China's in for a rough ride (China)

China is so vast and complex, almost any view can find corroboration. But Prof Story says that while the path ahead is going to be difficult, China will succeed in becoming an economic giant. SUSAN LONG reports

Meet Professor Jonathan Story, 63, one of the world's foremost experts in assessing investment risks in China. The professor of international political economy at Insead in France was here recently to teach a course at the business school's Singapore campus. His latest influential tome, China: The Race To Market, charts the forces shaping China's future and what to expect in the new world order.

A Largely a fear of the unknown. It stems from the fact that China is a very complex entity with many different identities sending out different messages. So any view you hold can be corroborated by sufficient supporting evidence.

Just observe two sharply contrasting views within months. During the height of the severe acute respiratory syndrome outbreak in April, suddenly the whole world was speculating on the end of the China boom.

Tourism was down and manufacturers were slipping away to India, Turkey and Pakistan, and everyone wondered whether China's new leadership would make it.

Just four months later, United States Treasury Secretary John Snow was going across to China, suggesting revaluing the yuan because of its large trade surplus, and foreign investment was rising again.

All the hype makes it difficult for the rest of the world to cope with this phenomenon called China.

You have to take a holistic view, think it through from a geopolitical perspective, look at the economic dynamics of political change, the transformation of its businesses, as well as factor in the unreliability of statistics.

Q Many Singaporeans, whose breakfast reading is dominated by glowing reports on China's progress, are convinced the mainland is about to eat Singapore for lunch and dinner. Are such fears warranted?

A If you're in the neighbourhood of China, there are good reasons to be concerned, such as India because it remembers the 1962 invasion.

But for Singaporeans, many of whom came from the mainland, China should be a growth opportunity rather than a threat.

In Senior Minister Lee Kuan Yew's memoirs, he says one of the big problems that he faced in the 50s was the pull of Mao. Now, the boot is on the other foot. One of the countries that China is really attracted to in many ways is Singapore.

They are learning from you how to manage their financial markets, achieve a crime-and-corruption-free environment and transfer what you have achieved in a one-party dominant system to a bigger context.

So there are big opportunities for business and China is actually a source of enrichment for Singapore.

Of course, its entry to the world market has meant that it is able to bring online its huge advantage in labour costs, which is replacing lower value-added sectors in many areas.

But trying to cling to the old business sector where you're no longer competitive, well, forget it.

What all this means is taking in the full implications of China's emergence because if you try to protect yourself in the old way, you'll run into all sorts of problems like Japan has.

Q With China eclipsing everyone else with such meteoric growth potential, South-east Asia has lost its shine these days, crippled by terrorism and investment diversion. A perception problem? What bright spots can this region look forward to?

If you look at the figures, it's very clear that since 1997, there's been an exodus of foreign investment from the area because of the difficulty of distinguishing the region's political problems from its economic realities. In general, good politics brings good business.

But I don't agree with the pessimism of your question. A very important phenomenon is South-east Asia's success in the past. Of course it has been government-led to a large extent but this was the model that the US and the World Bank was selling in the 1960s.

It is now coming under attack by political threats related to religious questions, extremism, ethnic disputes and succession questions.

But the fundamental problem is how do you shift to a more market-based financial system, introduce more entrepreneurship, more risk capital and a boom or bust attitude that says 'well done if you get wealthy but too bad if you lose everything'.

What the region needs is a market-based financial allocation system where companies are allowed to rise, raise finances and go bust, but are not subsidised through any ups and downs.

It is this welfarish model that has made the Japanese, as well as French and German, economies stagnant.

A Not quite yet, but it is coming along. I date the first exercise of Chinese authority to 2001, when the Japanese agricultural lobby said we can't have Chinese leeks and shiitake mushrooms coming in at such low prices and wanted to slap on tariffs.

The response from China was: 'All right, put on your tariffs on our mushrooms and leeks, we'll put 100 per cent tariffs on your cars, air-conditioners and mobile phones.'

I believe the reason why Japan is getting out of its recession is because of China.

What China was saying in the mushrooms and leeks incident was: 'Look, you've got 45 million people in the lower value-added sector protected by internal arrangements and frankly, you've got to restructure because our costs are so far below yours. Open up your market and we will enter.'

And that's what's happening now. China is now running a trade surplus with Japan.

The key to Japan's revival, I've always argued, is when it runs a trade deficit with everybody, not a surplus. So although Japan is running a trade deficit with China, its exports to China are also booming, which has lifted its growth rate to about 2 per cent.

I think the next decade will see Japan grow about 5 per cent as it restructures itself under pressure from Chinese competition.

The more it restructures itself, the more prosperous Japan will become and the more integrated both countries will be. But the prime power in that relationship will be China.

A The first school predicts a sudden regime death for the Chinese communist party. After 50 years in power, without a single election, it faces a crisis of legitimacy.

Signs of collapse lie all around, triggered by massive rural emigration, get-rich-quick practices, mounting corruption, lawlessness, widening income disparity, weak public finances and a proliferation of sects to fill the vacuum left by communist ideals.

