Monday, November 22, 2010

Is China a “Colossus” or a Giant “House of Cards”?

Is China a colossus with the power to reshape the world, or is it beset by so many issues that it is struggling just to hold everything together? Elizabeth C. Economy has written an article for the November/December 2010 issue of Foreign Affairs in which she appears to say yes to both questions. The article is titled The Game Changer: Coping with China’s Foreign Policy Revolution.  She opens with these comments.

“After decades of following Deng Xiaoping's dictum ‘Hide brightness, cherish obscurity,’ China's leaders have realized that maintaining economic growth and political stability on the home front will come not from keeping their heads low but rather from actively managing events outside China's borders. As a result, Beijing has launched a ‘go out’ strategy designed to remake global norms and institutions. China is transforming the world as it transforms itself. Never mind notions of a responsible stakeholder; China has become a revolutionary power.”

“China's leaders once tried to insulate themselves from greater engagement with the outside world; they now realize that fulfilling their domestic needs demands a more activist global strategy. Rhetorically promoting a "peaceful international environment" in which to grow their economy while free-riding on the tough diplomatic work of others is no longer enough. Ensuring their supply lines for natural resources requires not only a well-organized trade and development agenda but also an expansive military strategy. The Chinese no longer want to be passive recipients of information from the outside world; they want to shape that information for consumption at home and abroad. And as their economic might expands, they want not only to assume a greater stake in international organizations but also to remake the rules of the game.”
Clearly China is a major player in the world because of the size of its economy, the size of its population, and its strategic location in the heart of Asia. The question to ask is: “Does this make China a ‘revolutionary power,’ one able to ‘remake the rules of the game’?” If China were able to continue its economic growth into the indefinite future and maintain a healthy and stable government and citizenry throughout that process, then one would have to agree with that description. Many people, including Economy herself, have doubts.

The author discusses a number of China’s actions and initiatives that have been discussed here before. The more aggressive naval posture was discussed here. Its increased emphasis on developing or pilfering technologies to be used for proprietary purposes was discussed here. China’s consolidation of power and influence in order to protect their access to needed resources was discussed here. Finally, Economy’s book, The River Runs Black, in which she details the enormous environmental burden that China must assume, was discussed here.

The author adds some new information on China’s plans for the future. The ambition incorporated in these plans is staggering.
“Yet for China's current leaders, Deng's revolution has run its course. They must now confront the downside of 30 years of unfettered growth: skyrocketing rates of pollution and environmental degradation, rampant corruption, soaring unemployment (reports range from 9.4 percent to 20 percent), a social welfare net in tatters, and rising income inequalities. Together, these social ills contribute to over 100,000 protests annually. In response, China's leadership is poised to launch an equally dramatic set of reforms that will once again transform the country and its place in the world. If all goes according to plan, in 20 years or less, China will be unrecognizable: an urban-based, innovative, green, wired, and equitable society.”

“At the heart of this next revolution is Beijing's plan to urbanize 400 million people by 2030. In 1990, just 25 percent of all Chinese lived in cities; today, that number is almost 45 percent. By 2030, it will be 70 percent. Urbanizing China will allow for a more effective distribution of social services and help reduce income disparities. An urban China will also be knowledge-based. No longer content to have their country be the world's manufacturing powerhouse, China's leaders have embarked on an aggressive effort to transform the country into a leading center of innovation. Beijing is supporting research and development; recruiting Chinese-born, foreign-trained scientists to return to China to head labs and direct research centers; and carefully studying the models of innovation that have proved successful in the West.”

“Even as China moves ahead with its bold plans to transform its economy and society, new pressures and challenges will emerge. The resource demands of rapid urbanization are substantial. Half of the world's new building construction occurs in China, and according to one estimate, the country will construct 20,000-50,000 new skyscrapers over the coming decades. Shanghai, already the country's most populous urban center, will soon be surrounded by ten satellite cities -- each with half a million people or more. Connecting all these and other new cities throughout the country will require 53,000 miles of highway. Once the cities are built and connected, the demand for resources will continue to grow: urban Chinese consume more resources than those in rural areas (roughly 3.5 times as much energy and 2.5 times as much water), placing significant stress on the country's already scarce resources. By 2050, China's city dwellers will likely account for around 20 percent of global energy consumption.”

