The End Of China's Growth?

Policy, Politics & Culture

The eurozone crisis has captivated audiences around the world, but it is recent economic data from China that should be capturing the attention of policymakers. Despite confident predictions from Wen Jiabao that the economy was heading for more growth, April figures across a range of sectors make for grim reading: industrial production is down, fixed-asset investment and retail spending slowed, home sales plummeted, and export sales growth was only half what it was in March. When China’s economy grew at an abnormally low 8.1 per cent clip in the first quarter of this year, some analysts suggested that it had reached the bottom of the business cycle. Better times were ahead, they reasoned. These latest figures, however, suggest that what we may be seeing in China is the start of a prolonged, and perhaps permanent, deceleration in Chinese growth.

Of course, it’s too soon to know for sure whether these data are merely a blip on the radar. But if the Chinese economy is indeed entering a permanent slowdown the political and social consequences will be profound. Decades of rapid economic growth granted legitimacy to the Chinese Communist Party and helped minimize social unrest. As the country prepares for only its second organized transfer of power since 1949 the incoming leadership team must be asking itself whether China’s political system is capable of undertaking the necessary economic reforms to maintain prosperity and stability.

As the New York Times notes, serious questions abound as to whether the forces of reform and modernization are strong enough to withstand the inevitable pushback from the web of powerful interests connected to the Party apparatus:

Many economists have been urging the government to loosen controls over the financial system, to support lending to private businesses while reining in state-owned enterprises, to allow more movement in exchange rates and interest rates, and to improve social benefits.

Such changes would curb the state's role, lessen corruption and encourage competition. But making them would involve a titanic power struggle. Executives of Chinese conglomerates, army generals, Politburo members, local officials and the "princeling" children of Communist Party elders have little incentive to refashion a system that fills their coffers.

Will failure to reform unleash waves of social unrest? Cracks are already appearing. Over 30 Tibetans have set themselves on fire in protest against the central government. The revolt in Wukan caught the attention of the world. And China hands are well aware that the Chinese government now spends more on internal security than it does on the military. From the Times:

The surging number of protests arising from this gap is another stress point in the China model. Officials rely heavily on domestic security forces to quell what they call "mass incidents," which one sociologist, Sun Liping, estimated at 180,000 in 2010. In March, the government announced that it planned to spend $111 billion on domestic security this year, a 12 percent increase over 2011, and $5 billion more than this year's military budget.

Recent years have seen a bubble in China babble among the global punditocracy’s talking heads. China’s apparent immunity to the 2008 financial crisis led many talking heads and columnists to argue that the Chinese growth model – a cocktail of authoritarian political control and so-called “state capitalism” – represented a new way forward for economies everywhere.

As history, this was simply ignorance speaking: authoritarian states and forms of state capitalism have been achieving rapid bursts of growth since the era of Louis XIV. During the Depression, Hitler, Stalin and Mussolini were all widely hailed by clueless western pundits as having found more “modern” and “efficient” methods of promoting growth than the “failed” policies of the liberal capitalist states. It has been well known for centuries that over the short term, concerted state-guided modernization drives can outperform liberal policies; the trouble is — and always has been — that sooner or later the accumulated inefficiencies, distortions, and political shortcomings of non-liberal states lead to prolonged slowdowns at best, revolutions and wars at the worst.

However, those who don’t know history are condemned to repeat the mistaken cliches of past generations as if they were shiny new truths; China babble has reigned among exactly the kinds of people who used to marvel at Hitler’s autobahns, Stalin’s steel mills, and Mussolini’s ability to make the trains run on time.

Many Chinese leaders also fell for the hype, and an over-estimation of China’s strength led directly to the foreign policy failures that paved the way for the reassertion of US power in the Pacific. The steady increase in spending on internal security suggests that not all of China’s leadership swallowed the Kool Aid; those numbers probably tell us more about Beijing’s true understanding of its prospects than the chest-thumping about a “Beijing consensus.”

Authoritarian modernization always works until it quite suddenly doesn’t; many observers hailed Stolypin’s reforms in late Czarist Russia and spoke in awe about Russia’s rapid industrial growth in the years before World War One. At Via Meadia we’re not able to give assign a date to the China correction that lies in store; the current slowdown could be a blip on the screen or the start of something more consequential.

Our hope remains that China’s transition to a more sustainable trajectory will be measured, peaceful and as smooth as possible. No sane American can wish China ill. But China is too big, too complex, too diverse and it is changing too rapidly for its future path to be easy and smooth.

