At the end of the day, there are significant differences in terms of anything from economic ideology to political values when it comes to today’s China and today’s Hong Kong. As such, some kind of compromise will most likely have to be reached to avoid resorting to the use of force and the potential onset of a full-scale civil war.

The current protests need to therefore be treated as a piece of a very complex puzzle. Needless to say, the average Hong Kong individual is worried about the increasing erosion of freedoms, as the various measures China is trying to impose are perceived. China, on the other hand, has it share of geopolitical problems to juggle, from regional ones such as its relationship with Taiwan or the South China Sea issues to global ones such as the tricky trade-related negotiations with partners such as the United States. What happens next is anyone’s guess, and this much is certain: the economic as well as geopolitical stakes are worryingly high.

Today, it’s time for the person who became the acting premier after Zhou Enlai’s death to be in the proverbial spotlight: Hua Guofeng. Furthermore, Hua Guofeng was ultimately chosen by Mao Zedong to act as the permanent premier of China and even became the chair of the Communist Party of China after his death.

As such, can Hua Guofeng be considered Mao’s successor?

Technically speaking, yes… but in practical terms, no. As tempted as one may be to draw a parallel between Hua Guofeng and Zhou Enlai in a way which considers them both highly influential historical figures who just so happened to receive less attention due to being overshadowed by “larger than life” characters such as Deng and Mao, it would only be a partially accurate parallel.

This is primarily because, no, Hua Guofeng was not as much of a key figure as Zhou Enlai. Instead, it would perhaps be more realistic to consider him a transitional figure. Not as influential as someone such as Zhou Enlai but, nonetheless, a person that needs to be included in China’s historical puzzle so as to paint an accurate picture of reality.

Simply put, Mao found himself in a bit of a predicament toward the end of his life. As mentioned frequently here on ChinaFund.com, Mao Zedong was a die-hard ideologue, in contrast to the far more pragmatic Deng Xiaoping and even Zhou Enlai. However, toward the end of his life, geopolitical circumstances forced him to become more pragmatic and open to solutions which would have been considered unacceptable during let’s say the days of the Cultural Revolution, for example establishing a closer relationship with the United States.

This left him with a difficult choice with respect for China’s future: should the nation continue to be led in an ideologically rigid manner or is it time to become more flexible? This dilemma is illustrated by the two factions that fought for influence toward the end of his life: on the one hand, the extremely ideology-driven Gang of Four (Yao Wenyuan, Wang Hongwen, Zhang Chunqiao and even Mao’s third wife, Jiang Quing) and on the other hand, the more pragmatic/moderate Deng Xiaoping group.

Hua Guofeng ended up representing a compromise solution.

On the one hand, he was not a so-called radical Maoist but on the other hand, he wasn’t perceived as having overly close ties to the Deng Xiaoping faction either.

However, surprisingly or even as a shock to many, his actions shortly after Mao’s death would end up proving to be a game-changer for China. Just four days after Mao Zedong died, Hua had the (in)famous Gang of Four arrested and paved the way for the rehabilitation of Deng Xiaoping, culminating with Deng once again receiving his position of vice premier.

Things however wouldn’t end there, with Hua Guofeng essentially handing over his power to the Deng Xiaoping faction one step at a time, from letting Deng supporter Zhao Ziyang take his role as premier in 1980 and being replaced by Hu Yaobang (another supporter of Deng Xiaoping) as the chairman of the Communist Party of China in 1981. While he remained a Central Committee member for almost two more decades… needless to say, he essentially “gifted” his political power to the Deng Xiaoping faction.

His legacy?

Let’s just say this is where things get tricky. On the one hand, many are quick to dismiss Hua as a rather unimpressive political/historical figure and leave it at that. However, the fact that his actions after Mao’s death greatly influenced China’s future cannot be denied. What if decisive action had been taken against Deng Xiaoping’s faction rather than the Gang of Four? What if Hua had decided to aggressively hold on to his political power? Needless to say, it isn’t difficult to think of quite a few scenarios in which decisions of Hua Guofeng would have led to potentially disastrously destabilizing outcomes. Yet that didn’t happen and as a conclusion, even if only for this fact alone, it might be wise to include Hua as a small piece of the Chinese puzzle we are building, a piece which helps us understand the subtleties of China’s political life without which our perception of reality would be incomplete at best.

