In the opinion of most of the ‘experts’, China has been an incredible success, in the last 50 years or so. They keep on telling how the rise of China is the greatest economic miracle of all time. In fact, it has become an axiom, and nearly a self-fulfilling prophesy, that China will be the biggest Asian power in the near future.
I have never quite believed all this self-serving drive. I have been skeptical about China partly because of circumstantial evidence: migrant Chinese men stuff themselves into cargo containers and arrive asphyxiated after a Pacific crossing; mainland Chinese prostitutes flood into Southeast Asia. These are not indications of a nation where all is well.
Based on my reading of the occasional dissenting voice and the odd piece of data that contradicts the ‘awakening of the dragon’ theory, I believe that China is in much more parlous shape than is generally believed. Also, there is a lot of hard data that suggests China's 'miracle' looks more like a 'debacle.' I think China has been brilliant only in one thing -- propaganda. It has managed to convince a gullible America that it is a very important nation, economically, militarily, and politically. I have been reading quite a few pieces recently about the hollowness of their propaganda.
To begin with…
Recently I came across a devastating article in the respected journal Foreign Affairs, entitled 'Does China Matter?' This article concludes that China really does not matter. Its author is Gerald Segal, Director at the International Institute for Strategic Studies in London.
Here is the abstract of Segal's article:
"Odd as it may seem, the country that is home to a fifth of humankind, China, is consistently overrated as an economy, a world power, and a source of ideas. Economically, China is a relatively unimportant small market; militarily, it is less a global rival like the Soviet Union than a regional menace like Iraq; and politically, its influence is puny. The Middle Kingdom is a middle power. China matters far less than it and most of the West think, and it is high time the
West began treating it as such." According to Segal, "China is a second-rank middle power that has mastered the art of diplomatic theater: it has us willingly suspending our disbelief in its strength."
The Great GDP Story
It is widely believed that China enjoyed growth rates in the double figures for several years, and that it continues to grow at the same rate. However, many authoritative that suggests that at least 2 to 3 per cent of GDP growth is simply made up.
Here, from a Western point of view, are the comparative numbers for China (from Segal):
Segal points out:
"Few economists trust modern Chinese economic data; even Chinese Prime Minister Zhu Rongji distrusts it. The Asian Development Bank routinely deducts some two percent from China's official GDP figures, including notional current GDP growth rates of eight percent. Some two or three percent of what might be a more accurate GDP growth rate of six percent is useless goods produced to rust in warehouses. About one percent of China's growth in 1998 was due to massive government spending on infrastructure. Some three percent of GDP is accounted for by the one-time gain that occurs when one takes peasants off the land and brings them to cities, where productivity is higher. Taking all these qualifications into account, China's economy is effectively in recession. Even Zhu calls the situation grim."
A rigorous and detailed study by Thomas Rawski of the University of Pittsburgh based on publicly available information casts even more doubt on these numbers.
According to Rawski, the numbers are significantly inflated. Rawski compares China's figures with those of many other developing economies, and asks pertinent questions: if the Chinese economy is doing so well, why is energy consumption actually falling (it fell by 12.8 per cent in 1997-2000 while GDP allegedly grew 24.7 per cent)? Why is unemployment rising? Why are retail sales sluggish? Why are incomes falling sharply in rural areas?
In "China's 'growth' is not what it seems", in the SJ Mercury News, Arthur Waldron, director of Asian Studies at the New Enterprise Institute, quotes Rawski's suggestion that the Chinese economy is in fact in recession, and has been contracting on and off since 1998. Not stratospheric 7+ per cent percent growth, but a shrinkage of 2 per cent in 1998 and 1999, and growth of about 3 to 4 per cent in 2000-2001! Waldron quotes Chinese strongman Zhu Rongji, who told a Chinese television audience that his economy would have 'collapsed' in 1998 without the state stimulus spending currently taking Beijing's government debt to record levels. We will come back to government debt later.
Waldron, in the above article, asks a relevant question: why are so many people so willing to suspend disbelief and accept this economic fantasy? His answer: 'Because of the chronic pathologies of China watchers: groupthink (in the academy and government), fear of Chinese reaction, job pressure (in the intelligence community and the media) and greed and wishful thinking (in the case of business). Once again, we look like gullible fools to the Chinese.' He is absolutely right. This syndrome of mindless servility to the Chinese is especially acute in Indian 'intellectual' circles, alas!
The FDI Truth
Even the much-ballyhooed Foreign Direct Investment numbers are misleading. According to reports in the Financial Express and The Economist, about 50 per cent of this alleged FDI is in fact flight capital, also known as black money, returning through a process known as 'round-tripping'. Chinese businessmen take capital out of the country through under-invoicing exports and over-invoicing imports, and park this flight capital offshore. Then they send it back as 'foreign direct investment' to take advantage of preferential tax treatment.
The in-competitive Industries
China has successfully sold the world the mantra of 'a billion-people market' whereas the set of actual consumers with disposable income is far smaller. To give credit where it is due, China is indeed a market leader in manufacturing many low-end products at low cost, although they have severely understated the cost of labour and especially of capital.
