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China's coming collapse?

From China, Paul Simon sends this Washington Post article on the high unemployment in China. It argues that only the free market system can solve the problem, which is common to many countries. Paul Asks about the authors: "Is Rawski right? Is Waldron a reliable source?" We leave it to every WAISer to use his own judgment.

China's Economic Facade
March 21, 2002; Page A35

Publication: Washington Post
Date: 03/21/2002
Author: Arthur Waldron

According to the Financial Times of London, Chinese Premier Zhu Rongji recently told a television audience in his country that the Chinese economy would have "collapsed" in 1998 without the state stimulus spending that is currently taking Beijing's government debt to record-high levels. Zhu Rongji is someone who chooses his words carefully, which makes the term "collapse" alarming, although not perhaps, in retrospect, surprising.

Officially, China has for some time been claiming growth rates of 7 percent or more. But information casting doubt on those figures has long been available. Visitors see lots of rural people camped out at urban railroad stations or on sidewalks: Clearly they have nothing to do where they come from, or where they have arrived. Block after block of abandoned construction projects in cities suggest someone has run out of money (as does the recent proposal that money be raised for the Three Gorges Dam by selling stock). Almost daily protests by workers, many violent, are also a clue that all is not well.

Moreover, even the official figures don't make sense: How can it be that energy use is falling in a booming economy? And unemployment rising (as the official statistics show)? This is unprecedented in economic history. Finally, the state borrowing for pump priming to which Premier Zhu refers has always been public knowledge. Why, if the economy is burning up the track, has stimulus been necessary?

Once again Chinese officialdom has put one over on Western observerdom. The shining exception is Prof. Thomas Rawski of the University of Pittsburgh, who over the past year or so has been making thoroughly empirical and highly persuasive presentations across the United States on China's economy, based entirely on open Chinese sources, comparisons with other fast-growing economies and some solid economic analysis. He argues that China's economy may actually have been contracting since 1998.

There are a number of prime candidates for the red-faced list, including the CIA and others in the U.S. government who appear to have been clueless; the high-priced reports of the Economist Intelligence Unit (which did pick up Rawski's work as it became known, but whose own work was very much consensus) and others in the premium newsletter trade, plus all the major media in the West and in Asia.

How could so many people miss something that, in retrospect, was so obvious? Because of the chronic pathologies of China watchers: groupthink (in the academy and government), fear of Chinese reaction, job pressure (in the intelligence community and the media) and greed and wishful thinking (in the case of business). Once again, we look like gullible fools to the Chinese.

The reason is that once again we have taken our cues not from our own observations and deductions but from China's official self-presentation. We hear "economic reform" constantly proclaimed, but fail to observe that it is not really being practiced, at least not consistently and thoroughly.

The only way China can possibly create enough jobs for its immense population is by adopting a free-market entrepreneurial economic system, in which the state's role is limited to the provision of justice and arbitration according to clear and legitimate rules. In such a system, however, no place exists for a Communist Party, whose justification, in theory, is its skill at guiding the economy and the society. (And whose current reality is its existence as a lawless elite, looting China in the interests of its members.) So the necessary economic reform is out of the question without political change.

Still, something had to be done after Mao's death to prevent the total impoverishment of the country, and it was done -- but not the whole required package.

The result is that today China's economy is dysfunctionally bifurcated. One side is very much consumer -- i.e., demand -- driven. That demand should elicit and mold supply, but not in China. Supply is still largely determined by the Communist Party, which allocates scarce resources to state enterprises manufacturing things people don't want and won't buy.

These enterprises are kept afloat by "loans" (never repaid) from the massive savings the Chinese people have entrusted to the state-controlled banks. Their rule of thumb seems to be: If you are state-controlled and losing money, you qualify for big loans. If you are private and growing, you do not. That is a recipe not for growth but for economic collapse.

This risk-laden charade cannot continue indefinitely. Zhu's words may mean that the Party has decided to get serious -- but don't bet the farm on that. Meanwhile, for the rest of us, it is time to rethink a lot of comfortable assumptions and begin taking more seriously China's large potential downside.

Ronald Hilton - 3/26/02