Napoleon is reported to have said that when China awakens it will shake the world. What that prophecy overlooked, and what the China babblers of today also miss is that the awakening process will first and foremost shake China itself. The transformation of a nation like China cannot long or successfully be led by technocrats however enlightened and skillful anymore than the technocrats of Brussels can manage the far less demanding tasks of building Europe.

The ground under Beijing is seismically active; one doesn’t know when the next quake will strike, but come it will. The steady rise in internal security spending tells us that the Chinese understand this, even if starry eyed pundits in the West can’t figure it out.

China is too big, too complex, too diverse and changing too rapidly for simple and facile explanations about its future regarding both its economic model (authoritarian centered state control) and CCP governance (viability long term). Outsiders can only speculate the imponderables – even with diplomatic assistance.

One thing is certain China geopolitically going forward matters – especially in Northeast and Southeast Asia. Recent events have made the West more cognizant of that dynamic.

Excellent, a well researched and example filled article that shows why China’s growth has feet of clay.

I do however think you missed one glaring point. China’s success is built on an export model economy, which requires the manipulation of their currency through the purchase of foreign Treasuries which they must overpay for (China has overpaid for $1.15 Trillion US Treasuries, typical Government Monopoly stupidity). This large a holding of Dollars (it represents 25% of all foreign held ($4.5 Trillion) US Treasuries) cannot be liquidated without taking huge losses, and destroying China’s export model economy.

The Chinese are now trapped into using the Dollar as a reserve currency and they did it to themselves thinking all along that they were cheating the running dog American Capitalists. LOL You hear them squealing frequently now that they are going to find a new reserve currency, this is a toothless threat as they would lose their biggest customer and kill their export model economy at the same time (this will now happen even if all they do is stop buying US Treasuries).

Eventually there will be a rebalancing of the Dollar, and all the cheating export model economies will experience snapback behavior as the US economy becomes an export model economy in the best way possible. What do I mean by that you ask? The rest of the world already has $4.5 Trillion of our currency with which to purchase American products, services, and capital investments like stocks and bonds.

I believe we should invite this rebalancing now, by having the Fed payoff all foreign held US Treasuries ($4.5 Trillion). This would liquefy and accelerate world trade, and cause the US to experience an export driven recovery. This is the only way the US economy is going to get out of Great Depression 2.0 in a timely fashion, now that the American Family Nest Egg of home equity (the normal source of small business start up and expansion capital, which creates most of the jobs during a recovery) has been destroyed by massive Government borrowing of $6+ Trillion from the Democrat's fiscally irresponsible spending policy.

WRM,

Terrific column! Wonderful historical summary of the fallacy of Tom Friedman and his ilk about the superiority of the authoritarian model. Not unlike the push in the US in late 1980s for “more patient, bank-centered lending” of Japan model.

Fads come and fads go for the “central planning” crowd. As you oontinue to highlight, the superiority of the Anglosphere in the face of a rapidly changing world reveals itself time and time again to be the best way for people to live healthier and wealthier lives.

I’m on a big China kick lately, reading Chinese history backwards, i.e., starting with The People’s Republic, back through the first half of the 20th century, then the histories of the Qing and Ming dynasties in that order, then skipping back to the Song and going forward thru the Yuan to the Ming again. Jonathan Spence’s many books and Mote’s Imperial China have been particularly well written, but for real insight there is nothing to equal the classic Chinese novels, The Golden Lotus and The Dream of the Red Chamber in particular (Haven’s gotten to Marsh Men or Three Kingdoms yet).

With that background — I am just a beginner, a real amateur, let me make a few observations:

The biggest ones are that China hasn’t fundamentally changed in the last 1000 years and that we are comically ignorant of the nature of Chinese society, upon we have staked the future of our world order formerly known as Western civilization.

China has never known the distinction between executive, legislative, and judicial powers: they have always been one. Official corruption has always been an accepted way of life, a given, leading eventually to social revolution, at which point a new ruling clan is eventually installed, which starts our relatively honest but inevitably declines.

There has never been an influential middle-class in China.

The problem of succession has never been solved, even within Dynasties: coups, murder, rebellion, and every sort of treachery you can think of have been the norm.

Polygamy has always been the norm at the top.

Prostitution was a major institution always, including the selling of young girls from poor rural families into houses of prostitution (don’t know if this is going on now, but if it is we will be the last to find out).

It has always been a low trust-society. Grudges are remembered, “face” is paramount, torture routine, bribery standard operating proceedure, etc..

Political power has always trumped wealth when it comes to a showdown.

Superstition is a major component of popular belief (which is why Falun Gong had a hundred million devotees apparently, including a lot of members of elite communist families, before it was banned.

