The Indian Economy Blog

October 3, 2011

China Skepticism

Filed under: Business — Arjun Swarup @ 9:50 am

(I wrote this after my visit to Shanghai and Beijing in May ’10, as part of my MBA program at Duke. I originally circulated it around with friends and other readers with the title “China is at least 2 generations behind the rest”, but that was just needlessly provocative, and incorrect in many respects. Nevertheless, I remain quite a sceptic on China).

Flawed Economics

Firstly, China’s much vaunted economic growth is on very flimsy foundations. Yes, they were 173rd in world GDP rankings in 1978, and #2 today. But,the economic model in place is – keep currency low, have an unlimited supply of labor, and export to the US/Europe (‘capitalist’ nations). They earn dollars, and also have near total capture of all household savings, which are then funnelled back into the economy, mainly to just build infrastructure, and infrastructure only (there are highways in China, where one can drive for hours and see very fewr cars).
 
The success of this is based on trading with the world’s wealthiest capitalist country through the post-WW2 global trading system, and the US can significantly damage the trade by the stroke of a pen which forces them to revalue (or they close down trade doors, although this is hard for the US to do, given how badly off they are, in their own way). It leads to a ridiculously lop-sided economy, with not much going on (local consumption is almost negligible). The amount of ‘economic waste’ is unbelievable – nearly half of the skyscrapers in Shanghai are absolutely empty.
 
When, and it’s a question of when, and not if, the crash happens – which could be the collapse of exports, the internal property waste bubble bursting, the GDP will see a very severe contraction – which means lots of unemployment, wealth disappearing, and…
 
And that brings me to the most vexing part of the Chinese economic story – contrary to what the world thinks, there is a lot of poverty in China, the kind of degrading, dehumanizing type one associates with Africa, India, and South America, and in much larger numbers – 800 million of them.  In interior China, people live on 1000-1500 RMB a year, which is about 200 RMB a month, or about a dollar a day. 
 
Politics

The government in control – the communist party, get their legitimacy from the fact that they’re providing growth. Simple as that. So what happens when growth stops? Now, Shanghai and Beijing look grand, clean, and Shanghai in particular, is like downtown Manhattan times 100. Of course, it is all economic waste, since none of the skyscrapers are occupied. No forces of demand or supply, no consumption locally of the product (people can’t afford it).
 
And the way they’ve made it happen – any slums that were there get cleaned out, people get evicted. Picture that in Mumbai, think of what you could achieve. Nariman Point would be much more impressive. A lot of Shanghainese remarked that Shanghai was designed as a ‘showcase’, as ‘national pride’, and that once you step out, all the cities/towns look as ‘bad’ as any Indian tier-2 city.
 
Communist rule has destroyed every single institution that is present in a real society – media, government, judiciary, citizens organizations. Private industry cannot flourish – while 70% of China’s GDP is locally produced, it’s actually all government controlled, land is allocated by the government, and all resources/permissions are linked to the government.
 
The government owns everything, and the destruction of all institutions means that the common people have effectively been stripped of all and any means of rising, or of growing personally. A good example of this is in banking - banks exist, but the decisions on who to lend, where to lend, what to lend – nothing is in their hands. Beijing decides all that.
 
No media exists. At our hotel, there was a different newspaper for foreigners and for locals. Locals can’t move where they want, they need permits to move within their country.
 
(There is a broader philosophical issue of what is the point of living like this, but let’s leave that aside for now – as that can be flipped around and asked for India or any other country as well).
 
Society
 
This bit is the most ‘flaky’, but again, worth mentioning, it appears that communism has created a disjointed social network. There are lots of people who feel really rootless, with no grounding (although whether this is more inherent is an open question, as Nehru remarked when confronted how cavalier Zhou Enlai seemed with regards to an all out nuclear conflict between countries as large as China and India). You have a vast population that just lives as hawkers, peasants and workers, under tight-fisted control. And then you have a totally disjointed middle-class, which only cares about wealth, cars, apartments, and property. It’s very tangible, when you talk to the people, to see what has happened. By contrast, China, India even Dubai – seem to have a more connected local population.
 
It’s the combination of all these things – the weak economics, the political backwardness, and the skewed society, which makes me question the China story. And other emerging markets have very major issues and problems (and the less said about the developed markets the better), so its not as if China is in a club of one.

 A quick note on the Olympics: it was a manifestation of all that is wrong with the model. The manic national pride and desire for global (mainly Western and Japanese) respect, and a desire to impress other developing nation trade partners made them embark on the thing, with no respect for the true social and economic cost (which would have happened elsewhere). The unlimited labour supply and total control enabled them to mobilize a large workforce to work, kick people out from places where they needed the land, and just pull it off.

(Cross posted on my blog).

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