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Showing posts with label EU. Show all posts
Showing posts with label EU. Show all posts

Tuesday, August 1, 2023

The New World (Dis)order: Part IV: Crony Capitalism and the West’s Achilles Heel

Empty shopping cart in an empty parking garage
(Image: Xavi Cabrera on Unsplash)

NOTE: This is the fourth in a five part series.
PART I: American Adventurism, Non-Interventionism, Trumpism and Afghan Chaos
PART II: The Misunderstanding of Vladimir Putin
PART III: China Awakens Under Xi Jinping
PART IV: Crony Capitalism and the West’s Achilles Heel

November): The New World (Dis)order

Part IV: Crony Capitalism and the West’s Achilles Heel

“Private individuals can corrupt free markets by using the government to procure for themselves ‘systems either of preference or of restraint’.”


-Adam Smith on Crony Capitalism (via Heritage Foundation Report)

Have you ever visited Londongrad and strolled along Moscow-on-the-Thames? No, seriously these nicknames were conferred upon the British capital city, with good reason.

Since the fall of the Soviet Union, successive British governments of every political stripe had an open door policy to welcome in Russian money. In 1994, PM John Major, a Conservative, launched a ‘golden visa’ scheme offering residency visas to anyone who invested £1m pounds. Tony Blair and the Labour Party continued the visa scheme. Even Ken Livingstone, London's Mayor from 2000 to 2008, a socialist, declared he wanted “Russian companies to regard London as their natural base in Europe.

The scheme was rebranded the Tier 1 investor visa by Gordon Brown, in 2008. The BBC reports that since the rebrand, 2,581 visas have been issued to Russian citizens. In 2020, Boris Johnson made his friend Evgeny Lebedev, owner of the Evening Standard newspaper and son of a former KGB officer, a peer in the House of Lords.

Even after Russia’s annexation of Crimea in 2014 and release of the Panama Papers in 2016, which detailed how 214,488 offshore entities shell companies invested in places like London, nothing was done. Russian oligarchs continued to launder money by buying luxury mansions and even English Premier League football teams.

In 2020, UK’s parliamentary intelligence and security committee issued a damning report about the growing influence of Russian money in the country. The report stated that the UK had become the ‘most favourable’ destination for oligarchs and that the visa scheme offered the ‘ideal mechanisms’ to launder money. 

It warned that dirty money was being used to “extend patronage and build influence across a wide sphere of the British establishment – PR firms, charities, political interests, academia and cultural institutions…” Another report issued that same year by the Home Office cautioned that “Russian-linked illicit finance” was being used by individuals to successfully "launder their reputations”.

A 2022 analysis by independent anti-corruption group, Transparency International, found £1.5 billion worth of property owned by Russians accused of financial crime, or with links to the Kremlin. The actual figure is likely much higher because they found another 90,000 properties owned by shell corporations, which prevents the British Government, law enforcement and the public from uncovering who owns them.

Despite the obvious red flags the visa scheme remained open and was only shut down one week before Mr. Putin invaded Ukraine. However, a new book by Oliver Bullough argues that even though the UK sanctioned Russian companies, banks, tycoons and pushed through a hastily crafted anti-crime bill, there remains a big “gulf between rhetoric and reality”.

According to Mr. Bullough, the UK became the preferred destination for oligarchs, gangsters and kleptocrats not by accident, but by design. He says the government’s new law lacks teeth, and more importantly does nothing to dismantle the underlying systems that have led to Britain having an estimated £100 billion-a-year money-laundering problem.

According to him, the lawyers and public-relations firms that scare away anyone prying into their clients’ business, along with plaintiff-friendly libel and privacy laws, remain in place. As does access to a network of secretive offshore territories like Jersey and the Cayman Islands. Extradition to Russia is still a no-no in the eyes of British judges and oligarchs rest easy knowing they spent years investing large sums of money building deep ties to every part of the British establishment.

While the UK has a big dirty money problem, it is not alone in Europe. 

In 2005, less than three weeks after Gerhard Schröder stepped down as chancellor of Germany, he got a call from Mr. Putin asking him to lead the shareholding committee of Nord Stream, the Russian pipeline which delivered 55% of Germany’s natural gas, prior to the Ukraine invasion. Despite the obvious ethical conflict of Mr. Schroder being the one who pushed through approval of the pipeline, during his final weeks in office, he accepted the job.

It is true that successive German chancellors, captains of industry and journalists believed that binding Russia in trade would deter Mr. Putin from risking a conflict with Europe, while securing Germany’s economic interests. After the Ukraine invasion this calculus changed for every German, but not Mr. Schröder. 

He has made millions pushing Russian energy interests and far from expressing regret, he accepted a new position to be on Gazprom's board last year. He refuses to condemn the invasion and is still pushing Germany to reopen Nord Stream.

The European Parliament too has been rocked by a recent corruption scandal. A series of raids carried out by Belgian investigators, last winter, uncovered that politicians had pocketed cash in exchange for praising Qatar and downplaying its human rights abuses, leading up to the 2022 World Cup.

A New York Times investigation found that Qatar used bribes to turn the International Labor Organization, the United Nations workers’ rights watchdog, from critic to ally. Qatar’s campaign included “free travel; a parliamentary hearing with planted questions and a $25 million Qatari contribution to the labor organization”. 

On the eve of the World Cup, Qatari officials succeeded in getting the U.N. watchdog to refrain from making comments that might overshadow the tournament and to withdraw an earlier complaint “accusing Qatar of forced labor and exploitation”

The reality is that dirty money’s tentacles have spread to every part of the West and infiltrated sectors ranging from startups and real estate, to colleges and cultural institutions. 

