Eight Reasons China is Not Yet Ready to Take Over the World
The American media loves to latch onto a narrative and then relentlessly pound it home, until it becomes accepted fact -- even if the narrative is full of flaws and half-truths. The latest example of wrong-headed groupthink: The Chinese economy will soon bury us alive.
To be sure, the Chinese economy recently became the second largest in the world, after finally overtaking Japan. That means we're next -- right?
Not really. Back in the 1980s, America feared that its once-mighty manufacturing base was getting "hollowed out" and its assembly line workers were being transformed into a mindless horde of minimum wage hamburger flippers. Not too long ago, economic pundits warned that our country was saddled with a low-skilled, poorly educated workforce on the verge of becoming indentured wage slaves to the Japanese.
What a difference a recession makes. After the bubble burst in Japan in 1989, that once mighty economy is still mired in a 20-year slump and is grappling with deflation. With the ascendancy of American high technology during the last two decades, you don’t hear that kind of whining about Japan anymore.
But now, everyone is afraid of the latest boogeyman -- China.
It's a fact that China increasingly dominates the world economy by wielding carefully calibrated mercantilist policies. But here are eight serious shortcomings to Red China, Inc. that you should keep in mind:
1) Poor Financial Planning and Management
Think America is the only country that has endured a financial crisis and a build-up of toxic loans? Think again. The Chinese central authorities recently were compelled to bail out the country's largest banks because of the same sort of reckless lending that characterized U.S. banks in the run-up to the 2008 meltdown. Nonperforming loans are accumulating once again on Chinese balance sheets, forcing Beijing to consider yet another multi-billion-dollar rescue.
Just because you're an ostensibly communist society doesn't mean that human nature changes. China still has its share of greedy people -- and incompetent banks that lend money to them.
2) Overheated Activity
Chinese Politburo members who control centralized economic policy continually set higher and higher production goals. The result is overly generous investment in factories, infrastructure and research and development, whether or not these investments are warranted by economic cycles. The result? There's now a serious danger of overcapacity and an overheated economy in China's near future. The country's GDP has been racking up double digit gains every year, but unless the country's rulers have figured out a way to repeal the economic laws of boom-and-bust, that sort of growth can't continue forever.
3) Lowered Educational Standards
Myth: Chinese students are math and science whizzes, encouraged by disciplined teachers and motivated by the centuries-old Confucian ethos of hard work and respect for your elders.
Reality: Beijing sets artificially high quotas for graduates who are engineers and scientists. Thanks to sheer numbers, its graduation rate appears good to the outside world, but the statistics hide the fact that, to achieve these quotas, standards are lowered to levels below those of the United States. When it comes to higher education, America still serves as a magnet for the best and the brightest.
4) A Graying Population
The Chinese population is rapidly aging. Meanwhile, the government's one-child policy is impeding the addition of new workers into the economy. The result will be an eventual drain on competitiveness, as a greater number of elderly citizens need more care and a falling number of young workers add vibrancy to the economy.
5) Rising Wages
China for years attracted multinational companies that outsourced their productive capacities to the country, where wages are lower and work rules less restrictive than in the West. But now, rapid economic growth is creating a Chinese middle class with expectations, putting upward pressure on wages.
That's good news for the Chinese people, but it's making China less attractive as a place for companies to save money. China now finds itself in competition with nearby countries where the wages are even lower, such as Vietnam.
6) Lack of Entrepreneurialism
Conformity still reigns in China. Certain sectors are allowed a looser rein, but by and large Chinese society lacks the freedom and dynamism of Western cultures, which in turn stifles innovation in China.
China tries to maintain an authoritarian government and still enjoy the economic fruits of an open society, but it can't have it both ways. It's trying to twist the arms of foreign companies to agree to industrial offsets that transfer advanced technology to China, but companies are pushing back, for reasons of national security.
Eventually, China will have to choose between being free and prosperous, or autocratic and economically sclerotic. (Witness its recent imbroglio with Google.) In 1989, when faced with this stark choice, China's rulers chose repression and clamped down on dissent. China will soon arrive at this fateful crossroads again. We all know what happened to the Soviet Union, when it faced a similar dilemma in 1991 -- it collapsed.
7) Rampant Corruption
China is having a hard time coming to grips with these problems, and a major reason is corruption at all levels of officialdom. To get anything done, the right palms have to be greased. Multinational companies are hit up for thinly veiled bribes; local officials exploit average people by insisting on payoffs at every turn; the courts are rigged and a stable set of laws governing, say, property rights are virtually non-existent.
A powerful and entrenched coterie of big shots have a vested interest in maintaining the status quo, which makes it difficult for China to reform its problems.
8) Severe Pollution
Chinese construction projects, whether they're hydroelectric dams or river diversions, suffer from the same wasteful gigantism that the Soviet Union experienced during its days under Stalin. Massive projects are wiping out entire villages, ruining the ecosystem, spoiling agriculture, and polluting the air, food, soil, and water.
Air pollution is at epidemic levels; dust bowls ravage the interior; and the public health continues to suffer. The Chinese have resisted all international protocols to deal with global warming. Soon, the country's fouling of its own nest will generate social repercussions and economic problems.