China Following in the Footsteps of the Kaiser’s Germany

Posted: Jun 14, 2016 12:01 AM
China Following in the Footsteps of the Kaiser’s Germany

By: Martin Hutchinson, Global Markets Analyst

China is now a rapidly rising power that’s become difficult to deal with. And it’s increasingly resembling the Germany of Kaiser Wilhelm II. (Fortunately, that signals mere problems rather than the disaster of 1914-18.)

Wilhelm II (1859-1941, ruled 1888-1918) has been maligned by history, largely because that history was written by his World War I opponents.

The German side of the story was further discredited by his unpleasant successors’ precipitation of World War II.

But Wilhelm II was not Adolf Hitler, or anything close to him. He was a man of his time with a flair for bombast somewhat like that of Donald Trump, but with much better taste in music and a genuine affection for the Britain ruled by his cousin George V.

Following in Germany’s Footsteps

The Kaiser’s Germany, however, was a difficult country to deal with.

Economically, it was growing rapidly, taking market share from Britain – previously the leader in industrialization – and cannibalizing the businesses of weaker European countries.

It operated under a very effective centralized economic strategy, which was established by Otto von Bismarck with the advice of a few major industrialists and a powerful Jewish banker, Gerson von Bleichroeder.

Politically, it was a new power surrounded by suspicious neighbors, without much of an empire (due to its recent formation in 1871). And it aspired to assert itself in global politics.

Its economic growth was paralleled by the United States, which played a much smaller political role at the time, but would become more important in the future.

Modern-day China now bears considerable similarities to Wilhelm II’s Germany.

Chinese President Xi Jinping has veered from the cautious but pro-market course charted by Deng Xiaoping and his successors since 1979, in both foreign and economic policy:

  • The country is expanding its position economically, taking market share from Western countries. It’s attempting to establish a position as one of the world’s great powers, using its military muscle to throw its weight about.
  • For German dreams of empire, you can substitute China’s desire for hegemony over at least the South China Sea, no doubt to be followed by the Western Pacific.
  • Like the pre-1914 United States, India is also growing fast, potentially as powerful as China, but not yet playing a major global role.

Charting a New Course

China’s foreign policy previously centered on the Pacific, behind economic considerations. But Xi has changed course, handling international disputes aggressively while reducing the size of the People’s Liberation Army, building a strong Navy (as did the Kaiser), and strengthening China’s air and rocketry forces.

Under Deng and his successors, especially the colorless Hu Jintao, Chinese leadership was collective. Xi has now replaced this with a much more personalized leadership, although without the style of the flamboyant Kaiser.

Economically, Xi is stamping out the corruption that was characteristic of the Chinese economy. It’s not yet clear what solution he’ll propose to deal with the Chinese banks’ mountains of debt, but it’ll likely involve more centralized control, particularly of the provincial governments and their infrastructure spending.

Chinese economic management hasn’t been definitively “communist” for decades. But it’s not moving to a true free market either, a “westernization” that’s bitterly opposed by Chinese academics.

Instead it’s taking a form similar to that of the Kaiser’s Germany, with the major industrial sectors dominated by large groups, all operating under an economic strategy set forth by a powerful government.

Minimizing Conflict

As we know, Germany’s economic and political aggression under the Kaiser ended in a disastrous world war.

Yet recent scholarship suggests this wasn’t inevitable, and only marginally Germany’s fault. Russian aggression, French revanchism after the defeat of 1871, and the terrorist state of Serbia all played a role. The British alliance with France and Russia also contributed to the war, which appeared to justify the Kaiser’s and the German General Staff’s fears of “encirclement.”

Politically, China will require very careful dealings to deter it from aggression and avoid making it feel as Wilhelm II’s Germany did.

Economically, Chinese mercantilism should be resisted, but not by opposing it with U.S. mercantilism and anti-Chinese trade arrangements. German economic success strengthened its war-fighting capability when the war came, but its peaceful pre-war economic expansion came close to preventing war by creating a lobby of exporters and international businesses who dreaded it.

Similarly, the Chinese may hate foreigners, but they know global commerce is enriching them, and would strongly oppose being cut off.

While China may go through a temporary recession while it sorts out its banks, I believe the country’s growth will continue, although not at the pace its official statistics have claimed.

In spite of his aggression, the Kaiser responded well to overtures of friendship, such as those offered by Britain at the time of Queen Victoria’s funeral in 1901.

David Cameron’s emollient approach to China, rather than the belligerent China policy proposed by Donald Trump, is both safer and far more likely to be effective.

Good investing,

Martin Hutchinson

For 27 years, Martin Hutchinson was an international merchant banker in London, New York, and Zagreb. He ran derivatives platforms for two European banks before serving as director of a Spanish venture capital company, advisor to the Korean company Sunkyong, and chairman of a U.S. modular building company. In Zagreb, he established the Croatian debt capital markets, set up the corporate finance operations of Privredna Banka Zagreb, and arranged for the monetization of 800,000 frozen Macedonian foreign currency savings accounts. He has been a financial journalist for over 14 years, and is the author of Great Conservatives and co-author of Alchemists of Loss, which details the causes and consequences of the 2008 financial crash. He currently publishes a weekly column called The Bear’s Lair, in which he comments on the economy and market. He is also a correspondent forReuters’ BreakingViews. Martin has a first class Honors Degree from Trinity College Cambridge and an MBA from Harvard Business School.