Archive for the ‘Economics’ Category

The long-running debate as to whether China will dethrone the U.S. as the world’s top superpower or buckle like Japan or the Soviet Union is heating up again. Slowing growth and a slew of ominous data has people talking about just how serious this crunch will turn out. You can check out two great discussions about this at ChinaFile and New York Times (or to simplify, just read the opposing viewpoints of Michael Pettis and Justin Lin).

Whether there will be a crash and what that says about China’s economic model is certainly very significant, but I think when looking at the big picture of China’s future, it’s hardly THE most significant issue. I don’t fear a Chinese hard landing nearly as much as I fear the hard long slog unfolding much more quietly.

Right now China is barrelling down the economic rapids trying to avoid crashing, but there’s already a hole in the bottom of the raft. Even if it avoids a crash, there are much worse things in store. And China doesn’t have just one big hole in its raft, it has (at least) four.

1.  The Aging Population
In 2010, about 13 percent of China’s population was over 60-years-old. Or in other words, there were five working age people for every retiree, and even that’s already causing problems. With China’s enormous “floating population” of migrant workers, about half of all elderly live by themselves or with just an elderly spouse. This leaves many migrants the choice of essentially straddling their hometown and work-destination in order to care for ailing parents, or paying to put them up in the city. Both options can cause huge financial strains, which is made worse by the fact that the one-child policy has left plenty of couples to solely support four parents. But as tough as it is now, we ain’t seen nothing yet:

population aging chart

That 5-to-1 ratio of workers-to-retirees will fall to 3-to-1 just by 2020 and continue to get worse from there until the over 60 crowd goes above and beyond a third of China’s population. Some may point out that this is very similar to what Japan and several other countries are going through, but there’s one very important thing to keep in mind:

 japan china gdp2

Thanks to the one child policy wreaking havoc on demographics, China is facing a first world problem while it still only has third world resources to cope with it. Japan may be able to afford it, but in all likelihood, China won’t. The facilities and the trained personnel to care for these elderly just aren’t there, and putting them there will be incredibly difficult with the meager means China has at its disposal. It will put unmanageable strains on families, pensions and China’s healthcare system…not to mention the economic dividends China’s large population of workers have been supplying over the past two decades.

2.  The Pollution
I don’t even know where to begin on China’s pollution problems. For starters, an estimated 750,000 Chinese die prematurely each year from air pollution-related respiratory diseases. Hundreds of “cancer villages” dot the countryside. And the country’s carbon emissions, which are already the highest in the world, aren’t expected to peak for at least another two decades.

But the most frightening implication of China’s pollution is what it’s doing to the food and water supply. Wall Street Journal reported last week that “anywhere between 8% and 20% of China’s arable land, some 25 to 60 million acres, may now be contaminated with heavy metals. A loss of even 5% could be disastrous, taking China below the ‘red line’ of 296 million acres of arable land that are currently needed, according to the government, to feed the country’s 1.35 billion people.”

Many farmers that used to produce healthy food are now growing food they know can’t be sold just so they can qualify for compensation from the government or polluting factories. Or worse, they’re growing food they know isn’t safe to sell, but they’re sellling it anyways. On top of this, desertification resulting from global warming and deforestation is claiming arable land the size of Rhode Island every year.

After decades of growth policies that used the “grow GDP first and clean up later” principle, China is realizing that it all may be too expensive to clean up. A researcher from the Chinese Academy of Social Sciences has estimated that if you factor in environmental costs, China’s real annual GDP growth would be nearly halved. However, no matter how much money is thrown at the problem, there are some resources that may never be recovered…which leads to the next big problem.

3.  The Water Shortage
Demand for water in China is skyrocketing, while at the same time supply is dwindling and being contaminated.  The Tibetan glaciers, which supply the water for all three of China’s major rivers – The Yangtze, Mekong and Yellow – are disappearing by as much as 7% per year. About half of the rivers that existed in China in 1990 have already dried up, and of those rivers and lakes that remain, about 75% are severely polluted. 28% are so polluted that their water can’t even be used for agriculture.

The water shortage will also have severe effects on industry. As much as 17 percent of China’s water is now used by the coal industry and other power stations. And as you can see, China’s coal use has been shooting upward for the past decade with no promise of slowing any time soon.

 coal chart
Chart via U.S. Energy Information Administration

Over the next two decades, this water crisis is poised to come to a head with demand far outstripping supply by nearly 200 billion cubic meters. What this will mean for China’s economy and the everyday lives of its citizens is scary to think about, to put it mildly.

 waterrisk
Chart via Business Insider and China Water Risk

4. The Gender Imbalance
The one-child policy, a patriarchal culture and sex selective abortions and have come together in what will eventually create a population of surplus men that rivals the overall populations of many large countries. According to a Chinese population researcher from Xi’an Jiaotong University, the number of these “bare branches” aged 20 to 49 in China will reach 20 million by 2015 and continue to grow to around 44 million by 2040. At current birthrates, eventually one in five Chinese men will be hopelessly single. These numbers are unprecedented in human history, and experts are expecting very little good to come from it.

Times and places in history with large male surpluses – from the American Wild West to mid-19th century Northern China – have been marked by lawlessness and exploitation of women. Rises in violent crime rates have been attributed to the imbalance that already exists in contemporary China. And since those left without wives tend to be the very poorest men – who are increasingly finding themselves clustered in “bachelor villages” – other grievances could easily consolidate them into a violent force. This is exactly what scholars Valerie Hudson and Andrea Den Boer have argued preceded historical Chinese conflicts like the Nien Rebellion, the Black Flag Army, the Boxers and the Eight Trigrams Rebellion.

Furthermore, if the Chinese government gets worried about the social upheaval bare branches could cause, they may try to channel that angst into the Chinese army. In that case, it could result in ultra-nationalism and a foreign policy that’s “swaggering, belligerent, provocative,” as Hudson and Den Boer put it.

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I try to be an optimist. I have confidence that new technologies and targeted policies can mitigate some of these problems before they become catastrophic. But the fact that these four things are happening in concert is downright terrifying and presents the probable scenario that they’ll exacerbate one-another. The worsening health effects from pollution could make it more expensive to care for the elderly. The water shortage and soil degradation could cause food and utility prices to rise, making it harder to eke out a living and keep the bare branches content. You get the idea.

