The Dawn of the Dragon

How Xi Jinping Has Transformed China

In 2012, Xi Jinping took office as the head of the Communist Party at the same time Bernhard Zand become DER SPIEGEL's correspondent in Beijing. Before leaving the country, he traveled all across the nation to measure how the Chinese people are faring today.

By Bernhard Zand

The skyline of Harbin, a city of over 10 million in northern China: The country is more conscious of its power today than it has been since the days of the great dynasties. Foto: Fu Qiang / Costfoto / Sipa USA / ddp images

Deep in Siberia, at the same latitude as Hamburg, China begins. It only comes to an end some 4,000 kilometers away, on the beaches of the tropical island Hainan. Both are places of great beauty.

In the north, the Heilongjiang, the Black Dragon river, winds silently eastward. It marks the border to Russia, where it is known as the Amur. The pine forests of the Taiga stretch out behind it.

In the south, the surf of the South China Sea gently rolls into Hainan’s Yalong Bay. Plane and palm trees line the coast and children frolic on the beach. Hainan is often called "the Hawaii of China."

In between lies a country about the size of the United States, but with four times as many people – twice as many as in Europe, more than in Africa.

China’s dimensions have always been difficult to grasp, but rarely has the country's size, combined with its growing political and economic weight, become as apparent to the world as it has over the past eight years.

I arrived in China in fall 2012. And just a few weeks later, in the Great Hall of the People in Beijing, a thickset man appeared before the press. The Communist Party had just appointed him as general secretary. 

The responsibility for governing China now rested on him and his colleagues. "Our people love life and expect better education, more stable jobs, better income ... and a more beautiful environment," he said. "People's yearning for a good and beautiful life is the goal for us to strive for.”

The accession of designated head of state Xi Jinping, then 59, raised hopes in both China and the West. In the place of his lackluster predecessor Hu Jintao, a relatively young and self-confident politician was now taking over leadership of the rising world power, an authoritarian country that seemed to be ready to open up. 

Four years earlier, Beijing had hosted the Olympic Games, and millions of Chinese set off abroad as tourists, business people and students. "China needs to learn more about the world,” Xi said at the end of his inaugural speech, "and the world also needs to learn more about China.”

Xi has fulfilled an important part of his promise, but other hopes have been dashed. Prosperity has increased inside the country and there is also less poverty. At the same time, the power of the state has grown, with Xi having secured his office for life, cemented party rule and perfected the surveillance state. 

In the west of the country, hundreds of thousands of the Muslim Uighur population are in labor camps, and critics of the regime have fled or been silenced.

DER SPIEGEL correspondent Bernhard Zand Foto: DER SPIEGEL

Internationally, China is leveraging its power more assertively than it has since the days of the great dynasties. In the South China Sea, Beijing has transformed islands into military bastions; and in Hong Kong, China has pushed aside an international agreement and imposed a draconian security law. Spurred on by the West’s weakness, China is expanding its influence.

The outbreak of the coronavirus and the ensuing crisis, certainly the most momentous event of the past eight years, has only served to accelerate this trend. Xi Jinping still speaks of the "reform and opening-up policy” today. But it has been a long time since he last said that China needs to learn more about or from the rest of the world.

How have the lives of the Chinese changed in these eight years? Are things better, as Xi pledged they would be back in 2012? And how do the Chinese think about their country, about the way they are perceived - and how they perceive themselves?

Before my tenure as Beijing correspondent comes to an end, my colleague Wu Dandan and I went on a trip to investigate these questions. We traveled from the north to the south, from Manchuria through Beijing to Shanghai, up the Yangtze River to Wuhan and Chongqing, into the hinterlands of Guizhou Province and then south to Hainan.

We met up with people we had met before, but we also visited towns and villages we didn’t know ourselves. The Chinese authorities knew where we were at every turn. And it wasn’t just security officers who shadowed us. In each of the 11 provinces we visited, an app on our mobile phones recorded where we were going. A journey across China in times of corona.


A large red star with a yellow hammer and sickle marks China's northernmost point in Heilongjiang. Beyond their symbols, the two countries that share a border here had very little in common when the Soviet Union disintegrated almost 30 years ago. Beijing and Moscow had spent most of the Cold War as rivals.

Since then, their relationship has improved, while many in the West now see China as having succeeded the Soviet Union as their main rival. But what differentiates China from the U.S.S.R. and Russia is its economic strength.

A group of Chinese tourists arrives to visit the border monument – women in beautiful dresses and men with expensive cameras. A modern coach has brought them to this remote place, traveling along a perfectly constructed highway leading 100 kilometers through deserted birch forests. 

A bit upstream, a holiday town has sprung up, complete with a wide waterfront and chalets that could just as easily be located in Switzerland or the Rocky Mountains. The tourists look inquisitively across to the Russian shore, where the few structures that can be seen sink into darkness at night. Colorful lanterns shine on the Chinese side.

