WRFH/Radio Free Hillsdale 101.7 FM - Dennis Unkovic: The Fragility of China

Episode Date: August 5, 2024

Dennis Unkovic is the author of The Fragility of China: Breaking Points of a Seemingly Invincible Regime.Chinese President Xi Jinping believes his country is destined to displace the United States as the world’s top military and economic power. Every policy that Xi has put forth since assuming power in 2013 has been carefully crafted with this end goal in mind.In this book, Dennis Unkovic coins the term MaxTrends® to identify critical factors and developments that have the potential to derail Xi’s aggressive ambitions for China. These MaxTrends® include alarming demographic shifts, cracks in the global supply chain, an accelerating global arms race, and the Taiwan conundrum, all of which indicate that China’s strength may be more illusion than reality. Unkovic warns that the world’s democracies must take increasingly aggressive steps to exploit China’s vulnerabilities if they hope to blunt Xi’s ambitions.From 08/05/24.

This is Radio Free Hillsdale, 101.7 FM. I'm Gavin Listro. With me today is Dennis Ungavik, international lawyer, business consultant, and author of the new book, The Pugility of China, breaking points of a seemingly invincible regime. Mr. Ungovic, thank you so much for joining us. Thank you for having me, Gavin. Looking forward to it. Of course. Yeah, and before we get into the main content of your book, I would love if you could just start by laying some historical groundwork by telling the listener how China got to be what you call invincible regime and kind of their path to economic dominance that we now see is jeopardy. Well, going back to China, you're really back to 1949 when Mao Tehtun essentially

threw out the Guom and Dong, which was Chiang Kai Shack, and took over what is today's China. After that, he died in 1976, but really beginning in the early 1980s, China decided that it needed to develop its economy. And so it essentially devoted an enormous amount of resources in time to building up its infrastructure. And so China moved from being one of the poorest countries in the world until today, you know, 2024, when it's the second largest economy in the world. To put that in perspective, China's GDP today is about $17 or $18 trillion.

Nobody knows exactly, but that's a good estimate. And as you know, the U.S. has a GDP of around $26 or $27 trillion. So while the U.S. is the largest economy in the world, China, for a long time, was catching up very quickly. During the 1990s, up until about 2013, you had China growing at anywhere between 8% and 12%. It was the fastest growing economy in the world. Now, that has slowed down a lot recently, which is probably what we'll need to talk about over the next few minutes. But it is the very powerful economy.

It's about 1.3 or 1.4 billion people compared to the U.S., which has about 350 million, give or take. So although it's four times the size in number of people, it's second in size. In the news recently, China's real estate market has come into the public eye of concern, and I would love if you could kind of explain what's going on with their real estate market and how that fits into the bigger picture of what's going on here. Yeah, I would love to. Really until the 1990s, the government owned all of the real estate in the country.

And there were larger companies that were Chinese-owned that had control of them. But in the 1990s, the Chinese thought, why don't we allow the average Chinese person to be able to invest in real estate? Now, while the average Chinese person can't buy a home today or an apartment or a condo, it can get essentially a 75-year lease, which can be extended. So since that's longer than almost everybody in the world lives, that's a good thing. So what the Chinese started to do in the 1990s was to the governments, the local governments, they're called provincial governments.

For example, if you're in the state of Illinois, the state of Pennsylvania or Florida, for example, were states, but over there they had provinces. And so the average Chinese person who had made it, in other words, become sort of middle class, decided they would put their money into real estate. And so there were enormous number of apartments and buildings put up over the last 10 years. What happened in the mid-19, let's say, 2000, right before COVID, 2017 or 18 or 19, most Chinese who had any money had 70 to 80% of all of their savings invested in real estate, and they were buying apartments and condos.

