China on the Boil (Part 3 of 3)

THE FIVE WOES

The key goal of the Chinese Communist Party is control. Until the 1980s, it maintained near total control over most aspects of society, but that has steadily slipped since the early 1990s.

Today Party’s control of a greatly changing society is fragile. The Party knows it, and they are increasingly insecure about it.

The fall of communism in Eastern Europe and the Soviet Union was a warning bell for change, even if change means giving in to non-communists. After 13 years of studying the European parties, the Chinese communists opened up party membership, even to avowed capitalists.

Further, the growing middle class, with independent sources of wealth, is increasingly vocal.

With its ideology dead, the Party’s political legitimacy comes only with continued economic growth. An uneasy accommodation between Party and people has held, but the middle class is becoming more vocal in demanding better governance.

The Party’s diminishing control of society and politics is caused by five woes:

Economic, with incomplete reforms, an impatient younger generation, and pressures to change to a domestic consumer-oriented economy. The global economy also poses problems with strict rules of international trade, international product quality standards, and international demands for greater access to the domestic economy.

Political, with no clear ideology, Party corruption at local levels, and no defined means of leadership succession.The Party has given up many of the tools used to control society, especially the household registration system, which tied people to localities and work units. China now has considerable social mobility.

Social, with a growing civil society that allows numerous independent non-governmental organizations to lobby such issues as environmental protection, use of eminent domain, housing, health care, education, and product quality standards.

Cultural changes caused by the globalization of information. Internet, cell phones, texting, and e-mail cause difficulty in controlling new ideas, national and international contacts, and organizational capabilities.

International pressures from a growing awareness of foreign political and legal systems.

Chinese communists have long fought against “cultural pollution” of Western ideas. None of this is good news for China’s leaders, who, above all, want stability to remain in control.

Yogi Berra said, “It’s hard to make predictions, especially about the future.”

I see four possible scenarios for China’s future that are not mutually exclusive.

Muddling Through. Continuing the status quo with an increasingly ineffective central government regarding social welfare policies and the environment.

Military Dictatorship. An inability of military leaders to agree on an appropriate political leadership within the CCP leads to an outright takeover of the government. China would look very much like Taiwan prior to lifting of martial law in 1987 and the legalization of opposition political parties in 1991.

Rise of political pluralism. Emboldened by an ineffective Communist Party at the central level, opposition parties organize to offer alternative policies for governing China. The political scene, though chaotic, evolves with consolidation of political parties into a manageable few. This system would not be a Western-style democracy.

Collapse and Chaos. With a divided military and an ineffective Party, China’s government collapses. Chaos follows. Different segments of the army favoring one type of government or another enter into armed fighting, with a full-scale civil war following. The country would be governed once again by Warlords.

And we all think Barack Obama has worries.

China on the Boil (Part 2 of 3)

The Dark Side

Deng Xiaoping kicked off China’s economic reforms with a refutation of Mao Zedong: “Learn truth from fact,” Deng said in 1978. In our first segment we saw the rosier side of China’s economy. But we have to seek the truth from its darker side.

China faces a perfect storm of challenges that have broad implications for its economy and, given its authoritarian system, its politics. The dark side looks like this:

Sluggish industrial production. In 2008 it grew by only 5.8 percent, down from the 18 percent in 2007.

A projected growth rate of 6 percent for 2009. This is a hard landing for China, according to the Economist Intelligence Unit.

An inflexible currency policy that undercuts long-term economic stability. China is forced to assume large amounts of U.S. Dollars to keep the currency value within targeted levels. This causes over-production and non-performing loans held by banks.

But China is in a vicious circle. The more dollars China holds, the less likely it will float the currency as the value of dollars would depreciate. A free-floating Renminbi (Chinese currency) would likely settle at five per U.S. dollar. It is currently at 6.84 per dollar.

The burden of government owned enterprises. About one-third of China’s industrial production comes from them, and half are losing money. Ending government subsidies and allowing state-owned companies to go out of business creates great unemployment, a clear political problem for a fragile government.

An inefficient banking system that provides government subsidies to state-owned enterprises. Chinese loans are often made on the basis of politics rather than economic profitability. China has yet to open its banking sector to foreign banks because its own could not compete.

A horribly degraded environment along with a growing water shortage. This poses serious risks to public health and to China’s economic well-being.

