Is the China Model a Myth?

Tuesday, May 29, 2012 2:43
Posted in category The Big Picture

In the depths of the 2008 financial crisis, the China model received a lot of positive press and analysis. China’s high savings rate, its ability to act fast on the stimulus package, and their general ability to keep itself afloat when everyone else was drowning was seen as a model that perhaps others should look to going forward. It was an equally interesting time because China, after having to listen to various groups criticize their model, were standing up saying “we told you so”.

Now, 5 years later some are beginning to (finally) question the blind, rabid, “China does everything better” mentality that took over the minds of many.

The recent NYT piece China’s Growth Slows, and Its Political Model Shows Limits takes a stab at it:

But now, with the recent political upheavals, and a growing number of influential voices demanding a resurrection of freer economic policies, it appears that the sense of triumphalism was, at best, premature, and perhaps seriously misguided. Chinese leaders are grappling with a range of uncertainties, from the once-a-decade leadership transition this year that has been marred by a seismic political scandal, to a slowdown of growth in an economy in which deeply entrenched state-owned enterprises and their political patrons have hobbled market forces and private entrepreneurship.

Core to their report is the recent Bo Xilai incident, the questions of reform that have bubbled to the surface, and the speculation about whether or not China will tackle the elephant(s) in the room.

“Many economic problems that we face are actually political problems in disguise, such as the nature of the economy, the nature of the ownership system in the country and groups of vested interests,” said Zhang Ming, a political scientist at Renmin University in Beijing.

[…] Mr. Bo’s policies also helped expose another fault line in the China model: the priority placed on economic growth through investment projects carried out by state-owned enterprises, with generous loans from state banks. This is the framework propping up the Chinese economy.

It is a piece that reflects a wider conversation that I have been seeing more frequently in China, but it is a piece that I think is still only speaking to the byproducts of the problems that plague the system, and in a way that it equally rabid / misdirected in a sense… similar to recent pieces on why millions of Chinese (with means) are looking to leave China… as the wider context can at times be lost so that a point can be made.

Certainly there is downside risks to China’s model, and as we have seen recently there are going to be blowouts in politics, economics, society, and the environment, but that is not to say the entire system is broken or will implode. Even if the instance may indicate a greater systemic risk.

Systemic risks that I think Minxin Pei does a good job of quickly framing (at the macro level) in his piece How Much Longer Will the East Be Red?:

To appreciate the mortal dangers lying ahead for the party, look at three numbers: 6,000, 74 and seven.

[..] Statistical analysis of the relationship between economic development and survival of authoritarian regimes shows that few non-oil producing countries can sustain their rule once per capita GDP reaches $6,000 in purchasing power parity (PPP). Based on estimates by the International Monetary Fund, Chinese GDP per capita is $8,382 in PPP terms ($5,414 in nominal terms).

[..] 74—the longest lifespan enjoyed by a one-party regime in history, that of the Communist Party of the Soviet Union (1917-1991) […] The Chinese Communist Party has governed for 62 years. If history offers any guidance, it is about to enter its crisis decade, and probably has at most 10-15 years left on its clock.

[…] Chinese colleges and universities graduate seven million bachelor degree-holders each year. The party admits one million new members with a college education or higher each year, thus leaving out roughly six million newly minted university graduates. Since party membership still is linked to the availability of economic opportunities, a sizable proportion of this excluded group is bound to feel that the system has cheated them. Many will turn their frustrations against the party.

For me, even though  I largely agree with Minxin’s article and analysis, there are still some big pieces of the framework that I feel are missing out.  that, beyond the statistics and ability to create jobs, a balanced economy, etc, China has to do more than hit numbers for its model to ever be considered legitimate.

Four of which are:

1) Accountability – Throughout China this is an issue, and it is one that I ultimately feel poses the greatest threat to firms in China.. and the general economy. It is an issue that facilitates a number of the problems that China’s economic model faces, none more important then issues of graft and consumer protection.

2) transparency – closely linked to accountability, China’s economy is mired by issues of transparency. Supply china’ whose products fail, and consumers are impacted (in mass). Firms whose accounting malfeasance goes unreported. Bidding processes that are predetermined. And the complex web of relationships that underlay the economy.

3) Equity – equity is an issue that is typically expressed through statistics like executive pay and gini coefficients, but in china the idea of equity has a particular economic application as private businesses fight for oxygen in the market. And for china’s market to truly stabilize, this is an area that will need to be improved upon.

4) Security – For many who hold assets in China, be it farmland or a successful private enterprise, the issue of economic security takes on a special place as China’s need to develop has often trumped ownership.  And for Chian’s model to truly prove itself, increase effort to secure those assets in a fair and transparent way is needed.

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4 Responses to “Is the China Model a Myth?”

  1. gregorylent says:

    May 29th, 2012 at 10:39 am

    mediated reality … vs. just plain reality … the china story for a decade has been one big, huge, humongous, mediated, agenda-driven, made-up story that has drifted so far off of what actually is happening that phrases like “the china model” have absolutely NO MEANING ..

    sorry for the caps, but especially as a new paradigm is unfolding on the planet, this old distorted narrative not only has no value, but is counter-productive …

    life is moving on from all of these concepts, the western one and the china one

  2. Ryan says:

    May 30th, 2012 at 2:32 am

    About 300million people work in these new Chinese factories. Average wage is £1 per hour. Compare this with the UK where 30million people work for an average wage of £10 per hour. Clearly the economy of China should be about the same as for the UK, but with the wealth spread more thinly over a larger overall population. So why does China appear to be getting so rich so fast? Well that turns out to be due to the game China has been playing to keep its currency low relative to the $. They achieve this by printing renimbi and using these freshly printed renimbi to buy $ treasuries. So far they have accumlated $3trillion worth of treasuries. Which means that the US must have $3trillion worth of Chinese currency. Except it doesn’t, because the Chinese currency is not a reserve currency so not worth holding onto. Instead these $3trillion worth of renimbi has been used to invest in China real-estate. That is enough to create one hell of a real estate bubble with Chinese investors drawn in too. So China is a tale of two economies. One being the low wage economy that should make China a bit like Turkey and the other being a massive property bubble Ponzi scheme that looks like the dot.com bubble but with fancy steel and glass buildings being the output (i.e. similar to Spain but on a much bigger scale). This second economy is the one that is about to fail spectacularly.

  3. Jerry Hingle says:

    July 13th, 2012 at 1:33 pm

    Interesting points made throughout the piece, and in the comments as well. I agree that the media has blown the Chinese economy out of proportion, and I also completely agree with the last four points the author makes. Thank you for sharing.

  4. Tseng Kin-Wah says:

    July 14th, 2012 at 9:34 am

    @Ryan China printing RMB to buy Yankee Dollars? Really? And you think the Yanks are that stupid to get nothing in return. Again really? Gee! that’s the first time I’ve ever heard such an analysis. As for the China predicitons, the last time I took heed was 20 years ago when I sold my house in HK, uprooted my family & migrated to Toronto. Now coming back, I find I’ve lost more than half of my life savings, Can’t even buy back my old home because the price have rocketed 600%. Can’t afford the massage I ‘d enjoyed over in Shenzen either as the value of the damn RMB have also risen sky-high. All thanks to the excellent China predictions from great pundits like Dotor Doom or famous economic journos. But atleast I got my Canuck passport.