The Atlantic Council estimates $1 trillion in Russian "dark money" is hidden around the globe. The National Bureau of Economic Research (NBER) estimates that 60% of the wealth of Russia’s richest households reside outside the country’s borders. 

Another place swimming in dirty money is Silicon Valley. Russian oligarchs have sometimes invested openly, like when Mikhail Fridman made a $200 million investment in Uber, in 2016. However, most use shell companies and middlemen that are hard to trace, and through them invest in blue chip companies like Meta, Twitter and Airbnb.

Saudi Arabia is one of the largest investors in US startups. A 2018 estimate by Quid put their direct investments at $6.2 billion in companies like Tesla, Uber, Lyft and Twitter. In 2020 they bought a $500 million stake in LiveNation, the parent company of Ticketmaster and Taylor Swift fans’ worst nightmare. Prior to that they wrote a $45 billion cheque to SoftBank’s Vision Fund. Through it they have made around 26 investments in startups like WeWork, Magic Leap, GM CruiseWAG, Slack, Sofi and DoorDash. 

After the World Cup in Qatar, the Saudis managed to pull off their first professional sports coup by signing one of the greatest footballers of our time, Cristiano Ronaldo. They are paying him over $200 million a season to play for a local club. They also offered football legend, Lionel Messi, a $400-$600 million a year deal to sign with another Saudi club, but he decided to sign with FC Miami in the end. According to press reports Miami managed to make him a sweeter deal.

In 2022, five European football clubs were owned by Russian oligarchs and five by Arab billionaires, including one by Saudi crown prince Mohammad Bin Salman. Russian oligarch Roman Abramovich only agreed to sell Chelsea to a US consortium, after he was sanctioned for the Ukraine invasion.

As they continue to sportswash their human rights record, last year the Saudis upended the genteel world of US professional golf. First, they divided the PGA tour by luring away some of their biggest stars to join a rival Saudi-backed LIV Golf circuit. Last month, Saudi Arabia effectively bought off the PGA Tour when it was announced that LIV and the PGA were going to merge

While financial details of the merger have not been disclosed, the head of the Saudi Public Investment Fund (PIF), who happens to be the right-hand man of Crown Prince Mohammed bin Salman, will be the new Chairman, and the current PGA commissioner its CEO. The deal also gives the Saudis the first right to refusal on any outside investment in the future, effectively giving them total control over a major U.S. sport.

The real estate markets of Los AngelesMiami and New York are another magnet for dirty money. Current US law makes it easy to make large purchases through untraceable shell companies with few questions asked. 

According to PropertyShark, $8 billion is spent each year on New York City homes that cost more than $5 million each. That is triple the amount spent a decade ago and over half these purchases are made by shell companies.

In 2010, a entity named 25CC ST74B L.L.C. paid $15.65 million to buy a condo on the 74th floor of the Time Warner Center. A NY Times investigation traced it to the family of Vitaly Malkin, a former Russian banker who is barred from entering Canada because of his suspected ties to organised crime. 

The condo down the hall was bought by a shell company for a Greek TV magnate, who was later arrested on fraud and corruption charges. A few floors down, three condos were purchased by another shell company that belongs to a Chinese businessman, Wang Wenliang. His construction company was fined for housing workers in hazardous and unsanitary conditions in New Jersey.

The same NY Times investigation found that two-thirds of Time Warner Center residences were owned by shell companies. They managed to uncover the names of 16 owners. All sixteen were the subject of government investigations into housing and environmental violations or financial fraud in their home countries. They hailed from places like Russia, Colombia, Malaysia, China, Kazakhstan and Mexico.

Remember the Chinese businessman who owns the three Time Warner condos and was cited for labour violations? Turns out that Mr. Wenliang managed to secure a seat on the NYU board of trustees after making a donation to New York University. 

In 2020, the US Department of Education (DoE) sent letters to Harvard and Yale for failing to "disclose donations and contracts" from foreign governments that included China, Iran, Russia, Qatar and Saudi Arabia. While the majority of money these institutions received was from legitimate sources, the department said the lack of “institutional controls” was making it easy for dirty money to go unnoticed. The DoE's letter cited Yale for failing to disclose “a single foreign source gift or contract in 2014, 2015, 2016 and 2017.”

These colleges are not alone. A 2021 report by the National Endowment for Democracy found that US educational institutions and think tanks have become vulnerable to “transnational kleptocratic activity”. 

Kleptocrats are using major gift giving as a way to launder their reputations by influencing academic remits, serving as guest lecturers and gaining admission for family members. Russian oligarchs have donated $1 million to MIT, $4 million to NYU and more than $10 million to Brandeis.

US Cultural institutions too, have been busy opening their doors to dirty money. The John F. Kennedy Center for the Performing Arts got more than $5 million from Russian billionaires. Viktor Vekselberg donated to Lincoln Center, Carnegie Hall and the Museum of Modern Art. Vladimir Potanin is a major donor to the Guggenheim Museum and recently gave over $6 million to the Kennedy Center in Washington.

The Brooklyn Museum received $1 million from Mikhail Prokhorov, former owner of the Brooklyn Nets basketball team. Even the Mayo Clinic has accepted at least $1 million. According to the co-founder of the Anti-Corruption Data Collective, these gifts do not even start to scratch the surface of oligarch donations, as most are impossible to trace.