The facts are staggering. Twenty of the world’s 30 most polluted cities are in China. Three hundred million rural residents are drinking unsafe water. China has now surpassed the U.S. as the world’s largest contributor of CO2. The rates of various cancers and lung diseases are on the rise.

Though strict environmental laws are on the books, they go unenforced at the local level in a trade-off of economic growth for environmental health.

The high cost of pollution -- estimates have it as high as 12 percent of GDP -- in terms of illness, factory shutdowns, and remediation (cleanup) projects.

Fallout from the global financial crisis. China’s exports shrank in the last several months, and Chinese officials expect no growth in exports in 2009.

Half of China’s GDP growth in the last 30 years is attributed to exports and government consumption. Domestic consumption is a weak link given the Chinese penchant for saving.

Thousands of shuttered factories in Guangdong Province. Five million jobs have been lost. Half of China’s toymakers and one-third of its shoe manufacturers have disappeared.

Supply chain contagion. Foreign manufacturers rely on Chinese-made parts and accessories to finish their own products. Foreign companies using Chinese supplies will suffer too.

Consumer confidence has plunged. In November the Chinese government issued its own stimulus package of $586 billion.

Moving away from an export-led model requires increasing government-funded social security such as health care, pensions, and education to dampen the Chinese penchant for saving.

Production would need to be reoriented to the domestic market, which in turn requires labor retraining. Replacing the foreign investment garnered with the current economic model requires financial institutions that can raise capital and are not risk averse.

A widening income gap between rural and urban residents. In 2007 it was 3.33 to 1 (urban to rural). This January it was 3.36 to 1. Peasants account for about 65 percent of the population.

Growing public unrest. There were 87,000 reported protests (many violent) in 2005 over issues of pollution, government corruption, land seizures, forced relocation, and unemployment. Estimates of protests for 2008 are at the same levels.

Already insecure because of communist government collapses in Eastern Europe and the Soviet Union in 1989 and 1991, the Chinese government feels boxed in by economic woes. The future is not as bright as the façade appears.

NEXT: The Five Woes (Part 3 of 3).

China on the Boil (Part 1 of 3)

THE THREE BENEFITS

U.S. Senator Sherrod Brown recently blew the whistle on the United States government’s use of Chinese steel for construction projects along our border with Mexico.

He and United Steelworkers President Leo Gerard called for enforcement of “Buy America” provisions in the stimulus legislation that President Barack Obama signed last week.

“This is about jobs and putting our economy on the right track,” said Brown said. “Buy America provisions will ensure that U.S. taxpayer dollars go toward the creation of U.S. jobs.”

Brown said the Department of Homeland Security used Chinese steel products to build portions of the 854-mile border fence along the U.S./Mexico border. The senator demanded that the government use AmericanAmerican goods for projects it funds.

Brown’s message leaves an impression that China is stealing our jobs, growing stronger economically, and is, well, just passing us by.

China just celebrated 30 years of economic reforms. The stranglehold of central planning and government ownership of just about everything has been transformed into an economy based on capitalism, private enterprise, and astute entrepreneurship.

In a short time, China and its leadership have reaped three benefits: The country is rich, more people are richer than they were, and the Chinese Communist Party gets to take credit for it.

Growth

Let’s examine some of this growth (unless otherwise cited, all figures from the Economist Intelligence Unit).China’s economy has grown from almost nowhere to the second largest in the world. In 2007 its economy was 14 times larger than it was in 1979. Over that same period, per capita GDP was more than 10 times larger.

China has enjoyed an average annual GDP growth rate of 9.8 percent from 1979 through 2007. By comparison, the U.S. average annual GDP growth rate between 1979 and 2006 was 3.04 percent, according to the World Resources Institute.

Trade with the US has gone from a total of $5 billion in 1980 to $387 billion in 2007. Our trade deficit with China in 1985 was $6 million. Today it is a whopping $266.3 billion.

While the U.S. has been bogged down in Iraq and Afghanistan, China has been busy shellingopping its goods around the globe. China’s total world trade in 2007 -- was$1,218 billion in exports and $955.8 billion in imports -- leaving it with a trade surplus of $262.2 billion.


Factory of the World

Many see China as the “factory of the world.” We have lost thousands of American jobs to Chinese factories have grabbed thousands of American jobs. Almost everything we buy, or at least parts of those things, are made in China.

