China: Economic Miracle or House of Cards?

China: A three-headed dragon is difficult to control

China: A three-headed dragon is difficult to control

Jacek Popiel

For years our financial press and media have hailed the rise of China to the rank of global power. Such phrases as “the Chinese miracle”, “the workshop of the world” or “the engine of the global economy” and “the Asian (meaning China’s) century” have become common parlance.

The tone started changing, quite suddenly, a few weeks ago. Apparently China is now in some kind of trouble. Some even blame the developing stock market crash on Wall Street on contagion from Shanghai and Hong Kong, where a similar market collapse is occurring.

Are these problems only growing pains or something much deeper?

The answer requires a critical look at China’s economic rise, which until now has been presented as an extraordinary success, the result of both political genius and superb economic management.

In fact it has been something quite different.

China’s growth to-date has occurred in several distinct phases:

The classic Marxist, centrally planned phase, under Mao, provided basic infrastructure and heavy industry development, as happened in the Soviet Union during the 1930’s. Progress was, however, marred by Mao’s “revolutionary” initiatives, the Great Leap Forward and the Cultural Revolution. As a result China in the 1980’s faced a far more powerful, dynamic and resurgent U.S. With the Soviet Union in decline China could not play one superpower against the other. A new policy was needed to move the country forward.

China’s leaders then launched the export-led, manufacturing boom phase, in which they offered extremely low manufacturing costs to multi-national – primarily American – corporations. This was highly attractive to corporate leadership: not only were product prices lower than attainable at home, but labor issues, environmental constraints, work safety problems and supplier relations could be eliminated by transferring production to China.  And so it was done, making China – for a while – “the workshop of the world”.

But there was a major flaw: the policy did not take into account the cyclical nature of capitalist economies. Lower prices fed a consumption boom, but the loss of manufacturing wages and assets reduced the income and wealth of China’s export customers (primarily the U.S.). Cheap credit supported consumption for a while, but the inevitable bust arrived in 2007. Suddenly China faced a huge drop in export demand, potentially leading to massive unemployment and social unrest.

The leaders’ answer was the domestic fixed investment phase. The government ordered the nation to build, build, and build: thousands of housing blocs, miles of railway tracks, airports, highways, and additional manufacturing capacity in major industries. Anything went; as long as it kept people employed and raised GDP numbers.

But this time there were two major flaws:

  • The work was financed with borrowing at all levels, making China one of the most indebted countries in the world.
  • Little attention was paid to return on investment: apartments, once built, stood empty; new rail lines had no passengers, expanded production facilities saw no demand. At the same time economic growth among China’s export customers (primarily the U.S.) lagged. Within China high debt levels now preclude additional investments while those already made offer little return. China is stuck with high debt and little income to show for it.

This is where we stand now: China can produce, but no longer sell, because potential customers cannot afford to buy. It has a huge national pollution problem, resulting from decades of uncontrolled industrial expansion. Money is leaving the country, and the stock market just crashed. Debts must be paid, but the income to do it is in question.

Looking back, one sees that China’s growth was as much an exercise in improvisation as the result of strategic planning. It was brilliant, but short term. Now the question is: can the growth be maintained, and the implied promises to the population kept?

There are two fundamental issues:

The first is what can be termed “the shadow sector” of the economy. To make the country both rich and powerful, China’s leaders created a capitalist economy within a communist dictatorship. The operational rules of these two systems are not compatible, so a “shadow interface” had to grow between them in order to minimize friction. This “grey sector” which by itself contains considerable wealth and power, is not answerable to either the capitalist or Marxist side, and thus essentially out of their control. The Chinese dragon has three heads. Can such a beast be ruled at all, particularly in a crisis?

The second issue is related: governing a nation or empire requires a set of rules over which the majority of citizens agree, whether by choice or by tradition. So the United States has the Declaration of Independence and the Constitution. Regardless of the variety of interpretations given these two documents, they remain standing, providing the nation with a rallying point in peril and a “how-to” manual.

The Chinese equivalent was Confucianism, which inspired 25 centuries of Chinese civilization. But Mao destroyed it – in Chinese parlance he “burned the books”, replacing ancient tradition with his own will. With Mao gone, where will the Chinese find their ultimate inspiration?

Born in Poland, Jacek Popiel was educated in Africa, Canada, and the United States. He speaks five languages. His career spans military and international business development in the Soviet Union, Eastern and Western Europe, North America, and Japan. He is currently a freelance writer and political consultant. His book “Viable Energy Now,” grew out of his military and international business experience and his professional involvement with energy issues.

11 thoughts on “China: Economic Miracle or House of Cards?