The second view is that of China as a second-rank, medium-sized and introverted regional power. This notes that China formed 30 per cent of the world economy in 1820, fell to 6 per cent by 1950, fell to about 1.5 per cent by the time Mao died.

Now it's back up to 3.5 per cent, which shows some recuperation but is still well below 1950 levels. The view contends that the communist regime has been doing pretty well but continues to face huge problems, so don't take its threats and demands too seriously.

The third view is that China is an 400kg gorilla about to unleash itself in the world jungle. This view of a belligerent, assertive and rising power is widely represented in some circles in Asia-Pacific and the US.

The emphasis here is on the controversial size of its military budget, which is estimated to be about US$60 billion (S$100 billion) a year, dwarfing most of its neighbours. China is represented as Germany a century ago, rife with internal social tensions, growing nationalism and xenophobia, and seeking its own place in the sun.

The fourth one, which I'm leaning towards, is of market democratisation - that China has no option in the long run but to integrate itself into a pre-constituted world.

Here, China is the growth miracle, enjoying 9 per cent growth year on year right through to 2030, when it begins to overtake Japan. The communist system is a legacy of its past and extracting itself from that is the name of the game.

It is heading towards absorbing the norms of the Western world, introducing the rule of law, greater political freedoms, modern means of communications and there's no going back.

When you join the rest of the world, you do so on the rest of the world's terms.

This does not mean China will begin to imitate the West, but there will be an evolution of its existing systems with more accountability built into it.

A The key signs are the achievement of China's diplomacy in entering the World Trade Organisation, accelerated by the leadership changes in China in 1998 from Mr Li Peng to Mr Zhu Rong Ji, followed by winning the 2008 Olympic Games.

Today, the expectations of the whole of China and the international business community are riding on 2008 - which has become the equivalent of the European Commission's creation of an internal market in 1992.

In China's case, having won this victory means four billion people worldwide will be watching the Beijing Games. It's self-evident that increasingly over the next few years, journalists and TV crews will be walking around China turning the spotlight on human rights, labour abuses and legal biases. Too much of this would not give China a good image.

The No. 1 priority of the Chinese leadership today is prestige and status. And that is bestowed, frankly, not by themselves but by the rest of the world, particularly the international media.

I am anticipating that there will be subtle changes in political norms in China, just as WTO membership has introduced global business norms such as transparency.

A recent example was Sars, where we had the typical Marxist-Leninist response for the first five months, before the World Health Organisation stepped in and President Hu Jintao declared the country would introduce transparency into health policy in China.

That was rather like Deng Xiaoping saying in 1992: 'It's glorious to get rich'. Now the message is it's glorious to be transparent. There's the recognition that if you hold to your own old ways of keeping silent, you could find yourself in big trouble.

China now knows it is highly dependent on what goes on in the US. They are aware they can't just be observers of world developments but have to become co-participants and co-shapers, which is why I believe they are on a voyage towards democratisation.

From village elections to allowing more separation of political powers in Shenzhen, all these add up to a statement that China is thinking of developing new political norms that signal to the world that it realises the days of sticking to the old status quo are over.

The Chinese government also realises that managing perceptions about China is much more complicated today.

In the 1980s and 1990s, this was how the leadership phrased it: 'We mainland China are not a great power, just a normal country. We are no different from everybody else. We don't know what you are worried about.'

Today, China knows that people are more sophisticated and they have to deal with expectations in all domains. And that is why they are widely soliciting ideas on how to enter the international system more smoothly.

Q Others like The Coming Collapse Of China's author Gordon Chang have predicted the Chinese economy will collapse in five to 10 years as its political system disintegrates. How much stock do you place in the many obstacles threatening to derail the Chinese market economy?

A Well, I don't agree with him, but his thesis of a China on the verge of collapse is not a foolish one. Mr Chang's position is that the party state in China is ideological. It may recognise the problems, which have been around for the last 20 years, but it is incapable of dealing with them because it will never give up its monopoly. There is going to come a time very soon when people are going to be so angry they will rise in revolt and revert to the tragedies of the past.

I believe he's wrong. I don't believe ideology is in the driving seat. I believe pragmatism is. This is an extremely flexible party which has no justification for staying in power other than performance.

Its performance criterion is to deliver a better lifestyle. Its ideology is best expressed by Deng's famous quote about it doesn't matter what colour the cat is, as long as it catches mice.

So I don't think collapse is around the corner. I don't see any opposition inside mainland China. I can see mobile phones and other telecommunication devices. I know there are house churches which are very active.

All these signs are there but what is the unity between unemployed peasants, Buddhists from Tibet, Islamists from Xinjiang province and discontented intellectuals? Where is the link? Very little. And where is the organisation that can bring them together?

But although China has got off in the new century on the right foot, I think we are in for a rough ride. It has never been and is not going to be smooth.

Take the problem of state enterprises, which accounts for only 40 per cent of total output but take up 80 per cent of total resources. So the question facing the government is how to unlock all the resources going to the state enterprises and feed the growth in financial markets that will encourage more private business, which account for 95 per cent of new jobs in China today?