Then what happened with, it wasn't actually caused by COVID, but COVID triggered it off, and so real estate prices essentially collapsed because there were private companies in China. A good example is a company called Evergrand. Evergrand was one of the largest private developers. They used to take deposits from people, and then they said, okay, I'll give you an apartment or a condo in the next six to nine to 12 months, and that's where people put in their money. Unfortunately, there was overbuilding, and then these companies ran out of money. And so over the last several years, there have been major bankruptcies of Evergrand and other companies there.

another large Chinese company is called Country Garden. And so the tragedy is that most Chinese people have seen their savings, their investments, which were put into real estate dropping over the last three or four years. So the Chinese people have done what anybody else would do. They don't buy much more real estate. And so you have these real estate companies, and you think I'm exaggerating, but I'm not, millions and millions of units that are unsold there because people don't want to buy them. And so China today, let me put it in perspective.

If 100% represents the GDP, the gross national product of a country, all right, today if you look at real estate, that would be both commercial and personal real estate that's in China, one-third of their economy is based upon real estate. So now that the real estate has dropped so much, the Chinese people simply are not buying more apartments or condos or houses or places to live. And so their economy is in a funk. If you look at China's growth 10 years ago, it was probably growing at 8 to 9, in some cases 10% a year.

One year it went to 12%. This year, the Chinese economy will, be lucky if it grows at 5%. I don't think it will grow that much, but they say it might grow at 5 percent. So imagine the U.S. if our economy grew at half of what it normally did, what it would be. That's the problem with real estate, and frankly, it's really not getting much better. This is Radio Free Hillsdale 101.7 FM. I'm Gavin Lestrow, and I'm talking with Dennis Unkovic, international lawyer, business consultant, and author of the new book, The Fragility of China, breaking points of a seemingly invincible regime.

That kind of leads to my next question about the national population of China. Is the lack of babies being born in comparison to the people leaving the workforce? Is that playing into this as well? That's a really, really good question, because there are a couple of things going on with the population. The Chinese, as I said a few minutes ago, are 1.3 to 1.4 billion. You're saying, my gosh, that's a lot of people. But what happened is they put in a one-child policy. This is the central government put it in in the 1980s.

And so, again, this is a good statistic. In the 1960s, when China was starving and had problems, the average Chinese family was having five to six children. They put the one-child policy in at exactly the wrong time. And so the number of children now being born in China is less than the replacement rate. Let me explain. If you grow, if you want to keep your population essentially stable, you have to have

2.1 children per family with children in order to do it. But the Chinese have been, was so successful in reducing the number of population, the Chinese population is now growing. I'm sorry, it's not growing. The bigger problem for the Chinese is that many, of the choices that they make and having children, when they had a choice between a boy and a girl, they oftentimes had males.

And so there are more males, I think it's like 90 million in a certain age category, than they have females. And the overall number of people in China is decreasing. They think, I'm not an expert who is, but the people who make these projections are saying, the Chinese by the year, I think it's 2070, let's go at 40 or 50 years, the size of the Chinese population might be half. There's one other thing that I think your listeners might be interested in, and that is that having children is directly affecting the aging of the population. In the United States,

most people work to the age of 60, 65, 70, and then they retire. That's when we have Social Security come in. In China, women who work in manual labor jobs retire at age 50. Women who are in more professional jobs retire at 55. Men retire between 55 and 60. And so what you have is an increasingly amount of the population in China becoming older and not working. And as you know in the United States, we have our Social Security. system in Medicare, which takes care of a lot of people who are over 65.

China does not have this. And so I'm just trying to explain it's not just they're having fewer babies, which is the fact, but they're having older people, fewer babies, and you have an economy that's dependent upon fewer workers. And as you can see, that's a real problem. And so there seems to be a very clear trajectory of if this trend stays where it is. There's going to be disaster. Is there time to fix this?

Well, Xi Jinping is the current head of China. He came in in 2013, and he's now begun his third five-year term. So he'll be in for another four or five years. Most people think I do. He'll be in forever until he dies. But as Seasoninging is there,

the situation is he had a big speech that he gave last November to a large woman's group in Beijing, and he said, it's sort of the duty or obligation of women, no matter what their careers are, to have more children. Well, he said that, but there's been no, it doesn't appear that the women over there want to have, you know, many more children than they currently do. So do I see this reversing? Is that your question? The answer is no. If anything, it might get worse because you're adding not just fewer children, but you're adding