So by all means keep an eye on the present economic hurdle. It will certainly have enormous implications on the quality of life in China and the extent to which the country is able to address other issues. But don’t forget that even if China gets over this hurdle, there are much bigger ones on the road ahead. Keep a very close eye on these hurdles, because they won’t become apparent in any abrupt crash. But they have the potential to be much more crippling to the country’s sustained growth.

Over last few weeks the Apple supplier Foxconn has been in the news yet again for the usual reasons: fights, strikes, riots, underage workers, etc. Every few months the same sweatshop narrative comes up about Foxconn (because apparently it’s the only manufacturer in China), and every time unverified and wildly exaggerated media reports hastily come out (and that doesn’t even include super-fraud Mike Daisy).

I’m always disappointed when this happens; not only because of the eagerness to jump on a largely bogus narrative, but also because it overshadows what I think are the much more interesting nuances of factory life in China. Yes, the hours are long, life is hard and conditions aren’t enviable, but there are deeper issues than that.

Last week I recorded a podcast (listen here) with Liu Zhiyi, a former intern from Southern Weekend, who got a job at Foxconn’s Longhua factory for 28 days in 2010 in order to do undercover reports.

One of the big misconceptions resulting from the sweatshop narrative is that workers are routinely forced to work ungodly hours. In fact, the workers themselves usually demand as much overtime as they can get. While at Foxconn, Liu described this saying, “For the workers desperate for making money, overtime is like ‘a pain that can breathe.’ Without it, the days without money make them ‘suffocate.’”

They’ve travelled so far from their hometowns to work that any idle time not spent making money is seen as a waste.

The conditions are another misconception. At Foxconn, they’re pretty good – especially compared to other factories. (James Fallows recently posted some photos from the same factory Liu worked at – here, here, here and here).

Liu said about the factory, “I have entered a system, and the system can provide everything that I need for my body. We have gymnastics, swimming pool, exercise room… The only thing they don’t provide is time.”

Because of the long hours (which remember, the workers desperately want and will seek elsewhere if they don’t get), it’s easy to lose touch with some simple human needs. Liu explained how roommates are always turning over or working different shifts, so it’s hard to make friends (or even learn people’s names). And because different departments are usually skewed one way or the other toward a single gender, it’s even harder to find a lover. He said the resulting emotional imbalance and conflicts over girls are often what spark fights in the factory.

The thing that surprised Liu most though, and what he sees as the biggest problem, is how workers seem completely puzzled about their futures. Earlier he wrote: “They often dream, but also repeatedly tear apart their dreams, like a miserable painter who keeps tearing up his drafts. ‘If we keep working like this, we might as well quit dreaming for the rest of our lives.’”

He says they’re almost all focused foremost on making a lot of money, but they don’t know how much is enough or what the next step is after making the money. They hope to move up in the world through their hard work, but they often don’t know where the path is, or if there even is a path. This, he says, could be a major problem in the future if society and the government can’t address it.

Anyways, Liu was very insightful about his time in the factory. I hope you’ll listen to the full podcast.

Since Reform & Opening up (and to an even greater extent after the Tiananmen uprising) the Communist Party has used China’s torrid economic growth to justify its absolute unchecked power. By pointing to slower growth in emerging economies like India and the recessions of developed democracies, the CCP can proudly tout the superiority of its system.

But things are changing. Just about every economic indicator for China is headed downward. Mass factory layoffs/closures, sharply declining steel production, a pile up of unsold cars…you name it. Serious questions are being raised over the “superiority” of China’s command and control economy, which pushed down interest rates, forced excessive loans (MANY of which are starting to go bad) and created what could be the biggest real estate bubble in history.

Over the next few months we should start to see an answer to the “hard vs. soft landing” question. Since talk of a possible hard landing began, I’ve often wondered how China’s propaganda apparatus would respond if and when China’s economy takes a sharp turn south.  The party can’t exactly just say, “Oops. I guess our system is deeply flawed and not as superior as we led you to believe.” Its legitimacy lies almost completely in the idea that efficient economic growth is a result of its authoritarian model.

A few weeks ago People’s Daily gave a little clue as to how the party might be planning to address this issue. Unsurprisingly, it looks like it will go with the standard approach of “It’s not that bad; and anyways, it’s the West’s fault.”  The piece said:

The Chinese economy is slowing down due to both international and domestic factors.

Internationally speaking, the weak growth in developed countries caused by the global financial crisis has had a marked negative impact on the Chinese economy. China’s trade surplus rebounded greatly in the second quarter, but not due to the acceleration of export growth or slowing down of imports. In fact, the growth of China’s exports to the United States, Japan, and Europe has slowed down markedly, becoming a major constraint on economic development in the eastern regions.

Domestically speaking, China’s economic slowdown is a legacy of the global financial crisis. In order to resist the crisis, China introduced a large-scale economic stimulus package, which created objective conditions for subsequent inflation and soaring housing prices. The country then adopted a series of macro control measures to curb the inflation and cool the overheated property market, when the contribution of consumption to its GDP growth failed to increase markedly. This countercyclical action has inevitably caused a slowdown in domestic demand.

So whether it’s domestic or international problems, no fault lies with China itself. The rest of the piece downplayed the idea that China’s economy is in serious trouble anyways, with a touch of “look on the bright side” (inflation is falling). It seems a likely double-pronged approach: Pretend that a hard landing isn’t happening and blame foreign countries for the minor economic hiccup that has to be acknowledged.

Many of the points the piece raises are valid. If it wasn’t for the US-created 2008 financial crisis, China wouldn’t have injected its $586 billion stimulus (which has largely gone into fruitless projects) or required banks to give out a ludicrous $2.7 trillion in loans (ditto). So in that sense, a fair amount of blame does belong to the US for setting the stage for China’s potential hard landing. Europe certainly hasn’t done anything to help matters either.