As great as the contrast to Russia may seem, China’s northeast is poor when measured against the rest of the country. Manchuria, with a population of 110 million, was once home to heavy industry: coal mines and cement works, steel mills and arms factories. But China’s economic miracle began elsewhere in the early 1980s, on the Yangtze River and in the Pearl River Delta, in the east and in the south.

The north still hasn’t managed to make sufficient progress on structural change, despite billions in investments. Baoyu, our first driver on the trip, makes a good living from the tourists he drives through the greenery in summer and the snow in winter. He just bought himself a big SUV. But his wife and daughter have moved to Zhengzhou, a city of 10 million inhabitants located around 2,000 kilometers further south. "Our parents and I will follow them,” says Baoyu. "Life is just better there. More education, more jobs and a better future.”

His colleague Wang Bo in the provincial capital Harbin, famous for its annual ice festival, tried in vain to persuade his daughter to stay with him. "Dad,” she said, "I earn four times as much in Beijing as I do here. What did I go to university for?"


Around 50 kilometers south of Harbin -- past a train station from the time of Japanese occupation, an abandoned factory and a few provisional-looking concrete structures housing car repair shops -- a gravel road turns off into a cornfield. 

It leads to Yusheng, one of the 600,000 villages in China that you only notice when you zoom in on Google Earth between the country's 113 cities of over a million inhabitants. The dense symmetry of these settlements can be seen from above: houses lined up next to each other, with small backyards behind them.

Bruce’s family of farm workers lives in one of these homes. He's been calling himself "Bruce" since he became the first from his village to study English in Beijing. Later, he changed his major and wrote his doctoral dissertation on the literature of the ethnic minority to which he belongs, the Manchu, which gave Manchuria its name and China its last dynasty.

Communist Party leader Xi Jinping at the party congress in Beijing in May: "China needs to learn more about the world." Foto: Li Gang / Xinhua / eyevine / laif

A 35-year-old man with thick hair and the soft hands of a bookworm, Bruce reports with satisfaction on the interest scholars at Harvard and Oxford have shown in him, his research and the 10 million-strong ethnic group to which he belongs. 

The same cannot be said for modern China, which looks with suspicion toward anything having to do with the Manchu. The Qing Dynasty emerged from their midst before it disappeared in 1911, taking feudal China along with it -- and the Communist Party continues to treat the dynasty with contempt to this day.

Bruce chooses his words carefully and doesn’t want to be quoted too extensively. He’s not a dissident, not even remotely. But it bothers him to see the degree to which the official history marginalizes the achievements of minorities like the Manchu. 

"But there are professorships within my field," he says. His career is precisely planned, like that of many young Chinese: He left Beijing in the summer because his chances of advancement are better in the provinces. He is now taking up a lecturing position in Harbin, where he hopes to marry before one day returning to Beijing as a professor. 

He spends most of the day in his room. At night, he sleeps on a brick bed, which, like all the others in the house, is connected to the kitchen stove and is therefore well heated in the winter. 

The toilet is in an outhouse in the backyard -- like most homes in the village, the house has no running water. Many of his peers grew up in the same way, as will have many of his students.

"He was always the best in school,” Bruce’s mother says proudly. "Ah, mom,” he replies, sheepishly. The parents' recognition is still an obligation for young Chinese, especially for the successful ones. 

The expectation is that they will one day provide for the rest of the family. China’s pension and welfare systems are rudimentary compared to those in Europe, especially in rural areas.

In Manchuria, China doesn't look like the power and money machine that the West perceives it to be. It's an emerging country -- ambitious, but far from reaching its goal, a state that doesn't succeed in everything it sets out to do. 

China’s massive export figures obscure the fact that per capita wealth in China is only about a quarter of that in Europe and America. Perhaps this is one of the reasons the leadership doesn’t trust its people.

Shortly after we leave, Bruce gets paid a visit by the local public security bureau. Who were those people, the officials ask, and what did they want?

Hearing that news worries us, but it's not surprising. Already back in Harbin, four men wearing sunglasses had been following us around - on foot in the center, and in two alternating cars further out. The state doesn’t trust us, either.


In Jinzhou, a steel town around 700 kilometers further south on the Yellow Sea, they’re already waiting for us. Again, there are four of them, and again, they're wearing sunglasses and avoiding eye contact as they sit in the lobby of our hotel in the morning.

But it appears that we briefly gave them the slip on the previous evening. Immediately after our arrival in the city the day before, we visited Li Tianyou, 29-year-old, fallen superstar of the Chinese live streaming scene, who we had met three years earlier at the peak of his career.

MC Tianyou, as he was known at the time, coined a new rap genre called hanmai, meaning literally: "shouting at a microphone.” The rap style, rooted in the northern Chinese working class, may be harmless by Western standards, but it is salacious and crude to many Chinese. "Listen Up, Girls,” was the name of Tianyou's biggest hit.

His success was phenomenal. He had 22 million followers, and on one evening, he attracted more than a million of them to his chat room and earned the equivalent of 200,000 euros. A fashion label in London even booked him for an ad campaign and he says almost all young people still recognize him on the street today.