“In China, the amount of water available per person is one-fourth the global average. China is water rich in absolute terms, but given the number of people, the levels of pollution, and the location of China's water resources, water is scarce throughout much of the country -- and China's leaders fear serious future shortages due to rapidly growing household and industrial demand. Consequently, they are moving quietly but aggressively to dam and divert the water resources of the Qinghai-Tibetan plateau, a move that will affect millions of people outside the country's borders. China's river-diversion initiatives are generating significant concern in Bangladesh, India, and Kazakhstan, among other countries, and paving the way for future regional disputes: the economic livelihood of millions of people outside China's borders depends on access to these water resources.”
The author seems to be saying that China has to succeed in this ambitious plan because it has no other choice: the current path is unsustainable.

Is the planned path sustainable, even assuming one can get there? Let us remind ourselves of some of the author’s own words from her book.
“....officials in Shanghai, Guangzhou, and Taiyaun have all cited water scarcity as the number one environmental concern, and the Ministry of Water Resources predicts a ‘serious water crisis in 2030 when the population reaches 1.6 billion and China’s per capita water resources are estimated to decline to the World Bank’s scarcity level. According to the World Bank, 400 of China’s 660 cities are already short of water and 260 million people find it difficult to get enough water for their daily needs. Moreover, 300 million people in rural areas lack access to piped water. In the absence of adequate piped water, people must rely on surface water, which is often highly contaminated due to run-off from surrounding farm land and factories. As a result, 700 million people in China drink water contaminated with human and animal waste.”

“Over the past twenty years, main stream water flows have declined by 41 percent in the Hai River Basin, 15 percent in the Yellow River and Huai River basins, and 9 percent in the Liao river basin. Since 2004, Beijing has resorted to drawing water from fragile groundwater supplies as deep as one kilometer below the surface. Even still, the city’s per capita water availability has plummeted from 1,000 cubic meters in 1949 to less than 230 cubic meters in 2007....China’s plundering of its groundwater reserves, which has created massive underground tunnels, is causing a corollary problem. Some of china’s wealthiest cities are sinking—in the case of Shanghai and Tianjin, by more than six feet during the past fifteen years. In Beijing, land subsidence has destroyed factories, buildings, and underground pipelines, and is threatening the city’s main international airport.”

“ investigation conducted by the Ministry of Water Resources found that drinking water in 115 out of 118 cities surveyed was polluted, largely by arsenic....and fluoride....”
And now they want to add 400 million more people to their cities. Taking some water away from other countries does not seem sufficient to make this work. Also for consideration:
“Beijing is one of twenty Chinese cities among the thirty world cities with the most polluted air. A 2005 survey determined that half of China’s cities did not meet the governments own air quality standards. Moreover, according to the World Bank, in 2007 only 1 percent of China’s urban population breathed air considered safe by European Union standards....China’s sulfur dioxide emissions, which cause acid rain, are now the highest in the world, affecting one-third of China’s territory. Acid rain poisons the country’s fisheries, ruins cropland, and erodes buildings....Japan and South Korea also blame China for much of their problems with acid rain, a situation that has contributed to ongoing tensions in the region.”

“A joint study by the World Bank and SEPA in 2007 estimated that 650,000 to 700,000 people in China die prematurely from air pollution annually. In the country’s most polluted cities, when children breathe, it is the equivalent of smoking two packs of cigarettes per day.”
And now they want to add 400 million more people to their cities? Somehow this does not add up.

All the changes the author described will require enormous levels of resources. That has to presuppose a continuous healthy growth in the economy. Can they really pull that off? Here are the thoughts on that subject from one observer.
“STRATFOR thus sees the Chinese economic system as inherently unstable. The primary reason why China’s growth has been so impressive is that throughout the period of economic liberalization that has led to rising incomes, the Chinese government has maintained near-total savings capture of its households and businesses. It funnels these massive deposits via state-run banks to state-linked firms at below-market rates. It’s amazing the growth rate a country can achieve and the number of citizens it can employ with a vast supply of 0 percent, relatively consequence-free loans provided from the savings of nearly a billion workers.”