But the mismanagement of the economy by the Chinese government is where the lion’s share of the blame rests for China’s economic woes. When faced with an economic crisis and potential unrest, the government opted (as always) to secure short-term stability at the cost of long-term sustainability by throwing cheap money at the problem and trying to guide the invisible hand of the market too forcefully.  “The debt-ridden western countries are to blame” argument can only stretch so far.

But accepting blame and owning up to deep systematic flaws with its economic model aren’t in the CCP playbook. So it’s likely we’ll see that argument stretched to its very limit.  The question is, will people buy it?

As worries of a banking crisis have started to weigh on China in recent months, economists’ eyes have been fixated on Wenzhou. Entrepreneurs in the Zhejiang business hub tend to forgo the banks and simply lend money to each other. This has traditionally served the city well, as it allowed small enterprise to thrive. But now trouble is brewing.

Overinvestment and a slowing economy are starting to see many defaults on loans in Wenzhou. Scores of business owners have already fled the city or committed suicide to escape their debts to shadow lenders. In one case, the daughter of a businessman was taken hostage by a creditor to insure repayment of debt. Because of the growing network of shadow lenders across the country, as well as over-lending by official banks, Tsinghua economist Patrick Chovanec has said Wenzhou is the “canary in the goldmine” for China.

Those interested in the implications of Wenzhou’s economy may do well to look at the city’s other claim to fame: Its Christians. The city has around a 20-30% Christian population – abnormally high for China. Cao Nanlai, Hong Kong University professor and author of Constructing China’s Jerusalem: Christians, Power, and Place in Contemporary Wenzhou, recently told me how religion and economics relate in the city.

He said that Wenzhou Christian entrepreneurs tend to take loans from one another because of the trust and shared values they’ve cultivated together in church. When the city’s debt crisis began, preachers started giving sermons about God’s punishment for greed and telling congregants to keep this in mind in their business dealings. “Wenzhou Christians tend not to put on pressure to repay loans, while their secular counterparts may have resorted to extreme measures that caused an exodus from the city,” Cao said. “In this sense, Christian values and networks do have a very positive impact on Wenzhou’s regional economy.”

In 1905 German economist Max Weber introduced the idea of a “Protestant work ethic.” It said the religion was instrumental in the development of many western countries because of the Calvinist emphasis on honest hard work that would lead to worldly success – a sign that one was heaven-bound.

Recent research has suggested even further economic benefits to religion. A study last year found that people who believe in a vengeful god (ie- one that might send you to hell) cheat less often. And another study that looked at economic data in 59 countries over 20 years found that rises in a belief in hell, and to a lesser extent heaven, correlated with spikes in economic growth.

In 2002, Hong Kong University Professor Wang Xiaoying wrote on China’s “post-Communist personality” and how the country is suffering the excesses of capitalism. Becoming rich is the focus and any attempt at moral guidance is scorned. “Nothing better represents such problems as the sheer scale of corruption and the ineffectiveness of all measures to keep it in check,” Wang writes. “Whatever the intrinsic flaws of capitalism as a social system, China’s social problems seem to come as much from the failure to establish a viable capitalist social order.”

Wang fears China doesn’t have the established social order that the west did during its development to reign in the capitalist excesses. Religion might be one effective way to establish this order and perhaps even turn a few corrupt officials honest. “Christianity may play a very important and positive role in the public sphere at the local and grassroots level,” said Cao Nanlai. “An informal local network of churchgoing relatives and friends can embed local officials within a shared emotional structure, shaping their moral values. This is certainly the case in Wenzhou.”

But religion’s potential in helping China develop might not just be about stopping the strong from exploiting the weak. It could be just as much about keeping the exploited quiet and working through the excesses of development. We’ll dig deeper into that tomorrow.

 

Christianity series Part 1: Can Lei Feng compete with Jesus?

Christianity series Part 2: The new Christians

Christianity series Part 4: What Marx may have gotten right

Christianity series Part 5: Communist Christianity

How economic growth happens

Posted: January 31, 2012 in Economics
Tags: , ,

For years now the debate has been going on about the superiority of China’s economic model. China has averaged around 10% annual GDP growth for the past 30 years while, on a very good year, western capitalist countries might see something like 3% – and that’s on a very good year. Yesterday Global Times ran an interview with Ding Chun, a member of the Global Agenda Council on Europe of the WEF, and asked, “Do you think the West should learn from developing countries like China?”

He replied, “I believe so. The West used to praise highly the Washington Consensus. Then they promoted the so-called conscientious market economy. Now the economic situations of developing countries are better than those of Western countries.”

The Chinese government loves to tout the idea that, since Western countries are suffering and China’s economy is soaring, it means capitalism is bunk and Socialism with Chinese Characteristics (AKA authoritarian capitalism) is superior. China is lucky to have the Communist Party ruling it.

I’m not an economist, but I have taken one entry-level economics class – which is one more than anyone who would make a claim like that has taken. China’s meteoric rise would be completely predictable to any economist worth giving himself that title. Let’s dumb down growth for developing countries to its most basic form. Essentially, it’s turning this:

into this:

A poor developing country isn’t very productive, so after people save up enough money from picking wheat, they buy a machine to improve productivity and income. Eventually they can buy the most productive machine there is and learn how to use it most efficiently. Then with all the new money, industries that never existed before (ie-tourism) can also bloom. Voila! Growth.

China is massive and there are still a lot of people doing things the old-fashioned way. So it’s completely normal that, as long as the government doesn’t get in the way, there will be large growth for a long time. But China’s government did get in the way from 1949 to 1979. Then Deng Xiaoping had the wild notion that if you let people reap the direct benefits of their work rather than force them to slave for the good of the motherland, they’ll be more productive. So I suppose you can credit China’s government for the huge economic growth of the past 30 years. Just like if I won a marathon I could credit the guy who was bear-hugging me at the beginning of the race for finally letting go.

To be sure, China’s development under authoritarian capitalism has been much faster than, say India’s democratic capitalism during this stage (although not necessarily better). But what happens when everyone finally has the biggest, most productive machines? Then they have to innovate and make an even better machine or method if they want to keep growing. This is what western capitalist countries are doing now – and it’s much slower.