But this success was followed by a deep fall for Tianyou and for many of his imitators. His streaming platform terminated his account in early 2018 under government orders and banned three of his hits. 

Chinese state broadcaster CCTV portrayed the hanmai culture as a dark cloud that rained down filth, weapons, panties and whips on the country’s youth. Bloggers loyal to the state welcomed Tianyou’s ban, saying he lacked "positive energy.”

Two years later, the once well-traveled Tianyou is back in Jinzhou, the city where he grew up. He’s an athletic young man with a gladiator haircut. 

His headquarters are a mixture of office, gym and motorcycle museum. Ten employees sit on the first floor and manage other live streamers that Tianyou now has under contract.

"I wouldn’t even want to be online anymore,” he says. "I was an entertainer. I talked and rapped. Live streaming in China today has more to do with selling things, like beer or shampoo. 'Hey, why don't you order a few more bottles?' That's not my world anymore."

Outside his door are two classic cars, an Austin Mini and a vintage Mercedes, and he has built a big toy racetrack for himself inside the office. The internet rebel who tested the boundaries of Chinese taste has retreated back to his comfort zone, the small area where the regime lets its citizens do business in peace. 

Tianyou doesn’t mention a word about the crisis caused by the coronavirus or the details surrounding the ban on his work. "I can’t talk about that,” he says.

Tianyou’s rise and fall is a testament to how obsessive the Chinese state has once again become. It may not be fundamentally opposed to its citizens embracing new technologies and cultures, but it can be relentless when it believes red lines are being crossed. 

A decade or so after it seemed like social media was nudging the door open in China, the party has returned to the total control that it exercised when it first came to power a hundred years ago.

The morning after our meeting with Tianyou, as we check out and drive to the train station, the four agents get out of their seats and follow us in a black Toyota. At the station, three of them jump out of the car and follow us to the ticket office. One of them stays at the security gates long enough that he can be sure we're not coming back.


In Beijing a few days later, we have a meeting arranged with Liu Chengcheng, 31, a startup founder we first met six years ago. Liu, known as CC for short, started a blog as a student that became one of the most successful Chinese tech websites, showcasing new apps and inventions and bringing together startups and investors.

Our first meeting took place in an office in Beijing's University District, back when Liu had 50 employees. In 2018, he welcomed us for a visit at the company's new headquarters on Chang'an Boulevard, not far from the Great Hall of the People. By that point, he had 700 employees and had founded two other companies.

Once again, two years have passed and Liu invites us for a meal at a Japanese restaurant that’s even a little closer to the city center. He now has 1,000 employees and one of his companies is listed on the NASDAQ technology exchange in New York.

Liu, who hasn’t totally shaken his student habits, arrives late, although a few pounds heavier this time. That morning, he was in Chengdu, the capital of Sichuan, meeting with the leadership of a province that has about as many inhabitants as Germany. 

He was accompanied by an employee of his who is working on a major project: an all-Chinese operating system that could make computers and mobile phones in China independent of U.S. market leaders Microsoft and Android.

    Startup founder Liu in 2018: "Anything but a Mercedes." Foto: Gilles Sabrié

"Technically, it's not a big problem," Liu says. What will be more difficult is building up an "ecosystem” connecting the software and hardware. 

But the political situation makes it increasingly likely that the digital world will fragment – not just in an American and Chinese one, but into many national and regional spheres, including a European one, a Russian one and an Indian one.

The amiable nerd we met six years ago has since become a CEO, a man who thinks in global terms and routinely avoids any questions that could potentially land him in hot water with the financial regulators. 

He soon plans to take the second of his three companies public, but this time he will do so in Shanghai rather than New York.

Liu says the corona crisis is accelerating trends that emerged before the pandemic, some of which are beneficial to China. "Between March and June 2020,” he says, checking the numbers on his mobile phone, "China’s gross domestic product was only 5 percent below that of the U.S. 

The mood is good for tech companies in China." This is in large part due to the fact that Beijing wants to become technologically self-sufficient. 

"It wouldn’t be this way if relations with Washington were better."

Entrepreneurs still have more freedom to talk about sensitive issues than scientists, lawyers or even human rights activists. The state praises and encourages young founders like Liu, hoping to profit from their entrepreneurial spirit. But there are red lines that apply for them as well. 

The party’s primacy has once again become sacrosanct under Xi Jinping. It’s easier to talk about private matters than about the party.

Shortly before our first meeting in 2014, Liu had just got his driver’s license. When asked what car he wanted to buy at the time, he answered: "A blue one." Which brand? "Anything but a Mercedes. 

That's what businessmen drive around in.” Six years later, he calls his driver during lunch. Liu has a hunch what our last question might be and laughs. "OK, he’s coming in a Mercedes. But that's just my company car."


It's 1,318 kilometers by train from Beijing to Shanghai, about as far as from Hamburg to Bologna. A flight takes just under two hours, a train journey takes more than four and a half hours, hardly a minute of which passes without a city, a factory or at least a skyscraper being visible when looking out the window. 