  1. I find this article basically sound, but there’s always room to quibble! 1.) the early phase of economic development after Mao’s forces gained control of the whole country can be characterized as similar to the “war communism” phase in the USSR, with the civil war threatening the very survival of the regime. I dare say China was even more of a peasant society than old Russia, and integrating peasants into a modern economy is no easy undertaking; 2.) I think some of the underlying ideas of the Cultural Revolution weren’t bad at all. Giving lifelong pencil-pushing bureaucrats a taste of the manual labor entailed in rural life was quite eye-opening, I’m sure. Things apparently–I say apparently because all we in the “West” were told contained anti-communist bias–went bad when things were taken to extremes (I recommend the Chinese film “To Live” in this regard); 3.) I don’t see a justification for applying the concept of “empire” to modern China unless one wants to argue that different regions of the country merit the status of independent nations; doubtless they were ruled by warlords in times of yore before unification by rule of Emperors. The new billionaire class in China, I’m sure, live like emperors, but there are far fewer peasants for them to look down their imperial noses at. And that, of course, is by government policy: driving the rural populace into the cities to work in the factories that make Apple products, etc.; 4.) I am surprised at the lack of mention of the huge stash of US Treasury Bonds accumulated by China and the implicit threat of their being dumped onto the market to send shock waves to the shores of America. Official Chinese statements cannot be trusted regarding just how much of this UST paper, or gold ingots, they possess; nor should their claims of GDP be trusted. And the same must be said for official stats here in the US!; 5.) though I have never visited China I am confident that Confucian tradition is reasonably alive and well in that society. This is something handed down through the generations, not confined to the pages of books; 6.) to the extent China suffers societal and economic ills from its very enthusiastic embrace of capitalism, I can only pass on to them this bit of wisdom: “He who lies down with capitalists is liable to get up with fleas.”

  2. greglaxer you explain your points with an elegance that I envy and I cannot even try to imitate. So let’s see if I can explain my point in very simple, everyday English. There are two items common to the Communist Russian process and the Federal Democratic American one, the gray area. That is the only one that wins in every system without risking either personal integrity or capital. They are the capital. They hold the capital. They make the decisions and they prosper even more during internal revolutions and international wars. Until we do not mentally develop/grow and find a way to stop the members of the gray area from taking control, the world will continue sinking in muddy waters coming once in a while out of the muddy water to get a gasp of air. By the way with the world aquifers getting dangerously low, the gray area members might end up owing everyone of us and our property just by cutting our free access to clean water.

    Just a final thought, we will never be able to stop the gray area members until we do not learn how to live with enough to cover our essential needs and maybe go back to the original communal trade system. But in 2015 the human condition is vey weak and spoiled by consumerism. Our illness has spread and contaminated even the most primitive cultures by making consumerism the pivotal factor of survival particularly among the new generations. I also hope that in this case, the Confucian tradition is still in the genes and comes to the rescue.

    • Graciela–Yes, absolutely, we may say that the crucial decisions that determine society’s fate, and trickle down to impact us all as individuals, are made “in the gray zone.” In this so-called democracy, republic, whatever label you prefer, the citizens never have a direct voice on whether our young people are to be marched off to war, whether it would be preferable to derive energy from Nature’s renewable resources, etc. The crucial decisions are made by “the elites,” behind closed doors. We only get to choose every four years between Tweedledum and Tweedledee, with the desperate hope that promises will actually be kept. Like “Change We Can Believe In.”

  3. “The Chinese equivalent was Confucianism, which inspired 25 centuries of Chinese civilization. But Mao destroyed it. …”

    The Chinese have an idiom for everything. The one that applies to Maoist Communism’s attempt to supplant Confucianism says: “The centipede is dead but not stiff.”

  4. China is not the only card shark around. The US is also an accomplished card shark. The US market fell close to 500 (470+) today following triple digit falls in five of the last six trading days.

    Now are we competing with China for the biggest house of cards. China owns more of our debt than we do of China’s debt. What if China wants to cash in on what we owe her to cover her house of cards. Will our house of cards fall down and “go boom”. Who is more foolish , our leaders who have financed war and outsourcing our jobs to China or theirs who just spent their money a bit foolishly?

  5. b. traven Thank you for saying it. Was the spending of their money so foolish? They made the change in less time that it took America with the Great War and unspoken billions of tax dollars to become the military industrial complex because now with a stroke the Chinese own their gold and ours plus unknown amount of property in our country. And the Chinese destroyed in a short time and without applying any force the communitary farming society in their own country that was so difficult to bring up to be a part of the 21st Century. They simply and without any effort stole their youth and broke the traditional family unity.
    Everything happens at such speed in the today world society that people is denied the right of time not to adapt but to grasp the change.
    It is a complex thought and I hope I have been able to communicate it.
    Why the Chinese investment in gold is important? Because with all the uncontrolled speculation most money in the western world has no value. No matter how much it is devaluated the few ones who own most of the paper money will end up with a positive balance. It is not the first time that our civilization faces bankruptcy. Gold and silver have always been the last resort to get food and other necessities. Please, let me know what is wrong in my thoughts. It helps me to learn.

    • Graciela–You are right, pardon the expression, “on the money”! The modern world economy is one gigantic Ponzi scheme that must collapse eventually. The various currencies being printed in unprecedented quantities around the globe are backed by nothing but the hot air of “the full faith and credit” of their respective governments/central banks. When people stop believing that the Emperor is wearing new (or any) clothes, we will see true mayhem erupt. These ruling regimes despise the notion of a Gold Standard because backing a currency with something of actual value would force spending discipline on governments. No more issuing of unlimited amounts of debt to finance their military adventures abroad. Oh, what a pity if they lose that ability! Pass me a crying towel!

    • Graciela. Yes. China’s rise to the world’s number two economy and predicted #1 replacement of the US has been meteoric. One year after the Tianamein Square massacre I visited China on my way to a UN mission in South Korea. We seemed t be the only Westerners in Shanghai judging from how the people stared at us and wanted to touch us. At that time there was only one modern hotel on the outskirts of the city with a very sensitive elevator system only for the hardy. The inner city was still very old China. Even tourists were avoiding China.
      Less than 20 years later China became the manufacturing center for the world which took the US two world wars and over 75 years. Just another ten years later and the Chinese economy was the rival to the vaunted #1 slot of world economies.

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