The Dark Side of China’s Rse

You simply have to read it. Thanks to Bill Stimson for calling it to my attention.


The only thing rising faster than China is the hype about China. In January, the People’s Republic’s gross domestic product (GDP) exceeded that of Britain and France, making China the world’s fourth-largest economy. In December, it was announced that China replaced the United States as the world’s largest exporter of technology goods. Many experts predict that the Chinese economy will be second only to the United States by 2020, and possibly surpass it by 2050.

Western investors hail China’s strong economic fundamentals—notably a high savings rate, huge labor pool, and powerful work ethic—and willingly gloss over its imperfections. Businesspeople talk about China’s being simultaneously the world’s greatest manufacturer and its greatest market. Private equity firms are scouring the Middle Kingdom for acquisitions. Chinese Internet companies are fetching dot-com-era prices on the NASDAQ. Some of the world’s leading financial institutions, including Bank of America, Citibank, and HSBC, have bet billions on the country’s financial future by acquiring minority stakes in China’s state-controlled banks, even though many of them are technically insolvent. Not to be left out, every global automobile giant has built or is planning new facilities in China, despite a flooded market and plunging profit margins.

And why shouldn’t they believe the hype? The record of China’s growth over the past two decades has proved pessimists wrong and optimists not optimistic enough. But before we all start learning Chinese and marveling at the accomplishments of the Chinese Communist Party, we might want to pause for a moment. Upon close examination, China’s record loses some of its luster. China’s economic performance since 1979, for example, is actually less impressive than that of its East Asian neighbors, such as Japan, South Korea, and Taiwan, during comparable periods of growth. Its banking system, which costs Beijing about 30 percent of annual GDP in bailouts, is saddled with nonperforming loans and is probably the most fragile in Asia. The comparison with India is especially striking. In six major industrial sectors (ranging from autos to telecom), from 1999 to 2003, Indian companies delivered rates of return on investment that were 80 to 200 percent higher than their Chinese counterparts. The often breathless conventional wisdom on China’s economic reform overlooks major flaws that render many predictions about China’s trajectory misleading, if not downright hazardous.

Behind the glowing headlines are fundamental frailties rooted in the Chinese neo-Leninist state. Unlike Maoism, neo-Leninism blends one-party rule and state control of key sectors of the economy with partial market reforms and an end to self-imposed isolation from the world economy. The Maoist state preached egalitarianism and relied on the loyalty of workers and peasants. The neo-Leninist state practices elitism, draws its support from technocrats, the military, and the police, and co-opts new social elites (professionals and private entrepreneurs) and foreign capital—all vilified under Maoism. Neo-Leninism has rendered the ruling Chinese Communist Party more resilient but has also generated self-destructive forces.

It comes to the same conclusion I do: China’s moment of truth will be the “stress test,” when a recession or other catastrophe tests the system. That’s when we’ll know whether China’s rise was a lot of hot air or a true economic miracle.

The Discussion: 8 Comments

Yeah, but what’s its budject deficite like?

February 28, 2006 @ 8:26 am | Comment

Richard, I have to agree that this article is a must read. It somehow manages to sum up the major contradictions of the Chinese experiment, and puts into coherent prose what were only confusing thoughts floating around in my head.

This piece manages to reflect the nagging doubts that I’ve always had about all this China hype- it seems people forget that, at the end of the day, the Middle Kingdom really is just another developing country with growing pros but debilitating cons.

February 28, 2006 @ 8:36 am | Comment

Good article, Richard. Cheers.

February 28, 2006 @ 9:11 am | Comment

Also check out discussion of the rape of the Chinese environment and other economic externalities at Australian Investment Review:
Click on Big Trouble in Big China, article is pages 2-7 of that PDF.

February 28, 2006 @ 12:13 pm | Comment

The CCP is not logically consistent? Did we really need FP to tell us that?

BTW, savings rates are determined in large part by the level of confidence in the government and social systems. Of course the Chinese will save like mad because the banking industry is ineffective, credit system non-existent, and people can’t get medical services unleses they ring in at the cashier first.

February 28, 2006 @ 5:29 pm | Comment

As Richard’s bit at the end points out, the real test will be the next time China faces a major event such as an economic crisis, widespread social unrest, anti-govt demos, an explosion of primitive anti-Japan/anti-US nationalist madness (like the Belgrade Embassy bombing), a natural disaster, etc. etc.

The single most frightening piece of news I’ve read lately was the (albeit flawed) opinion poll that the Mainland Chinese are the most optimistic people on the planet er the future AND their personal expectations are extremely high.

What happens when 90% of the population finally realises that the sum total of their entire lives involves working for around 1,000 rmb per month, living in the most poluted country on the planet and living in a cruel and selfish society where people wouldn’t piss on you if you were on fire?

February 28, 2006 @ 7:57 pm | Comment

I am not so sure. The writer is a Chinese nationalist dislike the CPP and also opposes Chen Shui-bian. Parts of his analysis seem to suggest that he is abusing statistics.

In public health, the consequences of misspending are even more severe. Government money, which accounted for 36 percent of all health expenditures in the 1980s, plunged to less than 15 percent by 2000. China has hospitals and equipment, and its per capita spending is higher than comparable developing countries.

It’s pretty much to be expected that in an economy that is rapidly growing wealthier the amount of private spending on health care would increase far faster than government spending. What Pei is describing is perfectly normal. When I saw this I figured I was looking at a propaganda piece whose goal was to appeal to the natural inclination of everyone to despise the CCP and appear to have more depth than it really does. The fact is that the KMT did many of the exact same things in Taiwan, yet look where we are now.

Essentially the article is criticism of China attempting to pass itself off as critique. It is heavily government-focused — a slanted way of hacking on the CPP — it seems to trace all evils in China to the behavior of the CCP. I do not trust Pei, and I do not trust this article.


February 28, 2006 @ 8:42 pm | Comment

“Government-focused” in a place where the government has its hands in almost everything? Gee, go figure…

I’m with Richard on this one.

February 28, 2006 @ 11:07 pm | Comment

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