Sick Red Dragon

I tell folks all the time that China, much like the hype of Japan and the Arabs taking over everything is a whole lot of hype. (Also the same with the EU being a dominant power for the ages.). Many many very smart folks however believe the hype.

Here in Foreign Policy and here from Columbia University we see two very smart people laying out points I expressed far less eloquently.

First lets folks on the “Grey Bomb” Scenario. You think it’s just a problem in the west with the massive social welfare infrastructure? Oh no the “Grey Bomb” is coming and coming hard to the PRC to.

Based on United Nations statistics and data provided by the Chinese government, it was estimated in 1987 that in 2000, the population over 60 years old (the retirement age is 60 in urban areas) would number 127 million, or 10.1 percent of the total population. The projection for 2025 was 234 million elderly, or 16.4 percent. According to one Western analyst, projections based on the 1982 census show that if the one-child policy were maintained to the year 2000, 25 percent of China’s population would be age 65 or older by the year 2040.

Why is the massive aging population a problem? Well when you reduce the number of young folks who can take the jobs it will mean either A) Massive immigration (which will never happen in china for cultural reasons) of B) Economic collapse.

This is made more problematic by the fact the PRC doesn’t have good population data and this problem could be MUCH MUCH worse

The gaps in the population totals and vital rates for the crisis period 1958-1961 are probably illustrative” (Aird 273). The government needed to make policy based on data that it wanted to suppress from public awareness. Consequently, in 1979, no population count had been staged for fifteen years (Scharping). The People’s Republic conducted censuses in 1953, 1964, and 1982. The questions only included age, sex, nationality, and relationship to the head of the house hold. The 1979 Communique, one of the most complete censuses, provided the Chinese population records without Taiwan (Aird). In 1987, the government announced that the fourth national census would take place in 1990 and that there would be one every ten years thereafter.

But the collapse is far more then economic as even the potential to change the problem in 2040 won’t happen because of preferences of births

Here are the startling numbers.

In 1995, there were 1,166 boys born for every girl (Scharping 290). In 1994, there were 1,211; in 1993, there were 1,213. These numbers add up over time, leading to a population of many unmarried men.

Some of this may be solved by importing brides from Chinese communities abroad, some perhaps by marriage to foreigners (which I see from my understanding of Chinese culture as less likely) but in 2014 or so when these kids start becoming of marital age and they don’t find anyone to take as a spouse if they have the freedom to leave china for better waters as our increasingly integrated global economy shows they will. I also don’t know what a mostly bachelor nation of china will do but tons of unmarried men will be very hopeless and I don’t like that as a prospect for our future.

I’ve also seen elsewhere that these kids born of the one child policy generation have no desire to care for their parents which means in the 2010s and the 2020s China will either have to shift economic assets to the geritol economy (rather then butter or guns) which means again we will be seeing a decline in the economy of china assuming nothing like a plague happens to mend these unsupportable population numbers.

But surely their economy is a Juggernaut now right….right?

Well….. lets look at that.

Behind the glowing headlines are fundamental frailties rooted in the Chinese neo-Leninist state. Unlike Maoism, neo-Leninism blends one-party rule and state control of key sectors of the economy with partial market reforms and an end to self-imposed isolation from the world economy. The Maoist state preached egalitarianism and relied on the loyalty of workers and peasants. The neo-Leninist state practices elitism, draws its support from technocrats, the military, and the police, and co-opts new social elites (professionals and private entrepreneurs) and foreign capital—all vilified under Maoism. Neo-Leninism has rendered the ruling Chinese Communist Party more resilient but has also generated self-destructive forces.
To most Western observers, China’s economic success obscures the predatory characteristics of its neo-Leninist state. But Beijing’s brand of authoritarian politics is spawning a dangerous mix of crony capitalism, rampant corruption, and widening inequality. Dreams that the country’s economic liberalization will someday lead to political reform remain distant. Indeed, if current trends continue, China’s political system is more likely to experience decay than democracy. It’s true that China’s recent economic achievements have given the party a new vibrancy. Yet the very policies that the party adopted to generate high economic growth are compounding the political and social ills that threaten its long-term survival.

