The other side of China's success story(China)

The $52.7bn in foreign direct investment that China attracted last year is an impressive sum. It is almost certainly enough to make the country the world's biggest recipient of FDI in 2002. And with much of it spent on developing China's export sector, the investment underlines just how much the country is now an important part of the global economy.

The sum may not be quite as big as the headline figure. Practices such as "round-tripping", where Chinese companies send money offshore then re- import it as "foreign" capital to qualify for tax breaks and other investment privileges, almost certainly lead to some domestic investment being relabelled as foreign.

But such claims cannot - and should not - detract from China's achievement in pulling in the several hundred billion dollars of genuine FDI that has already arrived.

Barring unforeseen disasters, this flow will continue and increase. Manufacturing operations are expanding their presence. Intel, for example, plans to raise its current $200m commitment to $500m by the end of 2003. And China's entry to the World Trade Organisation is allowing foreign business to buy significant stakes in large companies in sectors previously closed to them - hence HSBC Insurance's announcement in October that it was spending $600m on a 10 per cent stake in Ping An Insurance, China's second largest life assurer.

With many more such deals being lined up, talk of China's annual FDI inflows rising to $100bn is anything but fanciful. But - and it is a big but - while FDI is doing a great job for China, especially at building the country into an export powerhouse, its impact is far from universal. Across huge swathes of the country it is having little impact.

Province-by-province figures for last year have yet to be released. But they are unlikely to be much different from 2001. That year, 50 per cent of all FDI went to just three locations - Guangdong province, next to Hong Kong, the city of Shanghai, and its neighbour, Jiangsu province. Most of the rest of the money went to other locations up and down the coast.

Inland, and indeed in some places along the coast, the flow was just a trickle. In 2001, Guizhou, China's poorest province and home to nearly 40m people, attracted less than $30m. In such places, growth has largely been kept going by China's other economic driver of the past half decade: government spending, especially on infrastructure and construction. These attempts to stimulate the economy have succeeded up to a point - national growth has remained above 7 per cent a year for the past several years. But, as Xiang Huaicheng, finance minister, warned last April, the government cannot continue to finance growth through deficit spending indefinitely.

When the tap is turned off, the impact along much of the coast will be offset by continuing foreign investment and export operations. But elsewhere, much of the country will find the going tough. In fact, many places already are. Thanks to the huge state-spending binge of the past five years, many second-tier cities, including many provincial capitals, have heavily over- invested in everything from near-empty highways and surplus bridges to speculative high-rise properties and grandiose multi-storey stations that dispatch a train or two a day.

They are also home to a big part of China's surplus manufacturing capacity - again, much of it caused by over-investment. This has been a prime cause of the deflation that has plagued China since 1998. It has also created tens of thousands of money-losing companies propped up by bank loans - in turn adding to the bad debts of China's banks, now standing at 40-50 per cent of all loans.

As a destination for foreign investment second-tier cities have little appeal. China's massive migrant labour force means cheap workers are available to companies on the coast, and poor infrastructure means that, even if companies opted to set up inland, they would find moving goods around a headache and local markets too poor to sell into. The advantage for investment lies with coastal regions, which can offer direct access to international shipping to import inputs and send goods abroad - and which, unsurprisingly, have also emerged as the homes of China's richest consumers.

As a result, while overseas capital will continue to flood into China, it will also exacerbate the already sizable gap between the wealthy regions of the eastern coast and most of the rest of the country.

FDI will help China maintain the 7-8 per cent annual growth in gross domestic product its leadership deems necessary to keep the country's economy ahead of its fast-growing labour force. But it will do so by having growth rates of 10 per cent or above along the coast, and dropping those inland to 5 per cent or perhaps below.

For now, such fissures look manageable. But for a country that prides itself on its unity - and whose government still claims to rule on behalf of all sectors of society - the hundreds of millions of people being left behind create a challenge that even double the amount of FDI will do little to address.

The writer is a former editor-in-chief, Asia, for the Economist Intelligence Unit and the owner of Big Brains, a Hong Kong-based publishing and research company

Ever hear the one about the shoe salesman sent to South America? He came back to report to his boss st Shoes r' Us that, sadly, no one in South America wore shoes, and he quit.

A few months later another guy, fresh-in from Beliz, burst into the New York headquarters shouting joyously: "Hey!!! Nobody in South America has shoes!!!!

Inland China may be a backward place where everybody is underproducing and work is carried on inefficiently; but, INLAND CHINA IS A PLACE WHERE EVERY BODY IS UNDERPRODUCING AND WORK IS CARRIED OUT INEFFICIENTLY!!!!

Seems the big stumbling-block is that the state, reluctant to change its ways, is trying to "Build it, so prosperity will come." A planner's dream; a society's nightmare. These folks aren't terminally stupid, though; and the dreaded private sector--unleashed--will make millions of smart improvements in efficiency, marketing and infrastructure that'll make the heartland of China a cornucopia of agriculture and manufacture for the world.

I think the chances are very good that economic freedom is growing exponentially: the Party is purging itself of the old paradigm. Slowly now, but soon it'll be out of their control. Capitalist cancer. The happy blight upon socialism. And an economically prosperous nation doesn't usually invite or export war and conquest...despite what the ANSWER idiots would have the world believe.

Optomistic thoughts from dasboot. Have a nice day.

I recently met some people from the branch of my family that missed the "boot" (sorry!) from Germany during the Franco-Prussian War. They are simple German suburbanites. When you get a few drinks down their throats, they actually do say "Vell, Hitluh at least made zee trains run on time." I am not kidding you.

