Monday, April 26, 2010

No One Can Tell China's Fortune

As a result of declining exports and other factors, Beijing presided over the world’s fastest slowing economy. China’s economy, in fact, grew by about 15 percent in 2007, but fell to negative growth at the end of 2008.

Beijing stopped the precipitous decline with a $586 billion stimulus program, announced in November 2008. The plan created a “sugar high” as the central government flooded the country with money, but resulting growth will be short-lived. The state’s stimulus plan favors large state enterprises over small and midsize private firms, and state financial institutions are diverting credit to state-sponsored infrastructure. The renationalization of the Chinese economy with state cash will eventually lead to stagnation.

But the economy could fail before stagnation eventually sets in. Prime Minister Wen Jiabao, to fund his stimulus plan, has forced state banks to create the greatest surge of lending in history. One state manager, Lin Zuoming of Aviation Industry Corporation of China, publicly complained last April that central government officials forced him to borrow the equivalent of $49.2 billion from twelve Chinese banks, saying he did not know what to do with all the cash.

Government-mandated lending pushed unneeded funds into the Chinese stock markets, which caused an abnormal jump in prices; similar funds also flooded into the coffers of casinos in Macau, which had been languishing before the stimulus program. Predictions that Beijing’s plan might trigger the biggest wave of corruption in Chinese history now seem correct. _WorldAffairs

There are interesting parallels between China's attempts to restore pre-2009 growth, and the Obama - Pelosi regime's attempts to re-inflate several US economic bubbles, using crony capitalism and political payoffs. The difference is that as corrupt and poorly responsive as Obama - Pelosi may grow to genuine economic needs in the US, China's CCP will always be much more corrupt and less responsive to the needs of an organic economy.

In the US, even if the government becomes the enemy of a healthy economy, there remain legions of entrepreneurs and institutions who still know how to make capitalism work. The US government is finding it difficult shutting all of them down. Call it a form of latent capitalism that refuses to bow to the fascist O - P reich's corporatist road to socialism.

In China, such society-wide institutions never had the chance to grow, and the entrepreneurs and bankers of China have never experienced being immersed in an environment of capitalism without massive corruption at every level. The latent quantity in China is intelligent energy, but without a history of wide participatory institutions at all levels, which could serve to unite a nation in the midst of violent transformation.
So the Chinese economy, once in an upward super-cycle, is now headed on a downward trajectory. Beijing’s leaders had the opportunity to fix these problems in a benign period of growth, but they did not because they were unable or unwilling to challenge a rigid political system that inhibits adaptation to changing circumstances. Their failure to implement sensible policies highlights an inherent weakness in the system of Chinese governance, not just a single economic misstep at a particular moment in history.

...In addition to its outdated economic model, China faces a number of other problems, including banks with unacknowledged bad loans on their books, trade friction arising from mercantilist policies, a pandemic of defective products and poisonous foods, a grossly underfunded and inadequate social security system, a society that is rapidly aging as a result of the brutally enforced one-child policy, a rising tide of violent crime, a monumental environmental crisis, ever-worsening corruption, and failing schools and other social services. These are just the most important difficulties.

...And so, as the economy began to fail in 2008 and as factories closed by the tens of thousands, workers took to the streets, especially in the country’s export powerhouse, the Pearl River Delta of Guangdong Province. Protests have continued around the country. At the end of July last year, for instance, some thirty thousand steelworkers in the rust-belt province of Jilin fought with police and beat to death a top manager who had threatened large layoffs after a merger. The incident illustrates the trend that disturbances are becoming larger and more violent. In fact, demonstrators in the last few years have been using deadly force as an initial tactic against local authorities.

...Middle-class Chinese, the beneficiaries of decades of reform, now behave like activist peasants and workers whenever they think their rights are threatened. Yet Hu Jintao is repressing, not protecting, those rights. The humorless general secretary is now presiding over a seven-year crackdown on almost all elements of society, even the writers of karaoke songs, and the regime now attempts to control political speech more tightly than it did two decades ago. That is a sign of trouble to come. The party can censor and imprison, but it does so at the risk of creating even more enemies, both internal and external, and further delegitimizing itself.
... _WorldAffairs

The Chinese people have a long history of obedience to central authority. But obedience and loyalty can move over time away from the central government, toward competing movements that better represent and champion the inner values that the people feel.

Right now there is no such movement ready to go toe to toe with the CCP. But just as any empire, China also has a long history of competing clans and warlords, civil wars, and insurgencies. Mao's revolution was successful in taking advantage of the turmoil following the Japanese invasion of WWII, and the subsequent power vacuum when Japan was forced to retreat.

Nothing similarly disruptive can be seen on the horizon, but it is impossible to rule out the possibility of insurrection in Tibet or Xinjiang, or catastrophic escalation of hostilities with Taiwan. Border clashes with either Russia or Vietnam are likewise not out of the question. Even something as banal as a trade war with the US could trigger events leading to important schisms within the nation.

In addition, the psychology of a nation that has lived under the "one-child" rule is necessarily different than the psychology of societies where brothers, sisters, uncles, aunts, and cousins are all common. The family fragmentation caused by the one-child rule must leave deep marks on the psyche. Something or someone may come along who knows how to take advantage of that particular quirk.

The situation is dynamic, far from equilibrium.

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