It’s military has never been efficient, relying on quantity not quality to overcome its enemies. Chinese armies have been a full order of magnitude larger than anything seen in the West for more than a thousand years. The focus has always been on the north.

Social Darwinism — survival of the fittest — has been a fact of life, particularly during the past three hundred years: curiously the early Quin Dynasty (the last one) undertaxed its farm population, which led to a population explosion and a fall into a Malthusian trap. To survive at the bottom you had to work very, very hard for a bare subsistence, be smart, but not take chances, which explains the nature of the Chinese labor force we in the West are being asked (by our greedy, foolish corporate class) to “compete” with. None dare call that treason, but I will.

I think we need to withdraw from China except for a small, balanced trade to force this mercantalist society to undertake true capitalist reform or else collapse into what it has always collapsed into after corruption overwhelmed it. China has the option of cashing in its chips (all those American dollars) which it can use to import the machinery and capital equipment it needs to develop true internal markets (the division of labor is governed by the extension of the market, and theirs is plenty big). We in the West have our hands full trying to recover from this un-Godly error.

That’s the way I feel right now. Hope I am wrong.

“The transformation of a nation like China cannot long or successfully be led by technocrats however enlightened and skillful anymore than the technocrats of Brussels can manage the far less demanding tasks of building Europe.”

IMO, highly appropriate parallel between the two. I’m sure differences between “hard” and “soft” authoritarianisms look very considerable on paper, and at conferences. But the fallout arising from mislaid and mismanaged – to say nothing of grossly exaggerated – expectations does not seem to have translated into terribly different results on the ground. Expectations that were fueled, if I remember correctly, by politicians, bureaucrats, planners, investors, consultants and companies throughout the developed world. Including a few, I’m told, in that most economically dynamic and enlightened of all possible countries, the United States. And all of it premised – pardon me if I simplify – on the further, deeper, more hairspring-trigger-accurate (just in time?) integration of a seamless global economy. No utopian vision, mind you: simply where the Irresistible Future was taking us at the time. And meanwhile if certain recalcitrant realities on the ground kept popping up – like the massive, centuries-old cultural differences between China and the West, or even between northern and southern Europe – well, they’d just have to smoothe themselves out, wouldn’t they? (Or be beaten down? Or swept under the rug?)

Again, “on the ground.” Which MAY be just the place we’ve been failing to look at in recent decades. But then wouldn’t that be just like our modern technocratic “expertise,” the farther it’s removed from the backward, inefficient, barely-employable slobs it must ULTIMATELY govern: local and regional communities? Almost as if some big, rich, important patient had been ignoring sudden changes in the behavior of a few of his own body’s cells, because the region of those same cells had always been so “minor,” so “unimportant” – or so easily manipulated. Or as if households, localities, even whole electorates had become so many ingredients in a chemical lab experiment, to be shuffled, mixed, rearranged, even dissolved, almost at the whim of some bureaucrat or metropolitan planner. (Not that stern, bold, visionary concepts like “growth,” “infrastructure” or “eminent domain” should ever be regarded as whims, of course.)

My point is that I doubt either Europe nor China could have made such rapid, democractically unaccountable “progress” without our encouragement and confidence. And lest anyone be tempted to confine his mud-spattering to Right or Left, the bipartisan American consensus of the past three decades, as thibaud has so aptly phrased it, was a strong, well-orchestrated one on these points. Nor is it necessarily clear just where it came up in the color spectrum from Red to Blue. That may be the more accurate work of future generations. For now I’m tempted to call it Late Blue (or Deep Blue, or Decadent Blue, or even Depraved and Degenerate Blue). At all events, it would be interesting if future US historians’ conclusions suggested a pattern of as much – and as little – continuity between 1940 and 2000 America as between, say, the Republic of Scipio Africanus and the Empire of Caligula.

And in any case I know what I’m hoping: That the “consensus” will be remembered as the one element in US history whose eager financing of Chinese and European “miracles” (hopefully only) all but broke the global economy.

And one last thanks for some other very interesting, instructive historical parallels.

In sum, our new China policy should be a combination of containment (particularly at sea) and peaceful co-existence. The same one we had with old Soviet Union. We will have to ally ourselves with Russia eventually, might as well start thinking about it now.

“Social Darwinism "” survival of the fittest "” has been a fact of life, particularly during the past three hundred years: curiously the early Quin Dynasty (the last one) undertaxed its farm population, which led to a population explosion and a fall into a Malthusian trap. To survive at the bottom you had to work very, very hard for a bare subsistence, be smart, but not take chances, which explains the nature of the Chinese labor force we in the West are being asked (by our greedy, foolish corporate class) to ‘compete’ with. None dare call that treason, but I will.”