The point? Even a Christian people who were the leading philosophers (arguably) of Europe can be seduced by economic development, and will give credit to the man sitting in the capital when things turned around.

The Chinese on the other hand are almost without philosophy or religion. They are materialist to a degree that your average materialistic American suburbanite can scarcely even contemplate. They will give credit to whoever is sitting in Beijing when prosperity arrives.

Therefore, I see one of two scenarios developing, both of them bad. Number one -- development halts, the populace is increasingly discontent, so the government looks to the opiate of a People's War (a drug which works very well on everyday Chinese, sadly) to keep them in line. Number two -- the development continues, the Party's rule is cemented, and the people are therefore willing to follow the "New Communists" (who brought prosperity using socialism with Chinese characteristics) into Hell and out the other side -- that is a new war to restore the glory of China.

I believe we are headed for a crash. The two sides have considerable resources for war and incompatible visions of how Asia in particular and the world in general ought to be ordered.

Interesting points. Allow me to counter:

I think that those forces which caused Germany to become the parasitical monster it was, are more similar to those forces ambient in Iraq today, than in China. The Chinese, I think, are not to be persuaded that any foreign nation oppresses them; rather, they are, in large, perfectly aware that it is their own government that is the enemy: at least historically. There is a perceived change in the ordinal economic philosophy of the PRC . I can detect this by what I read, and in conversations with Chinese come-overers with whom I am acquanted.

Add to this the internet, satellite communications, and a growing moral awakening among these folks--and the creep toward free-market capitalism expressed in some speeches before the recent Commie shindig by some of the comers in the Party--and I read an orderly shift--no revolution or war--away from abject socialism, and toward a more Taiwanesque future.

Chinese I know take to Capitalism like it is geneticly ingrained: the want for a thing is inversly proportional to its availability.

Then there are the thousands of U.S. trained, Chinese financial prospectors, who publicly whine about how much the prosperity of China is hurt by government interferance with the natural forces of free-markets. They have the ears of a lot of powerful Party-types, who are becoming more trusting of the benefits of Capital, and the superior happiness that comes with being leaders loved, instead of a tyrants loathed and feared.

Along with Bibles, the most sought-after books in China are the classics in economics and liberal government. This I have gleaned from some young Christian missionaries who have been there, doing what they do.

I sincerely believe, as I've said before on some other threads, that China will soon be ruled by men who have gained wealth by earning it, instead of having stolen it from peasants. The potential economic gain of free-market exchange (so much more than that obtainable through a few arms deals) it lost on fewer and fewer in the Party.

China has agents everywhere, South America, e.g.; but I am not convinced they mean to overtake the world by means of armed conflict: I think they are actively pursuing economic hegemony. What they may not fully appreciate is how their economic success will float all boats. It'll really rankle them to notice that the stronger their economy becomes, the stronger the world's economy becomes. Just the way it works. Ask Miltie Freedman.

I guess the Prozac is kickin' in :^0

And let me extend my remarks, and REALLY go out on a limb. (I know I should leave this for the professionals, but...)

The locus of Western civilization moved from Israel to Rome, thence to England and from there, to the U.S.

Now, acknowledging that when something happens in China--like Communist Revolution, e.g., it happens big, and FAST, I can actually contemplate a time, perhaps a hundred years from now, (maybe only a decade) when China will become the preserver and locus of that historical thread. (as we, like the U.K., like Rome, slide backward into.....whatever)

Look, China has Hong Kong; China may well soon have Taiwan...and not by force. I can reasonably prognosticate that, rather than Communism trumping Capital, the reverse will actually occur; and as quickly as China was forced to embrace Communism, it will seek and embrace the comparative bliss of liberty...and the corollary wealth that flows therefrom. The entire Chinese culture, redirected and bent to the task of persuing economic and moral enlightenment (not to mention hot-and-cold running water in every home) will be absolutely unstoppable: old-guard socialists/ communists in the United States, Africa or Arabia notwithstanding.

Tinfoil hat, proudly buckled: asbestos suit, ready.

The Chinese prize order. In Chinese history when dynasties have collapsed bad things have happenned. No one remembers the 1845 - 1949 period with any nostalgia. There is to the Chinese a solidly statist tradition.

Add this to a basic physical fact that people who talk about democracy in China flatly refuse to recognize. Chinese civilization is physically based on water control on a massive scale. A Jeffersonian government cannot control the Yellow River or the Yangtse. When the Yellow River gets out of control as it its wont during periods of weak government, when dikes and canals are unmaintained, hundreds of thousands of people drown in the floods, hundreds of thousands more die in the famine from the destruction of all that farm land, and hundreds of thousands more die of plague from all those unburied corpses.

Law and order and peace and prosperity matter a whole lot more to Chinese than anything else.

Our version of government copes quite a lot better with the occasional hurricanes that swamp the southern U.S.; jets that hit skyscrapers; volcanos in Washington State; tornados in the heartland....and , oh yeah, a lot of fires in Hollywood. This version of Jeffersonian society dug the Canal Panama; defeated hookworm, malaria, polio, cholera; Hitler. I look at the IRS and every level of law enforcement, bureaucracy, and don't see how were any lovers of disorder, except by degree of tolerance and severity of "rehab", compared with China. Remember, Amnesty International whacks the U.S. as much as China.

The Chinese I know love order and stuff as much or more as I do; they also love prosperity. I think they are, as a culture, beginning to surmise that Jeffersonian constructs will offer better and more efficient control of rivers, disease and wealth.

Perhaps Jeffersonian government is just the thing for intellegent war against misbehaving Chinese rivers?

Also I remember that the United States were once the property of European Monarchs. They didn't think we had a shot: bunch a' criminals we were.

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