Reputed journals have widely reported experiences of Matsushita, the Japanese electronics giant. Despite being one of the first to enter the newly-'liberalised' China, 17 years later Matsushita is still in the red. Apparently, any profits are siphoned off by local partners. Some 120,000 foreign enterprises or joint ventures employ about 17m people, equivalent to one-tenth of the urban workforce. Yet more than half the multinationals operating in China are not making money, according to experts.
It has been proven time and again that there is no money to be made in China, despite all those overbearing promises of a billion Chinese consuming more of whatever, television sets or pork chops or cell phones.
Collapsing Banking System
There is this widely-held suspicion that a very large fraction of all bank loans in China are non-performing assets. Matthew Forney, reporting from China for the reputed Time magazine, writes:
‚China's banking system has built a mountain of bad loans—nearly all to state enterprises that had little expectation of ever repaying them—that now totals as much as half of China's GDP. By normal accounting standards, the country's biggest state banks are insolvent. Then there's the debt China will incur when it has to follow through on promises to pay worker pensions, which equals another 70% of GDP, according to the World Bank. Add in debts that the government has raised by selling bonds—another 24% of GDP—and the country's balance sheet looks dicey. Alarmed by China's soaring debts, Finance Minister Xiang Huaicheng warned at a news conference this spring that the government must "make sure we don't spend like rich men."
Add to this what The Economist says: "China's state enterprises as a group are efficient destroyers of wealth. It would be cheaper to close them all down, and still keep paying the workers."
A recent study by the OECD quoted by The Economist survey suggests that a 'severe vicious circle' has developed in China. The banks cannot restore their solvency unless enterprise performance improves substantially, but the high level of non-performing loans is a problem. Officially Non-Performing Loans are only 25 per cent of total outstanding loans, but Nicholas Lardy of the Brookings Institution suggests that the real figure might be 50 per cent, way over the danger mark. The chief of the central bank, the People's Bank of China, Dai Xianglong, admitted in public that the bad loans of big state banks could be up to 30 per cent of their total lent. Officially, 30 per cent of some $950 billion lent -- that is $280 billion, money that has no chance of being repaid.
The OECD study calculates that the cost reducing NPL ratios to 10 per cent will be as much as 30 per to 60 per cent of GDP -- which translates to $300 billion to $600 billion -- a gigantic amount of money by any count. This figure is probably after the transfer of $170 billion in NPLs (18 per cent of the total loans) to asset management companies in 2000. Although these are set up on the model of the Resolution Trust Corporation that handled the savings-and-loan meltdown in the US, these (unfortunately just like a similar attempt in Japan) are half-baked and unlikely to provide much relief. So far the AMCs have managed to sell the loans at about 20 per cent of their face value; however, this ratio will plunge in future because the best assets in their portfolios were sold first.
Vicious Unemployment
The Economist also talks about 100 million Chinese peasants who have been permanently displaced from their farms -- they form an underemployed, dangerous underclass in the cities they have migrated to, where they are often officially 'non-persons'. between state-owned enterprises and banks that are forced to lend to them, even if there is no business reason to.
China's headlong rush to join the global economy is creating new jobs in the private sector, but it is simultaneously breeding a gigantic underclass of have-nots—citizens the government fears could one day rise up in open revolt.
The Time magazine reports:
“Urban joblessness, unheard of when the Maoist government provided cradle-to-grave employment, now averages around 8-9%, according to scholars at the Beijing-based Development Research Center (DRC), a government think tank. (The official rate, by contrast, is a rosy 3.6%.) Joblessness is much higher, perhaps 20%, in industrial rust belts that cut great swaths across the north, where outmoded, bankrupt factories are being shut down and communist-era work units eliminated at a breathtaking pace. Reliable numbers aren't available, but some estimate there are at least 19 million Chinese who are out of work; tens of millions more are unaccounted for by Labor Department statisticians.”
In addition to the problems of unemployment, they face another threat from their rapidly aging population. It is estimated by McKinsey that there will be a deficit of $15 billion in 2005 and $110 billion in 2010 in the provisions made for pension liabilities. The elder dependency ratio, that is the number of retired persons per 100 working people (defined as those between 15 and 64), is about 10 in 2000, and will rise to almost 40 by 2050: that is, there will only be 60 people supporting 100, including 40 pensioners. There is no simple way this gap can be handled by anything other than the government, because Chinese capital markets are weak.
The Bleak Future
I have also read excerpts from Gordon Chang's book, The Coming Collapse of China. Chang is an American lawyer who worked in Shanghai for 20 years.
Chang writes that China's problems are far more serious than a superficial study would suggest. There are structural problems. In The Coming Collapse of China, Chang suggests that China's entry into the WTO will 'shake the government to its foundations.'
Says he: 'China is not prepared for accession to the WTO. Its state-owned enterprises and banks are not ready for increased competition. The economy, in reality, is stalling, not growing fast enough. The result is worker and peasant unrest. The central government's finances are in bad shape, and one day the People's Republic could run out of money. But before that happens, the rulers of China will run out of something even more precious: time.'
