Xi should capitulate—not because US is right, but because China is vulnerable

By China Money Network
2 min read
(Image credit: Bigstock/ Sergei Gnatuk)

This article by Nina Xiang originally appeared on China Money Network, the best data intelligence platform tracking China’s tech and venture capital markets (access requires subscription).

A camel, though dead, is still bigger than a horse—so goes a Chinese proverb. Such is an accurate depiction of the current US-China relationship.

America, a declining world power, can easily push China into a dead end, despite China’s economic rise over the past four decades. Xi Jinping should immediately capitulate in the trade negotiations, as this will inflict the least damage to China. For China’s long-term prospects, to accept US demands, instead of fighting against it, is the best course of action because China is currently too weak to afford any wars.

China’s vulnerability is worse than most people realize. Perhaps Trump knows this better than most. Its economy is at a critical turning point. After years of restructuring, the growth model struggles to become more sustainable. Its technology capabilities, despite Chinese media’s grandiose self-congratulations, can’t survive blows from the US. Its military power lags far behind. Its currency sits in a precarious position. It has lost a global public relations battle. China has no one’s sympathy.

When chatting with someone who works at a large Chinese AI startup a few months ago, we both laughed at the hypothesis that if Nvadia stops selling GPUs to Chinese companies, no Chinese AI company can survive. It was such an unthinkable scenario to imagine back then. Now it suddenly becomes very real, after Huawei was put on the “entity list” and Google cut off Huawei’s Android license.

The US has a tight stranglehold on Chinese industries and technology. Without American chips and operating systems, the giant Chinese IT industry skyscraper will topple. The reverse is not true. For the type of low-end assembly and manufacturing work Chinese companies are conducting, American companies can restructure their supply chain to many other countries who are more than happy to take China’s place.

China’s hands are tied in purchasing US treasuries. Its national coffers are mostly in US dollars and it must protect its own assets. China’s economy is loosing steam while the American economy is very strong. If Beijing begins monetary and fiscal stimulus again after the trade war escalates, it will make the Chinese economy further addicted to the drug of credit. Xi must realize that his cards against the US are very limited.

The US can inflict so much more pain to China, and this is only the beginning. On the other hand, China has few “weapons” in its hands. The sooner Xi caves in, the less damage to China’s economy and the better the future China can secure.

This is a bitter pill that China must swallow. To some extent, China deserves it. It got ahead of itself and was lost in a self-congratulatory mentality. After pundits called the US to wake up to “Chinese threat,” it is time for China to wake up from its illusion that it can already rival the US.