Many reputed US firms have been caught engaging in corruption while doing business abroad. Goldman Sachs paid a $3 billion fine to end a probe into its role in the 1MDB corruption scandal. The scheme involved paying $1 billion in bribes to Malaysian government officials, including a former prime minister. US officials concluded that Goldman played a "central" role in the "massive corruption scheme”. 

Even McKinsey, the world’s most prestigious consulting firm, has gotten their hands dirty. They were barred from doing business in Mongolia after allowing a government official to double as a profit-seeking business partner. More recently, they were criticized for nepotism when they hired the children of high-ranking Saudi officials while being paid millions to advise the Saudi government on its economic transformation.

In 2018, McKinsey found itself embroiled in a corruption scandal involving South Africa’s largest power company, Eskom, in a deal that had ties to shady businessmen brothers who bankrolled the former president, Jacob Zuma. In 2021, McKinsey agreed to repay $63 million in fees to Transnet, a South African logistics company, after being linked once again to bribery-tainted contracts. Last year McKinsey was officially charged in the Transnet case by the country’s National Prosecuting Authority. 

Not to be outdone, their rival Bain & Company got themselves banned from bidding on public contracts in South Africa for ten years, after they helped corrupt government officials degrade the country’s revenue services’ ability to probe tax evasion.

Meanwhile across the pond, Europe’s biggest bank HSBC decided to become the local bank of drug cartels in Mexico. The ‘world’s local bank’ had created a Ponzi scheme to help cartels funnel money. They did this while on probation for past ties to drug kingpins.

A UK government investigation found that HSBC’s subsidiaries helped traffickers transport billions of dollars in armored vehicles, cleared suspicious travelers cheques for them and helped one drug lord purchase an airplane to transport drugs. 

The same UK investigation found that HSBC employees helped terrorists move money outside Iran and Syria, and a Saudi bank with links to Al-Qaida transfer money to America. British lawmakers concluded that the bank had a "pervasively polluted" culture that had persisted for years.

Much before the HSBC scandal, Siemens, a German company and the world’s largest electrical engineering firm shocked the world in 2012 when they agreed to pay a $1.6 billion fine. The penalty related to a bribery scheme that began in the 1990’s and ran through the 2000’s, spanning the globe from Azerbaijan and China, to Iraq and Russia. 

German investigators found that the corruption started in Siemens executive suite and flowed from there to every corner of the firm. It was so pervasive that Siemens actually had an internal accounting euphemism for bribes. One German prosecutor summed up the case saying, "bribery was Siemens' business model”

Even Scandinavian companies, long considered the gold standard for corporate responsibility, have been caught in dirty money scandals. Danske Bank, the largest Danish bank, was the first to get caught conducting suspicious activities, after which the scandal spread to the highly respected Swedbank. Both are accused of helping Russian oligarchs, corrupt politicians and organized crime lords transfer hundreds of billions to offshore tax havens.

Earlier this year, the Swedish telecom giant Ericsson pled guilty to and agreed to pay $206 million in criminal penalties. They were fined for covering up bribes they paid between 2000 and 2016 to government officials in Kuwait, Saudi Arabia and China. Credit Suisse, the 167 years old Swiss bank that was recently sold to UBS, was criminally charged in 2022 for laundering money for a Bulgarian cocaine smuggler. 

While corruption seems endemic, there is a more fallible weakness the West has when it comes to their ties to autocratic regimes, and it has to do with their reliance on these countries for critical raw materials, minerals and energy. 

Take for example the fanfare with which US, UK and EU imposed sanctions on Russian billionaires. An analysis by Bloomberg found that the EU sanctioned nine and U.S. just four of twenty billionaires with ties to Putin. Sanctions experts say the decision not to sanction some was based on their "critical stakes in energy, metals and fertilizer companies”. It is the same reason that Russian agricultural products, like fertilizers, have not been a target of Western sanctions.

Russia is the world’s largest supplier of fertilizers, followed by China, which means the two countries effectively have a stranglehold on the world’s food supply. Russia and its closest ally Belarus, account for nearly a quarter of all crop nutrients, followed by China. 

According to the US Department of Agriculture, fertilizer accounts for almost one-fifth of a U.S. farmer’s cash costs. For corn and wheat it is even higher, accounting for 36 percent and 35 percent, respectively.

After the Ukraine invasion, global fertilizer prices skyrocketed but US consumers did not feel these effects because for 2022 plantings, purchases had been made in 2021. This year, wheat prices have increased 21 percent, barley 33 percent and fertilizers 40 percent. The longer the war continues, the more likely it is that Americans will start to feel some pain at their dinner table. However, for poorer counties the impact of these price rises will result in starvation. 

In early 2023 the IMF raised the alarm saying that 48 countries in Africa, Asia and Latin America were at serious risk from “acute food insecurity,” because of the war in Ukraine. 

Many low-income countries in Middle East, Africa and Central Asia get 75% of their wheat from Russia and Ukraine. Prior to the invasion Ukraine accounted for 46% of global exports for sunflower oil, 37% of millet, 15% for corn, 13% of barley, 10% of wheat, 8% of honey, and 7% of walnut.

With the Russian navy blockade of the Black Sea the situation has grown more precarious. Russia now controls the main shipping corridor for these critical food exports. Last year, the UN had to step in to broker the Black Sea Grain Initiative for exports to resume, after Mr. Putin halted them.

Late last year Russia again refused to renew the initiative unless the West softened sanctions, and last month they withdrew from the deal altogether. A few days later Russia said it would treat any ship heading to Ukrainian grain ports as a military target and they started bombing grain facilities in Odesa and other cities. 

