Monday, October 03, 2011

China -- Red Dragon or Paper Dragon

From what you read in such prestigious sources as the New York Times you would think that everybody should start learning Chinese because China is not only a rising military power but an economic power house that is overwhelming all competition. But is that a realistic appraisal of the situation? I think a little critical thinking may be in order.

First the New York Times is not noted for its veracity or being in love with capitalism nor is most of the American media The critical thinking seems to be reserved for American business and foreign policies rather than any critical analysis of what lies beneath the public policies and positions of the Peoples Republic of China. In fact when was the last time you saw any reference to China as the “People’s Republic of China”? Currently the PRC is simply referred to as China which may just be laziness of the part of the media but the fact is failing to call the PRC what it is in reality is misleading. The reality is that Communism or Marxism are demonstrable failures as a government. Furthermore Socialism as a governmental form is far from successful as can be seen in the current upheavals in Greece, Italy, France, and across Western Europe in general. The fatal flaw in these political philosophies is that their objective is employment not efficiency and wealth redistribution not wealth creation.

There is no free enterprise in the PRC in spite of appearances. Permitting a family or an individual to set up a noodle stand is not quite the same as opening a factory. The Chinese government permits these small businesses to operate more like a safety valve on a steam engine – the internal pressures on the Chinese government are immense and growing. These pressures are both political and economic but the economic ones are by far the greater.

In the PRC the government owns everything – there is no true private ownership. The government owns all of the factories, the land, and all means of production from rice to warships which mean that they are the sole employer and that they control all prices. But the PRC, like all governments is faced with a finite amount of revenue that must cover their overhead, but unlike capitalist governments they cannot raise taxes because that is just taking from one pocket and putting it in another. Consequently the PRC is forced to increase revenues from exports which means they must compete in a global market for both labor and goods. To date the PRC has been able to maintain the fiction that they are a competitive powerhouse but in reality they are operating a giant Ponzi scheme.

The PRC is manufacturing and exporting vast amounts of product because foreign manufacturers are sending thousands of jobs to this “low labor cost” market. But the manufacturing centers are along the coastal areas where the quality of life is far superior to the internal quality of life. This is leading to a growing influx of young people seeking a better life which in turn is causing pressures on housing as well wages as the cost of living increases. If the wages increase the competitive position vanishes and that foreign investment will move to other low labor cost markets. The PRC has attempted to deal with this issue by subsidizing the manufacturing which means that the cost of goods being exported are a) below cost b) at cost or c) with low margins. This in turn has led to quality issues but the real problem is that these subsidies are draining financial resources from the interior infrastructure. While the internal infrastructure cannot be improved the major problem is that it cannot even be repaired. The PRC has suffered greatly from major floods and earthquakes which have left much of the interior in need of repair, which means the government is faced with some very difficult decisions. They cannot reduce the subsidies without raising prices which will create a demand for higher wages which will drive foreign investment away. They can fail to quickly repair the damage but the rural areas are already restive due to their quality of life versus that of the coastal areas. What ever they decide there will be major changes in the economy of the PRC.

And this brings us to the Chinese Military. As Talleyrand once said regarding Napoleon’s military exploits “the problem with an army is that it eats” and thus the PRC has this issue to deal with as well. Armies are pure overhead. They cost a great deal to feed and equip while providing nothing in peace time, so they must be employed or reduced in size. The PRC cannot use their army by adopting an expansionist policy nor can they reduce its size because they would still have to pay the soldiers being released because the government is the sole employer. But there is another less visible issue and that is the military itself. Generals do not like to see their power reduced but more importantly the soldiers themselves are the sons and daughters of farmers and small shop keepers. These are the people who are suffering from a poor quality of life which is aggravated by the damaged infrastructure. A Failure to alleviate the suffering in the rural areas could easily transfer to a restive military, so the central government cannot ignore the problems of the interior and they are caught on the horns of this dilemma. If those weren’t problems enough there is another historic problem that has plagued China for thousands of years and that is corruption. Nepotism, bribery, and kickbacks are a way of life and part of the Chinese culture. The PRC does what it can to stop this and do prosecute and act on the most outrageous examples, but the problem is endemic and undermines trust in the government.

So China – the People’s Republic of China – is perhaps more of a Paper Dragon than a real one. While they appear to be crushing everything in their path, the reality is that Communism and Central Planning are demonstrable failures. The PRC cannot continue to sustain the house of cards they have built indefinitely and their dominant position in world trade must eventually collapse from the internal economic pressures.

1 comment:

Anonymous said...


Can you do me a favor and review this article, written by a liberal college professor friend of mine. He states that wealth is zero sum (if you have money, I can't have it.

My theory is that it is zero sum only in very primitive economic systems and societies. Please let me know your opinion of this article on my blog if you can.

Thank you,

Douglas (Rolling Hot)