In July 2011, two of China’s vaunted new bullet trains collided in a
spectacular wreck that killed 40 people and injured nearly 200 others. When one
train stalled after being struck by lightning, a second train rammed it from
behind, causing four train cars to plunge 60 feet off a bridge.
The accident was the worst of a
series of setbacks that have plagued China’s new high-speed rail project, a
visionary plan to link major Chinese population centers that has become
something of a symbol for China’s explosive growth over the past several
decades.
But China’s foray into
bullet-train technology has come with a steep price tag. Having spent an untold
fortune on the construction of the rail system, China’s Ministry of Railways
has clocked up trillions of yuan in debt (a figure equivalent to hundreds of
billions of dollars), and continues to lose around $600 million per quarter.
Add to this the steep interest rates that China now has to pay for new debt issues
to fund the railway and very low passenger turnout because of the cost of
tickets, and the Chinese high-speed rail project has all the hallmarks of a
financial disaster in the making.
The high-speed rail project is
only one of a myriad of state-directed enterprises in still-socialist China
that are looking less and less like unstoppable engines of success driving the
world’s most dynamic economy and more and more like train wrecks in the offing.
For a generation now, and especially in the years since the great economic
collapse in 2008, we have been informed by a range of economists, journalists,
politicians, and international investors that so-called “red capitalism” has
been and will remain a resounding success, that China’s manifest economic destiny
is to eclipse the economies of the West within a few short years, and that such
growth as the world economy has managed to eke out in recent years has been
crucially dependent on China’s progress. In a word, the more
free-enterprise-based system of the West appears to be in decline, while
China’s oligarchic, managed economic system is held to be the wave of the
future, representing a rational compromise between Western laissez-faire and
Eastern central planning.
Can China Keep It Up?
But how sustainable is China’s
growth? And does it really herald the arrival of a “Chinese century” and the
terminal economic decline of the West?
First, the facts: There can be no
doubt that China’s economic progress over the last 30 years has been
impressive. China essentially launched a modern banking system from scratch and
began liberalizing its economic laws in the late 1970s under the leadership of
Deng Xiaoping, who pragmatically grasped that China needed to learn to harness
the engines of economic progress in order for the communist state to sustain
itself. Deng urged his fellow communists to accept that neither socialism nor
capitalism could be “pure,” and that China would have to learn to live with
both. For a few years, as Eastern Europe and the Soviet Union came unraveled in
the late ’80s, it appeared that a similar pageant would play out in China.
Events in 1989 in Beijing’s Tiananmen Square, however, dispelled any illusions
that China’s economic progress would be paralleled by political liberalization.
Government tanks slaughtered hundreds of innocent demonstrators, most of them
university students, agitating for “democracy,” quelling any prospect of an
overthrow of China’s communist oligarchy.
In the generation since Tiananmen
Square, the Chinese economy has continued to charge forward, even as
once-isolated China has thrown its doors open to the outside world. Nowadays,
millions of foreigners — students, bankers, teachers, and businessmen — live
and work in China. The media are filled with dazzling images of glittering new
skyscrapers and nouveau-riche Chinese in BMWs and Ferraris, even as China’s
space program progresses by leaps and bounds. Chinese factories hum day and
night, manufacturing consumer goods that used to be made in the United States,
and which wind up on the shelves of Walmart and other Western retailers.
Measured against where it was three decades ago, China has indeed enjoyed
extraordinary progress — probably the fastest and most dramatic economic growth
episode the world has ever witnessed.
Much of this growth, however, has
less to do with enlightened policymaking than with the character of the Chinese
people themselves. Although China and Russia, the two former titans of
totalitarian communism, may seem to have enjoyed parallel histories in the 20th
century, they have very different cultures. Russia, when it first embarked upon
its disastrous experiment with communism, was a feudal state with little
inclination toward the commercial and financial enterprise that had propelled
Western Europe to economic supremacy. After the breakup of the Soviet Union,
the Russians have more or less reverted to form, with a sort of modern
feudalism transforming the Russian economic landscape into a patchwork contest
of entrenched oligarchies and partisan machinations. While the Russia of Stalin
is thankfully gone, its departure has not ushered in an era of Western-style
economic liberalization. Russia’s economy has grown, but not on the scale of
China’s, Brazil’s, or those of a host of other newly competitive economies.
China, on the other hand, comes
from a robust mercantile tradition, as famed investor Jim Rogers — long one of
China’s most conspicuous Western proponents — has pointed out. “China,” Rogers
wrote in 2004, “has had a vibrant merchant class throughout much of its
history; many are still alive who remember what capitalism was like before Mao
Zedong’s revolution.” Nor was the Chinese entrepreneurial spirit snuffed out by
the communist revolution in 1949, Rogers pointed out:
Many of those Chinese capitalists
went abroad to Hong Kong, Taiwan, and elsewhere to pursue their business
interests. Before the Communist revolution, Shanghai had the largest stock
market in Asia and between London and New York, and it will again. Even after a
half-century of a strictly controlled Communist economy, the Chinese seem more
culturally predisposed to capitalism than their Russian counterparts.
