Debating the Optimistic versus Pessimistic Views of China

American Chamber of Commerce in Japan Journal, March 2010.
 
Expanded summary of remarks to the ACCJ meeting of February 8, 2010, giving the optimistic view.
 
By Gregory Clark
 
Begins.  First a  few personal facts. My involvement with China goes back to the early sixties as a diplomat in Hongkong where I was learning Mandarin. For a while I served as China desk officer in Canberra’s foreign affairs ministry.  Then during Cultural Revolution days I finally got to China, by organizing an Australian pingpong team (over Canberra’s opposition). Since then I have visited China many times on both reporting and university business. And while my conclusion is not quite as colorful as the famous Newsweek description of Japan during the heady eighties – an economic juggernaut out of control – I have to admit to fairly strong optimism about China’s economic, and to some extent political, future.
 
Let’s begin with the obvious: The economic progress we are seeing in China today is almost a carbon copy of the dynamism we saw in Japan’s high-growth economy of the sixties and early seventies. And for the same reasons.  Take a large, reasonably well-educated population keen to have the basic essentials of life – TVs, refrigerators, housing, transport equipment, etc… Combine that with a high savings rate, some foreign investment, access to technology plus competent entrepreneurs and bureaucrats, and rapid progress is inevitable.
 
Nor was it just in Japan. We saw the same growth pattern in South Korea and Taiwan, then in non-Sinitic Asia -  Malaysia, Thailand and now even Indonesia. If Japan is in trouble today it is simply because of a failure to realize the need to create new demands (health, environment, education etc), and the funds to finance meeting those new demands
 
With Japan there was also the further advantage of a large domestic market.  Hence the seven to eight percent growth rates running right through to the 1973 oil shock. In terms of domestic market size China today is even better favored than Japan was, which is why we see those nine to ten percent annual growth rates. Some fret over claimed regional disparities, saying growth is concentrated in coastal areas. Clearly they have not visited Wuhan, Chungking or Chengdu lately.  Indeed, the intelligent Beijing investment in inland infrastructure is creating an employment boom situation where workers from inland are losing interest to traveling to the coastal regions looking for work.
 
Others warn darkly of over-heating, but Japan too had its frequent mini-booms which,  until the late eighties were, as in China, quickly cooled down by sensible Keynesian policies. 
 
A more valid criticism is the urban-rural gap. The trickle-down effect is gradually spreading from the main cities – to a radius of almost 200 kilometers by my count.  But this still leaves a large area to be covered.  And given the lack of a safety net, when the Chinese are poor they are really poor.
 
But a poverty gap does not mean an end to economic progress.  It simply means the glass is half full. Open a packet for say the Made in China gadgets on sale at your local home depot.  Check out the details – a maze of metal nuts and bolts, complex pieces of plastic and other materials needed for assembly, the instructions in Japanese, even the wrapping paper and the sticky tape holding it all together.   Most of this had to be supplied by someone outside the gadget factory. Then think of all the other things needed to get that packet to you – a financial system, sales agents, skilled labor, repair shops, communications, transport links, harbors with good facilities and so on.  All this adds up to what I call the industrial base. Without it, no economy can move (a major reason why all the money, training and technological aid poured into Africa produces little result).
 
On top of all this is what I call the snowball effect. In today’s world there are only two factors that decide relative profitability– cost of labor and cost of factors provided by the industrial base.  With each investment the industrial base improves. With each industrial base improvement more investments are attracted. Before long China will probably have an industrial base equal to any in the world. Combined with an undervalued currency– the other key factor deciding international competitiveness – China really could become a juggernaut out of control. And as with Japan in the eighties, the only problems that could slow things down are rapid upvaluation of the currency due to excessive export orientation and rising labor costs (Japan suffered a further blow – bad economic policies since the late eighties.)
 
