Ronnie C. Chan, Chairman of the Hong Kong real estate group Hang Lung Properties and former Chairman of Asia Society, explains why the trade war is merely a side issue in the rivalry between the USA and China.
Ronnie C. Chan personifies the bridge between the United States and China. Born in Hong Kong, the businessman studied in the U.S., has realized several major real estate projects in the People's Republic with his company Hang Lung Properties since 1992 and is associated with numerous think tanks and non-profit organizations on both sides of the Pacific.
The escalating trade conflict between Beijing and Washington is a matter of concern to the former Chairman of the Asia Society. He sees it as the classic pattern of Thucydides' Trap, the kind of conflict when an emerging power pushes up against an established hegemonic power. He sees a danger that the world economy will fall into two spheres of influence, where smaller countries will be forced to choose between the U.S. and China.
For him, it is clear who is responsible for the escalation: «Under Trump, the Americans behave like tyrants», he says. «They are forcing an unequal treaty on the Chinese. This is not a negotiation, this is an ultimatum - completely one-sided and humiliating.»
The Market met Chan in the Zurich offices of Asia Society Switzerland. Chan chose not to comment the current events in Hong Kong. «Don't worry about Hong Kong», he said, «Hong Kong will always be fine.»
Mr. Chan, you have spent decades building brigdes between China and the U.S. Why did the relationship between the two powers take such wrong turn?
Historically, there have been four defining moments in the relationship between China and America since the end of World War II. First, there was the Korean War, where the relationship went to hell. Then, there was Richard Nixon’s visit, where the relationship went to the sky. Third, there was June 4th, 1989, Tiananmen Square. The relationship has been gradually going south ever since then. The reason for that deterioration was not just because of China, but also because of the fall of the Berlin Wall. You have to remember that containment of the Soviet Union was the main reason for the improving relationship that started with Nixon.
And with the fall of the Soviet Union that reason fell away?
Yes. When the primary reason was taken out, the relationship went gradually south after 1989. Of course there were people who tried to bring it back up, President George H.W. Bush, his National Security Advisor Brent Scowcroft and many more. But overall it was a declining curve.
And the fourth defining moment was the election of Donald Trump?
Exactly. Trump is the last event. He didn’t cause the downfall, but he certainly pushed it into the abyss.
But why? And why now?
It’s a classic case of Thucydides’ Trap. Nothing more than human nature. An existing power, in order to prevent a rising power from reaching the top, will do all it can to make sure that the rising power will not succeed. If you don’t read history, you are surprised. But it’s not surprising at all.
So the trade dispute is just a prelude to a bigger rivalry?
This is much bigger. Trade is at best a tertiary issue in the conflict between China and the U.S. First and foremost, it’s a competition about technology. And technology always means military power. America, for the first time since the fall of the Soviet Union, feels threatened. Why are they dealing with Huawei in this way? George Yeo, the former foreign minister of Singapore, said it a few weeks ago, and I thought he was so right: Huawei developing 5G took away the monopoly of spying on the part of the U.S. Until now, America has a monopoly in spying on people. And Huawei became a competitor.
What’s the secondary issue?
Currency. When you control the international currency and capital markets, you can destroy a national economy overnight. Remember 1997, the Asian Financial Crisis. Over night, you can destroy a country, and I saw that happening to Thailand and Indonesia.
So first it’s technology, then it’s capital markets and only then it’s about trade?
Yes. But I believe that whatever America is doing, at the end it will be to its own disadvantage.
I was told a story: I’ll never know if it’s entirely accurate, but many years ago, China wanted to develop a space program. So they went to NASA to ask for help. But NASA wasn’t interested and sent them home. So China had to develop a space program on their own. Today, China has a GPS system called Beidou. Does America have any influence on the Beidou system? No. If NASA had worked with Beijing, I don’t think the Chinese would have developed their own system. And if they did, the Americans would have had the source code. Another example: I met a high-ranking executive of the Chinese railway industry once. He lamented to me that Siemens would not sell them their critical technology, because they feared they would steal it. So instead of signing a twenty-year service and parts contract and earning a lot of money, Siemens sent the Chinese home. And what did they do? They developed the train technology on their own. And now it’s Android: Google will not allow Huawei to use Android anymore. So what will happen? They have no choice, they will develop their own system. Necessity is the mother of all invention.
