Skip to comments.(Vanity) As the World Turns, Part III, or, The Year of Lipstick on a Pig
Posted on 02/18/2007 10:14:56 AM PST by grey_whiskers
This is part of a continuing series on possible changes in geopolitical power, concerning the decline of the West and the rise of other powers. In (Vanity) As the World Turns, or The Wild, Wild, East , I raised the idea of the Wests decline and considered three heirs-apparent: the Muslim World, China, and India. In (Vanity) As the World Turns, Part II, or Back to the Future, I looked at the Muslim world and some of the flaws within its culture which might keep it from rising to a true World Power. In this piece, I reconsider China more carefully.
A great deal of the popular press, and the writings of opinion leaders, is heading in the direction that Chinas ascendancy is inevitable. And not only inevitable, but right and true. Many evidences are offered, including the continuing amazing economic growth of 10% annually, the vast amount of direct foreign investment, Chinas massive hard currency reserves, the rise of the military, and its large population. Any one of these factors alone would be enough to make China important, but together they are simply irresistible. But is this really true? Let us look not just at the propaganda of the apologists, and see if we can spot any weak scales in the Dragons hide. This is the Year of the Pig: quite appropriately named, too, since I think many of the tales of Chinas economic dominance amount to not much more than lipstick on a pig.
First, think of the economic growth of 10% annually. Is this the gift of a divine wind from Heaven, or is it the result of specific policies? Recall that one of the reasons given for Chinas replacing the United States is the continuing enormous trade surplus. What is a trade surplus? It is measuring how much more China sells to the United States than it buys from the United States. But it did not occur in a vacuum. There are three things which contribute to Chinas trade surplus. First, the massive direct investment includes wholesale movement of the infrastructure for entire industries from the United States to China. So when the industry as a whole moves its manufacturing base, it is a double whammy: the United States loses whatever exports had been from that industry, and China gains them. Second, there is the issue of the currency manipulation by the Chinese: the yuan is pegged directly to the dollar. This means that the yuan is artificially depressed, so that Chinas exports are artificially increased. More on this later. And finally, there is the large population of China, enabling massive wage arbitrage, and the exploitation of workers. This also makes China attractive to those only concerned with cost.
Why are the factors just given so important? It is because, for various reasons, they are non-sustainable and so the massive growth in the Chinese economy has many of the characteristics of a bubble. And history teaches us (from the Tulip Craze in the 1600s, to the United States own Great Depression, to the Dot-Bomb era) that the longer an unsustainable trend continues, the longer, sharper, and faster the fall when the bubble does burst. Consider then, some of the factors which make Chinas current burst of prosperity so unstable.
First, recall that China is still, in many regards, a Third-World nation. Yes, that is unpopular, and critics will point to the gleaming facades of Shanghai and other placesmore on those later. But the bright cityscapes do absolutely nothing about the hundreds of millions of peasants and farmers living at little more than a subsistence level. President George W. Bush pointed out that China must create 25 million new jobs a year just to keep up with those entering the workforce. That means, even if the United States outsources not only its manufacturing, but all of its service sector jobs, in a dozen years, China alone will have absorbed every job in existence in the United States. Just stealing jobs from the West is not sustainable.
