Could a war between the US and China break out?

Sure!

Is China likely to win that war?

Probably not.

Not today, not in a year, not in ten years, and probably not even in fifty years.

Now, the term “war” needs a closer definition. I don’t mean a limited confrontation in the South China Sea, where China could prevail due to its close proximity to the mainland. I mean an all-out war with the US over the position of the number one global superpower.

Of course, we’re in a nuclear age, so we might end up with some combination of limited confrontation in Southeast Asia and economic war. Or maybe we will avoid the kinetic component altogether and get Cold War 2.0.

My point is, China does not have a chance to beat the United States in either all-out conventional war or an economic war. I see a few reasons for that:

  • geography
  • demographics
  • lack of capital
  • governance

Let’s go through them one by one.

Geography

The number one issue is geography. China doesn’t have navigable rivers like the United States with its impressive Mississippi River Basin. At the same time, they have huge problems with floods in Northern China along the Yellow River caused by decades of silt accumulation.

It has a latent problem with water, being unable to support enough agricultural output to feed its own population. China compensates for this with massive imports of grains, mainly from the US. Do you see the irony?

But it’s not just food insecurity. China is also heavily dependent on energy imports, especially for seaborne crude oil. Most of it comes from the Middle East through the Strait of Malacca. While this is the most vulnerable source, don’t forget about the LNG imports and piped gas from Russia. The immense animosity between these two countries is a well-known public secret.

The main reason China is pushing massive electrification is not green ideology but very pragmatic energy self-sufficiency, as coal is the only energy source China has plenty of.

Demographics

Horrible Chinese demographics have been described thoroughly in mainstream media. The only bit I would single out are the recent reports that these already horrible numbers have, in fact, been artificially inflated by regional governments, resulting in an additional 100 million people “missing” in key demographics. That’s bad.

Another problem is youth unemployment, reaching anywhere between 15% and 25%, depending on the degree of manipulation with the data. And that’s the national average. In some rural areas, it can be as high as 40%.

Lack of capital

China is trying to pivot its economy to higher value-added sectors like high-tech manufacturing and services. Tech is very capital intensive. It is not a coincidence that US companies have been leaders in this industry for decades. PC, internet, smartphone, and now the so-called AI all emerged in the US. All of this was enabled by very efficient and deep US capital markets.

None of this is present in China. Their stock market is like a giant casino where ordinary citizens gamble their money. It lacks established institutional players who would provide infrastructure and liquidity. And if you think the US markets are manipulated, oh boy, you haven’t seen the Chinese markets.

Even with its bright people, the Chinese tech industry will always lag behind the US, as there simply won’t be the funding for great ideas. This problem will persist as long as China keeps a closed capital account. Any attempt to change this will result in capital flight from the country and destruction of the Yuan’s value.

Governance

And why will any attempt to liberalize Yuan’s convertibility lead to capital flight? Well, because the level of economic and personal freedom in China is rather low. You can find 101 reasons why the US sucks, but why are millions of people trying to immigrate to the US, yet no such thing is happening to China? On the contrary, everyone who has money in China tries to somehow get it out. And once (if) the money gets out, people often follow. I witnessed it myself in Hong Kong ten years ago, where mainlanders bought up real estate en masse, triggering a spectacular bubble. Pregnant women from the mainland even traveled to Hong Kong just to give birth there, so their child gets HK’s permanent residence.

The Chinese government structure is inherently flawed. Local governments allocate resources wastefully into unproductive parts of the economy, resulting in unsustainable GDP growth at a huge cost (debt), fueling a real estate bubble in the process. Why does the central government allow this? Because of politics. Should the CCP give local governments more flexibility to invest in things that actually make sense, the result would be stratification of provinces according to their natural advantages and the skillfulness of their local administrations.

That’s something the CCP fears the most. Some provinces would become more independent, and their respective local governments emboldened in challenging the policies of the central government. And if you know something about Chinese history, you understand why this would not end well.

Is China the new USSR?

If a war breaks out, China could indeed take Taiwan, and even destroy US bases in Okinawa and maybe even Guam. But that’s all. The US Navy could simply block the flow of raw materials and agricultural commodities in the Indian Ocean and Pacific, basically bringing the Chinese economy to a halt within a year. And there is no way China could support its population without the imported grain and a modern industrial economy.

And if we’re lucky and end up with Cold War 2.0, China is not in a position to challenge US global dominance anytime soon. All those predictions about the Chinese economy surpassing the US are unrealistic and remind me of the USSR.

At the beginning of the 1960s, the Soviet economy was growing faster than the US, and many scholars were convinced it was only a matter of time before it eclipsed the US. Of course, that never happened. Similar to the USSR back then, China has deep structural problems that can’t be resolved easily, nor quickly.