In fact, this is what they’ve been doing for more than a hundred years because they were the first to build these big machines. Late-comers like China only needed to buy (or pilfer) this technology and learn these methods that already exist – a big 2nd mover advantage. So naturally, its development has been much faster than the West’s was.

Now that developing countries like China, which are more numerous and have much larger populations, are getting these machines, their workers with lower wages and less stringent labor/pollution laws are making it cheaper to produce basic goods while developed countries struggle with ways to make them more efficiently.

During this struggle, developed countries are losing production they’ve traditionally had, yet their people have still clung to the quality of life they’ve grown accustomed to. Hence, many are going into debt. They’re trying to make up for this with even more innovation at the frontier, but again, it’s slow-going. So given China’s huge population, it will indeed continue to grow until its GDP is well past any western capitalist country. However, China’s growth is already slowing because of it’s diminishing returns in increasing productivity. So what happens when China eventually gets everyone the newest, most efficient machines?

Then even less developed countries will take away many manufacturing jobs and China will go head-to-head with developed capitalist countries in innovation. It will come down to who has a better education system and more intellectual freedom.  Given the current atmosphere, who would you put your money on as more sustainable in the long run?

The other night in Beijing I had somewhere to be at 7:00 that should take about 15 minutes to get to by bus on empty roads. But given that it’s Beijing, I left at 5:30…and I was still 20 minutes late. In related story, the next day I opened my pollution mask to change the filter. The one on the right in that picture is a new one. The one on the left is what it looks like after a month of casual (maybe an hour per week) use in Beijing.

Some problems in China are so complex and ingrained into habit that solving them will take decades; if they can even be solved at all. This is not one of those problems.

There was recently a hilarious report that claimed Beijing commutes have been slashed from an average of 145 minutes to 60 minutes since this time last year. This incredible 170% drop supposedly happened thanks to the odd-even license plate system that’s been in effect for three years – and it happened while over 240,000 new cars hit the road. I can’t imagine a single Beijinger (who hasn’t been bed-ridden for the past year) who believes this.

The 240,000 new cars are actually down from over 900,000 new ones last year, thanks to a new annual quota on licenses. But after doing extensive calculations of all the traffic reduction measures [looking at them], I found a common fatal flaw: they still allow the number of cars to go up.

If they actually wanted to solve the problem once and for all, it would be as simple as charging a toll to drive in the city. Singapore has a brilliantly simple system where drivers have a pre-paid card on their dashboard that overhead cameras scan, deducting money automatically as they drive around town. Prices are higher during weekdays and during rush hour. If traffic starts getting a little too congested, the price goes up and, magically, less people are on the roads.

The Singapore minister of national development said, “It’s not rocket science to know that if you charge people to use certain commodities, that use is managed and controlled.”

No, it’s not rocket science. It’s freshman economics 101. Use incentives and disincentives properly to achieve the desired result. Yet this is a concept that continues to elude many governments around the world.

While the number of cars has surged parking prices have naturally followed. The average cost of buying a parking space in the Beijing is now around 140,000 yuan ($21,726) while some spaces are fetching upwards of 800,000 yuan ($124,316). So what is the government doing? Accommodating the upset drivers by building 200,000 new spaces. If they had attended said economics 101, they would realize that when this measure makes parking more abundant, more people will have incentive to buy cars. Ditto if more roads are built. The problem will be solved very briefly, and then become worse. This is why several major cities have put caps on the number of new spaces that can be built.

The current measures being taken to alleviate traffic are all essentially gimmicks to pacify the greater public while avoiding too much agitation of car manufacturers and drivers. China doesn’t want to miss out on the boon that an auto industry gives the economy and the government doesn’t want to upset drivers – who are quickly becoming as whiny as Americans in defending their “need” and “right” to having a car.

Then there’s the social stability concern. Several drivers have beaten, and even killed, parking attendants over high fees.  But, to put that in perspective, the average life-expectancy of a Chinese traffic cop is 43. And how many others are having their lives shortened with blackening lungs each day and dying in traffic on the way to the hospital?

A Singapore-type measure wouldn’t solve Beijing’s horrific pollution completely, but it would help immensely. And it would, without a doubt, solve the traffic problem. In fact, it would work in any city that has a decent public transportation infrastructure. It would dent China’s auto industry, but if the government thinks it can develop the car culture the same way America did, we may as well all start digging our graves now.

Drivers would be upset, but frankly they can cry me a river. Why shouldn’t they pay for their negative externalities? It would be an egalitarian measure all around that does good for the maximum amount of people. Is there something I’m missing here?

At the risk of sounding alarmist, China is in trouble. China watchers from all kinds of backgrounds would probably agree with this statement to some extent. It’s “trouble” in the abstract sense, since we don’t know exactly how it will play out. But it’s hard to look at political, social, economic and environmental trends without getting the feeling that a perfect storm of sorts is brewing. I’ve put together this infographic to try and bring together some ominous signals from several different fields. What it all means, I can’t say for sure, but it’s apparent that in the very near future China will meet challenges unprecedented in the history of mankind. For the sake of China, and realistically, the rest of the world, let’s hope the 5th generation of leaders knows what they’re doing.

Feel free to use this image, please just link back to this site.

Recently I got a call from a friend offering me an interesting day job. She wasn’t clear on the specifics but it had something to do with businessmen and she assured me I wouldn’t have to do anything seedy. Foreigners in China often get offered these kinds of mystery jobs where you don’t really know what you’re getting into until you’re halfway through it. But they’re usually at least good for some entertainment and writing material, so I agreed.

I was whisked away in a Mercedes to the Diaoyutai Guesthouse – a government compound where foreign dignitaries stay and meet with top leaders like Hu Jintao and Wen Jiabao.

It was for a social networking company to formally announce its plan to go public on Nasdaq. They were pulling out all the stops to impress the investors. As I somewhat suspected, my job was to sit there and be a white guy. Sketchy, yes, but I was just happy they didn’t expect me to pretend I was part of the company or an investor like many of these white-guy-in-a-tie jobs do. I just had to sit and be foreign to enhance the prestige of the event.