While there is no question Mr. Putin will continue to use this as a bargaining chip, I do not believe he will completely halt exports because much of it goes to countries like Turkey, Iran, Egypt and African and Latin American nations that have refused to publicly condemn Russia’s invasion.

Instead, Mr. Putin might try to cut it off for European nations like Germany, France, Spain who rely on Ukraine to a lesser extent but would see a rise in prices if he managed to stop their supply. The bottom line is that the longer this war goes on, the greater the threat to global food security.

The West’s energy needs are another weakness that Mr. Putin and Mr. Xi are aware of. The EU surprised the world by how quickly they managed to cut their reliance on Russian gas but they pulled it off with a mix of expensive and short-term fixes like buying from higher priced suppliers, getting citizens to cut back on their energy use and doling out costly subsidies.

It is worth noting that the EU has not sanctioned Russian gas sales and member nations continue to import large volumes of Russian liquefied natural gas. It is also true that Europe got lucky with a mild winter last year. There is a long road ahead and no guarantees that these temporary solutions will be sufficient to withstand a harsher winter next year.

Unlike the EU, the US was only dependent on Russia for 8% of its oil imports, so Americans did not feel the same bite from sanctions. However, America's insatiable thirst for big cars and cheap gas still has dangerous consequences. 

A Berkeley study found that the average American consumes more than 300 gallons of gas a year, which puts the U.S. at the top of 128 countries studied. A typical American consumes more than what three Germans consume and the equivalent to the consumption by six Frenchwomen.

Last year, as global energy prices rose, fuel-guzzling Americans feeling the pinch at the pump were immediately up in arms. Being an midterm election year, gas prices turned into a hot button political issue, which led the US President to tuck his tail and run to Saudi Arabia. 

Mr. Biden, who had promised to turn Saudi Arabia into a ‘pariah’ over their human rights record, instead rushed to fist bump Mohamed Bin Salman. The man who, according to the CIA, had personally approved the murder of Jamal Khashoggi. 

Coincidentally, just when Americans were complaining about high gas prices, another dictator got a free pass. The Biden administration eased sanctions on Nicholas Maduro’s regime, giving Chevron permission to start producing and exporting oil from Venezuela. This is the cost of satisfying American’s insatiable thirst for oil. 

To be fair, while we can criticize American oil consumption, there was no shortage of countries looking to buy cheap Russian oil, including India and China. Another unintended consequence of Europe’s price cap on Russian oil is that it created a thriving black market. 

Russian crude managed to find back doors into Europe through middlemen, with one suspected route being through Azerbaijan. Data shows that Azerbaijan exported 242,000 barrels a day more than it produced last year. Another is through Turkey, which not only doubled its direct oil imports last year, but has refused to impose sanctions on Russia.

Russia has also been busy building a shadow fleet of oil tankers. They are estimated to have 600 vessels known as "dark" ships, which turn off their AIS transponder, technology used to identify and locate vessels. This playbook was written by Venezuela and Iran, who for years used these tactics to skirt sanctions. These dark vessels are operated by hard to trace shell companies located places like Dubai, Hong Kong and Cyprus.

Far from crippling Russia's economy, the sanctions have not even dissuaded many countries from trading with Russia. A NY Times analysis finds that over the last year, trade with Russia actually grew. 

This was not just with countries like China, Brazil and India but EU countries like Germany, Belgium, Spain and Netherlands, reaffirming how deeply the West is reliant on countries like Russia for their energy and other needs. 

Europe is weaning itself off Russian energy, with plans to replace it with clean energy solutions. However, in order to make their clean energy future a reality, they need Russia, because it is the leading producer of copper, nickel, platinum and other minerals. All critical raw materials Europe needs to build solutions for a low-carbon future.

In America, over the last few years there has been growing political rhetoric about “breaking-up” with China, but reality does not support this. President Trump first took a hard line with China by putting in place a number of trade tariffs. President Biden has not only kept these in place but he has also increased scrutiny of Chinese firms, adding new export controls on national security grounds. 

However, what no U.S. politician will admit is that behind all the rhetoric, the reality is that breaking up with China would cause untold economic pain for Americans. 

China is the U.S.’s largest trading partner with two-way trade totaling $559.2 billion in 2020. That same year the U.S. was China’s 3rd largest export market. By contrast, US-Russia trade accounted for $28.0 billion in 2019, making them the 26th largest trade partner.

Severing ties with Russia would feel like a paper cut, but cutting them with China would be akin to transplanting every organ in the body, without anesthesia.

Beginning in the 1990’s and a trend that accelerated in 2001, after China joined the World Trade Organization (WTO), American firms began offshoring manufacturing to China. This enabled them to bring down prices, while increasing profits. Today, the depth of America’s reliance on China, across every industry sector, cannot be underestimated. 


Apple relies on China for 85% of its manufacturing, according to market-research firm Counterpoint. Recently, Apple has been talking about moving production out of China, and started manufacturing iPhones in India and Vietnam, yet, the truth is starkly different. Bloomberg Intelligence estimated that it would take Apple eight years to move just 10% of their production capacity out of China, where 98% iPhones are still made. 

This is why Apple’s CEO, Tim Cook, on a recent visit to China said at a conference hosted by the Chinese government, “I am thrilled to be back in China, “It means the world to me and I feel really privileged to be here”.

For Tesla, China accounts for a quarter of its revenues and is their second largest market. Similar to Apple, they rely on China for around 85% of their manufacturing. Tesla just announced they are building a new battery megafactory in Shanghai, where they already have a Gigafactory that makes cars. This will deepen their investment in China, while helping to cement the China’s leadership role in the energy storage supply chain.

