(Vanity) As the World Turns, Part III, or, The Year of Lipstick on a Pig

grey_whiskers ^ | 1-18-2007 | grey_whiskers

[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 West’s 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 China’s 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, China’s 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 Dragon’s hide. This is the Year of the Pig: quite appropriately named, too, since I think many of the tales of China’s 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 China’s 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 China’s 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 China’s 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 1600’s, 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 China’s 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 places—more 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 Dragon’s scales. That is the financial system. While those who laud China’s 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 China’s 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 China’s 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 West’s 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 West’s 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 Tzu’s 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 China’s 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 China’s woes. Jim Jubak has come up with a lot of ideas on China that I hadn’t 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)

[Paul Ross]

BUMP!

[PaleoBob]

A very large factor in the evolution of China as a world power and its relationship with the USA relates to how the communists end up dealing with Taiwan (ROC). Right now, many of the old liners in the PLA want to invade Taiwan by 2012. If they are persuasive, and China moves on Taiwan, the idea that “we won the Cold War” might be seen as laughable.

[grey_whiskers]

Aye.

Remember Les Aspin and his advice to cut the military?

Now we can't even fight a full-fledged *one*-front war, let alone two.

Might as well hand over all the cutting-edge high-tech chip making equipment directly to Red China: who will reverse engineer, slip in hardware-based backdoors, and infiltrate the stuff into our COTS military supply chain.

The Clintons (along with Kennedy) should've been tried for treason.

[PaleoBob]

I actually knew Les Aspin. An idiot. LOL

[bitt]

FLASHBACK and timely for today!