Posted on 05/06/2005 8:54:13 PM PDT by Dr. Marten
China’s economy is a stunted giant
Peter Zhang
BrookesNews.Com
Monday 21 March 2005
Many American conservatives pay a great deal of attention to China’s military ambitions and potential — and so they should. But to do so while ignoring China’s economic situation is to show poor judgement. Beijing fully understands, even if most of these conservatives do not, that to successfully wage full-scale war against a highly advanced economy requires an economy at a similar stage of development.
When several years ago Jiang Zemin stated that we “should focus our limited funds on cutting-edge areas of military science and technology” he certainly alarmed many. But the word “limited” should be carefully noted. China is still a very poor country by any Western measure. The regime’s increased expenditure on sophisticated weaponry to counter the American presence should be viewed in this light.
Now a country’s wealth is not measured in terms of dollars but in its productive capacity. In that respect, and it is the only one that really matters, China lags woefully behind the West, especially America — a situation that Mao’s economic lunacies gravely aggravated.
Understanding this fact helps put China’s technology imports into perspective. What China lacks is not technology but capital. All the technology in the world cannot help her if she lacks the capital through which to apply it. This is easily understood once we realise that capital embodies technology.
Sure, Beijing has ICBMs aimed at American cities, and this should be cause for concern. However, it was not that many years ago when so-called sophisticated observers mistook the Soviet Union’s military hardware as evidence of a robust and growing economy when the very opposite was true.
Beijing has not forgotten that it was the failure of central planning to generate the necessary resources that finally caused the Soviet Union to collapse. A collapse, I might add, that was accelerated by the Reagan military build up. The military giant was found to be an economic pygmy in a state of terminal economic decline.
The similarities between China’s apparent military strength and the situation in the Soviet Union shortly before its demise should not be neglected. This is not to suggest that China is about to disintegrate, only that statistics and appearances should not be taken at face value.
To get a better understanding of China’s situation requires the examination of some economic facts that readers might find surprising and even heartening — but not if they are living in China.
It should always be recalled that genuine economic growth is a resource generating process. Therefore the greater the growth the greater will be the amount of available resources. It doesn't take an economics degree to see what this means for military strength.
Now savings is the material basis of growth. Because of this many have assumed that China’s huge pool of personal savings will quickly propel her into the foremost ranks of the world’s richest and most powerful countries. Alleged growth rates of 8, 10, 11 and 12 per cent lend weight to this view. That progress has been made is true. It is also true that the growth figures are useless. Not even Beijing trusts them, realising they have been inflated by a number of factors.
A considerable proportion of output consists of poor quality goods from state companies. Though these goods go unsold or are ‘recycled’ they are still given monetary values which are then included in the GDP figures. Huge amounts of savings that could go into expanding the capital structure have been wasted in keeping these industrial dinosaurs operating. A clear case of the state misdirecting capital on a massive scale.
Other examples of the misdirection of capital by the state are to be found in all manner of uneconomic projects that various provinces have undertaken. Nevertheless, they still become part of GDP. In addition, the state has fallen into the grievous error of implementing Keynesian policies.
Trade and foreign investment figures demonstrate that China's economic success has been greatly exaggerated. China accounts for about 11.5 per cent share of world GDP compared with about 25 per cent for America. But this is not a particularly impressive figure when, for example, we factor in differences in population size.
Furthermore, ignoring the fact that China’s GDP has been inflated, there is the other fact that her exports are overwhelmingly of a labour intensive nature. Looked at in this light we can see that there is nothing special about China’s export record, despite the panicked response of some observers.
China receives, despite its size and potential, only about 10 per cent of global direct foreign investment. Although this is not a particularly striking figure, particularly considering her size and potential, she has still been accused of sucking up foreign investment by unfair means.
But direct foreign investment is a rather vexed issue. It has been argued that a great deal of this investment actually originates in China but was booked in Hong Kong for tax reasons before being redirected back to the mainland. There is also the suggestion that a significant portion of this investment comes from ethnic Chinese resident elsewhere.
Then there is the question of why China should be so reliant on foreign investment when household savings are 45-50 per cent of GDP. It has been mooted that foreign investment is being sought to compensate for savings being used to subsidise large sections of the economy.
Now there are warning signals that China is heading for a rapid slowdown. Thanks to massive credit expansion investment has greatly exceeded savings. This is a fancy way of saying that inflation is being used to finance unsound investments that will have to be liquidated at a later date. This can only have the effect of wasting more valuable capital.