Other US companies may have less visible ties, but are equally reliant on China. Take Amazon, which entered the Chinese market through a local acquisition in 2004 but found itself unable to compete with local e-commerce behemoths. While they shuttered Amazon China in 2019, a 2021 Marketplace Pulse analysis found that 75% of new sellers of goods in their top four markets of U.S., U.K., Germany, and Japan, are based in China.

A few years ago, Nike’s CEO proclaimed that “Nike is a brand that is of China and for China”. He was referring to the fact that China had become Nike’s fastest growing market, accounting for 15.8% of total revenues in 2020; five years prior it was less than 1%. Nike is not alone. Numerous American brands are made in China like Barbie, Levis Gillette, Melissa and Doug and Chevy Silverado, to name a few from a much longer list. 

It is not just in manufacturing that America is beholden to China. In 2022, China overtook US as the world’s largest film market. Hollywood relies on China to stay afloat and this is why they kowtow to Chinese censors and stay away from storylines about Uyghurs and Taiwanese independence. 

Giants in the music industry have also been collecting big money for years, doing private performances for leaders of unsavory regimes. Beyonce, Mariah Carey, Seal, Nikki Minaj, Kanye, Jennifer Lopez and Sting are just a few of the names stars have entertained autocrats and their families.

Another important area where the West is reliant on China is critical rare-earth minerals. These are integral to nearly all high-end electronics from cell phones, computers, electric vehicles and flat-screen TVs, to defense equipment ranging from guidance systems, lasers, to radar and sonar systems. According to a U.S. Geological Survey report, China accounts for 80 percent of rare earth mineral imports to the U.S.

American reliance goes even deeper when we consider that approximately 80 percent of the active ingredients (APIs) used to make U.S. pharmaceutical drugs comes from China, and to a lesser extent from India. 

A US Department of Commerce study found that 97 percent of US antibiotics came from China. The FDA states that China ranks first among countries that export medical devices to the U.S., accounting for 40 percent of imports.

The same Bloomberg Intelligence report concluded that while it may be easier to move manufacturing of clothes and toys outside China, U.S. tech companies that have invested over two decades and spent billions of dollars setting-up sophisticated supply chains will not find it easy to unwind them. 

More worryingly nobody can predict the negative impact that a real decoupling of the world’s two largest economies will have on global markets.

Read final installment in November:

PART V: The New World (dis)Order

Saturday, July 1, 2023

The New World (Dis)order: PART III: China Awakens Under Xi Jinping

(Image: contrainfo dotcom)

NOTE: This is the third in a five part series.
PART I: American Adventurism, Non-Interventionism, Trumpism and Afghan Chaos
PART II: The Misunderstanding of Vladimir Putin
PART III: China Awakens Under Xi Jinping

PART IV: Crony Capitalism and the West’s Achilles Heel

PART V (November): The New World (Dis)order

PART III: China Awakens Under Xi Jinping

“If the U.S. side does not put on the brakes and continues down the wrong path, no amount of guardrails can stop the derailment and rollover into confrontation and conflict.”
Chinese Foreign Minister Qin Gang

From 2008-2013, there was one particular leader who was closely studying America’s actions and lack thereof. Xi Jinping became vice president in 2008, around the time Barack Obama became president. 

Xi’s rise was meteoric after being named chairman of the Communist Party and Central Military Commission in 2012. Holding the reins to the party apparatus and military, he began consolidating power by launching anti-corruption probes to purge the military and party ranks of rivals and non-loyalists.

As Mr. Xi consolidated his grip on the party we began to see a bolder China emerge onto the world stage. It is not a coincidence that this transpired around the time the world started to perceive a weaker, divided and non-interventionist America.

For most of the last century Chinese leaders have followed Deng Xiaoping’s strategy of "hiding our capacities and biding our time.” The idea was to avoid provoking hostility until China had the military and economic strength to challenge US hegemony.  Xi Jinping’s China didn’t simply come out of hiding but has embraced a far more aggressive and muscular posture at home and abroad. 

During Covid-19 Mr. Xi implemented a zero-Covid policy which involved forcibly locking up residents and publicly shaming those who broke quarantine. He authorized a genocide against Uyghurs in China’s Xinjiang region and oversaw a brutal crackdown in Hong Kong, a territory to whom China had promised press and other freedoms until 2047 under the ‘one country, two systems’ handover agreement with the British in 1997. 

In the last few years, China has provoked India with the Chinese military violating agreements along their shared border, leading to deadly clashes. Beijing packed Hong Kong’s legislature with loyalists and passed a draconian national security law. This law applies not only to local residents but to “people outside [Hong Kong] - who are not permanent residents”. China openly threatened the UK with dire consequences for offering residency to fleeing Hong Kong citizens.

In 2012, China launched their first aircraft carrier, after spending years modernizing their navy. Soon after they started to flex their muscles in the South China Sea, laying claim to disputed territories and territorial rights. 

A year later, they consolidated bureaucratic control over multiple maritime agencies to create a State Oceanic Administration that would match the size of Japan’s coast guard, the largest in the world. That same year they announced the creation of an East China Sea Air Defense Identification Zone over disputed territories and demanded that all non-commercial aircraft submit air plans prior to entering the area or risk being shot down. 

A 2015 Pentagon report found that China had reclaimed more than 3,200 acres of land in the southeastern South China Sea and were “weaponizing these man-made islands”. The report concluded that in addition to building facilities on disputed islands, China was “increasing its role and power around the world, while continuing to modernize and build up its military and inventory of ships, missiles and aircraft.”