However, a mistake frequently made when it comes to analysis efforts is that the author doesn’t dig deep enough and this lack of granular research leads to stereotypical conclusions which may sound accurate or logical and even be just that but absent the proper context, let’s just say the entire endeavor is… well, incomplete.

Political figures such as Zhou Enlai are oftentimes the key to filling that gap.

Right from the beginning of his political career as an activist and even downright imprisoned agitator, it became relatively clear what Zhou Enlai’s political path is likely to be, so it should come as no surprise that he has been “around” during the early days of 1921 when it comes to the Communist Party of China. A sometimes bumpy career path followed, from his “complex” and ultimately life-threatening relationship with Kuomintang leader Chiang Kai-shek (for more details about the political dimension of the Republic of China, click HERE) to his literally life-long friendship with Mao Zedong (the same way, click HERE for more details about the political dimension of the People’s Republic of China).

The birth of the People’s Republic of China has Zhou as one of the key figures (as the premier of the republic), with his role being best illustrated by two dimensions:

1. Zhou was put in charge of China’s let’s call it “challenging” bureaucracy, with his attention to detail being emblematic enough for him to gain Mao’s confidence when it comes to this crucial task
2. As strange as it may seem, the second dimension is a remarkably different one, international affairs. In light of the fact that China no longer had a foreign minister for political reasons, one might argue that Zhou became China’s #1 diplomat. His balanced personality enabled him to gain the respect of his counterparts, with Zhou negotiating some of China’s most tricky arrangements, including “contradictory” ones such as the 30-year alliance between China and the USSR signed back in 1950 and his key contribution to Richard Nixon’s 1972 Beijing visit

But perhaps the most important contribution of Zhou Enlai was the fact that his balance managed to even convince Mao Zedong and some of China’s most ardent ideologues to tone it down a notch every now and then. For examples, during the ideological fanaticism-driven days of the post-1966 Cultural Revolution, Zhou frequently managed to temper those who wanted to take decisive action against countless “destabilizing elements”… to use a rather diplomatic term.

On the one hand, may praise him for this achievement and, in fact, his death in 1976 generated a huge wave of sympathy toward him and antipathy toward ideologically rigid factions such as the (in)famous Gang of Four. This dual tidal wave reaction was so profound that it even led to the Tiananmen Incident and, again, Zhou played a decisive role in many of China’s key moments. Among other things, he even had a major contribution to the reinstatement of Deng Xiaoping, once the Cultural Revolution dust settled.

On the other hand, others criticize him for tolerating a wide range of inhumane excesses in order to remain close to power. And, indeed, in perhaps the most ideologically turbulent period of China’s history, he managed to stay very close to power until his death. Unfortunately, his resilience came at a significant cost, the fact that compromises needed to be made frequently and it is precisely these compromises which make many challenge his legacy.

Could he have achieved better results by being significantly more firm when trying to temper the excesses of the Cultural Revolution? If it would have worked out on his favor then yes, most definitely.

Could his decreased willingness to compromise have backfired, turning him into a Cultural Revolution victim and leaving Mao and his many ideologically rigid followers without a break pedal and China itself thereby even worse off? Indeed, this is also a possible scenario.

Let’s assume Zhou Enlai never existed. Would someone else have been as capable of tempering Mao? Hard to state. The same way, would Deng Xiaoping have had the support needed for his future political trajectory? Perhaps, but then again, maybe not.

Like with many key figures throughout China’s history or any nation’s history for that matter, it is hard to paint things in black or white. As the person he helped reinstate and who became China’s top reform agent (Deng Xiaoping) stated… at the end of the day, perhaps it doesn’t matter if a cat is black or white as long as it catches mice. And Zhou definitely caught enough mice to make it clear that he was one of the most competent individuals of his time and while there are undoubtedly questionable aspects pertaining to his activity and areas where he could have done more (yes, perhaps much more), this article hopefully makes it clear that including Zhou Enlai in the picture of China that we try to accurately paint is a must.

Right from the beginning, it makes sense to point out how unusual China’s post-1978 status quo is. In other words, let’s just say things were fairly straightforward under the rule of Mao Zedong with respect to the Communist Party of China. Standard Marxist-Leninist ideology applied to a predominantly rural population, in other words. Standard but excessively zealous, which led not just to a deterioration of China’s relationship with the USSR after Stalin’s death but also to measures which might have sounded “uplifting” from an ideological perspective but were hardly entrenched in the realities of China, with our most loyal readers most likely already knowing the two most (in)famous ones: the Great Leap Forward of 1958 and the Cultural Revolution of 1966.