What we have is a puny economy that is being made to stand on political stilts in order to make itself look bigger and more important than it really is — or will be for some time.
It will be a great many years before China can pose a real military threat to the US, unless Americans do something incredibly stupid like handing both Houses and the Oval Office over to the Democrats and the likes of Hillary Clinton. Nevertheless, Beijing’s capacity for political and military mischief-making should not be underestimated or ignored.
China Ping.
LOL
Thats a interesting article. It fails to mention that one of the main reasons why the USSR fell was it wasn't trading(small amount) with the US. They internally refused to create anything except perhaps weapons, nuclear meltdowms, hockey teams and vodka. Thats not the case with China. Our capitalism is supporting their communism.
Agreed. China seems to have really learned from the mistakes of the Soviets. They are building up their economy quietly and quickly. Once they surpass us (in about 15 years, based on the data in this article - maybe sooner, in reality), then they can get to weapons production.
It would be nice to take them out now, while we're still able. And if we're lucky, they'll give us a chance (with Taiwan, North Korea, or Japan).
Huh?
China may not become a superpower, but it can create a huge mess when its economy finally goes down in a combination of credit crunch and labor strife. That is what we would witness.
Fortune 500 types are trying their best to ignore what angry peasants and workers would do. They only thought about selling one billion pair of shoes, TV sets, etc. They have not thought about the down side that hundreds of millions of them could riot and rampage instead of being happy customers.
I think this might be understating Chinese economic potential. After all, they have a real competitive advantage when it comes to labor costs.
"China accounts for about 11.5 per cent share of world GDP
Huh?"
Sounds low to me also. Considering that they're using between 30 and 40 percent of steel, concrete, and lumber, it's probably safe to assume that they're closer to 15%, or more.
It doesn't take a lot of searching with a reliable search engine to find tons of news items describing the huge numbers of nonperforming loans that plague Chi-com banks. These loans keep Mao-era state owned enterprises "operating." Shutting them down would put millions more out of work and the Party fears the result would be a revolution.
It doesn't take a lot of searching with a reliable search engine to find tons of news items describing the components of the Chi-com's inflated GDP just as the components are described here.
Then there is the question of why China should be so reliant on foreign investment when household savings are 45-50 per cent of GDP.
One news item I recall stated that the Party does not dare waste those savings lest there be immediate revolution. The Party needs FDI. Western useful idiots happily transfer the funds.
The only argument I have with the article is "so-called sophisticated observers mistook the Soviet Union’s military hardware as evidence of a robust and growing economy."
B.S. Com-symps and outright communists praised Uncle Joe's workers' paradise but not even liberals were fooled. On the contrary liberals, progressives, and "free traders" pushed hard to transfer technology and wealth to the Soviets to help them become something that resembled an economy lest we play into the hands of the Soviet "hard liners" and we cause a war. Better minds prevailed. Can't say that about how we kowtow to the Chi-coms.
Ping
While I do not disagree that leaving large amounts of real resources and access to lots of labor in forms that destroy value is "misdirecting", this stuff is "savings" or "capital" in no real economic sense. An industry that destroys value is not "wasting savings", it is reducing income.
If you count every loss in the economy - or better still, every mere *cost* in the economy - as "savings" on the part of the workers who don't get value, and "investment" on the part of the industry that only maintains its existing capital stock, you will quickly find very high "rates of saving" and even higher ones of "investment" - but mysteriously, the output of the wealth destroying industry will not go up from its vastly expanded capital. Because its capital hasn't expanded, only been maintained. It just took a capital market transaction to do it, because the industry runs at a massive loss.
How is it that investment vastly exceeds savings while savings are supposedly 45-50% of GDP? Does anybody remotely believe Chinese families just choose to live on half of what their "income" is? Their income is what they are living on, in reality. And any increase in that figure over time, yes, but the latter is the only value that can be given to their "investment". As their real consumption is rising, the real value of their capital is increasing - but only as fast as that. The original cost side of the ledger for anything is irrelevant to real income. The society as a whole can't eat its inputs, only its outputs.
We don't bother making this correction in the west, because real activities that destroy value do not continue, or have to be financed out of taxation or income from capital. They are not financed by capital market transactions, because nobody forces feeds resources into losing propositions. But in any economy with a huge and inefficient state run sector, it has to be made. Otherwise, you just migrate over time to single entry accounting, where all costs are capital transactions and all sales are income.
BFLRAATWMBICF: (Bump for later reading at a time when my brain isn't completely fried.)
China is a communist country.
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