SINOGRAPH Power bubbles are Hu's
big challenge By Francesco
Sisci
BEIJING - It's one of those
questions too scary to ask publicly: very
politically incorrect yet very true as it throbs
in the back of many minds. Will Washington allow
China to overtake America economically - and
should it? And what can America do in a restrained
way, short of the usual doomsday scenarios, which
can be dismissed because of their incalculable
consequences for everybody?
Recent
International Monetary Fund (IMF) calculations set
a date for a first step in the overtaking: 2013,
when China's GDP (Gross Domestic Product) should
become larger than America's in PPP (Purchasing
Power Parity) terms. China's overtake of Japan
last year in terms of GDP makes it likely it will
exceed the US in
2013, and this reinforces the
possibility of a real overtake at current exchange
rates sometime in the next decade or so.
The consequences of this shift could be
huge. China would de facto take center stage in
the world, and although militarily China would
still play second fiddle to America, China would
then have the theoretical ability to engage
America in an arms race. That scenario could
potentially bankrupt the US, as in the 1980s when
the economically larger US took on the Soviet
Union in an arms race that eventually busted the
communist state. Simply put, dollar per dollar
military expenditure costs more in the
economically smaller country and eventually
bankrupts it.
Incidentally, this logic was
quite clear to Deng Xiaoping in the early 1980s
when he refused to deplete China's weak coffers
engaging in an arms race and instead focused all
resources on an economic build-up.
Even
without considering the strategic consequences of
China's GDP accruement, one can just remember
America's reaction in the 1980s to the possibility
that a friendly nation and strong military ally,
Japan, could overtake America: it was a scare and
a call to action against a state that at its peak
had a GDP about two-thirds that of America's.
Europe united by the euro in the early
1990s fared only slightly better, as the overall
euro economy was - and is - larger than the
American economy. But politically and militarily
the European Union (EU) is a non-entity. America
supported the EU extension that has de facto
undermined the possibility of a political union
that would be potentially menacing to the US.
In a decade, America overcame three major
challenges at once: it beat the Japanese rise, it
busted the Soviet Union and forestalled a possible
European political union. Meanwhile, it started
the new phase of globalization that is changing
the economy and politics of the world.
Then why should America, which was
displeased at the possibility of being
economically overtaken by one of its two bosom
friends, and which managed to take on so many
issues at once, accept the economic ascendancy of
China, a state that is not an ally and has a very
different political system?
Certainly,
circumstances now are different from 20 years ago.
The whole world is moving up thanks to the
America-driven process of globalization, and it is
hard to imagine one force that could stop or would
be willing to stop the growth of giants like
India, Brazil, Indonesia, South Africa ... and
China, which is creating more wealth and welfare
for everybody. Certainly the US didn't try to stop
the momentum earlier because it saw China's
potential economic contribution, and it envisaged
a possible peaceful political change. But now
China is almost overtaking the US, and political
change is not happening.
Prima facie China
doesn't seem to need political change. Its system
withstood the 2008 financial crisis better than
the West, providing practical proof of its value.
Yet this could be just a temporary answer if one
considers that crises are a cyclical feature of
the capitalist economy that dominates the world,
including China. Then China's ability to weather a
storm doesn't ensure that its system will be able
to withstand an economic crisis, especially as new
domestic threats are building up.
China
came out of the financial crisis with too much
power given to SOEs (state-owned enterprises),
which gulped down the lion's share of the public
credit surge to move out of the doldrums. This
increased their already huge firepower. They have
now billions of dollars in profits that they can
channel any way they please - and God knows where.
As these SOEs are systematically within the state,
they can use their money to advance their agenda
and protect their turfs within the state system -
entirely legally.
Meanwhile private
enterprises, which in the 30 years of reforms have
been the main drive of economic development, are
finding it more difficult and expensive to do
business:
While Beijing's inflation-fighting
policies have so far left state-owned companies
unscathed, private sector borrowers say they are
being forced to choose between bankruptcy and
taking on underground loans at up to 10 times
the official rates. ''Monetary policy is tighter
now than before the global financial crisis,'
said Zhou Dewen, head of the Small & Medium
Enterprise (SME) Development and Promotion
Association at Wenzhou, the heartland of China's
private sector. 'For SMEs it is a crisis of
survival [and] several commercial and industrial
companies have been forced into bankruptcy,'' he
said.''[1]
This is breaking the social
pact that bolstered reforms. Private entrepreneurs
could develop their own business as long as they
didn't meddle in politics. Now the private sector
is being squeezed out while not messing with
politics because of the ability of SOEs to advance
their own agendas thanks to their political
underpinnings. Social and political cohesion is at
stake, as SOEs are antagonizing a group of
entrepreneurs; but fast-paced development could be
in danger too. SME are the most efficient
producing most growth, without them China
development could grow slower and inefficient
moving into a former Soviet model.
