If you're ready to dissect a full take-down of the Chinese economic and political model, well here it is, from the author Gordon G. Chang. (Who will have an upcoming book, The Coming Collapse of China).
The main thrust of his argument is that China has already peaked.
Thus those who predict China's ascendancy as a global superpower are predicting far too much based on the country's recent performance.
They also fail to realize that China got a bit lucky:
So will ours be the Chinese century? Probably not. China has just about reached high tide, and will soon begin a long painful process of falling back. The most recent period of China’s fast growth began with Deng’s Southern Tour in early 1992, the event that signaled the restarting of reforms after the 1989 Tiananmen Square massacre. Fortunately for the Communist Party of China, this event coincided with the beginning of an era wherein political barriers to trade were falling and globalization was kicking into high gear, which set the table for a period of tremendous wealth generation.
It worked before, but now times are changing:
China’s economic model, which allowed the Chinese to take maximum advantage of boom times, is particularly ill suited to current global conditions. About 38 percent of the country’s economy is attributable to exports—some say the figure is higher—but global demand at this moment is slumping. (Last March, the normally optimistic World Bank said the global economy would contract in 2009 for the first time since World War II and that global trade would decline the most it had in eighty years.) Globalization, which looked like an inevitable trend in early 2008, is now obviously going into reverse as economies are delinking from each other. So China is now held hostage to events far beyond the country’s borders.
While we take issue with the idea that globalization is heading in reverse, at the very least the point about China facing some serious economic adjustment challenges holds. Globalization will continue and world trade will grow at a multiple of global GDP growth, as it has for decades. Yet it'll be far less driven by U.S. consumption than before.
Anyhow, Mr. Chang predicts a Chinese recession followed by stagnation. I think few would argue against the notion of a recession happening at some point. What makes Mr. Chang's assertion unique is that he predicts economic stagnation afterward, rather than continued robust growth.
But the economy could fail before stagnation eventually sets in. Prime Minister Wen Jiabao, to fund his stimulus plan, has forced state banks to create the greatest surge of lending in history. One state manager, Lin Zuoming of Aviation Industry Corporation of China, publicly complained last April that central government officials forced him to borrow the equivalent of $49.2 billion from twelve Chinese banks, saying he did not know what to do with all the cash.
Moreover, after listing China's many economic challenges, many of which readers of this site are now well aware of (Asset bubble risks, bad loans in the banking system, overcapacity in many industries, employment challenges, etc), he describes the unsustainable nature of China's political system with razor sharp succinctness.
Worse yet, even if the Communist Party could solve each of these specific problems in short order, it would still face one insurmountable challenge. The economic growth and progress of the last three decades, which makes so many observers believe in the inevitability of China’s rise, is actually a dagger pointed at the heart of the country’s one-party state.
Change, in general, is tough for reforming regimes. As Tocqueville noted, it was rising prosperity that created dissatisfaction in eighteenth-century France and paved the way for revolution. These same trends played out more recently in Thailand, South Korea, and Chinese-dominated Taiwan. And they are at work right now in China itself.
Senior Beijing officials now face the dilemma of all reform-minded authoritarians: the economic progress that legitimates their leadership endangers their continued control.
He ends with this anecdote, hinting that a political revolution might be sooner than many expect.
I was in a dingy walk-up in my dad’s hometown, Rugao. It’s a backwater town in Jiangsu Province. I was trying to talk to a group of residents, some young and a few elderly, about the Olympics. Nobody wanted to discuss the Games, which were dismissed as just another government-staged event. All they wanted to hear was news from the American campaign trail. They wanted to hear about John McCain and Barack Obama. They wanted to hear about the workings of democracy.
We have a feeling that Mr. Chang's long-term forecast is overly bearish. China will become an enormous superpower (While the U.S. will remain one as well, and could easily remain economically larger through 2050 thanks to excellent demographic trends)
We're more of the view right now that China could have an extremely tough adjustment period within the coming five years, perhaps involving a GDP recession and political turmoil, before then growing further. Yet at the same time, we find Mr. Chang's essay compelling. If you have some time, read the entire thing here.
(Via Abnormal Returns)