In March 2022, the U.S. Indo-Pacific Commander confirmed to the Associated Press that China had fully militarized at least three islands in disputed areas of the South China Sea. They armed these islands with anti-ship and anti-aircraft missiles, laser and jamming equipment and fighter jets. This happened despite the fact that Xi Jinping had made public assurances that China would never convert these islands into military bases. 

Last year, the Solomon Islands shocked the world by signing a security pact with China. It allows the Chinese navy to dock warships on the island and allows the island to call in Chinese security forces, to restore “social order”. 

The agreement also gives Chinese forces the authority to “protect the safety of Chinese personnel and major projects.” Both Australia and America sent high-level delegations to dissuade Solomon’s PM from signing the agreement but failed to change his mind.

Why all the fuss over six small islands with a population of less than 700,000 people?

Australia is concerned about having the Chinese military stationed less than 1,200 miles from their shores and America is worried about reduced freedom of navigation in the South Pacific because the Solomon Islands sits at a major trade transit point through which massive amounts of global cargo flow.

This agreement was a startling reversal for a country that had been both a diplomatic partner of Taiwan’s, and a long time Western ally. It can in part be explained by the 2016 election of President Tsai Ing-wen, in Taiwan, and her refusal to endorse the “one-China principle”. After the Taiwanese elections, Mr. Xi’s administration went into overdrive to persuade countries to sever ties with Taiwan. 

Today, only 13 countries, many of them small, less-developed nations, have formal relations with Taiwan. China recently persuaded Honduras to sever ties with Taiwan. This was a major rebuff to Washington, who had been working hard to get Central American countries to support the island nation.

China is reported to be building a secret naval base for its military in Cambodia, though both countries have denied this. If true, it would be their second such outpost outside their territory, and first in the strategically significant Indo-Pacific region. Australia's Defense Minister recently warned in a speech that China’s "military buildup in the region was occurring at a rate unseen since World War II”.

Last year, the US Commander of Strategic Command, Vice Adm. Chas Richard, issued a more ominous warning. He said America’s military edge, which has thus far provided a deterrence against China, “is slowly sinking.” He added that China is putting capacity in the field faster and that if this continues, “it isn't going to matter how good our [operating plan] is or how good our commanders are, or how good our forces are—we're not going to have enough of them. And that is a very near-term problem."

Even as China flexes its military might, Mr. Xi understands something previous Chinese premiers failed to see: that military might and financial muscle alone will never allow China to rival America on the world stage. They also need to build soft power. 

With soft power in mind, in 2013 Mr. Xi launched the Belt Road Initiative (BRI). The BRI is modeled after The Silk Road created 2,100 years earlier by the Han Dynasty to build trade routes linking Europe to Asia. However, Mr. Xi’s ambitions go far beyond trade. By investing in developing nations and making their economies co-dependent, it allows him to bring them into China’s sphere of influence.

Within seven years of launching the BRI, 139 countries have signed cooperation agreements. This includes 39 countries in sub-Saharan Africa, 34 in Europe and Central Asia, 25 in East Asia and the Pacific, 18 in Latin America and the Caribbean, 17 in the Middle East and North Africa, and 6 in South Asia. Currently, the BRI, including China, accounts for 40 percent of the world’s GDP and 63 percent of its population.

To put the scale of BRI in perspective, over the last decade, China has doled out more than $1 trillion across Asia, Africa and Latin America. This makes China the largest government lender to the developing world, almost equalling the total loans of all other governments combined.

In Africa, more than 60% of the revenue major international contractors collected in 2019 went to Chinese companies, according to a 2021 paper by Johns Hopkins University. In 2022, China’s trade with Africa was five times greater than that of the US. This, in addition to the fact that the Russian Wagner Group, a private military contractor, has been providing security assistance in several African countries. 

These ties to China and Russia are a large part of the reason why many African nations, including South Africa, have been reluctant to condemn Russia’s invasion of Ukraine. After neglecting the continent for many years, the US is now playing catch-up to try and blunt China’s influence with recent high-profile visits by the US Treasury Secretary and one by the Vice President.

In 2014 China launched the Asian Infrastructure Investment Bank (AIIB) to rival the Asian Development Bank (ADB), which lends money for infrastructure projects to Asia. According to China it was necessary because unlike the ADB, which funds projects ranging from environmental protection to gender equality, the AIIB would be focused on building infrastructure in poor Asian countries. Most world watchers believe the true reason was to expand China’s influence in the region at the expense of Japan and America, who hold more sway at the ADB.

Over the last decade, China has been increasingly using its economic clout to bully and punish nations that act in ways it deems unacceptable. In 2011, China blocked salmon imports from Norway after they awarded the Nobel Peace Prize to Chinese dissident Liu Xiaobo. In 2020, they blocked agricultural, beef and other imports, after the Australian government supported a global inquiry into China’s early handling of Covid. As the war of words escalated with Australia, China even threatened them with a missile attack.

When Lithuania, an EU country of less than 3 million people, let Taiwan open a trade office in Vilnius, China halted its own exports to Lithuania to starve their manufacturing industry of components and raw materials. Then they took their vindictiveness to a new level by letting Chinese goods, that had been paid for by Lithuanian companies, get mired in new red tape and endless inspections delays.

China even pressured EU countries to stop importing Lithuanian products. They halted shipments of auto components to German, French and Swedish companies from ports in China, because some parts were manufactured in Lithuania. The Lithuanian spat exposed the limits of power of a massive trading bloc like the EU, against the growing might of China. Apart from filing a complaint with the Word Trade Organization (WTO) and offering words of solidarity, EU was reluctant to do anymore, for fear of upsetting China. 