But, some would argue, what of the massive influx of people into the cities seeking a better life? Yes, what of them? Many of the sweatshops in China pay less than a dollar a day: and under conditions which would have made American coal miners feel like kings. See for example this article. (Thanks to TigerLikesRooster from the website FreeRepublic for pointing this out to me!) But this is merely the tip of the iceberg. There are tremendous problems throughout greater China, not only with carbon emissions (and it is funny how Kyoto is not being applied to China, even though on paper its economy rivals Japan and Germany), but also with water pollution, loss of arable land, and widespread pollution. Jim Jubak, whom I quote in the footnote below, says that 400,000 people in China die each year from air pollution. China, it seems, is polluting on a scale that would make even the Eastern Europeans blush. (+)
In the meantime, glittering skyscrapers are built and shown to the world. However, many of these developments are not much more than Chinese Potemkin Villages. For example, according to this article from the Christian Science Monitor,
On a recent Friday afternoon, only 20 shoppers were counted in one hour. There may currently be too many high-end malls, and not enough high-end earners, in urban China, some experts say A deficit of shoppers has been in evidence for several years. Many Chinese visit fancy local malls [but] few cash registers ring. Mostly, ordinary Chinese buy 10-cent soft cones and have fun wandering amid the goods At a cosmetics shop in Golden Resources, tiny tubes of face and eye cream were on sale for $40 each Two professionally dressed young ladies, potential shoppers, said they came to visit a friend who worked there. "We really like how we feel at this store, but we can't afford the clothes. The cost is 200 rmb [$24] too high for nearly every item."
"We think it will take three to five years to start making a profit," Fu says. One successful move has been to put a regular-price supermarket, Lotus, in the basement.
One might get the idea that much of the development in China is the international equivalent of bling : just as many of the underprivileged in the Hood in the United States dress in a flashy manner, trying to gain status through showy symbols.
But this reliance on high-prestige but unprofitable construction reveals another chink in the Dragons scales. That is the financial system. While those who laud Chinas imminent triumph like to point out the estimated 1 trillion dollars in hard foreign currency reserves, they conveniently neglect to mention the flip side of all of the investment in show projects. Nonperforming loans. These are a legacy of what can charitably be called not crony capitalism but crony Marxism: if you know a government official, or are in cahoots with one, there is a *much* better chance that a state-run bank will approve your project, whether or not it will ever show a profit. And this is a double-edged sword. First, there are the non-performing loans themselves, a risk to outside investment if they are allowed to fail; and a risk to the present order if they are allowed to succeed. For so many people in China are so poor, even meaningless make-work jobs are desired: and the political demands of the masses for work override market considerations for the profitability of the construction being performed. That is, the investment into China is being billed as "we are creating jobs for export to the United States" but not nearly all of the investment does so. Much of the jobs created are simply for show, and do not contribute to investments which provide continuing economic growth once they are built. It is as though an entire country is trying to lift itself into prosperity on the back of the WPA. For there simply are not enough real jobs to go around.
What would be the cure for Chinas financial woes? The creation of a true middle class. But that appears unlikely for two reasons. The first is that China, having pioneered the proverbial race to the bottom in wages in pursuit of market share, can hardly afford (either literally or politically) to allow wages to rise too much; they might price themselves out of their own markets, and there are plenty of other Third World countries to build factories in. The second is the political: Tiennamenn Square was not *that* long ago, and the leaders in China certainly do not want any of the masses to start getting funny ideas about democracy.
Speaking of Democracy, there remains the issue of Chinas military. Long ago they learned the lessons of the Soviet Union in the Cold War. No longer is China relying on overwhelming the West with sheer numbers: instead (thanks to Bill Clinton and Loral among others) they are seeking to buy, borrow, or steal the Wests own technology. And not just military technology either: China is infamous for, err, revising and extending the technology of others, in a way that would put Microsoft to shame. See for example this article for more. But China is not content merely to take the Wests technologies: they are seeking apparently, to use on the West, the same strategy the United States under President Ronald Reagan used on Russia: spend em into the ground! And this, it would seem, is an adaptation of the famous principle from Sun Tzus The Art of War: The successful general is not the one who can defeat his adversaries on the field of battle. The successful general is the one who can so overwhelm and demoralize an enemy that no battle even need be fought. And so it appears is Chinas strategy.
Whether they succeed is problematical: but I would say that they have a fairly short window of opportunity before internal problems in their society cause a major implosion: and short of a Nazi type-lebensraum campaign (*), I see no way for China to supplant the West should such an implosion occur.