But the prestige didn’t stop with me. The Diaoyu guesthouse must cost a small fortune for private companies to rent out. Everyone in China has heard of it. The investors lined up to be photographed next to the podium bearing the compound’s name.

There were cameramen and reporters from several of China’s major media agencies, but I find it hard to believe they had any real interest in covering the event. This was just some two-bit social network that will never compete with the established juggernauts. The ceremony itself was an excruciatingly ordinary chain of executives giving each other face and making flowery speeches.

It’s quite common in China for companies to pay reporters to show up and cover their event…even if there’s no intention of actually airing any of the material they get (that costs extra). Photographers conspicuously snapped away hundreds of pictures of the executives and, during the three minute question & answer period, two journalists were called on to lob softball questions at the panel. But the investors came away with a lot of face and confidence in their investment. The number of people who will actually purchase shares on Nasdaq remains to be seen.

It was reported last week that a Chinese cave somehow managed to get listed on the New York Stock Exchange through a series of backdoor schemes. The lengths and expenses some companies go to in order to bestow prestige and recognition upon themselves in China often goes to a Loony Tunes level of absurdity. I have a little more hope for this company to make a ripple in the stock market than I do the cave, but not a lot.

The money quote of the day came when an Australian investor who was backing the company said, “If you invest in the internet industry, you will achieve great success.”

I can’t say I know anything about this company, but I couldn’t help feeling a bit guilty while wondering how much the crowd, largely rich middle-aged Guangdong housewives, actually knew about “the internet industry.” I wondered how much my presence was contributing to China’s .com bubble (or rather, .cn bubble). And how many companies routinely put on shows like this wooing investors who, like Japanese of the 1980’s, think this rocket ship of economic growth will keep soaring forever.

Perhaps the most distressing thing I thought about while watching was how many Chinese Enrons there might be out there. How many companies are already seeing cracks, yet will keep aggressively pushing for investment until the house of cards comes crashing down?

I don’t know, but I’ve decided to cool it for a while with these mystery jobs.

When haphazard attempts to start a Jasmine Revolution failed comically in Beijing early this year, discussion over whether or not China is ripe for revolution was popular. The conclusion by most was that it’s not. But it seems that in just a few short months the situation has changed somewhat. While an uprising doesn’t look to be imminent, there seems to be many similarities between circumstances unfolding today and those that preceded the Tiananmen Square rebellion of 1989. So I want to look at some key parallels between then and now:

Corruption

Then: There was always corruption in the PRC, but Reform & Opening Up made it much easier and much more visible. In the 80’s, many price controls were lifted, but not all. The shortages of some goods allowed people with the right connections to buy at the artificially low prices and sell at market rates for huge windfalls. So naturally, the already-powerful became even more powerful. The inequality of opportunity and obvious abuse of power were two things immediately visible to those affected and were direct causes the Tiananmen protests.[1]

Now: You can click here to see a visual approximation of China’s Gini Coefficient wealth inequality over time (0 means perfect equality, 1.0 means one person has all the wealth).  In 1989 it was hovering around 0.36. It took a dip that year but has since soared to over 0.47 – well past the 0.40 danger level. China’s crony one-party capitalism and massive economic growth since Tiananmen have only increased the amount of capital involved with corruption and allowed the powerful to get exponentially wealthier.  This is perhaps best felt when local officials make illegal, undercompensated land grabs to raise capital for their city (and often take kickbacks from developers). A recent survey found the number of disputes over these land grabs is at an all-time high. Favoritism, graft and inequality of opportunity are in some ways better than the Tiananmen era, but in many ways much worse.

The Media

Then: The Chinese media of the 1980’s covered issues that had never been touched in the PRC previously; even dabbling in corruption cases. Single essays or TV programs could stir up fiery political discussion on college campuses. A documentary called River Elegy played on CCTV in 1988, which subtly criticized Chinese culture and sparked nationwide debate. When the protests themselves started, the press covered them extensively and even portrayed the student protestors sympathetically. These factors shined a light on many issues intellectuals were concerned about and brought together like-minded activists.

Now: Though the official press was reigned in after 1989 – where it’s more or less stayed ever since – new avenues of disseminating information have sprung up. Mobile phones, blogs and microblogs have put reporting in the hands of those directly affected – shining a light on things never before seen by most common people. Shrewd online political commentary on these issues by bloggers like Han Han may be playing a role similar to programs like River Elegy in the 80’s.

Education Failure

Then: After the Cultural Revolution, universities re-opened and were a sure ticket to a better life. However, with further reform and opening of the markets in the mid-to-late 80’s, many college students graduated to find their education gave them no real advantage in the new business landscape. In 1988, the system that assigned college graduates jobs was also amended to where private companies could reject those top students assigned to them in favor of those who had connections inside the company.[1]

Now: Educational prospects improved after Tiananmen, but now the situation is coming to resemble 1989 again. An overabundance of college graduates has left one-fourth of them unemployed without any better prospects than those who didn’t go to college. Many have also criticized the university system as useless, largely focusing on theory and failing to give students useful practical guidance. With labor wages rising China needs to move up the value chain in order to keep its people employed. Some think the innovation and collaboration needed to achieve this won’t be possible under the current intellectually repressive atmosphere.

Inflation

Then: Inflation was at an astounding 18.5% in 1988 because of panic withdrawling and buying on rumors of what relaxing price controls would mean. [2]

Now: Inflation is sitting at about 5.5%, down from a high of 6.5% in July. Not nearly as bad as pre-Tiananmen, but food is getting less affordable and housing is off the charts. With a roughly 32 million surplus of marrying age men, great pressure is being put on those who need to buy a house (and often a car) to compete for potential wives. And the poorest of the poor are having to cut food from their diet in order to stay on top of their finances.

Competing Party factions

Then: In the lead up to Tiananmen there was an obvious rift in the party between progressives like Zhao Ziyang and Hu Yaobang and hardliners like Li Peng. This rift was absolutely apparent in the days leading up to the crackdown. The protestors saw this split and sniffed weakness; which emboldened them further.