“It’s also amazing how unprofitable such a country can be. The Chinese system, like the Japanese system before it, works on bulk, churn, maximum employment and market share. The U.S. system of attempting to maximize return on investment through efficiency and profit stands in contrast. The American result is sufficient economic stability to be able to suffer through recessions and emerge stronger. The Chinese result is social stability that wobbles precipitously when exposed to economic hardship. The Chinese people rebel when work is not available and conditions reach extremes. It must be remembered that of China’s 1.3 billion people, more than 600 million urban citizens live on an average of about $7 a day, while 700 million rural people live on an average of $2 a day, and that is according to Beijing’s own well-scrubbed statistics.”

“Moreover, the Chinese system breeds a flock of other unintended side effects."

"There is, of course, the issue of inefficient capital use: When you have an unlimited number of no-consequence loans, you tend to invest in a lot of no-consequence projects for political reasons or just to speculate. In addition to the overall inefficiency of the Chinese system, another result is a large number of property bubbles. Yes, China is a country with a massive need for housing for its citizens, but even so, local governments and property developers collude to build luxury dwellings instead of anything more affordable in urban areas. This puts China in the odd position of having both a glut and a shortage in housing, as well as an outright glut in commercial real estate, where vacancy rates are notoriously high.”

“There is also the issue of regional disparity. Most of this lending occurs in a handful of coastal regions, transforming them into global powerhouses, while most of the interior — and thereby most of the population — lives in abject poverty.”

“There is also the issue of consumption. Chinese statistics have always been dodgy, but according to Beijing’s own figures, China has a tiny consumer base. This base is not much larger than that of France, a country with roughly one twentieth China’s population and just over half its gross domestic product (GDP). China’s economic system is obviously geared toward exports, not expanding consumer credit.”

“Which brings us to the issue of dependence. Since China cannot absorb its own goods, it must export them to keep afloat. The strategy only works when there is endless demand for the goods it makes. For the most part, this demand comes from the United States. But the recent global recession cut Chinese exports by nearly one fifth, and there were no buyers elsewhere to pick up the slack. Meanwhile, to boost household consumption China provided subsidies to Chinese citizens who had little need for — and in some cases little ability to use — a number of big-ticket products. The Chinese now openly fear that exports will not make a sustainable return to previous levels until 2012. And that is a lot of production — and consumption — to subsidize in the meantime. Most countries have another word for this: waste.”
China has done virtually nothing to create an internal consumer economy. They must continue to keep the value of their currency low because raising it and lowering imports would be a disaster.

As Economy points out, there are about 100,000 protests annually by Chinese citizens. Does this sound like stability? Recently, during the naval dispute with Japan, China authorized some anti-Japanese protests. This article describes what happened.
“Many reports from China say small anti-Japanese demonstrations were approved by the authorities in the last few days.”

“But these demonstrations were taken over by thousands of people venting their frustrations and unhappiness with their government.”

“Several of these approved demonstrations are reported to have quickly spun out of control, as protesters used cellphone text messaging and social networks to bring thousands of young people onto the streets.”

“In Chengdu, the capital of Sichuan province, for example, the authorities approved an anti-Japanese rally on Oct. 16 for about 100 university students. But word of the protest spread quickly over the Internet and the demonstration drew more than 10,000 people. The protest turned violent and the police had a hard time restoring order.”
The price of food is increasing in China, as described in this article.
“China's government announced food subsidies for poor families Wednesday as it tries to cool a double-digit surge in prices that communist leaders worry might stir unrest.”

“Inflation is politically volatile in China, where poor families spend up to half their incomes on food. Rising incomes have helped to offset price hikes, but inflation erodes gains that help support the ruling Communist Party's claim to power.”
There seem to be more signs of instability than stability in China today. Two decades from now China will probably have a stable economy and society. I am doubtful that China will arrive at the precise point for which it is now planning, and I believe it is impossible to predict the path it will follow to get wherever it ends up.


  1. Well stated. What is not so clear, is the degree of uncertainty and urgency, with respect to local governments, which seem to lag in implementing national rectification policies.

  2. Too many people in China. It would be a great place for 150 million.
    Too many people in India. It is interesting that the two countries "touch" in the Tibetan mountains and water is becoming an issue there, because of reduced rainfall and climate change, even before the Chinese try to divert water.
    Let's hope that the US stays out of the potential conflict. We have no issues there...


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