Leaders 9 The Economist iquogovig of boshnsbom so Jeuin moil model bemol g vino blow villsionin orsica Dealing with China oybs belgining sainsisand stem neriswial gnholeled bas -esvisamail lotamo An epoch-defining contest between autocracy and liberal values lies ahead AST WEEK China slapped down democracy in Hong Kong. The known tycoon, Jack Ma, has fallen from political favour, foreign Limposition of tight mainland control over the territory is not investors' stakes in his empire are still worth over $50obn. just a tragedy for the 7.5m people who live there, it is also a mea- All this is a rebuke to the West's China policy of recent dec- sure of China's determination not to compromise over how it as- ades. When Western leaders welcomed China into the world serts its will. After the collapse of the Soviet Union in 1991, liberal trading system in 2001, many of them believed that it would au- values were ascendant around the world. The challenge from tomatically become freer as it became richer. When that did not China will subject them to their greatest test since the early days happen the Trump administration tried coercion, tariffs and of the cold war. What is more, as the economy of Hong Kong also sanctions. Those have failed, too-and not only in Hong Kong. shows, China is more tightly coupled with the West than com- America has led a three-year campaign against Huawei, a firm it munist Russia ever was. This presents the free world with an ep- accuses of spying. Of the 170 countries that use its products, only och-defining question: how should it best secure prosperity, a dozen or so have banned it. Meanwhile, the number of Chinese lower the risk of war and protect freedom as China rises? tech firms worth over $5obn has risen from seven to 15. Hong Kong defies those looking for a simple answer. China One response would be for the West to double down by seek- has cut the share of directly elected legislators from 50% to as ing a full disengagement with China in an attempt to isolate it low as 22% and will require that they are vetted for "patriotism". and force it to change tack. The cost would be high. China's share It is the culmination of a campaign to squash liberty in the terri- of world trade is three times that of the Soviet Union in 1959 tory (see Briefing). The leaders of the protest movement are in Prices would rise as Western consumers were cut off from the exile, in prison or intimidated by a security law imposed on world's factory. China makes 22% of global manufacturing ex- Hong Kong in 2020. Censorship is rising and Hong Kong's judi- ports. Western clusters that rely on China would face a shock: ciary and regulators will face pressure to show their fealty. On tech in America, cars in Germany, banking in Britain, luxury March 12th the G7 group of democracies condemned China's au- goods in France and mining in Australia. Banning China from tocratic clampdown, which is a breach of the country's treaty using the dollar today could trigger a global financial crisis. obligations. China's diplomats replied with bombastic denials. IsSuch a price might be worth paying if an embargo were likely You might think the death of liberalism in to succeed. But there are many reasons to think Asia's financial centre, which hosts $10trn of that the West cannot penalise the Chinese Com- cross-border investments, would trigger panic, munist Party out of power. In the short run, if capital flight and a business exodus. Instead forced to take sides, many countries might Hong Kong is enjoying a financial boom. Share choose China over the West. After all, China is offerings have soared as China's leading com- the largest goods trading partner of 64 coun- panies list there (see Business section). West- tries, against just 38 for America. Instead of iso- ern firms are in the thick of it: the top under- lating China, America and its allies could end writers are Morgan Stanley and Goldman Sachs. up isolating themselves. In the long run, unlike Last year, the value of us dollar payments cleared in Hong Kong, the oil-soaked Soviet Union, China is big, diverse and innovative a hub for the world's reserve currency, hit a record $utrn. enough to adapt to outside pressure. It is testing a digital curren- The same pattern of political oppression and commercial ef- cy, which could eventually rival the dollar as a way to settle trade. fervescence is to be found on the mainland. In 2020 China It aims to be self-sufficient in semiconductors. abused human rights in Xinjiang, waged cyber-warfare, threat- At least an embargo would encourage China to protect hu- ened its neighbours and intensified the cult of personality sur- man rights, some will say. Yet isolation tends to strengthen the rounding President Xi Jinping. Another purge is under way. Yet grip of autocratic governments. Cut off from commercial, intel- when they talk to shareholders about China, global firms gloss lectual and cultural contact with the West, ordinary Chinese will over this brutal reality: "Very happy," says Siemens; "Phenom- be even more deprived of outside ideas and information. The enal," reckons Apple; and "Remarkable," says Starbucks. Main- day-to-day contact of im foreign-invested businesses in China land China attracted $163bn of fresh multinational investment with their customers and staff, and 40,000 Chinese firms abroad last year, more than any other country. It is opening the main- with the world, is a conduit that even China's censors struggle to land capital markets to foreigners (see Finance section), who contain. Students and tourists engage in millions of ordinary have invested $9oobn, in a landmark shift for global finance. encounters that are not intermediated by Big Brother. Moreover, the pull China exerts is no longer just a matter of Engagement with China is the only sensible course, but how size-although, with 18% of world GDP, it has that too. The coun- does it avoid becoming appeasement? That is the challenge fac- try is also where firms discover consumer trends and innova- ing the Biden administration, which held a summit with China tions. It is increasingly where commodity prices and the cost of as we went to press. It is at the heart of strategic reviews like the capital are set, and is becoming a source of regulations. Business one Britain has just unveiled (see Britain section). is betting that, in Hong Kong and the mainland, China's thug- It starts with building up the West's defences. Institutions gish government is capable of self-restraint in the commercial and supply chains must be buttressed against Chinese state in- sphere, providing contractual certainty, despite the lack of fully terference, including universities, the cloud and energy sys- independent courts and free speech. Though China's best- tems. The creaking American-led infrastructure behind globali->