Now: After Tiananmen the party learned to present a united front in public and keep disputes between factions – or even the existence of factions – behind closed doors. That era seems to have ended now though with Bo Xilai’s left wing and Wang Yang’s right wing both making very public criticisms of each other’s models. The bulk of the Chinese public has yet to express an interest  (or knowledge) in this feud, but that could change as factions push harder for influence and citizens begin to take sides.

Banking System Cracks

Then: In the late 80’s Chinese banks flooded the market with loans. As could be expected, a great deal of them went bad and an estimated 1/3 of factories were unprofitable.[1] The government brought this to an abrupt halt in 1988 by cutting the cash flow – a kind of austerity measure many didn’t take too kindly to.

Now: Take that same situation and multiply the figures involved to equal more than seven times China’s entire 1989 GDP. In the wake of the 2008 financial crisis, China pumped $586 billion into the economy as a stimulus. This is part of an overall $2.7 trillion Chinese banks have extended in loans over 2009 and 2010. Up to now that stimulus has looked pretty good in economic recovery terms, as it always does…until the loans start going bad.

The Street recently had a piece that said, “Economic-related news coming from China is a page-turning thriller. Ponzi schemes, zombies, off-balance-sheet reporting, subprime and mafia-style lending; rising inflation, declining asset values, slowing growth — it’s all there. Add in government meddling in market mechanisms and official denials and China sounds like it has the makings of a perfect economic storm.”

Wenzhou has recently had dozens of bosses flee bad debts – something that’s being read as a preview of larger things to come. Tsinghua economist Patrick Chovanec has said he’s not sure if China can make it through next year’s power transition before a major banking crisis hits.

Key differences between Tiananmen era and now

Nationalism and affluence

Since Tiananmen the government has pretty successfully educated nationalism into the youth and trained them to regard any talk of democracy or human rights as a western ploy to make China implode. The relatively well-off youth of today also seem far more interested in video games and pop stars than politics anyways. And the population as a whole is undeniably better off than they were in 1989 (though some studies suggest they’re not any happier). Most have a lot more to lose than they did at that time.

A paranoid and highly technological government

The technological improvements may work to the Party’s advantage more than any would-be revolutionaries. The government has the capability to monitor and immediately clamp down on dissent – a capability that improves by the day. If they were truly threatened by a spontaneous movement, they could temporarily shut down cellphone service, microblogs like Weibo, or even the entire internet – as they did in Xinjiang in 2009. And as the Beijing attempt at a Jasmine Revolution earlier this year demonstrated, the government will come down hard on any threat – real or imagined. And they’re very careful not to allow any large gatherings that they can’t fully control; as the turnout for Hu Yaobang’s funeral in 1989 was the final spark for the Tiananmen Protests.

Conclusion

Given the vast similarities between now and 1989, another go at a revolution seems possible. If history is any indicator, an iron fist can’t succeed by itself if grievances are too great and you have the right catalyst to bring the disenfranchised together quickly.

Probably the only leader popular enough to create this Hu Yaobang-like catalyst in death would be Wen Jiabao. But again, if that happened the party would be overly cautious; and it probably wouldn’t be enough anyways. It would have to be something big that directly affected a huge number of people.

A large scale disaster that could be linked to corruption or official incompetence might do it. The Wenzhou train crash earlier this year and Shanghai fire last year made a lot of people angry and concerned for their safety. They weren’t big enough to spark an uprising, but they were two of many small aggravators that are slowly ebbing away people’s patience with corruption and government cover-ups. If something like a nuclear meltdown, a mass public health incident or a large dam collapse happened, that just might break the camel’s back. In 1975, the Banqiao Dam in Henan collapsed killing 171,000 people. And if you think that’s something relegated to the incompetence of the Mao-era, an average of 68 dams still collapse every year in China, according to one official.

But an even more likely scenario would be a poorly timed financial crisis; one like the aforementioned banking crisis that many are predicating. Life is already getting rough for the post-80’s/post-90’s kids who grew up spoiled taking economic security for granted. The job market is shrinking, their time/money intensive education is often useless and the gender imbalance is leaving many men hopelessly single. To make matters worse, the 2010 ratio of five workers for every elderly person will drop to 3-to-1 by 2020 in what Time Magazine has called “China’s Demographic Time Bomb.” For many only children that means completely supporting two parents financially and physically amid some of the least affordable housing prices in the world.

If a housing bubble burst robs these people of the investments they’ve become slaves to, they might all-of-a-sudden take a very keen interest in politics. And if there’s a banking crisis, it would likely cause a run on banks and panic buying similar to what caused the massive inflation of 1988. Fitch has estimated there’s a 60% chance of such a crisis by mid-2013. If it comes any earlier than that, it would be right during the leadership transition when the party is at its most vulnerable.

I’ll give my standard disclaimer for any internet police or fenqing that might be reading: An uprising isn’t something I’m hoping for. It’s not even something I’d venture to predict. Predications of a CCP collapse have a way of making you look like a fool (See: Gordon Chang).  And even if an uprising did happen, it doesn’t mean the party wouldn’t survive it. But there are many cracks beginning to show – financial, political and social; figurative and literal. The Beijing Consensus of authoritarian led economic growth has delayed the Party’s need to address their legitimacy shortfall for a solid 22 years, but one way or another that growth eventually has to slow and the legitimacy issue has to be addressed. If I were in charge I’d focus a bit less on the iron fist and a bit more on the root problems distressing and disenfranchising those without financial and political influence.

Non-linked sources

[1] Silenced Scream: a Visual History of the 1989 Tiananmen Protests. Donna Rouviere Anderson, Forrest Anderson. p. 1

[2] Dingxin Zhao. ‘’The Power of Tiananmen: State-Society Relations and the 1989 Beijing Student Movement’’. Chicago: University of Chiacgo Press, 2001. ISBN 0-226-982600-2. pp.127.

A new set of maternity laws has been drafted in China, which includes extending maternity leave from 90 days to 98 and requires employers to assist in medical fees; either through insurance or out of their own pockets. While on the surface this seems good for Chinese women, it’s exacerbating a major flaw in China’s maternity system that heavily tips the odds against them when trying to find jobs.