Will China suffer the same fate? The rising labor costs which eventually chopped of the high growth rates not just in Japan but the Asian Tigers also will eventually hit China, but not suddenly.  The pool of countryside labor keen for urban employment will be around for at least another decade or two. True, we have already seen a rapid wage rise for skilled labor. And it could continue to increase if the planners implement their clever idea of deflecting upvaluation pressure by encouraging labor cost increases, at least in export industries. But I cannot see either problem – wage increases or yuan upvaluation – causing great harm since China has another secret weapon up its sleeve, one that Japan has now ceased to have, namely a rapidly expanding domestic market.
 
To date the world has rightly blamed China’s excessive export orientation on very high domestic savings which in turn weaken the  domestic market. But this situation will not continue long.  As with Japan in the sixties people naturally tend to save much to prepare for a hoped-for big leap in living standards, housing especially.  Those funds inevitably come back to the economy. True, China has the further problem of a weak safety net –government funded health care, education, pensions, unemployment insurance – encouraging excessive savings. But improvements there are not beyond the wit of China’s planners, and are already underway. Corruption is a further problem. Unfortunately this rarely hurts growth rates however.  And Beijing is not impervious to the problem.
 
Some predict China will eventually suffer something like Japan’s lost decade. I disagree, for two reasons.  One, on the basis of past performance I cannot see China’s planners making the mistakes that led to Japan’s Bubble boom. Nor do I see them making the same mistakes as Japan’s planners after the Bubble, namely the foolish moves to cut fiscal spending when the economy was still weak.  Apart from anything else the eagerness for improved infrastructure – high-speed railways and highways across the nation, for example – will keep the economy bubbling along for decades.
 
Nor do I see China’s consumers imitating Japan’s by cutting back on spending once basic demands have been fulfilled.  The Chinese like to splurge once they have the basics in life.  Eagerness for luxury, leisure and status-symbol spending will, as in the West, keep private demand active. Indeed, judging by what one can now see in Hongkong and Shanghai the Chinese liking for ostentatious spending can exceed the West. We may not like it morally, but such spending can be crucial for advanced economies once governments cut back on public spending. The lack of such private spending underlies much of Japan’s economic problems.
 
True, political problems remain. Unlike the Japanese, the Chinese do not hide their discontents.  Reports of up to 100,000 outbreaks of violence a year could be true. But these are local discontents. As we see in Singapore, the Chinese will accept firm central control provided it can produce results and to date it has done that (contrary to grossly distorted Western reports, the Tiananmen affair had almost nothing to do with student dissatisfaction or unprovoked government brutality.  It was the uprising by the discontented masses attacking troops sent in belatedly to clear the Square which so disconcerted Beijing and led it quickly to introduce economic reforms.) There is increasing democracy at the local level.  But I doubt if there is much demand at the national level.
 
The extraordinary lack of serious discontent over the one-child policy shows how much the Chinese people have been conditioned over the centuries to accept central government policies imposed in the national interest. Could such policies possibly survive under a democracy? Of course not. Incidentally the West owes China enormous gratitude for those policies which some say have lowered Chinese population by 400 million. Imagine the strain on world resources that 400 million would have imposed. Meanwhile Beijing has accepted and seems able to control the resulting problems of aging population and sex imbalance.
 
Separatism is a greater problem though here too we need to be careful not to accept distorted reports. The recent riots in both Tibet and Xinjiang included a thuggish element keen to kill and loot for the sake of it. Only the Los Angeles Times, as far as I know, gave us the true story of the Lhasa riots which were Buddhist Tibetans attacking Muslim Chinese on religious grounds. That said, Beijing is not known for kindness in dealing with anything that threatens its control (contrary to Western legend, crackdowns on pro-democracy dissenters are not for what dissenters say; it is for seeming to encourage others to join them in opposing the government). And the demands for locals to master Chinese language for employment purposes will only get stronger. Even so I think the Han Chinese in Tibet will be able to work out some way to coexist with the locals provided they continue to provide increased prosperity and education.  As in the former Soviet Union,  communist doctrine does at least make some effort to meet local sensibilities and culture. Xinjiang with its large Muslim Uiguir population could be a tougher problem, however, if discontent there merges with discontent in the rest of the Muslim world.