They also have the habits of
ready-made capitalists: The Chinese save and invest upwards of 40 percent of
their income (Americans save barely 2 percent), and they have an incredible
work ethic. The Chinese work and work to get the job done. I saw men and women
working on highways late at night under floodlights. They demonstrate the kind
of productivity and ingenuity that are required to build good companies.
Of the Chinese work ethic and
entrepreneurial spirit, this author can personally attest, having spent time in
the 1980s teaching English in Taiwan. That beautiful subtropical island that
served as a refuge for Chiang Kai-shek’s fleeing Chinese Nationalists fairly
buzzed with activity. Many of my English students worked two or three jobs over
an 80- or 90-hour work week and still managed to carve out time to study
English for 10 to 20 hours a week, so determined were they to position
themselves for competitive advantage in what was even then a global economy.
Much the same could be said of
Hong Kong, Singapore, and other East Asian cities, like Kuala Lumpur, where the
so-called “overseas Chinese” constitute a dominant class. Where Chinese
merchants have gone, prosperity has followed.
Thus the Chinese — hard-working,
thrifty, and entrepreneurial — enjoy a cultural profile that has allowed them
to achieve such extraordinary progress.
Politics of Impoverishment
Politically, of course, China is
a different story altogether. Since 1949, mainland China has been ruled by a
single party, which was introduced by foreign agents and driven by a foreign
ideology. The introduction of Russian-style Marxism in China was not the first
time a foreign power has imposed its will on China, but it was destined to have
devastating consequences. When Mao Tse-tung and his guerrilla army of
communists swept into power in 1949 — with the help and connivance not only of
the Soviets but also sympathetic Marxists in Western countries — China was
plunged into a totalitarian nightmare, complete with one of the largest pogroms
in world history. In contrast to the horrors of the Cultural Revolution, the
lighter hand of communism introduced by Mao’s successor, Deng Xiaoping, must
have seemed a blessed respite to China’s long-suffering masses. From the late
1970s to the present day, the Tiananmen massacre being a notable exception, the
Chinese Communist Party has behaved more like a run-of-the-mill autocracy than a
Stalinist dystopia, although crucial human rights generally acknowledged in the
West continue to be denied or severely abridged in China.
One of these is the right to have
children. China’s abominable “one child” policy, made explicit in 1979, has, as
intended, sharply curbed China’s population growth, an outcome that has been
met with strong approval among modern-day Malthusians and population-control
fanatics, outside as well as inside China (in 1987, China had 26 million
births; last year, only 15 million). It has also led to a campaign of forced
abortions and other unspeakable treatment of women and couples who conceive
children without government authorization.
And there has been an economic
price to pay as well, a price that is poised to become much steeper over the
next few decades: the loss of a rising generation. Thanks to strictly curbing
childbirths for an entire generation, China’s demographics now skew heavily old
and gray, and declines in productivity are already becoming evident as a result.
“Each year, the number of new workers joining factories is smaller than the
number of old workers who are retiring,” Zhang Zheng, an economist at Peking
University, told the Telegraph’s Malcolm Moore last year. “The supply has dried
up.” Zhang estimates that, out of a total Chinese workforce of 550 million, a
mere 154 million are under 30, and the number is dropping with each passing
year.
Such a trend spells serious
trouble for an economy dependent on a sprawling manufacturing base and the
millions of young people who keep its factories productive. China is not the
world’s only major power with a graying demographic — the populations of Japan,
Russia, and parts of Europe are also graying, as fewer and fewer children are
born to couples more and more reluctant to raise families — but China is the
only country whose government is directly responsible for the trend.
And China’s one-child edict is
only one example of the lingering totalitarian impulses that still define the
Chinese Communist Party. While foreign visitors in China are impressed with the
bustle and progress, a surprising number of successful Chinese are trying to
emigrate. As the Wall Street Journal’s Jeremy Page noted last November, more
than half of China’s millionaires are planning to leave the country, according
to a Bank of China survey. A whopping 40 percent wanted to relocate to the
United States, and another 37 percent were looking to Canada as a refuge. Why?
“Many Chinese who have profited most from the country’s growth,” Page observed,
“also express increasing concerns in private about social issues such as
China’s one-child policy, food safety, pollution, corruption, poor schooling,
and a weak legal system.” Beneath its veneer of modernity and order, Chinese
politics is still a graft-ridden spoils game and the Communist Party, with its
secret police and laogai, is still autocratic and unaccountable. Given the
choice between living and rearing such family as they are permitted to beget in
a rising China on one hand, and moving to the West on the other, many
successful Chinese are contemplating voting with their feet.