Whenever a woman goes to a job interview in China, she’ll inevitably be asked questions like, “Are you married?” “Have you had your baby?” or “When do you plan on having a baby?”  The employer will usually shy away from any woman with a pregnancy risk. I even had a friend who handed an HR guy her resume at a job fair and got it immediately brushed back. “You’re not a boy,” he said.

Employers’ fear of enduring both the direct costs and lost productivity involved with maternity leave very often prevents them from hiring or promoting women. So while the law is good for those who’ve managed to get a job, it’s detrimental to women’s progress in general.

Ironically, the best thing the government could do for women would be to give men more rights. Giving men an equal amount of paternity leave would take away the incentive to hire them over women. Shenzhen made a move in this direction earlier this year when it bumped the amount of paternity leave from 10 days to 30. With a very high proportion of female workers in the city, it was intended to let men pick up some of the slack of child care. And why shouldn’t they?

I’d argue that this would be better all around, even if they had to decrease the number of maternity leave days for women in order to give men more. Say the country follows Shenzhen; adds the 30 days paternity leave to the 90 days of maternity and divides that total 120 equally between the  mother and father. That gives them each 60 days with the baby – paid.

It would be unfortunate for the women, who undergo the real physical hardship of childbirth, to lose 30 days maternity leave. But that problem would be peanuts next the gross inequality of opportunity for women in China’s workforce that would be alleviated. And when you compare that proposal to the US’s maternity/paternity system, which mandates a total of zero paid days for men and women alike, it looks even better. In addition, there’s a number of social benefits that have been suggested arise from equal paternity/maternity leave.

Of course, this wouldn’t solve gender inequality in China’s workforce, but it would almost certainly help. What do you think? Would it work?

For those who haven’t heard of the horrific incident in Foshan, here’s a link with a video that will absolutely ruin your day and faith in humanity. It shows a two-year old girl getting run over TWICE and ignored by 18 bystanders. She’s not expected to live.

It’s hard to say how much of the bystanders’ ambivalence was universal human psychology and how much can be attributed to distinctly Chinese characteristics, but it’s becoming harder to downplay the latter. This is just the latest in a string of despicable stories to come out of China in recent years.  Consider these, some of which are just one instance of recurring events:

This list, unfortunately, isn’t even close to being exhaustive. It would be very tenuous to connect these all directly to any single factor, as most regard fear of legal liability as the main culprit in the Foshan story, for example, while the one-child policy is oft-cited for the child-trafficking problem. And of course, these things happen in other countries too, but their sheer scale and consistency in China is hard to write off, as many Chinese themselves have noted. There could be one thing at least partially contributing to all of this:

Hell.

Or rather, a lack of it.

I’m a devout atheist and tend to think dogmatic religion plays a largely negative role in society, but I can’t count the number of times in China I’ve shaken my head and wished more people believed in hell.

In any collectivist society, shame among peers tends to have much more influence than internal guilt. So if it’s unlikely that they’ll be caught, punished and shamed, people have less incentive to refrain from despicable actions. There’s even a Chinese proverb alluding to the idea saying “Neng pian jiu pian” (If you’re able to cheat, just cheat). You can couple this with the moral void that’s been left in the wake of socialism’s demise and the tunnel vision focus on money that emerged in the 1990’s.

The idea of hell as a means to keep people honest might be pretty intuitive (if not a bit Machiavellian) but University of British Colombia psychologist Ara Norenzayan published a study entitled Mean Gods Make Good People: Different Views of God Predict Cheating Behavior. He gave subjects a math test they could easily cheat on and those who believed in a vengeful god typically chose not to cheat. “Fear of supernatural punishment may serve as a deterrent to counter-normative behavior, even in anonymous situations free from human social monitoring,” the study said.

Studies by the Federal Reserve Bank of St. Louis and Harvard have also separately found a correlation between belief in hell and lower levels of corruption and higher economic growth.

According to the Boston Globe, “[Harvard researchers Barro and McCleary ] collected data from 59 countries where a majority of the population followed one of the four major religions, Christianity, Islam, Hinduism, or Buddhism.[...] Their results show a strong correlation between economic growth and certain shifts in beliefs, though only in developing countries. Most strikingly, if belief in hell jumps up sharply while actual church attendance stays flat, it correlates with economic growth. Belief in heaven also has a similar effect, though less pronounced. Mere belief in God has no effect one way or the other.”

“The expectation that there is a cultural belief in hell or perpetual and eternal punishment for wrongdoing will act as a disincentive to wrongdoing,” Eileen Lindner, deputy general secretary of the U.S. National Council of Churches, told USA Today.

The Chinese Communist Party has traditionally held a less than hospitable attitude toward religion and regarded the Marxist view that it’s “the opiate of the masses” as a bad thing. But there are signs they’re starting to see the (again, perhaps Machiavellian) advantages to the opiate concept. This seems especially true with Christianity, given its belief in hell and less potential for the political complications associated with Islam in China.

In Nanjing the government has built a 5,000 seat mega church and given other funding to help boost Christianity. In the manufacturing hub of Wenzhou, where it’s estimated as much as 20% of the population is Christian, the government is starting to seriously study the link between Christian enterprises and economic success. One Christian factory owner told BBC, “I’m not saying those people who aren’t Christians are all bad, but from the percentage of the workers who are Christians, they seem to be more responsible. Also when they do things wrong, they feel guilty – that’s the difference.”

During the Mao-era, throwing the doors open to religion would have been unthinkable. Communism was the religion and Mao its god. Any other faith would have been competition. But now, with the death of religious socialism, supernatural religion’s spread is inevitable and SOME in the now strictly utilitarian Party seem to be recognizing that that might be in their best interest.

For many of China’s tens of millions of religious followers, the repression of their faith itself is the biggest grievance with the Party. Standing aside or even assisting religion would likely pay the government far greater dividends than holding the Maoist religion-as-a-threat attitude. It seems it could also have very real economic and socially-stabilizing benefits.

In a 2006 interview with Reuters, Li Junru, deputy head of the Communist Party School  made a very telling statement. When asked why India can handle democracy while China needs an authoritarian government, he explained that India has religion to control the people.

