A Letter Home From China - Granite Grok

A Letter Home From China

From Bob Bestani on business in Bejing…

map of China

[Ed. note: What does it say about China when 2 ‘Groksters are there at the same time for different business activities? Terry, contributor to GilfordGrok, writes of his time in China here and here.]

After nearly a quarter century of visiting China, this country never ceases to amaze. In the mid 1980s, Beijing was still a very gray and shockingly backwards city. Cars were few and far between; the landscape was flat with the tallest building being only six stories or so; rivers of bicycles flowed throughout the city; its very somber people were dressed in uniforms of gray, blue or green Mao suits. Peat was still the most commonly used fuel to heat homes, even though it cast a thick pall of smoke and haze over the entire city. Rickshaws were the taxi’s of the day.
 
Today, Beijing is a colossal international city, with countless skyscrapers and modern ten lane highways that of necessity run through and around the city to serve its 17 million people. Every make and model of car has taken over the city streets. Its citizens are very brightly dressed in all the modern designer labels, and obviously happy with the prosperity they now enjoy. Every western brand of fast food restaurants, clothes, and vendors like Lenscrafters are scattered throughout this city which seems to extend out endlessly. Greater Beijing is said to be about the size of the entire country of Belgium. What a difference a quarter of a century makes!
 
With a total population of 1.3 trillion and a historically unprecedented level of economic growth, it is easy to see how projections suggest that China will soon be the largest economy in the world. Even in recession, China continues to grow at “only” 6% per annum. The country is sitting on over $2 trillion in cash reserves which the government is spending on yet more infrastructure projects to add a stimulus to the economy. Their banks are actively lending and their shops and malls are packed.
 
But looks are deceiving; just below the surface there is a quiet sense of unease. China, like virtually every country in the world, has been hard hit by the current financial crisis. Tens of millions of jobs have been lost, causing yet another mass migration, this time back out to the countryside. The problems that China faces are immense and every bit as daunting as the rest of the world is today facing – even bigger and more complex. Their 6% growth rate is hardly sufficient to maintaining stability and social order.
 
Their problems are such that the entire system of governance that has brought them to this point is under threat. For all of our problems, President Obama and Joe Biden do not have wake up in the morning worried that the legitimacy of the Presidency is at risk. President Jiang Zemin and Vice President Hu Jintao must worry about the future of the Communist Party. For decades now, the Chinese social contract has been very simple: we will give you economic prosperity – you keep quiet about political issues. While the next few years should remain calm, the clouds are there on the horizon.
 
Consider only few of their problems:


Highly Bureaucratic Governance
 
Given the Communist nature of their governance, all decision making remains top down. There is very little reward for pushing the system from below or seeking new and innovative ideas. This makes Chinese decision making highly sclerotic and slow. In these modern times, decision making must be fast and nimble. Right now they have hit on a formula which is working brilliantly and they are racing straight down that road. But when the road turns, as it surely will in time, will they be able to steer a new direction to stay on course? The Japanese ran off their road twenty years ago and their social and political ridgities are such that they have yet to find a new and successful direction.
 
Social Unrest
 
The government actively exercises its right of eminent domain and is very heavy handed at moving people and communities when new factories, roads or malls “need” to go up. People are readily shunted aside with little deference to their property rights – which often take a very distant backseat to the needs of the government or national growth. Such policies are creating massive social problems. According to official government statistics there are some 80,000 violent protests and demonstrations a year in the country. Chinese official statistics are notoriously inaccurate, designed to show the government in a good light. This leads one to believe that the true statistics are much higher.
 
Massive Environmental Problems
 
China’s breakneck economic growth has had a devastating impact on the country’s environment. In many inland cities, the air and water pollu tion are at staggeringly high levels. By many independent assessments, if the cost of cleaning up the environment is factored back into the equation (the so called Green GNP) China is actually not growing at all, or even slipping backwards. The day of reckoning will come and China will one day need to come to grips with these issues. Unfortunately, the social and political needs associated with growth are such that those issues are being pushed down the road for the time beings.
 
Healthcare
 
The environmental problems are having a devastating impact on the healthcare needs of the nation. Yet the government has not invested adequate monies to this sector and healthcare is something that most people are forced to bear largely on their own. Healthcare insurance is largely unknown. Moreover, there is no transparency to t he system. Since the vast majority of the country’s hospitals are government owned and run, doctors are glorified government bureaucrats. To encourage proper attention, surgeons expect “tips” from their patients. But how much does one dole out to have the proper effect?
 
 
Graying Population

In order to rationalize the old ways of the  Communist Party and the new orthodoxy, the official party line these days is that Mao was 70% correct and 30% wrong in his policies. But where was he right and where was he wrong?  Arguably, Chairman Mao’s biggest mistake was not the Cultural Revolution or the Great Leap forward. The social cost of those disastrous social and political policies has now dissipated with time. But his active efforts to increase the country’s population has had the most20profound and long term impact. China must now and forever deal with the over population that exists. In order to do so, post Mao China instituted the famous one child policy. While hard to properly enforce, it has had the effect of “encouraging” the birth of boys and thereby creating a socially unhealthy shortage of marriage partners. Moreover, in twenty years, the rapid graying of China’s population will have a disastrous impact on China’s future prosperity. The imbalance will create an enormous economic burden on future generations.
 
Massive Income disparity
 
China’s breakneck growth has brought with it a steep and growing income disparity. The Gini coefficient is a measure of statistical dispersion, commonly used as a measure of inequality of income distribution or inequality of wealth distribution. It is defined as a ratio with values between 0 and 1: A low Gini coefficient indicates more equal income or wealth distribution, while a high Gini coefficient indicates more unequal distribution. 0 corresponds to perfect equality (everyone having exactly the same income) and 1 corresponds to perfect inequality (where one person has all the income, while everyone else has zero income).
 
A research by the Chinese Finance Ministry has concluded that China’s Gini Coefficient stands at 0.46, which is well above the internationally recognized warning line of 0.4.  Most developed European nations and Canada tend to have Gini indices between 24 and 36. In a country which has a Communist expectation of social equality, this disparity has sparkled wide spread concern over the inequality in income distribution and possibility of serious social turbulence and economic turmoil.
 
Export Driven Economy
 
Economists have long regarded exports as sign of economic strength. But as Paul Krugman’s Nobel Prize winning work has shown, this is putting the cart ahead of the horse. The real advantage of trade is that it lets countries import what it needs. China has benefited greatly from its export of manufactured goods. Yet it has also become captive of international markets. As the international slowdown has shown, China’s lack of a vibrant internal market has put it at the mercy of the rest of the world. If the economic crisis we are today encountering persists, it will have a very troublesome impact on China’s economy in the future.
 
In short, there are real clouds on China’s horizon. As Americans we are pleased to see China adopt the “capitalist road.” But at the same time we are concerned about China’s rising economic and political might as an offset to our own. While we are right to be considering the implications of the rise of China into modernity, it is not at all assured that that rise will go smoothly or that it will propel China into the status of a superpower as some believe. Only time will tell.

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