Currency Comeuppance
But bad government isn’t the only
thing spooking China’s wealthiest. Concerns are rampant that the Chinese
economic miracle is about to go sour. For one thing, much of China’s growth has
been predicated on its ability to export cheap goods to Western consumers.
Since 2008, however, buying has slowed dramatically with the global economic
downturn. As household wealth in the United States and Europe has plummeted, so
has demand for consumer items made in China. And that’s not all. Page notes
that many of China’s wealthy are concerned that “China’s growth could be
derailed by a raft of problems, including high inflation [and] a bubbly
real-estate sector.” As in the West prior to 2008, China’s real estate sector
has been flying high — too high, many analysts are now warning. And while China
has refused to allow its currency, the yuan — officially called the renminbi —
to float freely against other currencies, the Bank of China has been no less
inclined than its Western counterparts, like the Federal Reserve, to pump up
the economy by expanding the money supply.
China’s inflationary policies
have had a single clear objective since the current 8:1 peg was instituted in
July 2008: Keep the value of the renminbi low relative to the dollar, in order
to ensure cheaply priced export goods. But any country wishing to maintain a
currency peg must print sufficient money to purchase lots of the foreign
currency in question; this is why the government of China holds so many
dollar-denominated assets. Like other kinds of inflationary activity, fiat
money created to support a currency peg in an international climate of
floating, or non-pegged, currencies will create malinvestment and asset
bubbles. Every major currency crisis in the last 20 years — the Mexican crisis
of 1994 and the Asian crisis of 1997 are two prominent examples — was triggered
by a breakdown in currency pegs. In those instances, however, the governments
of Mexico, Thailand, and elsewhere got their comeuppance from trying to peg
their currencies too high, leading eventually to catastrophic devaluation.
China, by contrast, has deliberately pegged its currency too low; most
estimates put the renminbi’s pegged value at anywhere from 25 to 40 percent
below market value.
Printing enough renminbi to
maintain the peg has resulted in fairly robust inflation domestically, but has
allowed China to avoid the worst effects of the global downturn — for now.
There can be little question that, as U.S. politicians frequently charge, China
is taking advantage of the international banking and currency system, including
the dollar’s status as the world’s reserve currency, to engage in a
none-too-subtle form of protectionism, while insulating itself from much of the
wild instability in global markets since 2008.
But what is really taking place
is that the Chinese government (which is top-heavy with keen financial minds)
has cynically discovered a clever means of turning a thoroughly rotten and
immoral international monetary system to its own advantage. Prior to World War
I, all major world currencies were pegged — to gold (and, in the case of
certain regional powers with fewer assets, like China and Mexico, to silver).
The gold standard meant that different currencies merely represented different
amounts of the precious metal; there was no need for currency controls,
currency speculators, and the like. The system regulated itself, and
immediately punished any government or central bank that attempted any funny
business, like printing more money than it had assets in gold to redeem.
The demise of the international
gold standard has given rise to modern currency trading and to the intricate
web of international banking and currency regulations we now have. It has also,
since the early 1930s, when most of the world abandoned the gold standard,
produced almost unremitting currency chaos, in which governments deliberately
manipulate their respective currency supplies in order to maintain competitive
advantage (or “beggar thy neighbor” policies, as they were once called). But
efforts to peg all currencies to the dollar and the dollar in turn to gold,
which emerged from the Bretton Woods agreement in 1944, came to naught when the
United States under Nixon, having printed money to finance the Vietnam War,
went off the gold standard in 1971.
Although the “Nixon shock” to
global finance was immediate and long-lasting, the U.S. dollar remained the
world’s reserve currency, allowing the United States to continue its
inflationary policies at the expense of the rest of the world. In other words,
thanks to the international demand for dollars, the United States for several
decades was able to issue quantities of fiat money that would have long since overwhelmed
any other economy with hyperinflation.
Many other countries with weak
currencies — Argentina, Thailand, and Mexico among them — have tried to hitch
their currency wagon to the U.S. dollar’s star, only to succumb to inflation
and currency implosion after running the printing presses to maintain an
artificial peg.
That China has succeeded at this
game longer than most others is a testament in part to her avoidance of debt
and to her seeking to artificially devalue rather than prop up the value of her
currency. The first wave of the great global economic contraction that is still
unfolding was triggered by the real estate asset bubble and (more recently)
unsustainable levels of sovereign debt, especially in Europe.
But the hard reality (so to speak)
of fiat money is that it always produces malinvestment, asset bubbles, and
artificial booms that sooner or later end badly. Fiat money is socialized,
i.e., centrally planned money, and like all other artifacts of centrally
planned economics, always falls prey to the errors inherent in centrally
planned economies. Authorities at the Federal Reserve and other central banks
have no idea how much money is appropriate for any economy, any more than
planning boards in the old communist bloc were ever capable of figuring out how
many cars to manufacture or how much wheat to grow. Only the free market can
make such determinations.