The fact is that the EU is reliant on China for their supply chain and China used Lithuania to send a message to the bloc. Theresa Fallon, Director of the Center for Russia, Europe, Asia Studies in Brussels summed it up saying,“Many European leaders look at Lithuania and say, ‘My God, we are not going to do anything to upset China.”

Prior to Russia’s invasion, China and the EU’s economic ties were mutually beneficial, and a way for both sides to limit their reliance on the US. However, after China’s bullying of Lithuania and support for Putin’s invasion, these ties have begun to fray.

At the 2023 Munich Security Conference, China’s top diplomat received a cold reception when he tried to woo Europe, by bashing the United States. His audience was aware that even as he spoke, in the background European security officials had discovered that official Chinese channels were hard at work spreading disinformation all over Europe.

Despite these tensions, it is worth noting that the EU’s largest economy, Germany, continues to have deep ties with China and is still their largest trading partner. At the end of 2022, the German Chancellor made a high-profile trip to Beijing. For now, Sino-German relations remain “cold politically and hot economically” as the Director of European Studies at Fudan University put it.

Meanwhile on the home front, Mr. Xi has been walling China off from the world. He aims to make China self-reliant and less dependent on the West. From the time he came to power Mr. Xi has feared “infiltration” of dangerous Western values, like democracy, press freedoms and judicial independence.

One of his first acts as premiere was to accelerate policing and censorship of the internet by banning anonymity and making internet providers responsible for deleting content deemed offensive or politically sensitive. He systematically clamped down on foreign NGOs and churches, and issued rules restricting the use of Western textbooks, banning any texts that promote “Western values”.

To understand why the man who once said in 2017 “Openness brings progress, while self-seclusion leaves one behind,” seems to be ignoring his own advice, we need to understand that Mr. Xi never embraced “openness” in the way we define it in Western democracies. Instead. Mr. Xi always viewed “globalisation” as a series of risks and rewards, enacting reforms in piecemeal ways to ensure that the Party never cedes control of the economy and is able to protect citizens from dangerous outside ideas.

Even prior to the Covid_19 lockdown, which closed China’s borders for two years, by every measure China’s global isolation had been growing. Foreign films accounted for less than 16% of box office revenue, down from over 50% in 2012. In 2021, the value of imported books and periodicals fell to their lowest level since 2017. The number of Chinese students leaving to study in Australia dropped dramatically last year. Even foreign remittances fell by more than half compared to figures for 2019.

In Mr. Xi’s vision of China the state plays a central role in guiding the economy, the private sector is loyal and aligned with the Party’s policy goals, and he is the leader who restores China’s power on the world stage. He envisions China as the center for global innovation, aided by government investment into domestic research and technology, which will help power productivity and propel growth. China as a self-reliant nation, no longer meek, or beholden to the West.

Over the past decade, the state has shuttered or taken control of many private businesses, absorbing them into state-owned enterprises, but the tech sector managed to escape Mr. Xi’s increasingly visible hand on the private sector. However, this changed three years ago, after Mr. Xi personally intervened to block the Ant Group’s IPO. 

In a speech a few days before the IPO, Jack Ma publicly criticized the government’s financial regulation, blaming it for holding back technology development. It is said that Mr. Xi was infuriated by this, but the likely reason is the complex ownership structure behind the Ant Group. A number of well-connected political families were shareholders, and could have posed a challenge to Mr. Xi’s leadership because they stood to collect billions from what would have been the world’s largest ever IPO. 

Since then Mr. Xi has singled out the tech sector, blaming it for widening inequality in China. Mr. Xi knows that if this inequality is left unchecked, it will lead to social unrest. 

A few months after launching antitrust investigations into big tech companies and announcing new rules to restrict overseas listings by Chinese companies, Mr. Xi gave a speech about pursuing a “common prosperity agenda,” in which he vowed to adjust excessive incomes and redistribute wealth to tackle growing inequality.

However, I believe the main reason for the tech crackdown has to do with the fact that a handful of entrepreneurs and companies have attained such great market dominance and influence over the economy that they threatened the clout of the Party. Chinese tech giants account for a much larger portion of the economy than their counterparts in the US and Europe, and I suspect that Mr. Xi’s began to view them as a threat.

To give you an idea of the dominance Chinese tech companies have, Alipay, a mobile payments app owned by Jack Ma’s Ant Group, is used by roughly 70% of China’s population. Ant has issued loans to 20 million small businesses and nearly a billion individuals. 80 million businesses use their apps and they run China’s largest mutual fund. Ant’s focus on serving the unbanked has made it a dominant force in finance.

Also, unlike in America and Europe, a small handful of Chinese companies have a multi-tentacled reach. They have built super apps with walled gardens, offering services that span e-commerce, payments and delivery, to social media, gaming and entertainment. This power over the economy and populous was likely viewed as a long-term threat to Mr. Xi’s leadership and the Chinese Communist Party dominance.

The tech sector was the last remaining threat to Mr. Xi having absolute power, ahead of being anointed de facto emperor of China, at the 2022 CCP Congress.  At the last congress, the party amended its constitution to enshrine Mr. Xi as the “core of the party and his political thought as its underpinning ideology”, clearing the way in March this year for the National People’s Congress to unanimously vote to rubber stamp Mr. Xi’s norm-breaking third term, putting him on track to be in premier for life. 