The former, for example, may have sounded great on paper because the Great Leap Forward revolved around setting overly-ambitious output goals which would have China surpass the United Kingdom (a nation which was multiple orders of magnitude more productive at that point in time). In reality, people across multiple levels of the administration just lied about outputs (for reasons which range from fear to an excessive desire to please their superiors), leading to disastrous export decisions (China exporting considerably more than it should have) which brought about the famine with the highest numbers of casualties in documented history. The same way, the Cultural Revolution’s unrealistic expectations (a complete “out with the old, in with the new” reset which revolved around ideas such as forcing intellectuals to learn from illiterate farmers, for example) ended up doing a lot more harm than good. As strange as it may seem, however, things were fairly straightforward (even if wrong!) under the rule of Mao Zedong… in other words, more or less what one would have expected by a country run by the Communist Party of China.

As of 1978, China embarked on a remarkably different journey under Deng Xiaoping and a most unusual balance was reached: on the one hand, China was moving toward a status quo which revolved more and more around embracing capitalist frameworks such as market dynamics but on the other hand, the political grip of the Communist Party of China on the nation was as great as ever.

Ideological cognitive dissonance at its finest.

Needless to say, members of the Communist Party of China found and still find themselves in a bit of an ideological predicament. What do you do when certain actions that contradict your fundamental ideology on quite a few levels generate overwhelmingly positive results? Do you revert to ideological “purity” at the risk of jeopardizing your country’s economic growth trajectory or do you maintain the current course, knowing that you’re moving away from the principles your party was initially governed by?

Tensions without a doubt exist at various levels of China’s political life but, in light of the way the Communist Party of China functions, there are hardly fireworks. Why? Simply because, moving on to the structure of the CPC, we are definitely dealing with a monolithic entity which places little importance on democratic frameworks.

To put it differently, power flows from the top to the bottom of the CPC. In other words, whenever there is political will at the very top of the organization to push things in a certain direction (as was the case with Mao Zedong’s vision as well as Deng Xiaoping’s vision), the rest of the party will figure out a politically acceptable way to follow suit. For this reason, from Mao Zedong to today’s leader Xi Jinping, all of China’s paramount leaders have tried to contribute to the CPC’s ideological framework by adding their own philosophies to the mix.

So, how do things work when it comes to the CPC specifically?

As with many other communist parties throughout history, a large number of delegates (approximately 2,000 in China’s case) gathers once every five years for the National Party Congress so as to elect the so-called Central Committee (which will consist of roughly 200 members) through a plenary session. The Central Committee will meet on a yearly basis and gets to choose a Political Bureau (also known as the Politburo, a term some of you might have come across throughout various China-related articles) which consists of just 20 to 25 highly influential members, the elite of the CPC if you will. Of these 20-25 individuals, 6 to 9 of the most powerful political figures represent the Political Bureau’s Standing Committee.

While these 6-9 individuals can be considered the most influential politicians in China, the #1 most influential political figure in the Communist Party of China (formally speaking) is the so-called general secretary of the CPC Secretariat, the entity which deals with the various administrative tasks of the CPC. The general idea is that the political system of China, monolithic as it may be, is quite complex and this is why “paramount leaders” tend to take on many roles within the Chinese system at the same time.

From having mechanisms in place to exert influence across all administrative dimensions of China to having a commission through which internal party-related “wrongdoings” are punished and to even having its own publications such as Renmin Ribao (“People’s Daily” for English speakers), there are few places in China shielded from the reach of the CPC. As such, as a rather blunt conclusion to this article, one cannot “get” China without understanding the Communist Party of China.

However, it makes sense to take our analysis to the next level and dig deeper, deep enough so as to at least understand a thing or two about how the Communist Party of China got to where it is today (to get a proper dose of context, in other words) and let’s just say the ride was more than bumpy on several occasions.