the workers who would normally retire in this country five or ten years later, retiring sooner. This is Radio Free Hillsdale 101.7 FM. I'm Gavin Listro, and I'm talking with Dennis Unkovic, author of the new book, The Fragility of China, Breaking Points of a Seemingly Invincible Regime. I would love to switch towards the business side of what's going on in China. In your book, you mentioned that for decades, they've had a staggering track record for global supply manufacturing, and you say this is not what it used to be. What's happening now and where is the manufacturing going? Well, you can blame the Americans to a large extent

because a lot of American companies in the 80s and 90s adopted a theory called just-in-time manufacturing. So the theory is instead of putting something in inventory and holding it until I need it, I'm going to have it delivered to me just when I want it. Okay, nice theory. Do you have a watch? Do you have a mechanical watch?

I don't. I have a smart watch. Okay, well, it might be the same with a smart watch. Because the mechanical watch, they have about 120 pieces that make the watch work. What happens when you remove one piece? The watch doesn't work. So they build up this very large infrastructure. They have an enormously good infrastructure in China.

They have airports, they have, you know, harbors. They have, you know, large areas where they can produce goods. But when COVID came along, countries began to decide where am I sourcing this stuff? And when they found out all of it was coming from China and the Chinese couldn't deliver, the global supply chain was really hurt. And what you're seeing now is although COVID has gone, thank heavens, I think, we hope, you still have companies that are saying, do I really want to source something 12,000 miles away, hoping that, you know, the Chinese, you know, manufacturer will ship it to me on time or not.

So what's occurring is the thing called offshore, reshoring. We used to offshore, in other words, take jobs that were made in America, put them in China because it was cheaper. But then when that broke down, a lot of companies are saying, maybe I want to reshore come back to America, or we have something called, it used to be called the North American Free Trade Agreement. it's, you know, NAFTA, you know, but now it's called the USMCA, but basically Canada, the U.S. and Mexico, are benefiting by more manufacturing being made here. And people were afraid when they couldn't be supplied as they had been for 20 years by the Chinese on a reliable basis, and that is broken down what's called the global supply chain.

Now, things are going to continue to be made in China. Don't let me mislead you. But if you had all of your supply coming from China, and I actually represent, I'm a lawyer, I represent a couple of companies that 100% of their supply of their parts, which they needed for manufacturing were made in China, now they're starting to say, I can't do it all in China. I'm going to do some of it in Asia, maybe some of it, North America. But that has hurt China, because I told you a few minutes ago, a third of the Chinese economy is based upon what?

Real estate, right? Another third of the economy in China is based upon what? manufacturing. Manufacturing is down. And so the Chinese have this great capacity to reduce things, but people aren't ordering as many Chinese parts and goods as they did in the past. How much is foreign investment in the kind of rejection of that as well playing into this? Another good question. It used to be, there was a joke, I hope you won't laugh, but it's a joke. If you had a million dollars in a clean bowling shirt, you could invest in China. Okay. Well, obviously, companies, not just American, but Europeans and even Asians, did a lot of investment in China.

The Chinese had made it much more difficult now for foreign companies to invest because they want to say, who is on your board of directors, or who is running this company, you know, who are you doing business with? They've been very difficult for foreign companies. And so if you're a foreign company and you have all of these restrictions on you, then you put on top of it your question a few minutes ago, what about the supply chain? They're not as reliable as they are. That's the kind of problem you see. This is Radio Free Hillsdale 101.7 FM. I'm Gavin Listro, and I'm still talking with Dennis Uncovic, international lawyer, business consultant, and author of the new book, The Fragility of China,

breaking points of a seemingly invincible regime. And with all of this manufacturing, I mean, obviously that leads to pollution, and that seems to be another big issue, the environmental issue facing China with water source issues or air pollution. Do you see a breaking point of this as well where the country can't simply continue to function, or are they going to be able to navigate through that? The U.S. is the second largest producer of essentially pollution, air pollution, as we talk about it, right? The Chinese produce twice as much pollution as the U.S. while in this country, I think we're trying, we're not doing a good enough job, but we're trying to do a better way of making our

economy operate effectively without pollution, the Chinese are heavily reliant on coal, all right? We use various ways to produce coal. Now, the Chinese are building solar farms. No question about it. But more than 50 percent of the energy that they produce comes from coal. Coal is dirty, and it's very hard to make it cleaner. Now, the Chinese are shutting down some coal plants, but what are they doing in its place? they're building new coal plants.

