As predicted in my book, “The China Crisis,” China’s economic structure is proving to be unsustainable.
In my last post, I argued why the China Evergrande bankruptcy is not the end of the economic crisis in China but just the beginning.
Knowing that such predictions have been made in the past by China observers, including yours truly, why should anyone think that it’s happening today?
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A bit of historical context helps provide an answer to this question.
In 2012, I was asked by Wiley and Sons to write a book on China’s economic structure from my contrarian point of view. You may or may not recall that, at the time, China was the economic marvel of the world. Unlike most observers, I could see several critical problems with China’s political economy model and wrote about them in “The China Crisis.”
I identified seven key areas—given the basis upon which China or, more accurately, the Chinese Communist Party (CCP) operated—that made China’s economic model unsustainable. I wasn’t the first to see this. Gordon Chang wrote about it in 2001 in his book, “The Coming Collapse of China.” Mr. Chang predicted a collapse by 2011, which, of course, did not occur. This is an update of sorts.
Instead, China’s economic clout and technological prowess continue to grow and develop. That explains why, at that time and for the next seven years, all kinds of terms were coined to describe China’s burgeoning economic status. There was the “Beijing Miracle,” “The China Model,” “Chinese State Capitalism,” and other glowing pronouncements that gave near-unanimous affirmation of China’s progress and prognosis for a bright future.
In fact, many experts, economists, and observers were predicting that China’s state capitalism would be the model for emerging nations around the world because of how fast it had transformed China’s economy. It was also predicted that China would soon eclipse the United States in GDP and replace it as the global hegemon.
Regarding this last prediction, it’s important to acknowledge that it appears as if it's actually coming to fruition. In that regard, however, keep in mind that it's mostly due to U.S. policy failures rather than what China is doing.
But even our leaders' traitorous actions that have aided our adversaries in Beijing can’t compete with or prevent the venal nature and deleterious policies that the CCP has inflicted upon the Chinese people for many decades. The United States and other Western nations’ financial and technological investments have certainly delayed the inevitable but won’t stop it.
At its root, of course, is the corrosive nature of corruption. For the CCP, corruption in the form of political graft, wholesale theft from the private sector, and abuse of the financial system are the means to maintain control and gain wealth. Obtaining absolute power is the end goal, not a healthy economy.
Below is a brief look at how seven factors erode the social and economic sustainability in China.
1. Excessive Overuse of Factors of Production
When greasing the palms of Party officials is the main requirement for a project or policy, waste and fraud are not only unavoidable but lead to inefficiency in leveraging factors of production. In 2013, China used 10 times more factors of production than the United States to produce the same product. Has that improved? It’s hard to say, as accurate statistics that reflect poorly on the CCP and Xi Jinping, in particular, are difficult to find.
2. Inefficient Allocation of Economic Goods, Activity
This is related to No. 1 and is manifested in many ways, such as the theft of profitable companies by the Party and turning them into inefficient, debt-ridden "zombie" state-owned enterprises that destroy value and efficiency. It also transfers wealth from the middle class to the Party elite.
3. Stifling Innovation in Middle Class
Lack of freedom of information and the punishment of violators stifles innovation and creativity. Individuals are not allowed to solve problems by themselves. Successful private firms can count on being confiscated by the state at some point. Successful entrepreneurs who speak out about the abuses of the CCP are disappeared and reeducated. This engenders total fear of and reliance upon the state, both of which are what the CCP wants. Crushing individual creativity and innovation stifles a nation’s greatest resource—its people.
Developed economies are based on a broad middle class—precisely what has not been attained in China.
4. Lack of Enforcement of Regulations, Standards
From critical areas such as food production to pharmaceuticals, corners are cut, and quality is compromised. Over the years, this not only negatively impacts the health and safety of the people, but it undercuts the authority and legitimacy of the Party.
5. A False Economy: Debt-based 'Growth' Is a Cancer on Economy
In a capitalist economy, most development is based on market need, which is determined by local prices and market conditions, which then attract capital. Distorted “development” driven by political expediency isn’t development but a waste of time, money, and resources.
The Evergrande collapse is a prime example of the CCP’s distortion of the economy. China’s overreliance on overdevelopment could be compared to healthy growth in muscle tissue from working out versus that of a cancerous tumor from exposure to toxicity. The former builds up strength and vitality; the latter destroys it. Thus, at some point, even state-owned debt from a state-owned central bank becomes unsustainable.
6. Rampant Pollution Making China Unlivable, Causing Social Unrest
China is one of the worst polluters in the world. For example, it is rapidly losing its arable land to toxicity from mining, manufacturing, and desertification. This is happening because decades of state ownership have led to indifference about what happens to the natural resources, also known as the “tragedy of the commons.” Losing arable land by either toxicity or desertification is not easily reversible and leads to greater dependence on external food sources to feed itself.
Water pollution is another environmental disaster brought about by the CCP. When I wrote “The China Crisis,” about 40 percent of China’s waterways either could not sustain life or were unsafe for human consumption. Today, that number is up to 70 percent. Moreover, 80-90 percent of its groundwater is undrinkable.
China’s air pollution is known for being the worst in the world, responsible for millions of premature deaths. State officials claim that air pollution is decreasing in China. Yet, at the same time, China is adding more coal mines for energy production, leading to more pollution, not less. The CCP’s inability to address its pollution crisis reveals its economic model's failures, adding to civil unrest rather than social support.
7. Dystopian Depression Among Young Generation
When young people lose faith in their nation, they lose faith in their future. One outcome of that pessimism is the decision not to have children. China is not alone in this phenomenon, but like South Korea and Japan, it’s a big problem. Without the energy, drive, creativity, and belief of the young, the fall in population and its effects on consumption, taxes, and other economic factors make China’s economic future bleak.
Unfortunately, its unbalanced social and economic structure will lead to more excessive actions, internally and externally, as economic and social conditions worsen.
James R. Gorrie is the author of “The China Crisis” (Wiley, 2013) and
writes on his blog, TheBananaRepublican.com. He is based in Southern
California.