In other words they are still on the Communist plantation according to this article from Foreign Policy magazine… so lets go more into the nuts and bolts of the problems

The Chinese state remains deeply entrenched in the economy. According to official data for 2003, the state directly accounted for 38 percent of the country’s GDP and employed 85 million people (about one third of the urban workforce). For its part, the formal private sector in urban areas employed only 67 million people. A research report by the financial firm UBS argues that the private sector in China accounts for no more than 30 percent of the economy. These figures are startling even for Asia, where there is a tradition of heavy state involvement in the economy. State-owned enterprises in most Asian countries contribute about 5 percent of GDP. In India, traditionally considered a socialist economy, state-owned firms generate less than 7 percent of GDP.

First of all there is no way the kabillions upon kabillions of dollars in FDI and portfolio investment is going into that 30% private sector of the economy. We hear a lot about the PRC buying up our debt instruments well the funds from those debt instruments along with loans from folks like Bank of America are propping up the building of the ginormous state sector of the economy.

Even is you assume the PRC’s 38% figure is accurate the billions in US capital going to china has to be financing state sector parts of the economy in a big way. And since China has moved toward this paradigm since the 1970s I’d find this the maxim the current government is willing to go to in liberalizing the economy which has state involvement in GDP that would make Sweden pleased does not show a strong economy at all but an economy where the state has a very vested interest in Enron-like inflating of numbers. (look to Sweden as an example and wonder what institutional investors would think there, but China is really doing the same kind of things)

Ok but the 38% figure really isn’t supportable as the article in Foreign policy shows here:

But China’s tentacles are even more securely wrapped around the economy than these figures suggest. First, Beijing continues to own the bulk of capital. In 2003, the state controlled $1.2 trillion worth of capital stock, or 56 percent of the country’s fixed industrial assets. Second, the state remains, as befits a quintessentially Leninist regime, securely in control of the “commanding heights” of the economy: It is either a monopolist or a dominant player in the most important sectors, including financial services, banking, telecommunications, energy, steel, automobiles, natural resources, and transportation. It protects its monopoly profits in these sectors by blocking private domestic firms and foreign companies from entering the market (although in a few sectors, such as steel, telecom, and automobiles, there is competition among state firms). Third, the government maintains tight control over most investment projects through the power to issue long-term bank credit and grant land-use rights.

They control the fixed assets making developing a private economy of scale really impossible. They control who gets the land and they control who gets domestic capital. So realistically foreign interests aren’t dumping all that money in less then half of the fixed industrial assets they simply can’t be dumping the money that way. Again we see Foreign Capital is propping up state interests. If we look at the Automobile sector (which has gotten some coverage in the US recently) they control who gets in the market and who can build. They have their own firms playing the game so why would they allow people to take away from that massive investment? Yet our auto firms have formed partnerships and passed key technologies over to the PRC.

Furthermore Over half the executives in Chinese firms, even those that are on paper shareholder owned are appointed by the regime which makes their performance tied to the Party leadership’s ability to hold power. To keep from rocking the boat these companies cannot act in a way that is capitalist. Yet we are giving them money

Today, Beijing oversees a vast patronage system that secures the loyalty of supporters and allocates privileges to favored groups. The party appoints 81 percent of the chief executives of state-owned enterprises and 56 percent of all senior corporate executives. The corporate reforms implemented since the late 1990s—designed to turn wholly state-owned firms into shareholding companies—haven’t made a dent in patronage. In large- and medium-sized state enterprises (ostensibly converted into shareholding companies, some of which are even traded on overseas stock markets), the Communist Party secretaries and the chairmen of the board were the same person about half the time. In 70 percent of the 6,275 large- and medium-sized state enterprises classified as “corporatized” as of 2001, the members of the party committee were members of the board of directors. All told, 5.3 million party officials—about 8 percent of its total membership and 16 percent of its urban members—held executive positions in state enterprises in 2003, the last year for which figures were available.

This also shows that their corporate policy is designed to maintain political control over the population. Be a good boy and buy into the communist system and you get to manage a plant for us, and ostensibly be part of “capitalism”

But surely you’re saying all this capital can’t be going to bad ends? I mean big companies are smart right? Well not only are big companies rarely effective capitalists there is a poker saying “Don’t send good money after bad” you wouldn’t say this kind of a saying if their wasn’t an urge to do that…to try to make that lost money good and yours again.