Travelers from Beijing typically arrive in the Hongqiao transportation hub in western Shanghai, a massive concrete structure that connects Asia’s largest train station with the city’s domestic airport.

Less than a year after the outbreak of the coronavirus, the halls and corridors of Hongqiao are as crowded as ever before, perhaps even fuller, whereas emptiness reigns at Pudong Airport’s international terminal. China has isolated itself, and travel to foreign countries has almost completely ground to a halt.

About halfway between Hongqiao and Pudong, financial broker Zhang Jiahua, 30, works in a skyscraper. He’s wearing a green t-shirt, track pants and athletic shoes, the "Shanghai financial look,” he says. The Chinese may have adopted Western financial capitalism, but they have ignored its dress code.

Zhang is upbeat about his day-to-day business. He manages the fortunes of entrepreneurs and investors on China’s east coast and he recently took on a prominent author and a race car driver as clients. That kind of thing counts among Chinese investment bankers.

But Zhang doesn’t trust the stock market boom that has swept China in the wake of the pandemic. In the large, industrial provinces along the Yangtze River where most of his clients live, the mood remains cautious. Some companies that manufacture products largely for export are suffering from weaker demand from certain countries.

Like Beijing founder Liu, Zhang is also worried about relations between China and the U.S. and believes the situation is even more fraught than Liu does. "I don’t fear a major war,” he says, "but I do anticipate a regional conflict in which China and the U.S. could get entangled.” The crisis scenarios he discusses with his colleagues focus on the island of Taiwan, which Beijing considers to be an "inalienable part of China.”

It is true that the majority of mainland Chinese consider Taiwan to be a part of China. 

But with the pandemic, nationalist sentiments have increased dramatically and are being promoted by state propaganda – to make people forget China’s failures at the beginning of the crisis, on the one hand, and to distinguish themselves from Western governments that are perceived as incompetent, on the other. 

By cutting itself off from the rest of the world, the feeling of superiority is being reinforced from the inside.

Stock broker Zhang is betting on the "Fear Index.” He advises his clients to buy gold and real estate, investments that may retain their value even after a severe political crisis.


Wuhan, the central Chinese city of 11 million where the coronavirus first appeared, is located 1,000 kilometers up the Yangtze River from Shanghai. In the West, its name has become synonymous with disaster. But for most Chinese, Wuhan is a city of heroes.

On Chezhan Street, which leads up to the old colonial railway station, parking spaces grow scarce in the evening. The tables in front of restaurants fill up, guests laugh and glasses are clinked. 

It must have looked something like this last autumn -- before, a few kilometers away, the first people began falling ill with a mysterious form of pneumonia at the now infamous Huanan seafood market.

"If I didn’t know what happened, I wouldn’t believe it,” says Yang Xiu. She has run a restaurant with frog hotpot specialties on Chezhan Street for more than 20 years.

We first met Ms. Yang in April, when she returned to her restaurant for the first time after more than two months of lockdown, opened the windows, emptied the refrigerators and started all over again.

Initially, her fears were confirmed. It took another two months for enough guests to return to enable her to rehire her first employees. She estimates today that she lost the equivalent of 30,000 euros.

Now, though, she says business is "tebie hao,” extraordinarily good. "We are now allowed to put the tables on the street in the evening, which had been strictly prohibited before. But it’s true: It’s good for business but bad for the epidemic if people are eating and drinking outside. 

Sometimes, it seems like people are taking their revenge on the virus by going out to eat even more often in the evening.” On a good night, she has revenues of around 10,000 yuan, about 1,300 euros.

Unlike in Europe and the United States, Wuhan was the only city in China that suffered thousands of deaths, likely many times the official figure of 3,869 victims – because the numbers were initially manipulated and many sick people couldn't get tested during the first few weeks.

The government, which initially dragged its feet before then crushing the virus with severe lockdowns, has rewritten the story of the past 11 months into a heroic saga. And Wuhan plays a leading role: Its residents are portrayed as having made a great sacrifice to save the motherland. This grand narrative is celebrated in paintings, documentary films and TV shows. Wuhan for all, all for Wuhan.

But that myth has never been very perceptible in the city itself. When the sirens wailed shortly after Wuhan's opening in April, only those people stopped who didn't realize it was a signal for reflection and commemoration. The rest just carried on with their shopping and errands. They hadn’t been allowed to do so for a long time.


On the evening of that November day in 2012 when Xi Jinping introduced himself as the new leader of the Communist Party in Beijing, a tragedy took place in the city of Bijie in the poor, southwestern province of Guizhou. 

Five boys, left behind by their parents, who were migrant workers, shut themselves in a large dumpster and lit a fire to warm up. They suffocated from the carbon monoxide poisoning. The country was shocked. Where was the state? Where were the teachers? Where was the care?

Four weeks later, we traveled to Bijie to report on the case. It was raining, and the drive from the provincial capital of Guiyang to Bijie took five hours. Today, Bijie is connected to the Chinese high-speed rail network. The train ride from Guiyang now takes just 48 minutes.

