China: 10 Warning Signs of Problems

Article excerpt

CHINA is now the world's main economic locomotive. The Great Wall of China has become the Great Mall. There has been recognition by the Chinese leadership since the late 1970s that socialism has failed and that a greater reliance should be placed on the market system. This has resulted in the biggest rise in income for the biggest number of people in world history: one of the greatest achievements of late twentieth-century history.

China now has the world's second largest economy, still well behind the United States but recently overtaking Germany and Japan. With the US and European Union still largely in recession, the world looks to China's continued economic growth to draw along the rest of the global economy. But just how secure is China's continued phenomenal rate of economic growth?

This article examines ten warning signs to monitor when the Chinese economic boom begins to wind down. The list is not in any order of priority, least of all an order of likelihood. The list is drawn up simply as a warning that the current rate of Chinese economic growth cannot be sustained and that we need to be ready for surprises.

First, no economic boom in history has continued indefinitely. There are more ex-empires in the world than currently flourishing civilizations. All the European empires, for example, have now gone. The Europeans dominated world affairs from around the 1490s until the rise of the US (which itself is largely a 'European' country) in the mid-twentieth century. The European influence is still felt around the world, in terms of political heritage (they drew up most of the world's national borders, for example), languages, legal systems, and social trends. But they no longer dominate the world as they did in, say, the nineteenth century.

China itself is a good example of a country that has risen and fallen. Twelve hundred years ago the Tang dynasty stretched from the South China Sea to the borders of Persia (Iran). 'The Tang welcomed diverse people to its capital, Changan, the site of modern-day Xian, and multiethnic groups lived side by side in a city of a million - a population unmatched by a Western city until London in the early nineteenth century. Then, as today, China was an economic powerhouse - and much of that power was built on trade'. (1) China pioneered the development of. for example, papermaking, cast iron, gunpowder, and paper money. All of these had to be re-invented by the Europeans in the last half millennium or so. (2) As Europe developed as a great power, so it acquired a taste for Chinese products, such as tea which arrived in London in 1657 'when the fabric of English social and commercial life began to include as an essential significant quantities of this hot brown infusion'. (3) But in more recent centuries China went into decline and fell prey to warlords, civil wars and some European colonization (the British got Hong Kong and the Portuguese got Macao for example). China has therefore collapsed before - and may yet do so again.

Second, China's booming economy is just a bubble - and it may burst. This has happened to all other bubbles, for example, when The Netherlands was a great power in the seventeenth century a great deal of speculative money went into tulips. Other European great powers put speculative money into canals and railways bubbles, which also collapsed.

China is not yet an efficiency-driven economy. There are many obstacles to overcome, including access to finance for local investment, local politics, corruption, inefficient government, inadequate intellectual property rights, and a limited rule of law and property rights. The country may no longer be 'communist* but it is still a long way from being 'capitalist'. China draws attention from overseas companies because of the sheer size of its potential market - rather than its inherent attractiveness as a place fordoing business, such as transparency and honest public administration. …