The very beginning of the Communist Party of China has to do, as the history enthusiasts among us surely suspected, with the Russian Revolution of 1917 and the victory of the Bolsheviks. Think of the CPC as a combination between an ideological movement and a political party, with leaders such as Mao Zedong and Liu Shaoqi emerging from China’s May Fourth Movement and gradually building up a base throughout the 20s via methods such as organizing unions in urban areas.

Next, much to the surprise of those who are familiar to the current relationship between the nationalist Kuomintang party and the CPC in the context of China’s modern-day Taiwan situation, the two entities actually did very well together after joining forces back in 1924 so as to establish control over China by, among other things, driving away warlords. In other words, the beginning of the relationship between the Kuomintang and the CPC was actually not just peaceful but downright fruitful.

As of 1927, however, the CPC was forced to go underground by the Kuomintang in light of the fact that its leader (Chiang Kai-shek) decided it was time for the previously mentioned love affair to end… in a brutally violent manner. In the end, the CPC had little choice but to retreat from its urban strongholds to rural regions but fortunately for them, they were rather successful in that endeavor, in that they gained enough popular support to be able to establish the Chinese Soviet Republic in the southern region of China in 1931.

Needless to say, the Kuomintang was less than thrilled and as a result, the overwhelmingly more powerful (at that point) nationalists destroyed the positions of the CPC. In the end, leaders such as Mao Zedong and whatever forces they had left were forced to retreat to northern China (more specifically, to Yan’an), as those familiar with the Long March know. A march which, among other things, enabled Mao Zedong to gain control over the Communist Party of China, control which would not be lost until the year of his death (1976).

But going back to the more distant past, it is important to point out that as of 1936, the actions of Japan against China left the Kuomintang little choice but to stop military campaigns against the CPC and, on the contrary, join forces. This alliance ended up being far more productive for the CPC than the Kuomintang had hoped, with the communists being able to dramatically bridge the logistical gap between the two entities. They ended up controlling an area with a population of roughly 100 million individuals and had everything they needed to take things to the next level, from a ready-to-implement political program (which included complex relationships between peasants, the proletariat, the middle class and even certain capitalists) to the military and administrative capacity to generate clear results.

And, indeed, this is precisely what happened as of 1946, when the civil war started again in China as a result of the fact that Japan had lost World War II and was forced to surrender as well as retreat from China. At that point, the United States offered some support to the Kuomintang, whereas the Soviet Union supported the Communist Party of China… however, neither the US nor the USSR were all that eager to actively support their preferred entity.

In the end, though a combination between the previously mentioned growth working in the favor of the communists and the nationalists proving to be remarkably inefficient to the point of incompetence, the Communist Party of China gained control over mainland China (the overwhelming majority of China’s territory) in 1949, with the Kuomintang retreating to Taiwan.

What followed were two remarkably distinct periods:

1. A period marked by Mao Zedong’s “continuous revolution” mindset, which resulted in excessively ideologically rigid programs such as the Great Leap Forward of 1958 and the Cultural Revolution of 1966 that put a major dent in the (overly optimistic) economic goals of China. Furthermore, China even considered the USSR under Stalin’s successors a disappointment from an ideological perspective (criticizing the Soviets for being too pragmatic), which led to a deterioration of the relationship between the two entities
2. The Deng Xiaoping and post-Deng period, which had China essentially changing course to its so-called Socialism with Chinese Characteristics, a model which tries to reconcile many market economy elements with the domination of the Communist Party of China. Economically speaking, the results were spectacular. However, some criticized Deng and his successor Jiang Zemin for focusing on economic growth but ignoring the social costs, with future leaders Hu Jintao and Xi Jinping showing more flexibility in this area

Today, the Communist Party of China is praised by some for being flexible enough to switch to a remarkably different economic model but criticized by others for sometimes being displaying more similarities to capitalist entities than socialist ones. More on that in future articles, however.

Why? Simply because the actual China-related knowledge of the average Westerner is superficial at best, with most people preferring a headline-oriented approach rather than meaningful (and therefore time-consuming) research. Here at ChinaFund.com, we believe the exact opposite: in unbiased analysis backed by facts rather than (geo)political rhetoric.

Let’s start… with the beginning, the name of China’s currency. The official name is actually the renminbi (which literally means “people’s currency”) but a lot of people choose to refer to it as the Chinese yuan (abbreviated CNY). To keep things accurate, however, we need to explain the difference: “renminbi” is the actual name of the currency, whereas “yuan” is the primary unit of account, with one yuan representing 10 jiao and one jiao representing 10 fen.