Eight years ago, the road to the village of Caqiangyan, where the five boys grew up, led up into the mountains over muddy dirt roads with knee-deep potholes. In the end, a four-wheel drive vehicle had to be called to get us back. Today, the road is paved all the way to the village. 

The house from which three of the boys had run away looks deserted. Two wild turkeys are running around in front of it and there are children’s shoes on a window sill. Then a boy comes out, 12 years old. 

He shares the same last name as his cousins, with whom he had played as a toddler. His parents are also migrant workers, who left him behind to stay with his grandfather.

In the regional capital down in the valley, Mr. Li sits in the municipal office, which is responsible for the villages in the mountains. It consists of a single large room, the walls of which are papered with huge charts. 

On them, line by line, are the names of all the families living on the brink of poverty. The aid they are currently receiving is listed in the columns next to them. "We help them buy things like food, heating oil, electricity and health insurance,” says Mr. Li. 

He said steps were taken to address poverty before the deaths of the five children, but the program was improved afterward.

Li Yuanlong is the man who first reported the 2012 tragedy in Bijie -- on the internet, because the state media initially declined to cover the story. He had been fired years earlier from the Bijie Newspaper and imprisoned for taking on the powers-that-be in the city. When the authorities requested that he cease with his reports after the deaths of the five children, he refused -- whereupon officials took him and his wife, a teacher named Yang Xiumin, into custody.

Restaurant owner Yang Xiu in Wuhan: "Good for business but bad for the epidemic" Foto: Gilles Sabrie / DER SPIEGEL

When they returned home, Li helped us with our reporting, which first created problems for him, and then for us. Just before we left Guizhou, our hotel rooms were broken into. The intruders deleted our hard drives and destroyed our equipment.

Eight years later, we called Li again. He has since changed jobs and works for a company far outside of town. He said he would like to see us again but asked if he could have a night to think it over. The next day, he said: "I think it would cause too much trouble for you and for me. But please visit my wife. She would be pleased to see you."

In 2012, Li and Yang Xiumin lived in an unplastered house on the outskirts of the city, only one room of the small apartment was heated. Today, they have an apartment on the 28th floor of a modern residential tower. The view from the elevator looks down on a futuristic new museum and the riverfront park promenade. It’s an impressive panorama.

But as we step out of the elevator, three men from the public security bureau are standing outside the door to Li’s apartment. "Who are you?" they ask. "What do you want here?” Before we can answer, Mrs. Yang opens the door, looks past the officials and invites us in. 

The men force their way in behind us as a dog yaps at them. An absurd situation ensues, and even the officials seem confused for a time. Yang Xiumin simply ignores them and starts talking about her son, who lives in the U.S., but whom they are not allowed to visit because of the ban on leaving the country.

Then she takes us to the building’s rooftop terrace, with the public security officials and the yapping dog in tow. "My husband relaxes up here during the weekends,” Mrs. Yang says, "writing poetry and watering the plants.”

At some point, the presence of the public security officers grows unbearable. Yang Xiumin apologizes, but it is actually us who should apologize. We bid a resigned farewell. The men keep following us, first to the elevator, then in a white car back to the hotel and in a Volvo to the train station.


Haikou, the capital of the island province of Hainan, is a city of 2 million people that’s just like dozens of others in China: monotonous apartment blocks, wide urban highways and office towers in Chinese neo-brutalism. If you didn't see the ocean on the approach, you might never realize that Haikou is located on a tropical holiday island.

Still, as our driver points out, there are "serious bars” in the city. He means nightclubs, maybe even illegal ones, but when asked about it, he says: "I can’t say it quite like that. Conversations in taxis are recorded these days.”

A grandiose Palace Hotel, the guest house for the government of the People’s Republic, is located in the center of the city. Here we meet Victor Gao, who was the interpreter in the 1980s for Deng Xiaoping, the reformist politician who opened China up economically after Mao’s death and had the Tiananmen Square uprising smashed in 1989. 

Today, Gao is a member of the board at a government-affiliated think tank and, by virtue of his convictions and polished English, serves as a kind of unofficial government spokesman.

Over the years, Gao has accompanied many delegations to Hainan and has a surprisingly sober view of the island’s development. Hainan was elevated to the rank of a province in 1988, with the declared intent of developing the same economic dynamism here as in Taiwan, a democracy that is roughly twice the size.

Visitors to the island of Hainan in the south: "The Chinese never bluff." Foto: VCG / Getty Images

That goal still hasn’t been achieved, despite 30 years of effort. "Hainan is beautiful. But I know many people who have made a fortune here and lost it again,” says Gao. 

The first era of "exuberance” was followed by disappointment.

Like Manchuria, which remains underdeveloped to this day, Hainan is an example of how a seemingly omnipotent Beijing is far from reaching all of its goals. 

Hainan was also covered with airports, roads and railways; and in the south, a huge cruise terminal was built, modeled on Miami. But none of these projects has really taken off yet. Instead, Hainan is today one of the most indebted provinces in the country.

This spring, the government decided to turn the whole island into what would become the world’s largest free trade zone. Since then, some in nearby Hong Kong have feared that Hainan could one day overtake Asia’s most important financial center. Gao doesn’t think that's very likely.