But in the big cities of China, 90 per cent of the employed population are employed by the government or state enterprises.

So, for the party, it is a choice between massive unemployment in the cities or the destruction of its peoples' savings by pouring them into these loss-making state enterprises.

But one thing is clear. There is no going back or slowing down growth. Every year, the leadership knows it has to create 20 million new jobs. If it manages to produce only 12 million jobs, every year that comes by, there will be eight million new people on the labour market. It's a race against time. That's why China is so precarious.

Tell us about the four schools of thought on where China is headed today...
A The first school predicts a sudden regime death for the Chinese communist party. After 50 years in power, without a single election, it faces a crisis of legitimacy.
Signs of collapse lie all around, triggered by massive rural emigration, get-rich-quick practices, mounting corruption, lawlessness, widening income disparity, weak public finances and a proliferation of sects to fill the vacuum left by communist ideals.
The second view is that of China as a second-rank, medium-sized and introverted regional power. This notes that China formed 30 per cent of the world economy in 1820, fell to 6 per cent by 1950, fell to about 1.5 per cent by the time Mao died.
Now it's back up to 3.5 per cent, which shows some recuperation but is still well below 1950 levels. The view contends that the communist regime has been doing pretty well but continues to face huge problems, so don't take its threats and demands too seriously.
The third view is that China is an 400kg gorilla about to unleash itself in the world jungle. This view of a belligerent, assertive and rising power is widely represented in some circles in Asia-Pacific and the US.
The emphasis here is on the controversial size of its military budget, which is estimated to be about US$60 billion (S$100 billion) a year, dwarfing most of its neighbours. China is represented as Germany a century ago, rife with internal social tensions, growing nationalism and xenophobia, and seeking its own place in the sun.
The fourth one, which I'm leaning towards, is of market democratisation - that China has no option in the long run but to integrate itself into a pre-constituted world.
Here, China is the growth miracle, enjoying 9 per cent growth year on year right through to 2030, when it begins to overtake Japan. The communist system is a legacy of its past and extracting itself from that is the name of the game.
It is heading towards absorbing the norms of the Western world, introducing the rule of law, greater political freedoms, modern means of communications and there's no going back.
When you join the rest of the world, you do so on the rest of the world's terms.
This does not mean China will begin to imitate the West, but there will be an evolution of its existing systems with more accountability built into it.

So where do YOU fall amongst those four categories?

Of course you don't see the opposition. It's everywhere. Mobile phones without freedom of speech? Foreign churches without foreign ideas? American DVDs without American ideas?

Keep dreaming.

The internet connections that flow to the West carry millions of new minds every year. People will not be content to live as peasants under the Communist aristocrats forever, especially when they know full well how many rights the 'barbarians' enjoy.

Traditionally, that organization has been force. China is a wide country with many deep differences, both linguistic and cultural. Even among the Han they are far from monolithic. When freedom makes her bloody arrival in China, the call of separatism, now spoken in whispers, will be heard far and wide.

But although China has got off in the new century on the right foot, I think we are in for a rough ride. It has never been and is not going to be smooth

Like a man trying to walk without moving his right leg, China will soon find that without intellectual freedom, they will not be able to fully realize their potential. Once they dare to move the away from Total Obedience to the Chinese Communist Party, there will be a terrible breakdown in Chinese society. It will be for the best, in the long run, but it will indeed be a rough ride.

I find this article very interesting and generally like Singaporeans-- not only for their keen understanding of China but their distrust of communism.

However, the major fallacy in the essay is his belief that a Communist-Fascist elitist society will peacefully evolve into a somewhat autocratic but relatively free society like Singapore.

Communist-Fascist govenments do not ever voluntarly relinquish power or allow such evolution to take place. Autocratic anti-communist governments such as Taiwan under Chaing-Kai Shek, South Korea under Sygman Rhee and Singapore today do, however, evolve into functioning democratic republics.

I found the article very interesting also. I particularly like the format. Although I largely do not agree with the professor on many things, this is a very useful article for discussion purposes.

I think a lot of people talk of China but (as always) get divided up into camps, but don't talk about the facts.

Economically some describe China's economy as "good" or "bad" or "small" or "big"...but none of those are qualifiable measures. What one considers "good" is merely subjective, thus adding to the division amongst camps regarding China.

Of those 4 camps he mentioned, I am probably 40% in the second camp, 25% of the first and third camp, and 10% the last. I would be a pie chart of all of the above, not one or the other.

The only way we will end up with the last one is if we REALLY push them on it and seriously require it of them. It won't happen any time soon though.

the scenario that scares me is that the party, sensing collapse, uses nationalizm, particularly the Taiwan question, as a tool to weld together the nation state in a fight against a foreign threat.

with the demographics of China creating a surplus pool of warrior ants, it seems a natural step for some Chinese Hitler to take, and unfortunately it will probably resonate deeply amongst a large swath of the Chinese population.

the race is on between the burgeoning Chinese "middle class" who just want to make a living and the Chinese Communist/Military class, occasionally known as the PLA

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.