In other words:

1. Renminbi represents the name of the currency
2. Yuan represents the name of one unit of currency, with jiao being the name used for 1/10 of a unit and fen being the name used for 1/100 of a unit

As tumultuous as the present of the renminbi is, its past was even more problematic. The fact that it was launched (along with the People’s Bank of China being founded) back on the 1st of December of 1948 (when the civil war between the communist rebels of Mao Zedong and the ruling nationalists of the Kuomintang party was in full swing) speaks for itself. In other words, the renminbi appeared during the final days of the Republic of China (ROC).

As mentioned previously on ChinaFund.com, Mao’s communists emerged victorious and on the 1st of October 1949, the People’s Republic of China (PRC) was born, with the renminbi as the sole national currency and Mao’s administration trying to tackle the hyperinflation China was (unsurprisingly) dealing with.

Eventually, stability was reached and from 1955 up until 1971, the exchange rate of 2.46 yuan being worth one US dollar was set and enforced, with the year 1971 being important in light of the fact that China gained its seat at the United Nations back then (a situation related to the China-Taiwan dynamic, covered in another article). With the second RMB series issued in 1955 and the third in 1962, things were fairly straightforward, in line with what one would expect from a centrally planned economy with wage and price controls in place.

From 1972 to 1979, the renminbi went up in value compared to the US dollar, with 1.5 yuan being worth one US dollar. As the more loyal ChinaFund.com readers know all too well by now, Deng Xiaoping’s reforms started kicking in and the currency dimension was, of course, included in the equation. More specifically, the economy of China was becoming more open on all fronts and as of 1979, firms were actually allowed to retain a certain foreign exchange claim percentage.

At that point, the renminbi was considered overvalued and a devaluation process began, first through implementing a two-tier system which had an internal settlement rate of 2.8 yuan for one US dollar as well as an international rate and then with the dual exchange rate approach ending in 1985, as 2.8 yuan became worth one US dollar both internally and internationally.

However, Chinese exporters were still anything but happy by the early nineties, with them quasi-unanimously considering the renminbi overvalued. As such, in line of the first forex trading center being opened in Shanghai, China moved on to a (closely) managed floating exchange rate, with 8.28 yuan being worth one US dollar.

From 1997 up until 2005, a peg was maintained that had 8.3 yuan being worth one US dollar and as some readers undoubtedly thought about the famous “Asian Contagion” of 1997 (major currency crisis all over Asia), it is worth pointing out that China did not devalue in line with its neighbors and as such, its currency actually represented a pillar of stability for the region throughout the crisis.

Also, in the 1997 – 2005 equation, it makes sense to also mention the fact that China became a World Trade Organization member back in 2001 and as it started entering the “big league” of nations one step at a time, various other nations had a thing or two to say about its currency-related policies. One might argue that when it comes to the US, currency-related concerns stated in 2003, when senator Chuck Schumer approaching the US Congress with the first ever bill which referred to the yuan value. Back in 2006, the first bill which recommended economic sanctions for China if it keeps the yuan artificially devalued was co-sponsored by two senators and the rest, as they say, is history.

While there is a target for 2020 to represent the year in which China embraces full convertibility, let’s just say it’s a tricky goal in light of the fears Chinese authorities have regarding issues such as capital flight and all sorts of instability types that might pop up. It is however inevitable, in light of the fact that, again: China is entering the spotlight one step at a time (from becoming a WTO member in 2001 to being included in the IMF’s basket of currencies in 2016).

In a nutshell, this is the trajectory of the renminbi from 1948 up until today but before ending this article, an important reminder is in order: while it is true that Chinese exporters don’t want a strong renminbi, it is equally true that it would be economically hypocritical to consider China the only game in town when it comes to currency devaluation. To put it differently, as convenient as it may be to exclusively blame everything on China and ignore the fact that interest rates went to zero in the US and even negative in the European Union or that $85 billion per month were “printed” by the Federal Reserve at the height of its quantitative easing process and even more by the European Central bank… it would be an intellectually dishonest approach, to put it mildly. While currency devaluation is undoubtedly a legitimate concern when it comes to China, we cannot reach a meaningful understanding of today’s monetary realities (in China or anywhere else) without seeing the big picture.