He says that Beijing has another role for Hainan, one that goes beyond making it a profitable tourism center. The island, he says, is located on the "front line of a major geopolitical confrontation,” the conflict between China and the United States. 

From Beijing’s point of view, Hainan Province also includes islands in the South China Sea - islands that have been developed into military fortresses despite the fact that they are claimed by other countries. "The South China Sea is fully, comprehensively and seamlessly monitored by the Chinese defenses,” says Gao. 

"Every ship, every submarine, every hostile object is accounted for. War should not be an option, but if one broke out between China and the U.S., the South China Sea will become a graveyard for America’s ships. The Chinese never bluff.”

Gao is no radical – he represents the more moderate wing of the Beijing establishment. 

The fact that he can speak about the beauty and investment opportunities on a tropical island and then about a "graveyard” for the U.S. Navy shows two of the many faces of modern China: a soft civilian one and a hard military one.

At Yalong Bay in southern Hainan, a three-hour drive from Haikou, this contradiction is repeated, but it's barely noticeable initially. A long sandy beach stretches along the western side of the bay, with a dozen large hotels lined up behind it. Swimsuits hang to dry on the balconies, the first joggers set off in the morning and employees carry fresh hotel towels down to the beach.

On the eastern side, an inconspicuous, verdant forested mountain rises out of the sea. There is hardly any other place on China's coast that militaries in the West are keeping such a close eye on. The bunker where China’s navy stations its fleet of nuclear submarines is hidden inside the mountain. It’s the place from which Beijing symbolically asserts its claim to power over the South China Sea, the Western Pacific and, more recently, far beyond.

China has risen to become a world power for the second time in recent decades, an unprecedented comeback. One reason is China’s sheer size, its vastness, its density and the deep roots of its culture. The other, which is even more important, is the diligence, creativity and patience of its people.

There’s an unwritten contract between the Chinese and their leadership that still binds them today: You stay quiet and we will set the course for growth, success and China's path to the top. It's a tough, unambiguous contract. 

Way up in the north, by the Black Dragon River, where our journey began, there was a red banner: "Violate the laws of this boundary," it read, "and you will be caught and crushed like a worm."

Bernhard Zand has since moved to Hong Kong as DER SPIEGEL's correspondent there.

The tunnel gets darker

What the new variants of covid-19 mean for human health

Between now and when vaccines are widely available countries will face some hard choices

The winter solstice may have passed, but in the land of covid-19 the nights are still growing longer. In recent weeks two variants of the coronavirus have spread with ferocious speed in Britain and South Africa. 

They have mutations that make them a lot more contagious. Although, so far, they do not seem to be any deadlier, for every ten people that older variants would infect in Britain the new one infects 15. Early data suggest that the South African variant burns just as fiercely.

Just now the world is rightly focused on approving, making and administering vaccines. Alas, it also needs to face up to the fact that before jabs come to the rescue, the new variants will spread, creating deep difficulties for policymakers.

Evolutionary biologists have shrugged at the appearance of the mutations: this is how viruses behave, for natural selection favours variants that are more transmissible and less deadly. Some viruses that cause common colds may have started out as vicious as sars-cov-2 and moderated in their old age. 

Policymakers cannot afford to be so relaxed. A more transmissible covid-19 virus that is just as dangerous, as this variant is, means that hospitals may be overwhelmed. In England the majority of the population has been in near-full lockdown for weeks. 

Yet covid-19 patients at hospitals have now exceeded the peak in April and the health service is struggling to cope.

Much of the rest of the world, including Europe and America, will soon follow. More than 50 countries rushed to ban travellers from Britain as soon as its scientists told the world about the new variant, in mid-December. Many have also banned arrivals from South Africa. 

But such measures are likely to buy only a little time. In early November, before travel bans, the British variant already accounted for nearly 30% of cases in London, one of the world’s most connected cities. 

Given how early variants spread from ski resorts in the Alps last winter and from Spain in the summer, it is naive to believe that cases are not already seeded all over Europe and beyond. Once it arrives, the new British variant is likely to displace local strains within a few weeks.

So far, only sporadic cases of it have been found in 20 or so countries, including in America in a man who had not travelled. But that is because, unlike Britain and South Africa, most do little genomic sequencing to look for mutations. 

France has examined the virus fewer times in the entire pandemic than Wales does in a week. Most countries do not look at all. Other more contagious variants may thus be spreading undetected.

The good news is that these mutations are unlikely to reinfect people who have had the disease or to evade today’s covid-19 vaccines. Natural selection will, eventually, begin to change that, as more and more people are inoculated, but vaccines can be tweaked to remain effective. 

With the Pfizer-BioNTech vaccine, the process takes just six weeks.

Between now and then

However, even in the mostly rich countries that have hoarded vaccine supplies there will not be enough to stop the virus from spreading, at least until summer. 

This week’s emergency approval of the AstraZeneca-Oxford jab will help, but there will still be delays. 

