Ten years ago, we got Xi Jinping wrong. On his coronation, we should reflect on why

“I’d bet that he’s a reformer.”

“I’d agree — his father led Guangdong during the early stages of re-opening.”

“Right, and his father was on the receiving end of the worst excesses of the cultural revolution. He’s no Maoist.”

“China isn’t turning back, and he wouldn’t have gotten the job if he didn’t intend to stick with the trend towards greater reform and openness.”

“He visited Iowa and has many fond memories…”

These were the expert insights I heard in a November 2012 meeting regarding Xi Jinping, the newly inaugurated general secretary of the Chinese Communist Party (CCP). The panel, featuring a senior member of the CCP actively engaged in government and Western finance executives, collectively had over 100 years of professional experience in China. If there was a group to understand China’s trajectory, this was it. To a man, they got it wrong.

To be fair, little was known about Xi the man before his accession to the leadership. The “Old China Hands” were careful to point that out, and regularly expressed modesty in their predictions. However, it is disconcerting that, in hindsight, virtually all the assessments of the incoming Xi administration yielded, essentially, the same wrong conclusions:

• Xi was more likely to be a liberal than a conservative.
• More pro-market economic reforms were coming.
• Foreign businesses would increasingly be allowed to participate in the China market.
• Liberal political reform may be unlikely, but retrenchment was equally unlikely.

I don’t bring this up to chastise my colleagues in the China watching community. I struggle to recall any prominent China experts who made the case in 2012 that Xi was an authoritarian through-and-through, wholly committed to establishing a new world order built to accommodate Chinese supremacy.

The problem, however, is that we have made little effort to understand how so much experience and expertise was unified into the same mistaken forecast. We also made long-term political and commercial strategic decisions about integration with China based on those judgements. Choices we would not have taken had we known what was coming. Now it is more difficult than ever to extricate ourselves from integration.

We should be able to quit China, but we can’t. The problem lies in the incentive structures within businesses that are driving our continued deep engagement with China.

As a result, our two economies have become highly integrated. That integration hamstrings our ability to manage the growing threat from a hostile, expansionist China under Xi.

Since President Trump first imposed broad tariffs on Chinese imports in 2018, there have been perennial calls in some quarters to relax those restrictions for the sake of the U.S. consumer. The Chinese government itself has cheered those efforts. For all the excitement they generate, the tariffs have done little to decouple U.S. supply chains from China. How did we get to this point — the U.S. consumer and the CCP’s fates wrapped up together?

That November 2012 meeting is quite informative in this context. Regardless of the theme of the forecast, the people running U.S. businesses in China almost always report back a rosier picture than the circumstances merit. Their careers are bolstered by continued integration and growth in China, specifically. Their subordinates’ careers depend on that integration, and they lack the skills or authority to challenge those forecasts.

Those incentive structures in U.S. businesses, often manipulated by the CCP, are far more malevolent than the individual people working within them. These incentive structures are responsible for the strategic thinking that disproportionately favors continued integration. The erroneous assessment of Xi enabled greater integration with China at a time when the U.S. should have begun decoupling. The forces conspiring to keep our fate intertwined with that of the CCP have never been stronger. As a result, the most dangerous moral hazard since the subprime mortgage crisis has emerged.

Moral hazard is simple: I alone enjoy the upside of a risk I take, and if it goes poorly, I share the costs with other people. U.S. businesses operating in China are making real money. They reinvest the profits in China, increasing their exposure to the CCP but enriching their shareholders further. Little of the benefit comes back to the U.S.—certainly not through taxes or employment. It is difficult for anyone to argue in 2022 that entanglement with China is in America’s national interest.

In my time in China, I have met some fascinating characters who are essentially selling out American interests but are completely oblivious to their own role, or the collective role of the business community.

In my upcoming book, I profile the personalities in U.S. businesses in China that are driving the moral hazard. But what is most concerning is that, over the past decade, rather than backing away from a slowing market, hostile public and expansionist, genocidal government, businesses are finding they are too entangled in China to make a break for the exit door. People in my network express alarm that just as they are waking up to the threat from Xi’s China, they are becoming increasingly powerless to effect change within their own organizations. Perhaps this sensational week in Beijing will help to reverse that trend. But I wouldn’t bet on it.

Michael Frank is a geopolitical and macroeconomic analyst previously with The Economist Intelligence Unit in Hong Kong and the American Chamber of Commerce in Shanghai. He is writing a book about the incentives of U.S. businesses operating in China and how they diverge from the national interest.