Former U.S. Treasury Secretary Hank Paulson said last November at a conference in Singapore that we might see a new «economic iron curtain», where the world economy will be divided into two spheres of influence.
It is already happening. Globalization has been pushed back, not by China, not by developing economies, but by developed economies. And not only is globalization being reversed, but more and more Washington is forcing smaller countries to choose. And so far, the assumption was that everyone would choose America. However, three very thoughtful individuals have sounded a warning lately. The first was Kishore Mahbubani, the long-serving ambassador of Singapore to the United Nations and retired dean of the Lee Kuan Yew School of Public Policy in Singapore. In a speech at Harvard University he said «don’t force us South-East Asian countries to choose. The answer might not be what you’d like it to be».
Who are the other two?
Martin Wolf wrote an excellent article in the «Financial Times» on May 8th, where he basically said the same thing. If America decided to go all out on the trade war, don’t expect Europe and Japan to necessarily follow. The third was Bill Shorten, the Labor politician who lost the election in Australia. He stated during the campaign that as prime minister he would absolutely welcome China.
Will the United States risk losing their allies?
It’s definitely not a foregone conclusion that everybody in the West would choose America over China. America has been such a bully. They are imposing an unequal treaty on the Chinese. I mean, this is not a trade negotiation, this is an ultimatum. It is totally one-sided, humiliating, ridiculous. If Xi Jinping were to sign that document, he will risk being thrown out of office, because he will be seen as a traitor to China. Basically, the trade deal that Bob Lighthizer presented to the Chinese is saying «I am going to hit you. But before I hit you, I’ll handcuff your hands. And by the way, tomorrow I’ll return and hit you again».
Do you see any room for a deal after this kind of escalation?
I’ve said this from day one, more than a year ago: There will be a deal when Trump needs a deal. He thinks that he has all the cards. But he’s wrong. He has a lot of cards, true, but so does the other guy.
Who has more stamina in this fight?
The Chinese take the long game. For America, it’s the next election at the longest. If Trump’s ratings go down, he may need a deal, or he may purposefully not want a deal. For China, what counts is the longer term, they are much more pragmatic. Are the Chinese prepared for the worst? Absolutely. Depending on which study you read, Chinese GDP would drop by 0.3 to 0.5% if the trade war escalates further. Can China handle that? Sure they can! They surely can suffer that, especially in the face of a bully. That’s the way to unify China against America. Xi Jinping is still very restrained in the way he reacted.
The Chinese need the American market more than vice versa. Doesn’t that mean that Washington has the upper hand?
A full out trade war will hurt everyone, and I think America ist totally unprepared for the dire consequences. A year ago, they were subsidizing their soy bean farmers with $1 billion. Now they are already up to $15 billion. It’s going fast. The next Thanksgiving and Christmas will come up, and prices in the U.S. will have risen by a couple of percent. I don’t think they are as prepared as the Chinese. Nor does America have the long term view and the ability to suffer.
You said that America is the bully. Beijing could reach out to the rest of the world: South-East Asia, India, Japan, Europe. But they're not very effective at that, are they?
I think it’s good that they are not too proactively reaching out. Let’s see what happens with America first. Let me tell you: Every country is watching. They are watching China and America. At the end it’s really all about national interest. America has a strong tendency to isolationism. It was founded on isolationism. Up until today, they never pay their dues to the United Nations on time. Not once. So, America is retreating. Then, there is a second issue: America is increasingly considered by much of the world as being an unreliable partner. You know, personally I didn’t like the Iran deal. But the way America just suddenly ripped it up? Or take NAFTA, the way they dealt with Mexico, or the Trans-Pacific Partnership. It all leads to the perception that America is an unreliable partner.
Are you saying the pax americana, the rules-based world order after World War II, is over?
Just look at the moral high ground that U.S. had after World War II. Back then, America had all the moral authority, they had saved Europe, they had saved Asia. And yet, as we know, these things such as moral authority, unless they are being sustained proactively and wisely, will disappear over time. America is not wise in the way they behave. They cut off their own legs. The rules-based multilateral system that Washington has built is being undermined by whom? First and foremost by the Americans themselves.