The World Bank estimates that, between 1991 and 2000, almost a third of investment decisions in China were misguided. The Chinese central bank’s research shows that politically directed lending was responsible for 60 percent of bad bank loans in 2001–02. The problem persists today. Chinese economic planners revealed in early 2006 that 11 major capital-intensive manufacturing industries were overproducing. For example, the country’s steel industry, the world’s largest, has 116 million tons (or about 30 percent) of excess capacity.


But the government makes those bad loans your saying.

What was it I was saying about private investment can’t be just in private institutions… here is where it comes to roost. If China can in profitable and effective institutions get loans they can funnel those loans to the dead ends of the economic spectrum. Because in a nation of over a billion people massive unemployment is simply impossible to tolerate, and when you are a repressive regime it makes a revolution both bloody and likely.

But what about the record growth you say? Well that’s not the only record the PRC has generated economically.

State enterprises are also miserably unprofitable. In 2003, a boom year, their median rate of return on assets was a measly 1.5 percent. More than 35 percent of state enterprises lose money and 1 in 6 has more debts than assets. China is the only country in history to have simultaneously achieved record economic growth and a record number of nonperforming bank loans.


35% of state enterprises lose money. 1 in 6 has more debts than assets. That’s not a positive sign at all there but the worst is more bank loans are going bad in China then ever in history as they have had unprecedented growth. That shows unquestionably that Capital going to china is going down a very large rathole.

And more on the rathole for a moment…

But China’s politically connected tycoons have cashed in on China’s real estate boom; nearly half of Forbes’ list of the 100 richest individuals in China in 2004 were real estate developers.

Why the focus on Real Estate Developers Larry?

For the first time, homeowners here are learning what it means to have an upside-down mortgage — when the value of a home falls below the amount of debt on the property. Recent home buyers are suing to get their money back. Banks are fretting about a wave of default loans.
“The entire industry is scaling back,” said Mu Wijie, a regional manager at Century 21 China, who estimated that 3,000 brokerage offices had closed since spring. Real estate agents, whose phones wouldn’t stop ringing a year ago, say their incomes have plunged by two-thirds.
Shanghai’s housing slump is only going to worsen and imperil a significant part of the Chinese economy, says Andy Xie, Morgan Stanley’s chief Asia economist in Hong Kong.
Although the city’s 20 million residents represent less than 2% of China’s population of 1.3 billion, Xie says, Shanghai accounts for an astounding 20% of the country’s property value. About 1 million homes in Shanghai alone — about half the number of housing starts for the entire United States in 2004 — are under construction.

Over half the Forbes 100 Richest men in China are responsible for Building up property values in China that are now in Shanghai beginning to collapse and lead to a default of loans. Like some form of Bizarro world wealth redistribution money is being taken from the Banks and the people and given to the developers as part of China’s attempt at “Capitalism”

But what is going as an untold story is (to steal from John Edwards) a “Two China’s” problem.

In rural areas, home of China’s poorest citizens, 78 percent of the education budget must be raised from peasants through local taxation and fees, while Beijing provides only 1 percent of the funding for rural education.

In public health, the consequences of misspending are even more severe. Government money, which accounted for 36 percent of all health expenditures in the 1980s, plunged to less than 15 percent by 2000. China has hospitals and equipment, and its per capita spending is higher than comparable developing countries. But these resources are among the most unequally distributed in the world. The World Health Organization rated the fairness of the Chinese healthcare system below all countries except Brazil and Burma. According to China’s own Ministry of Health, two thirds of the population lacks any type of health insurance, and about half of the sick do not seek professional medical treatment at all.

So a cadre of poor people, uneducated and unable to receive health care exists in the periphery of china. If they want to receive any of those things they have to raise taxes on an area where we don’t see Boeing opening a plant and where the chance to make tennis shoes for Wal-Mart won’t be coming any time soon. You combine this with the demographic problems china is facing we see a real risk of serious large scale civil insurrection.

In the Industrial sectors where people have skills that can be bought off people are getting state perks and the chance to “own” a private company –under state supervision- but in the rural areas all they have are building projects and land grabs which aren’t going well.

Big companies are investing in China and very literally flushing money down the toilet. They have to hire people to run the brand for them in China in some industries, or “partner” with the state. This means that State industries are using big business to help them subsidize their massive regime.

If we see in the 2010s or 2020s large scale Chinese militarism or break down of public order untold billions of the money is as good as gone.

And the US will still sit atop the world as the Super-Power who never wanted the job, and whom will not be rested from its dominant position any time soon

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