From 2004 through 2007, the Chinese doubled the value of its merchandise.

Half of China’s trade is conducted by foreign firms operating in China. About 60 percent of our trade deficit with China – get this -- comes from American firms operating therein China.

Large trade surpluses, foreign direct investment in the country, and large purchases of foreign currency (U.S. T-bills for example) have made China the world’s largest holder of foreign exchange reserves at $1.9 trillion by the end of September 2008.

According to the U.S. Department of the Treasury, through December 2008 China held U.S. T-bills valued at $696.2 billion, a big jump from the $477.6 billion in held the year before. Last September China surpassed Japan as the largest holder of U.S. T-Bills.

In 2000, China initiated a “go global” strategy to invest in companies overseas. Two years ago it launched the China Investment Corporation, which is directly under the State Council, China’s governmental cabinet. This company oversees $200 billion of China’s $2 trillion holdings of American dollars.

So we are starting to see Chinese brands in the United States such as Lenovo, Haier, and soon an automobile called Chery.

All this provides a frightening prospect for the future. But China has serious problems. Its economy suffers from dislocations caused by incomplete reforms and the continued use of politics to determine economic action. The current global financial crisis doesn’t help matters.

NEXT: THE DARK SIDE (Part 2 of 3)

Goodbye Great Satan?

During the 2008 election, one of the news commentators said that people in the Middle East would not know how to deal with someone named Barack Hussein Obama. A president by that name would make them stop and wonder.

According to a recent report in the Boston Globe, http://www.boston.com/news/nation/articles/2009/02/11/gentler_approach_challenges_anti_us_regimes_analysts_say/, that is exactly what is happening.

“The new American president, who has tried to strike a more conciliatory tone toward some of America’s most intractable adversaries, may be making inroads into reducing anti-American feeling in some distant corner of the globe,” wrote Globe reporter Bryan Bender.
Adversaries such as North Korea, Venezuela, Hammas, Iran, and even Al Qaeda, Bender said, are all having a problem with Obama.

“They all feel threatened by a Barack Obama,” Hady Amr, director of the Brookings Doha Center in Qatar, told Bender. “They worry that Barack Obama will erode their base.”
This isn’t all roses. Bender noted several specialists who worry that a growing feeling of vulnerability might force anti-American leaders to act out.

Still, the prospect of an American president who does not act like a “Great Satan” may be a blow to the terror groups who can no longer point to an American enemy.

Time will tell. The United States has to walk the walk toward peace.

Good Tone. Now Details.

Vice President Joe Biden’s speech in Munich on Saturday set a new tone for American foreign policy in the new administration, but President Obama will need to provide more details on the many challenges that lie ahead.

Biden told representatives of the many countries attending the 45th annual Munich Security Conference that the U.S. is ready to talk – and to listen – but also asked allies to do more in facing the threat of terrorism.

In a stark contrast from the Bush Administration, Biden said “There is no conflict between our security and our ideals. They are mutually reinforcing.

But Biden also said some things that remain puzzling for those who thought the Obama Administration would reject everything George W. Bush did. One of those issues is Iran.

Biden said his hope is that the U.S. “will work in partnership whenever we can, alone only when we must.” That’s not quite a total rejection of Bush Administration policies.

In discussing Iran, Biden said the country “has acted in ways that are not conducive to peace in the region or to the prosperity of its people; its illicit nuclear program is but one manifestation.
“Our administration is reviewing policy toward Iran, but this much I can say: We are willing to talk. We are willing to talk to Iran, and to offer a very clear choice: continue down your current course and there will be pressure and isolation. Abandon your illicit nuclear program and support for terrorism and there will be meaningful incentives.”

Without further elaboration from the Obama Administration, that sounds like a conditional willingness to talk with the the same reconditions that Bush had.

Iranian Parliament Speaker Ali Larijani said the U.S. should change policies toward Iran and admit past "wrongdoings" before any dialogue could begin.

"The carrot and stick policy (toward Iran) must be dropped," said Larijani. "Over the past years, the U.S. has burned many bridges but the new government can rebuild them ... if it accepts its mistakes and changes its policies.

Candidate Obama said he would talk to Iran without preconditions. Now that he’s in office, the public will have to watch his foreign policies very carefully.