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China: A Tale of Two Economies

There are two distinctly different ways to look at China’s economy. Which is fact, and which is fiction?

The commentary and debate over CNOOC’s attempt to pursue Unocal and, to a lesser extent, Haier’s offer to take over the struggling Maytag, may have given Americans an inward shudder. China, like Japan in the 1980s and early 1990s, is emerging as an economic powerhouse that directly challenges the dominance of the United States. Two neglected anomalies, however, should first be consideredand hopefully, resolvedbefore it makes sense to jump on the bandwagon of the boom in the Chinese economy.

According to a Wall Street Journal report on July 6 that, mysteriously, is not widely quoted, Chinese regulators have imposed a freeze on new issues of stock in a bid "to support sagging share prices on the country’s two domestic exchanges." The same article also reports that, "The Shanghai Composite Index closed down 0.8 percent at 1039.04 yesterday. The benchmark has fallen 18 percent since the start of the year, and is hovering just above its lowest level since 1997." The article, however, fails to mention that since the markets peaked in 2001, their capitalization has lost 60 percent of its value, triggering an emergency bailout from the government.

Another fact that contradicts belief in the barometers for economic prosperity, concerns the job market for college graduates in China: Half of them are forced to settle for unemployment when the euphoria of graduation gives way to frustration, anxiety, and confusion. In the United States, every time the stock market tanked and a tight job market replaced a robust one, the country entered a recession. Surprisingly, despite similar signs in the Chinese market, nobody is so much as hinting at the same possibility for the Chinese economy.

If these data and facts give interested parties a certain amount of pause about the Chinese economy, it becomes easy to see that different pictures are being painted about Chinaat the same time, in the same article. Just when excitement sets in because China is becoming a growing trade powerhouse enjoying a respectable surplus with the United States every year, puzzlement follows as we find that China actually has a net trading deficit of over US$10 billion in each of the last several years, and is relying more and more on the outside for oil and raw materials to sustain its development. It is true, however, just as Shan Weijian, an alum of mine, pointed out in a recent Wall Street Journal, that China’s trade statistics suggest an undervaluation, rather than an upward revaluation, of its currency.

Surprisingly, similar instances, with wry contrast, permeate the Chinese economy. Just as you are awe-struck by the annual inflow of US$50 billion into China, your breath will be taken away by an even greater amount of capital flight each year.

Just as you become excited about the privatization of state-owned enterprises (SOEs) by way of management buy-out, in a form that is supposedly more advanced than Russia’s share-purchase program, you would learn most of those "buy-outs" are ill-disguised looting, with all the debts mysteriously written off, with the Party secretaries, the so-called managers, paying less than one tenth of their enterprises’ market value to become the new private owners.
Just as you are stunned by the announcement that China will export cars into Americaat less than half of the regular price we’re seeing these daysyou are told the cars are just too, too similar to one of the mini models GM is working on. So, again, just as quickly, a confident debut to announce China’s arrival in global competition becomes a highlight of its inveterate failure to protect intellectual property.

Just as you are proud, as a Chinese person, to hear people call your country the "world’s factory," you realize, on an afterthought, that it is probably as much an insult as a complimentafter all, a factory in the current hi-tech era means your only assets are people who have manual labor rather than mental power to sell.

Like me, any Chinese person will feel good about the number of people who have been lifted out of poverty in China, but will be totally flabbergasted at the following statistics of China’s Gini coefficient. It shows a steady rise from 0.1 in 1980 to the current 0.6, one of the highest in the worldbear in mind that the Gini coefficient by design ranges from 0 to 1, with a higher number signifying a higher level of income inequality in the society. Of course, there is always the cloud over China’s moribund banking behemoths, sitting on US$500 billion worth of bad loans and aspiring to be listed abroad after huge capital infusion from the Chinese government to improve the looks of its balance sheet.

Such an awkward juxtaposition and blend of pretty and ugly, hope and despair, new and old, static and dynamic, defines the economic reality of today’s China. Contemplating the economic realities of China is as if when heading out after a relaxing break in a Starbucks at Tiananmen Square, you lifted your head, and a shudder ran through you as your eyes met the empty but stern stare of Mao Zedong still hung on the rostruma reminder of where you really were.