And the problem with the coal plant is, once you build it, it has a lifespan of 30 or 40 or 50 years until it's taken out of production. That kind of thing says that the Chinese in the short run are really not going to be able to do a lot to reduce the amount of pollution that they produce. And that's bad. Now to the military aspect of what's going on there, too,

and their relationship with Taiwan, Could you give a quick overview of China's relationship with Taiwan and what their intentions are? As quickly as I can do it, Taiwan was the Gulom and Dong, which was the group that fought the Chinese Communist Party, the CCP. They moved to Taiwan, and were there under Chiang Kai Shack and his successors after that. The Chinese are really very upset because they think Taiwan should immediately become part of China. But Nixon essentially gave up on Taiwan in 1972 when he opened up relationships with China. But the U.S. Congress over the last 40 years has been a strong supporter, at least I guess up until the current people there, but was a strong supporter of Taiwan.

Taiwan has 23 million people, which isn't very big, but it produces about 90% of the most significant semiconductors in chips that are out there, including the AI chips. And so China, Cizhen Ping has spent enormous amounts of money in increasing the size of the Chinese military. it might surprise you to know that the Chinese Navy, it's called the Plan, PLAN, the Chinese Navy has about 400 ships now.

The U.S. only has about 325 or 328, but the Chinese are bigger. Now, I have to make it clear. We have more aircraft carriers by eight or nine than they do. Most of our ships are nuclear, but we have fewer ships than they do. And so, Xi Jinping has been spending a tremendous amount of money on that. Now, next to China is called the South China Sea. If you have China on your left,

did the South China Sea in the middle. You have Taiwan on your right. The Chinese are exerting their influence there by building up military bases in the South China Sea, which they should not be able to do, but they are. And so you're going to see China continuing to increase the amount of money it spends on the military, and that's a direct threat to Taiwan. Now, the U.S. government has had an, it's sort of an opaque policy. They're saying, we recognize there is one China, but we believe Taiwan should be able to have its own form of government, although it's still part of China. Now, this brings us to the presidential election. I don't think we need to get into politics, pro-Trump, pro, you know, whoever the Democrat will end up being.

But this is a real problem, and the fact that China is building up its Navy so extensively is essentially, I think, a threat to ocean trade, in other words, one third of all of the international, you know, goods and services that go around the world, go through the South China Sea. And that's what China is now building up. In theory, it could essentially stop votes from going through there. Now, the U.S. sends its ships back and forth through there to say the Chinese, no, you can't do it. But that's one of the most dangerous places in the world today.

My last question for you is, 10 years from now, where do you see China's economy? Is it getting worse? Is it getting better? Where are they at in 10 years? I think the Chinese economy has a lot of challenges. For example, they're going to have fewer workers than they do right now. if they are militarily aggressive around the Pacific rim, that will make it more difficult for them.

They used to grow at 8 to 9 to 10, and sometimes 12% of a year. This year they'll be lucky to grow at 5%. So I think their economy will grow more slowly. One of the real problems they have is while we have Social Security and Medicare, things that support older people in this country, we pay into it, of course, in our taxes. They don't have that in China.

So I see there are a lot of challenges for them going forward, but to think the Chinese will not work is wrong. They work very hard, they're very diligent, and they've certainly been successful over the last 30 years. So the reason I wrote my book was to sort of wake people up and say, hey, the China you know isn't exactly the Chinese you know, but they're a very serious challenge to the U.S., so the U.S., I think, has to be smarter.

One of the reasons is that I think the U.S. has to build up its military capacity, its Navy, in the Pacific Rim, to essentially counterbalance the Chinese. Our guest has been Dennis Ungevik, international lawyer, business consultant, and author of the new book, The Fragility of China, breaking points of a seemingly invincible regime. And I'm Gavin Lee Stroh on Radio Free Hillsdale, 101.7 FM.