It’s not just Trump. The Democrats are just as confrontational to Beijing, and the business community widely supports the hard line. What happened?
It’s very simple. Number one, America woke up the fact that technologically, they are, in some specific areas such as 5G, falling behind. Number two, Trump has for the last 35 years been saying that everyone is taking advantage of the U.S., whether it’s Japan, China, Mexico, Canada or even Rwanda. He is convinced that everyone else is taking advantage of America. Which, I think, is a false premise. Then you have two or three other things that have turned some of the elites in America: One, there were people who were convinced that when China opens up economically it will also open up politically. That didn’t happen. And now they are realizing that there is a system that, in certain circumstances, can be more efficient than the western system.
You mean the autocratic system?
Yes, and America cannot accept that. I don’t think that has much to do with Trump. He may not even be able to think all that clearly. But the influential think tanks have that kind of thinking.
You mentioned Thucydides’ Trap: In most cases in history, the conflict between a rising and an established power led to war. Do you see that risk?
It’s definitely possible. But I hold out hope for two reasons. One: So far, China is very restrained in the face of all those humiliating unequal treaties. So as long as one party is restrained, we have hope. In this situation, China is the adult, America is the child, throwing a tantrum. And even if the behavior is blatantly wrong, how many people have the moral attitude to stand up and speak the truth? Very few. So America is on the wrong path right now, and even people like Hank Paulson or Tom Friedman are just blowing with the wind.
You said you held out hope for two reasons. What’s the second?
As Churchill famously said, America will always do the right thing, but only after exhausting all alternatives. You see, China does not have the intention nor the ability to be the number one in the world. So many of the world’s problems cannot be solved without the U.S. and China working together. The Chinese never liked the idea of a G2 world. They always wanted to bring more people to the table; Europe, Japan, India. But whether you like it or not, today we live in a G2 world. Europe is not united, and even though it is the biggest economy, is does not have the political let alone military power. Optimally, a G2 world does not mean that the two leading powers fight each other, but that they, as much as possible, collaborate. Of course they will compete in many areas, but the overall direction is one of cooperation. America is bent on not doing that right now, but let’s hope they wake up one day.
European business leaders would have much more sympathy for the Chinese today if they delivered on their promises, opened their markets and stopped stealing our technology.
Well, he who is without sin shall throw the first stone. Who didn’t steal? The British stole from the Germans, the Americans stole from the British, the Japanese stole from the Americans, the four Asian tigers stole from Japan and everybody else. So now it’s China’s turn. That’s the world as it always has been. You expect China to be a saint? That’s not going to happen. Ask yourself: Are you a saint? After you stole, do you expect the next guy not to do it? When they are young in their economic development, everybody steals.
That doesn’t make it better.
I don’t say this to condone the action. I'm just stating historical facts. Then there is another thing about Western companies: 20-30 years ago, the playing field in China was totally in favor of foreign companies. I used to serve on the board of Motorola in the late 1990s. They were making more money in China than in any other country except the U.S. in those days. Because the playing field was not level. China needed everything. So today, the playing field is slightly against you: Now you suddenly cry like babys. Wake up, be an adult! Of course, China will protect its critical industry. Everyone does. Can you buy an airline in America? A telecom company? You can’t even buy an oil and gas company in America. Is that a level playing field? Of course not. That's how the world is.
Your company, Hang Lung Properties, is renting out high-end retail space in China. How is your business going there?
Fantastic. Read the quarterly reports of LVMH, or Kering, or Richemont. They are our tenants. The luxury market in China is growing strongly. In the last year, we have signed thirty to forty new lease contracts with five or six of these top brands. They are all expanding. In the next 12 to 18 months, we will have signed a total of more than 50 lease contracts, and not just in Shanghai.
You see no softening of demand?
No. Of course we went through six very tough years between 2012 and 2017. But because we are financially strong, we never had a down year at Hang Lung. We never had to cut our dividend. Now, the projection is that as much as 50% of the world’s luxury market in the year 2025 will be in China. Which is just around the corner. We are just lucky to be in the right sector. Their sales are growing at 20 to 30%. And our rent income is growing at double digit rates.