Therefore, China’s economy,
sooner or later, will slip into recession as the inevitable need to correct the
pernicious effects of inflation arrives on Chinese shores. There is
considerable reason to believe that China, like the West a few years ago, is in
the midst of a spectacular real estate bubble, as manifested in part by the
binge of skyscraper construction that has transformed the skylines of many of
China’s largest cities over the last few years.
Present Position
In the meantime, China has
managed to avoid the worst effects of the global downturn by maintaining
certain economic fundamentals a little better than the United States and
Europe. China is a creditor, not a debtor nation, a distinct advantage at a
time when debt is threatening to bring down Western civilization. In relative
terms, China is much freer than was the case a few decades ago, engendering
confidence on the part of her huge workforce that there will be no returning to
the darkness of Maoism. The United States, on the other hand, is dramatically
less free, particularly in economic terms, than was the case a generation ago.
Our corporate taxes are the world’s highest, and the IRS is now poised to
become a national healthcare gestapo on top of its already onerous powers.
During the last three and a half years alone, the United States has virtually
nationalized her entire financial sector and her insurance industry. Most of
the rest of our economy is under the regulatory thumb of the federal
government, from pharmaceuticals to automobile manufacturers to oil companies.
What basis does the smart money have for expecting America to reverse course?
Not only that, many of our
government’s own policies have created huge incentives for American
corporations to relocate to China. From the aforementioned vertiginous
corporate taxes to the gargantuan cost of compliance with Byzantine
occupational, financial, and product regulations, America has become a very
hostile environment for building and conducting business. This in contrast to
the likes of China, which rolls out the red carpet for any foreign corporation
willing to build its factories on Chinese soil and employ its willing
workforce.
One piece of silver lining in the
recent economic clouds, though, is the arrival of the shale gas industry, which
bids fair for the United States where cheap energy is concerned, compared to
the likes of China and Japan. As investment guru Antoine van Agtmael pointed
out in Foreign Affairs, “The [shale gas] glut has made natural gas prices of $2
to $2.50 per 1 million BTU equivalent to oil at about $12 to $15 per barrel....
In contrast, China and Japan are now forced to import gas at much higher prices
of $13 to $17 per 1 million BTU.” Van Agtmael forecast a rosy future for the
American energy industry, thanks to the explosive growth of gas extraction via
hydraulic fracturing:
In the future, gas will be king
rather than oil. In a decade, gas prices may no longer be set by oil prices,
but the other way round.... China has its own shale gas but the United States
has a major head start in geology, technology, and pipelines. It will take
China several years to catch up. India’s offshore gas production has been
disappointing and slow. Thailand will run out of gas in ten years, though
Myanmar will bring on line large new supplies.
But factors like these have
failed to revive confidence in the long-term viability of the U.S. economy as
against that of China, whose economy this year is poised to grow by a figure of
“only” around seven percent — down from the double-digit growth rates of recent
years but still a figure that American and European policymakers can only dream
about.
That we have arrived at a state
of affairs where an authoritarian regime like China’s looks good, economically
and financially, in comparison with the United States speaks volumes about our
dire predicament. With investors like Jim Rogers already proclaiming the
arrival of a Chinese and Asian century, is there anything the United States can
do?
First of all, much of the mess
we’re in — the massive indebtedness, the expiring asset bubbles, and the Big
Government that is inevitably created to remedy such ills — can be ascribed to
a century-long diet of fiat money. In the long run, no nation — not even the
frugal, industrious Chinese — can resist the siren song of easy credit and
inflationary booms occasioned by fiat money. Over time, excessive debt and easy
money become cultural expectations, and people become unaccustomed to thrift.
The only way to extricate
ourselves from the culture of easy money is to return to the gold standard.
Pegging all currencies to gold once again would put an end to currency wars and
would eliminate inflation as long as governments honored their commitments.
Under such conditions, no country’s currency would enjoy a competitive
advantage over any other’s; if one country tried to print its way out of debt,
its currency would self-correct.
The fiscal discipline that a gold
standard imposes is, of course, the reason that American politicians and
bankers are loath to consider it. Unfortunately, the market is now imposing a
discipline of its own, and the inflationary dollar’s days are numbered.
The other step that we must take
to avoid being swamped by young economies on the make, like China and Brazil,
is to restore some semblance of a free-market economy. America must restore her
economic preeminence by returning to her heritage of laissez-faire and getting
rid of regulations and taxes that are destroying our economy. If we fail to do
so, we will continue down Hayek’s dreary road to serfdom — and may someday soon
pass the Chinese going the other way.
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