Poorer and middle-income countries will remain less well protected for a lot longer.

Countries in Europe and beyond will be forced to deal with this fast-changing reality by reassessing the trade-offs between the benefits from the harsh lockdowns needed to stop a more contagious virus and their long-term costs to schooling, health and livelihoods. 

There is still light at the end of the tunnel. 

But the road through it has become a lot more treacherous.

Janet Yellen's Return and the Financial Storm Ahead...

by David Stockman

Janet Yellen is back. 

Naturally, the follies of Keynesian central banking come to mind.

In many ways, Yellen’s tenure as Fed chairman was far worse than Ben Bernanke’s. At least Bernanke’s money-printing madness was undergirded by his credentials as a misguided scholar of the Great Depression and the mistaken conclusion that the Wall Street meltdown of September 2008 was the prelude to another such occurrence.

The Great Depression of the 1930s was caused by way too much Fed-fostered foreign borrowing on Wall Street during the roaring twenties. It stimulated an unsustainable boom in US exports, soaring domestic CapEx in order to expand production capacity, and a stock bubble fueled consumer-spending boom in cars, radios, and appliances.

Therefore, when the Wall Street bubble burst in October 1929, foreign borrowing dried up, US exports and CapEx crashed and spending on consumer durables plummeted.

This was the cause of the massive contraction in 1930–1933, which took the GDP down from $95 billion to $58 billion in dollars of the day. By contrast, it had nothing to do with Milton Friedman’s crashing M-1 (money supply), which was a consequence of unavoidable and necessary bad debt liquidation by the banking system. Nor did it stem from any lack of credit availability to solvent borrowers, as demonstrated by market interest rates that remained ultra-low (under 2%) throughout the downturn.

The depression of 1930–1933 wasn’t owing to the stinginess of the Fed, which actually expanded its balance sheet by 72% between August 1929 and early 1933. 

Consequently, Bernanke’s maneuver of flooding the zone with fiat credit during 2009–2013 was a mistaken page from Milton Friedman’s counterfactual playbook, which was wrong the day it was written in the early 1960s and even more wrong when Bernanke cut and pasted it into his PhD thesis at MIT in 1979.

By the time Yellen became Fed Chairman in February 2014, however, there was no plausible excuse for keeping Bernanke’s bloated Fed balance sheet in place or continuing to keep interest rates at the zero bound. If there was ever a chance to normalize Bernanke’s misbegotten Depression-fighting policy, it was during the 48 months of Yellen’s term.

Needless to say, Yellen’s Fed did no such thing. After 45 years of devotion to the 1960s Keynesian bathtub theory of full employment economics, Yellen kept real interest rates buried in negative territory during the entirety of her term, and not just marginally.

The 16% Trimmed Mean CPI increased by an average of 1.90% per annum during that four-year period, while the Fed’s target interest rate averaged just 0.40%.

During the sweet spot of the longest business cycle expansion in history—from month #55 to month #103—when the economy should have been left to expand on its own without "stimulus" from the central banking branch of the state, Yellen kept real money market rates pinned at an unprecedented -150 basis points.

The justification for such economic insanity was the claim that the US economy was not at its full-employment level as measured by the dubious U-3 unemployment rate and that the job of the central bank was to keep injecting "demand" into the economy until the bathtub was full to the brim and 100% of "potential GDP" was attained.

But here’s the thing. Potential GDP and full-employment labor markets are Keynesian malarkey.

In a world in which domestic labor competes with China’s price for goods, India’s price for internet-based services and Mexico’s price for manufactured goods assembly, full employment cannot be measured by the headcount metrics of the BLS, nor can it be achieved by injecting massive amounts of fiat credit into the bank accounts of Wall Street dealers.

In fact, with total outstanding credit now at $81 trillion, or 382% of GDP, the Fed’s liquidity injections never really leave the canyons of Wall Street. The result is increased speculation on Wall Street and accelerating inflation of financial asset prices.

After all, money markets do not finance the working capital or fixed asset investments of business, nor do they fund consumer borrowing for automobiles and durables. Instead, short-term money markets are where Wall Street dealers finance their inventory and where speculators fund their positions in the options markets—or via margin and repo credit against stocks and bonds held outright.

Consequently, negative real interest rates are the mother’s milk of financial speculation and the resulting asset price bubbles.

Yellen’s policies constituted an epic monetary error that has fueled bond- and stock -market bubbles that are off the charts, thereby sending erroneous price signals to Wall Street gamblers, corporate C-suites and spendthrift politicians alike.

The yawning gap below between the purple line, signifying (the running inflation rate) and the brown line (the money market rate) connotes the massive subsidy Yellen’s Fed conferred on speculators and day traders. 

In short, Yellen sowed the wind of monetary excess, and now we are reaping the whirlwind of a gargantuan Wall Street bubble that is a clear and present danger to the economic future—because it will crash, and the resulting financial and economic damage will be biblical.

Ironically, Janet Yellen may be sitting in the captain’s chair when the most violent and destructive financial storm in history finally comes ashore. It would serve her right.

