Friday, March 23, 2012

China – A Strategic Threat?

Apparently in an effort to cover up the total failure of Communism and the growing failure of Socialism, the popular press has chosen to forget that China is actually the People’s Republic of China and that it is in fact a troubled communist country. Instead we are treated almost daily to the glowing reports of China as an economic powerhouse that is rapidly taking over the global market. Unfortunately the popular press is not noted for its objective reporting or critical thinking so perhaps it is time to look behind the press releases.

While China is a large country with a huge population, it is not a homogenous population in economics, culture, or ethnicity. Historically China has been a series of fiefdoms or provinces that have not always been comfortable or even friendly with each other. Imperial China was more or less stable but hardly rich and hardly a military threat. But also the coastal regions of China have always been economically stronger than the interior and have prospered at the expense of the agrarian interior regions. It was this economic disparity that allowed Mao Tse Tung to overthrow the Chinese government and to establish what Communist China is today.

However, the reality seems to be that nothing has changed under the communists and the same economic divisions remain. In fact what appears to be a strong and competitive Chinese economy is more of a veneer than a reality. The reality is that two thirds of the Chinese people have incomes equivalent or below third world countries. While the Communists unified China they also once again demonstrated the weakness of communism, which is universal poverty. The current government recognizes the growing instability of their government and has sought to achieve greater stability through mass employment. But mass employment requires industrial growth, subsidies, and expansion of consumption either domestically or via exports. But with central planning – the mainstay of communism – there is no thought given to markets or margins – just to employment. The result is exports become a necessity because the domestic market cannot absorb the output. Therefore, China must export their goods in order to maintain political stability through salaries and the revenues necessary to support the agrarian majority.

The economic downturn has affected the economies of virtually every nation but with its dependence on exports China has been hit particularly hard. China depends on the American and European markets to absorb their exported goods, but with their declining economies the law of supply and demand has taken over. The demand for Chinese goods is down and the competition for those goods is up. China is caught in a dilemma – they cannot reduce their output nor can they reduce their subsidies to the interior and their manufacturing base. They cannot layoff workers because employment is key to their communist principles, but they cannot sustain their current production levels either. The Chinese government is trapped in the inherent flaw of Marxism – central planning and government ownership rather than private ownership. Maintaining stability is dependent on goods flowing overseas while raw materials flow in, but maintaining this flow is a growing challenge because the Communist system ignores profitability in favor of employment which in turn breaks the self regulating law of supply and demand. This problem is further aggravated by inflation, which not only raises the cost of subsidizing the interior but it drives up the cost of the manufacturing output which reduces their competitiveness with other global suppliers. An alternative might be to produce higher cost products like automobiles, which China is attempting, but this requires a different workforce – one with more education and training than what is available today. But even if they are successful in making this transition they will come face to face with Germany, Japan, and the United States. The Chinese government is caught in a situation they cannot control. They are coming face to face with the fatal flaw in socialism, which is employment as the priority rather than efficiency.