Before the 1992 presidential election, a lot of people were anticipating an easy success for George Bush Sr., because he had just won a war in a most beautiful, if not easy, manner and his approval rating had been at an all-time high. But his mismanagement of the timing of economic recovery cost his second term, and spawned the now popular wisecrack for anyone who is politically inclined in the United States, "It’s the economy, stupid!!"

In my groping search for a thread, a theme, which runs through the 16 years of post-1989 Chinese economy, that vernacular aphorism for electioneering in the United States suddenly becomes inspirational. Indeed, to put all the froth and bubble puffed out by the Chinese economy into perspective, another wisecrack comes in handy and proves adequateIt is about political survival, stupid!!

In 1989, China chose to stick to authoritarianism at the crossroads where the other signpost read "Liberty," which turned out to be the path taken in the same year by all its ideological buddies in Russia and Eastern Europe. At that time, creating a bloodbath in Tiananmen might have been an easy decision and had the appearance of success to the Chinese regime, but the real challenge lay ahead. How to feed China’s ever-growing population while only tinkering with the economic system set up in the early 1980s? The regime had no choice but to confront this issue head-on, because in the wake of the total collapse of the Soviet-bloc, its legitimacy could only be guaranteed through economic growth.
Since then, the Chinese government has been busy pumping an inordinate amount of capital flowing in from the outside, into the abysmal hole of SOEs, to save it from bankruptcy, so that chances of social unrest due to mass layoffs are reduced. In fact, the government has in recent years quickened its pace to hand over the market and natural resources to foreign businesses, in the hopes of feeding its own people via foreign capital. This was evidenced by the dramatic accession to WTO by China in the year 2001, which amounted to handing down a death sentence to most of China’s SOEs.

Indeed, over half of China’s total export is now accounted for by foreign enterprises based in China, and the proportion of fully owned foreign enterprises permitted in the 1990s has been increasing exponentially in recent years, now reaching the percentage of 65 percent. These fully owned foreign enterprises are much less inclined to transfer technology, and they dominate the hi-tech exports. Which means, unlike joint ventures, these foreign enterprises will have no contractual obligation to help the Chinese obtain or develop advanced technologythe only benefit it brings are jobs for Chinese workers.

Many people have likened the Chinese economic growth to experiences of other Asian economies, and hope it will ultimately tread on the same path to democracy. But data in this respect suggests a divergent pattern. According to Professor Huang Yasheng of MIT, no more than 20 percent of the exports of Taiwan and South Korea were accounted for by foreign enterprises during the 1970s, their take-off period, and now are much lower. In Thailand, the share dropped from 18 percent to 6 percent by the mid-1980s. In contrast, all the Asian tigers instituted hugely preferential policies to help privately owned enterprises to develop international brands. South Korea’s Hyundi and Samsung are typical examples. In the case of Taiwan, it has become the #1 provider of computer chips, accounting for 70 percent of the world market worth US$8.9 billion, and the leader in many other computing areas. Taiwan is also the recipient of 5,299 U.S. patents, while China has only gotten 366. Not to mention Japan, whose Ministry of International Trade & Industry of Japan (MITTI) has been legendarily effective in cultivating home-grown competitive prowess.

The above analyses might help you understand the downward spiral of China’s competitiveness, as reported by the most recent report by IMD, a prestigious business based in Switzerland. More importantly, they should reveal a more serious problem underlying the Chinese economy: the fundamental mismatch between its governance and development. Political calculations of the communist regime have compelled it to sacrifice the country’s long-term development to maintain its grip on power. Big businesses from the West seem to have become another winner, on the back of the misery of cheap Chinese labor. But this pleasant party, cheered on by the press and pro-business politicians, can’t go on forever.

Imagine this, most liberal democracies these days have their economies propelled by the engine of productivity on four wheelsrespect of private ownership, competition, transparency, and accountability. Ahead of them, however, is a gigantic cyclist, going fast, on two huge, spinning wheels. One reads cheap labor, and the other foreign capital. To stay in the race, the cyclist pedals so hard while the people in the other cars look on. One person in the crowd, a Mr. Gordon Chang, who authors the book titled The Coming Collapse of the China, and who knows the cyclist very well, opines, "This poor guy will collapse soon," but his words only invite a huge "boo!"everyone is enjoying the show and nobody wants to be bothered. Their indifference, apathy, and callousness continue to cheer the cyclist onward. Now, you tell me, who is right?