Editor’s Note: There's no question the elite are eager to promote policies like negative interest rates, the abolition of cash and more.

COVID and the Comeback State

If the pandemic turns out to be only a temporary disruption, it will be remembered as little more than another tragedy – memorable, but essentially a discrete event. If, however, the disruption of 2020 spurs deeper reflection on the relationship between government and the governed, then this horrible year will come to be viewed as a focal point, rather than a data point.

Ana Palacio

MADRID – Some years are barely mentioned in history books; others get their own chapters. The last year certainly feels like the latter, and there is no doubt the COVID-19 pandemic, like the Spanish flu pandemic of 1918-20, will be long remembered. 

But what makes a year truly remarkable is not how it unfolds, but rather how it changes the world. An anomalous year, after which the world returns to business as usual, means far less, historically, than an inflection-point year that brings about a great transformation and marks the start of a new human epoch. 

Which will 2020 be?

There is good reason to think the world has been irrevocably changed in 2020. In particular, the events of the last 12 months may well have triggered a fundamental reshaping and rebalancing of the relationship between state and society, particularly in Western liberal democracies.

Since the Cold War ended, Western democracies’ social and economic models have become increasingly imbalanced. Free markets, once viewed as a powerful means of strengthening liberal democracy (by creating a rights-demanding middle class), are now an end in themselves – an ideal to uphold, no matter the cost.

And the costs have been high. As free-market orthodoxy demanded, globalization brought looser capital controls, more open borders, large-scale privatization, and deregulation. Governance evolved into a more limited, technical endeavor, and increasingly influential private actors stepped into public roles.  

Corporations thus became some of the most powerful global players, and governments have increasingly struggled to tax and regulate them. In some vital areas – from the spread of misinformation on social media to environmental sustainability – corporations have essentially been left to self-regulate.

There has been an impulse to claw back oversight; yet it comes not from the state but from other actors. The push for “environmental, social, governance” corporate accounting and reporting is one example. 

Public pressure and increasing investor interest have made companies eager to tout their ESG credentials. At the same time, serious transparency and accuracy issues with ESG standards remain. 

The state’s absence is palpable through all of this.

From the perspective of many ordinary citizens, government has behaved ever more like a private service provider in recent decades, even as inequality has soared. The aftermath of the 2008 global financial crisis – when governments pursued largely half-measures to shore up financial systems and prevent another meltdown – shattered the idea that liberal democracy is an automatic guarantor of stability and prosperity. 

Meanwhile, China pushed its own competing model with a strong central state intertwined with the market, setting the stage for today’s global battle of ideas.

From the financial-crisis earthquake rose a wave of populism and nativism – one that engulfed much of the West. With inequality continuing to rise and little effort having been made to mend the relationship between citizen and state, faith in institutions dwindled, and demands for radical change – often reactionary, state-eroding change – gained resonance.

During the COVID-19 pandemic, however, the state has been mounting a comeback. 

When economies grounded to a halt, governments channeled huge volumes of public money toward propping up private industry and limiting layoffs. 

In Europe, country-level interventions were buttressed by the unprecedented €750 billion ($918 billion) pandemic-recovery fund, Next Generation EU.

Moreover, supply-chain disruptions have raised the expectation that states should do more to ensure strategic essential commodities. 

As such, calls to re-shore production have not only grown louder; they now carry the implication of a reassertion of sovereign control over strategic goods.

Similarly, for the first time in a generation, governments revived their regulatory impulse, especially with regard to the increasingly distortionary Big Tech giants. The European Commission recently unveiled landmark regulations – the Digital Services Act and the Digital Markets Act – to curtail these firms’ power, and it has announced plans for further competition-based actions. 

And in the United States, the Federal Trade Commission and state governments have filed antitrust lawsuits against Alphabet (Google’s parent company) and Facebook for using their market power to fend off rivals. Calls to break up these mega-firms are growing louder.

The pandemic has shown that the market’s “invisible hand” cannot be counted on to deliver public goods, let alone defend the public interest. The visible hand of the state should contribute, through functioning effective institutions and good governance.

More fundamentally, health and safety measures are a constant physical reminder of the state’s presence, which has been so absent in recent years. Some have embraced this invasiveness, recognizing a common responsibility, while others have bristled; but all are aware of the government’s role. 

Sensibilities are changing, and this could be a foundation for broader shifts in the liberal-democratic model.

Of course, 2020 may turn out to be a temporary disruption. Widespread vaccination could end the pandemic, and people, corporations, and governments may return to the pre-pandemic status quo. 

Resentments will continue to fester and governments will keep muddling through.

In that case, the pandemic will be remembered as another tragedy – memorable, terrible, but essentially a discrete event. If, however, the disruption of 2020 spurs deeper reflection on the relationship between government and the governed, and brings about a genuine strengthening of liberal-democratic institutions, then this horrible year will come to be viewed as a focal point, rather than a data point.

Ana Palacio, a former minister of foreign affairs of Spain and former senior vice president and general counsel of the World Bank Group, is a visiting lecturer at Georgetown University.