While it may appear that Mr. Xi and China are at the pinnacle of their power, there is trouble brewing on the long horizon.

A slowing global economy coupled with rising interest rates and inflation are leading to an increasing number of debt defaults by developing nations which are struggling to repay loans received through the Belt and Road initiative. 

As a result other issues have emerged with these loans, from a lack of transparency and rampant corruption to labour violations and predatory lending practices. It has resulted in a number of countries finding hidden debt that was never officially disclosed on government balance sheets.

Additionally, completed infrastructure projects are falling apart due to poor quality equipment and construction flaws. These problems threaten to leave developing nations in worse shape because in addition to repaying loans, they will now need to spend money to repair these defects. 

Cracks were found in Ecuador’s Coca Codo hydroelectric plant, the country’s biggest power source. In Pakistan, officials had to shut down the Neelum-Jhelum hydroelectric plant after finding cracks in a tunnel, just four years after it went online. In Uganda officials identified more than 500 construction defects in a Chinese-built hydropower plant that has suffered frequent breakdowns since going online in 2019. The World Bank estimates that hydropower plants should have a lifespan of up to 100 years.

Also, China’s economy can no longer rely on easy growth through technological transfers.For much of the 1990’s and 2000’s foreign firms that set up factories brought advanced technologies that were forcibly transferred to local Chinese firms, or reverse-engineered at little cost. 

However, these transfers are increasingly being restricted, even though China continues to be accused of hacking and theft of intellectual property. The US put tough new export controls on advanced technologies, like semiconductor chips, in a bid to slow down China’s technological and military advances through illegal transfers.

In late 2022 and early this year, foreign investors pulled more than $100 billion out of China’s bond market and there was a dramatic slowdown in investments in the country’s stock market. But these investments are likely to bounce back because many investors sold for fear of getting caught up in sanctions aimed at Chinese entities, due to the country’s support for Russia's invasion, and because of Mr. Xi’s reluctance to lift the strict zero-Covid policies which were hampering economic growth.

In the early part of this year, after Covid restrictions were lifted, China’s economy has shown signs of a strong rebound with manufacturing showing the biggest improvement in more than a decade, services sector activity climbing and signs of stabilization in the troubled housing market

These figures were released ahead of the National People’s Congress in March, where Mr. Xi shared plans for “deepening structural reform” in the financial sector and tightening controls over science and technology in strategic areas like chips.

However, troubling systemic issues lurk beneath this short-term buoyancy. For years Chinese cities accumulated vast amounts of debt in a bid to boost GDP, by spending on wasteful infrastructure projects. 

Already struggling to pay off debt, these cities experienced a further strain on coffers to implement Covid restrictions. The situation is so bad that some cities are struggling to deliver basic services. Recently, a city went viral after announcing they could no longer provide bus services.

China’s housing market remains on tenterhooks after property owners suspended mortgage payments last year, over delayed and stalled projects. It is too soon to tell if this eroded confidence in home buying more broadly. Also, analysts expect that further government bailouts will be necessary to help debt-stricken property developers.

In 2022, China’s population declined for the first time in 60 years. This demographic crisis will result in a shortage of labour while simultaneously increasing healthcare and other social security costs. Aware of the looming crisis, the government has been trying to incentivize couples to have kids, raising the limit from 2 to 3 in 2021, but they have not succeeded in reversing declining birth rates.

They even tried paying couples but got pushback with people saying that the main issue is that the country has become one of the most expensive in the world to raise a child. They say that these government incentives do nothing to help with supporting ageing parents and dealing with the rising cost of education, housing and healthcare. 

A related problem is the high rate of youth unemployment. One in five urban youth were unemployed at the end of 2022. The latest figures for June this year show the unemployment rate among 16-24 year olds rising to 20.8%, which is four times the overall national jobless rate. This means China is now facing its worst unemployment crisis in four decades. Young people unable to find jobs and income are delaying plans for marriage and having kids, which is putting further negative pressure on the country’s birth rate.

While China says they have reopened for business and foreign investment, official figures show that the number of foreigners living in Shanghai and Beijing has been in steady decline over the past decade, and there is likely to be a mass exodus in the future. 

2022 survey by the European Chamber of Commerce found that 85 percent of expats living in China said that the government harsh Covid policies and inhuman lockdowns, had caused them rethink their future in the country.

It is not only foreigners who are fleeing Mr. Xi’s harsh policies. Wealthy Chinese faced with the prospect of income redistribution have been fleeing in greater numbers after Mr. Xi’s promise to narrow ‘inequity’, according to data compiled by firms which track the movement of the rich. They expect many wealthy families more to leave in 2023.

It is not just wealthy Chinese who are fleeing. The US has seen a marked increase in Chinese citizens willing to risk life and limb to pass through the treacherous jungle between Panama and Columbia, to seek asylum in America. Panamanian government data shows that in the first two months of this year, more Chinese migrants crossed into Panama than all of 2021 and 2022 combined.

More recently the government banned a prominent finance writer and two of his peers for “spreading negative and harmful information” because they had written about the country's spluttering economy and unemployment rate. While all this does not bode well for China, in the end their biggest threat might be the impacts of Mr. Xi’s desire both to remake the economy based on his ideology and to secure the Party’s grip on power. 

By giving the Communist Party even greater say in managing the economy, replacing tech leaders with academics and internationally respected economic officials with politicians loyal to Mr. Xi, he threatens to further erode the lines between party, government and private sector in ways that will have dangerous and unintended consequences for China and the rest of the world.

Read next installment in series:

PART IV: Crony Capitalism and the West’s Achilles Heel