One has to imagine the Communist Party sees the appeal of biblical verses like Hebrews 13:17, which says, “Obey your leaders and submit to their authority. They keep watch over you as men who must give an account. Obey them so that their work will be a joy, not a burden, for that would be of no advantage to you.”

Today, as Libyan rebel forces close in on Tripoli, it seems yet another nation will overthrow their authoritarian rulers in the Jasmine Revolution. Since the movement broke out in December, political forecasters have devoted plenty of ink to speculation over if and when China’s authoritarian government will collapse.

For the record (and anyone at the Ministry of Truth who may stumble upon this), I don’t at all wish for a collapse or overthrow of the Communist Party. Gradual reform leading to real public accountability would be much better than the abrupt dismemberment they’re setting themselves up for with the current iron fist approach.

But in the fairly-likely event that they do dig their own grave, where does that leave a post-Communist Party China?

The Party would have you believe that the country would dissolve into absolute chaos; that they’re the Elmer’s glue holding the whole rickety apparatus together. Without them, people would take to the streets to pillage, rape, torture, kill, etc.  Plenty of foreign observers share that bleak outlook too.

But a few weeks ago I spoke with Uri Dadush, former World Bank director of international trade and author of the book Juggernaut: How Emerging Markets Are Reshaping Globalization. He said China’s GDP is projected to grow at around 5% annually for the next 40 years. “Even if there is a political crisis, that doesn’t mean that China will not grow,” he said.

In economic terms, revolutions aren’t as catastrophic as they appear to be, especially in recent history. This chart maps Egypt’s annual GDP growth for the past 50 years. This measure shows how much the GDP grew in a given year compared to where it was the previous year. It’s good for highlighting economically disruptive events.

Clearly, Egypt has always been a fairly turbulent country capable of enduring crises and quickly bouncing back, never dipping below 0% growth. But the most significant part is if this chart were extended to today. It would show a dip to 2% growth in the fiscal year ending this June, which included the Jasmine Revolution. Before the revolution, it was predicted to grow at around 5%. The government overthrow may have very briefly slowed growth and had some opportunity costs, but it was hardly chaos. Now Egypt’s economy is humming again and will probably hit 5% growth again by year’s end.

Here’s China over the past 50 years:

The two largest dips were during government directed campaigns; the Great Leap Forward being especially catastrophic. Then in 1987-1988 there was massive (over 20%) inflation of the Yuan which partly enabled the Tiananmen Square uprising. The crackdown did scare away some investment. Growth slipped a bit but remained positive and quickly rebounded.

An even better indicator of national well-being is per-capita GDP, because this shows how the wealth of the average person is growing or stagnating. A flat line here is bad; people aren’t getting any wealthier. A downward slope is very bad; people are becoming worse off. If you look at China by this measurement the story is very promising.

There’s a very gentle negative slope during the 60’s and the power struggle of the late 70’s, then it’s all upward. Tiananmen didn’t even leave a mark.

Let’s look at another country’s per capita GDP growth and see if you can spot when the revolution took place:

There’s a sharp decline beginning in 1996 ravaging the average person’s net worth by over 33%, but if you think that’s where the political upheaval was, guess again.

The Asian Financial Crisis devastated Thailand, but when a military coup a decade later overthrew the ruling Prime Minister after a year-long political crisis, there wasn’t even a blip. Per capita income continued to grow to its highest levels ever.

These economic charts don’t tell whole story, but they do tell a lot of things. They tell that, even in the midst of political crisis, people still buy things and people are still working at the store to sell to them. Then there’s a whole network of manufacturing and investment behind those people that continues to expand. So the idea that a political crisis throws the country into violent chaos is greatly exaggerated. And what may have caused a serious disruption even 30 years ago might be hardly noticeable now thanks to globalization.

Mr. Dadush explained, “The drivers of economic growth are very fundamental. They are much deeper than even big political developments. They have to do with technologies and ideas that have already been invented. Once they’ve been invented it’s very difficult to stop their spread. If you have more or less the conditions and you have educated people you can absorb these things and you will have economic growth. Educational openness to the world, the absorption of ideas and technology are very fundamental forces. They can be delayed by political disaster but they cannot be stopped.”

There are plenty of non-political things that can tank the economy, like a housing bubble, demographic decline, foreign financial collapses, protectionism, environmental catastrophe, natural disasters, etc. But contrary to what the Party would like everyone to believe and what all those (totally existent) foreigners who dream of seeing China in chaos believe, political upheaval doesn’t seem to be a serious threat to the economy or the common person’s well-being.

This doesn’t necessarily apply to developed countries as strongly though. Once they’re developed they rarely see more than 5% growth in a given year and become more vulnerable to market and political fluctuations, as you can see in this chart of the US and Japan:

But it will be a long time before China gets to that point as a nation; around 40 years according to Dadush. So China could bounce back much more easily from any political crisis than these nations could.  A prolonged civil war might be different, but that’s very unlikely. Even then, it wouldn’t be as destructive as one would imagine thanks to the fundamental global business presence.

Whatever replaced the CCP would certainly have significant long-term economic impacts, but the simple act of a power switch (non-violent or otherwise) would hardly knock growth and the institutions supporting it out of place. Even in a country that, as we all know, has its own “special circumstances.”

I’m sure economists (which I am not) and others can poke holes in this theory. Tunisia isn’t bounching back quite like Egypt, but it wasn’t growing as much to begin with either. And Libya is still in a drawn out civil war (again, extremely unlikely in China) and its recovery is yet to be seen. But none of these countries come close to having the business apparatus and distribution network in place that China does, which are both hedges against “chaos.”

However, the most important thing these economic charts don’t address is happiness during and after a revolution, which obviously doesn’t equate with economic stability. Economic growth still allows for unchecked corruption, wealth inequality, trampling of human rights, perversion of justice, unfair trade practices, arbitrary violence and wholesale withholding of important information. It would indeed be a shame if the Chinese people were ever subjected to that.

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Chart Sources: World Bank data powered by Google Public Data Service (a great resource for comparing countries’ economic and social aspects)