Therefore, they de facto become states
within the state, interest groups of potential
oligarchs dominating the whole economy according
to their own particular interests. All fights or
compromises are hidden, bought and sold without
much public knowledge or possibly also without the
knowledge of the state's top echelons. They also
control large swaths of land, which at will can be
translated into cash for them and income for
different municipalities, fueling the existing
housing and credit bubble.
In other words,
China avoided the 2008 crisis by sowing the seeds
of a future political-economic crisis of its own.
This might have been unavoidable, but what should
be avoided is the belief that the present solution
is the best of all worlds. It is not: this
situation created the present credit and housing
bubble and the ''power bubble'' of the SOEs. Both
have to be curbed because otherwise the market,
and China's economy along with it, will die. SOEs
have to be carved up and privatized, and
provisions have to be taken from SOEs for
retirement and health care pensions and put into
separate entities and insurances. Otherwise, with
the present graying trend of the population, in 10
years, many elderly people could starve.
All urban land, including public and
industrial plots, should be brought into the
market and should have a value on the books. It
makes no sense economically or politically to sell
land at one price to a real estate developer, at
another for a factory, and to give it away for
free to a ministry. Also because in China's
present system it is easy for industrial players
or ministries to sell land in the market,
pocketing huge off-book profits that go God knows
where.
The suspicion that this money, at
least partly, goes to fuel special interests, turf
wars, and political jockeying doesn't seem
unfounded. To avoid such activities, China needs
to re-concentrate power (see Too
many cooks spoil foreign-policy stew, Asia
Times Online, Jan 7, 2011). But how can China do
this?
This economic turmoil occurs on the
backdrop of a very murky political transition. In
one year, China will present to the world its new
leadership. We know that some kind of political
campaign is going on (see Bo
Xilai focuses multiparty vision, Asia Times
Online, Apr 20, 2011). But the really scary thing
about China is that nobody will know how this
group of people, possibly the most powerful in the
world, was chosen. Xi Jinping might become soon
the single most powerful leader, and nobody knows
how that was decided. Then it is impossible to
have rational forecasts of the political and
economic directions China will take in the future.
In short, to solve those problems, China
needs to set a very quick agenda for privatization
(to break up the excessive power of the SOEs) and
democratization, which is the way to regulate and
bring to the open the murky political jockeying
and also to re-concentrate power to the top. It is
not easy to think about it because SOEs and some
rich localities with much to lose and will fight.
But privatization and democratization would be
minimal premises to help convince America that
China overtaking the US economically in the future
could be acceptable and not threatening.
A
part of the official Chinese rhetoric argues that
democracy can hold back China's necessary economic
progress. But this is not the point. Democracy is
not about progress yes or no, it is about
peacefully mediating power struggles (which exist
in any political system) in an open, regulated
manner that provides long-term stability. Hidden
power struggles are dangerous and highly
destabilizing.
Without privatization and
democratization, China's leadership would be taken
on two fronts. Domestically, murky SOEs power and
political jockeying will hijack policies and
fracture political consensus that in turn could
flare up in the open, with or without the
intervention of external forces. Externally, a
growing number of countries, prodded by or
prodding America, could coalesce against China,
stifling China's economic growth and fanning its
internal contradictions. There could be different
phases of this process: a slow external
''demonization'' of China that would start nervous
reactions, arrests, and crackdowns and that in
turn would further prove the demonization and fuel
it while spreading dissent inside; a second phase
of domestic and external investment could be
slowed, something that can bring dwindling
domestic investments, capital flights, and
exacerbating social tensions.
It doesn't
need to happen this way and possibly won't.
Chinese leaders have proved very resilient and
brave, facing very tough tests for their country.
President Hu Jintao has to rise to a challenge
unprecedented possibly since the times of the fall
of the Qing Empire.
This time it is not a
leadership grown soft after hundreds of years of
rule: these are people who endured and survived
the largest famine in history, the Great Leap
Forward; the largest and cruelest political
movement in China, the Cultural Revolution; and
the greatest transformation ever experienced, the
Reform and Opening Up. This should steel them to
face the new and most difficult test - the present
one.
Francesco Sisci is a columnist
for the Italian daily Il Sole 24 Ore and can be
reached at fsisci@gmail.com
Many
friends were important in discussing this topic
over the past few months, but Edward Luttwak and
Joerg Wuttke were particularly helpful in focusing
the issue.
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