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What Are The Long-Term Prospects For China?

Sep 14, 2018 by

There is no question that China has been one of the great economic success stories of the past several decades. They have gone from abject poverty and mass starvation as recently as about 40 years ago, to the second largest economy in the world today, with annual GDP approaching perhaps 60% that of the U.S. (depending some on the extent to which you choose to believe their numbers). Without doubt, they have made a huge accomplishment in reducing poverty, and have also made great strides in mass education. With a huge population of hard-working and entrepreneurial people, there could be many reasons to believe that China might represent the wave of the future. And the Chinese government has undisguised ambition to move into the status of a great world power, both militarily and economically.

China’s unique brand of state-directed crony capitalism has attracted plenty of fans among statism-loving American journalists. Certainly, you have not forgotten the famous 2009 praise from New York Times columnist Thomas Friedman (“[W]hen [a country] is led by a reasonably enlightened group of people, as China is today, it can . . . have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century.”) Or consider this, more recently (2017), from Time magazine, “How China’s Economy Is Poised to Win the Future”:

Today China’s political and economic system is better equipped and perhaps even more sustainable than the American model, which has dominated the international system since the end of World War II. While the U.S. economy remains the world’s largest, China’s ability to use state-owned companies to boost the party’s domestic and foreign influence ensures that the emerging giant is on track to surpass U.S. GDP in 2029. . . .

So what is your take? Before casting your vote, you might want to consider a few things about China today:

  • For starters, there’s that huge “trade surplus” that China runs with the U.S. Estimates of its size are in the range of $500 to $800 billion per year. Our President likes to refer to this as China “winning” in a trade war. Another way of looking at it is massive and alarming capital flight from China. There is good reason to believe that that is the way the Chinese leaders look at it. From Coco Liu, May 2017: “While Beijing has long been concerned with the efforts of its super rich to move money abroad, the rise of China’s rapidly expanding middle class has put overseas investment within the grasp of a vast new body of people This is why Beijing has stepped in with a raft of measures in recent months to restrict the flow of Chinese money overseas. . . . Crucially, some of these measures have also been aimed at the middle class.” While wealthy Chinese buy multi-milion dollar apartments in New York with no immediate intention to move in, do any Americans buy comparable real estate in China?
  • Have you read about the surge in American students studying the Chinese language? There actually has been something of a surge. According to the Xinhua news agency in 2017, some 227,086 American students are now studying the Chinese language (compared to 7.36 million studying the top-ranked second language, Spanish). Oh, the number of Chinese students learning English is “over 400 million,” with English a compulsory subject in all elementary and secondary education. That’s quite a contrast! And it’s a contrast that ought to tell you something about what people on the ground think is the actual “wave of the future.”
  • What is it about life in China that might have many of the top people planning their exit strategies? If you don’t know about China’s pervasive and mushrooming “social credit” system, it’s time to start learning. There’s an excellent piece on the subject today from Gordon Chang at the Gatestone Institute, titled “China’s ‘Digital’ Totalitarian Experiment.” In essence, they track everyone all the time, using everything from millions of security cameras to total following of your financial life, and use the results to impose social controls, deciding everything from who can fly to what school your kid might be able to attend. You should read Chang’s whole piece; I’ll only provide some brief excerpts: “China’s “social credit” system, which will assign every person a constantly updated score based on observed behaviors, is designed to control conduct by giving the ruling Communist Party the ability to administer punishments and hand out rewards. The former deputy director of the State Council’s development research center says the system should be administered so that “discredited people become bankrupt”. . . Chinese leaders have long been obsessed with what Jiang Zemin in 1995 called “informatization, automation, and intelligentization,” and they are only getting started. Given the capabilities they are amassing, they could, the argument goes, make defiance virtually impossible. The question now is whether the increasingly defiant Chinese people will accept President Xi’s all-encompassing vision.” The real question is why any top highly-productive workers and entrepreneurs would put up with this kind of thing if they can get out.
  • But of course, they will only use the “social credit” system for benevolent purposes — not!! Actually, they engage in frequent crackdowns against whoever falls out of favor at the moment. James Freeman of the Wall Street Journal, in his “Best of the Web” column today (probably behind pay wall) gives a few examples of recent crackdowns. One example is on the gaming industry. Another is on Christians: “China’s government is ratcheting up a crackdown on Christian congregations in Beijing and several provinces, destroying crosses, burning bibles, shutting churches and ordering followers to sign papers renouncing their faith, according to pastors and a group that monitors religion in China. The campaign corresponds with a drive to “Sinicize” religion by demanding loyalty to the officially atheist Communist Party and eliminating any challenge to its power over people’s lives.” Again, the question is who, given a choice, would want to live in this kind of place?
  • Then there’s the two-tiered system for investment and credit allocation: state-backed banks and loans on favorable terms for insiders and friends and cronies of the government; “informal” credit on unfavorable terms (or maybe no terms) for everybody else. How about the nobody with nothing but some talent and good ideas (Steve Jobs?).
  • And finally there’s what I call the Roman Empire Model of Governance and Succession. An all-powerful leader serves for life. When he dies, there is no generally-accepted succession plan other than the current leader can try to pick his successor and see if that sticks. If it does, great, for now. If it doesn’t, maybe things degenerate into a power struggle of all against all. Who knows? In the case of the Roman Empire, the first 41 years under Augustus were a time of great power and glory. The very next guy (Tiberius) started the great tradition of succession by assassination and/or poisoning, followed by power struggle. By 54 AD you had Nero, and on down from there. In the modern world, other examples of the Roman Empire Model of Governance and Succession include North Korea, Cuba and Venezuela.

I’m not saying that China may not have some way left to run on its current streak. But, in a world of tough competition for talent and investment, what does China really have to offer?

Meanwhile, if you think that China’s GDP of about $12 [tr]illion +/- seems impressive, remember that the U.S. GDP (after a recent spurt) now exceeds $19 [tr]illion; and China has about 4 times the population, which means that its GDP per capita is maybe 15% that of the U.S. Which is less than that of, for example, Mexico or Brazil. And that’s if you believe the numbers that China puts out. They have a long way to go, and increasingly they are putting big obstacles in their own way.

UPDATE, September 13: Commenters noted that I had put “billions” for GDP rather than trillions. Now fixed.

Source: What Are The Long-Term Prospects For China? — Manhattan Contrarian

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