(*) For a frightening scenario (which I have not been able to confirm, but which I fervently hope is tin-foil hat territory, click here). It is a long read, but read to the end. Is H5N1 avian flu merely a dry run, or an early attempt gone bad?
(+)(Check out this article, this sequel, and this final article from Jim Jubak for more on Chinas woes. Jim Jubak has come up with a lot of ideas on China that I hadnt thought of; I have tried to avoid anything of his while writing my article: but he is such a good source of further information that I felt honor-bound to include references to him)
As always, suitable for lining birdcages, at least until avian flu comes around.
Your bandwidth may vary.
Sorry for the delay, but my PC crashed in the middle of the night and I had to re-type the entire article largely from memory: the Microsoft Word recovery program could not rescue the file.
"lipstick on a Pig"
Has anyone noticed that today's (Feb 18, 2007) Google search page has PIGS ON IT?????????
Kind of undermines the first two?
I'm hardly supportive of a Chinese expansion, but he has to reconcile that statement to the whole series.
I wonder if Google Arabia or whatever also have piggies on it today?! Somehow I doubt it.
In addition, this article may also be of interest to the people. It is written by a Chinese insider:
Thanks so much for posting this interesting food for thought.
As to whether it is real, I throw up my hands. It could be.
That was an interesting link. The Chinese are caught in a squeeze play of their own devising...
And Bird Flu tangentially relates to the highlighted paragraphs...China is reporting only a handful of human cases, and insisting that through vaccination all the chicken in the entire country is safe, yet their information is suspect, their practice as occult as usual, a Chinese citizen is the head of WHO and is not being transparent as promised.
If/when Bird Flu becomes pandemic, whatever the case fatality rate, China will most certainly be badly affected and will most certainly hide knowledge of the impact of Bird Flu on its citizens, and the rest of the world may smolder and perhaps burst into flame...
Just thinking strange thoughts here, as I watched the end of the Daytona 500. Everyone please ignore me.
I don't know what you'll make of this, but thought you might like to look at it.
FWIW, I wholeheartedly agree, well, at least with the stuff I skimmed. :')
The one item I've always understood to be completely wrong is this whole idea of "currency manipulation."
The Chinese government isn't really depressing the value of their currency by pegging the yuan to the dollar -- they are inflating it.
Without this direct link between the two currencies, the yuan would be completely worthless.
I agree with most all of what you have written. I think the chinese leadership understands this, but they also are using an almost fascist approach to their economy to sustain it much longer than the old Lenin, Stalin, or Mao models allowed for.
The problem with fascism is that it can develop to a point of not only being sustainable, but of being a powerhouse if its people get behind it. Reference the Germans, who put out in shear numbers and technology, as a relatively small nation, a wartime economy that it took the combined mass of the rest of the developed nations (outside of Italy and Japan) to put down.
If that ever happens with the 1.3 billion Chinese...well, the prospect is frightening. But I think something along those lines is exactly what the CCP is working towards.
So, how will they do it? The Nazis did it during very severe financial times by instilling pride in the people in being Germans. Old areas were reincorporated into the Reich (Sudetland, Austria, Czeck, etc.), major infrastructure building (highways, waterworks, etc.), etc.
Watch out for these in China...their nationalsim and cultural pride is something that can be exploited by their leaders, just like the Germans were exploited by their leaders.
In the mean time, the window is there...how long they will be able to keep it open, and how they will go about maintaining their position should it begin to close is anyone's guess...but it is not likely to be pretty IMHO.
Did you read the footnote about the biological weapons attack...? How seriously do you regard those threats?
I do not believe they are our friends in the least (the Chinese government, not the chinese people as a whole), but I do believe they are using us and need to continue using us for some time to come to help keep their economic engine firing towards self sufficiency...when and if they can obtain it.
But make no mistake, they are trying to make it and in the process they are preparing to overtly confront us politically, economically and militarily once they are in a position to do so. Right now, it is more of a sparring match as we mutually depend on one another and feel each other out. But that's just my opinion.
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