Redherring: Special Report: China - The Coming Collapse

By Orville Schell

November 7, 2002

"Somewhere in that country today there is a person who will end the Chinese state as it now exists. He or she will dare to give a voice to thoughts that for most are unspoken or only half formed . . . China is a lake of gasoline, and that individual, in some small town or city, will only have to throw a match."
--Gordon G. Chang, The Coming Collapse of China (Random House, 2001)

No society of global consequence today is more in a state of irreconcilable contradiction than the People's Republic of China. A vast and overpopulated nation in the midst of a fevered but precarious transition, its leaders have failed to articulate a coherent development model as a guide for reform.

In the most concrete terms, China's ballooning population of 1.3 billion, which every year generates 12 million to 15 million new mouths to feed and workers to employ, presents a challenge so daunting that it is difficult even to imagine a solution. And its natural resources and environment have been so degraded by the high-speed development necessary to keep people quiescent that nine of the world's ten most-polluted cities are in China.

In the political sphere, China is governed by an autocratic Marxist-Leninist regime that is beholden to an obsolete ideology, has no durable system for leadership succession, is riven by endemic corruption, and is deeply wary of political reform (lest it reform itself out of power). At the same time, it has unleashed a market-driven economy that is creating such social contradictions that tectonic upheaval is almost as plausible as peaceful evolution.

On the economic and financial front, from which the government derives its limited legitimacy, China's nascent financial markets are little better than government-sponsored gambling casinos in which speculators and inside traders grow wealthy. Its banks are little more than giant cash registers that have long been dispensing subsidies to money-losing state-owned enterprises (SOEs)--as much as 50 percent of their loans (currently estimated at almost $500 billion) are considered nonperforming. What's more, the absence of sufficient locally generated investment capital for sound new projects is responsible, in part, for excluding millions of workers and peasants from the economic boom of coastal China, making them a disenfranchised and politically unstable class. As if this were not enough, China's accession to the World Trade Organization in 2001 means that SOEs will soon have to compete with foreign companies and banks, creating the specter of even more unemployment and disaffection. Indeed, for the fifth year straight, desperate leaders have had to continue an expensive fiscal stimulus program of massive public spending that no one knows how to end.

And it is far from certain that technology alone will save China. With the country's reputation for exploiting technology transfer through copycat theft and for pirating intellectual property, it's unlikely that IT will be China's salvation. Instead, it's just as possible that China will remain a low-end manufacturer exporting to an increasingly depressed world market and never moving to the next level of the food chain.

Victimized by decades of extreme revolution that ruined traditional value systems and culture, the Chinese have been plunged into a state of ruthless market competition that has left them socially and spiritually lost. And, should central authority ever be challenged in a concerted way, tensions between Beijing and the far-flung minority-Buddhist areas of Tibet, Muslim areas of Xinjiang Uygur, and all of Inner Mongolia could conspire with economic regionalization to fracture China. Meanwhile, China's relations with its two most important trading partners, Japan and the United States, remain compromised by complex feelings of ambivalence that often erupt in expressions of muscular nationalism and outright xenophobia, which could easily be directed in a most destructive fashion against newly arrived foreign companies, as has happened so often in the past (see "Defeated and Retreated" at http://www.redherring.com/insider/2002/11/defeated111202.html).

Despite efforts to isolate the Chinese people from contagious foreign ideas and political "isms," the "Great Wall" erected by the Communist Party increasingly is being breached by the Internet, radio, television, and globalization, making it more difficult for the party to remain politically supreme. But since it is also unlikely that the party will allow itself to be voted out of office, or otherwise swept aside, a destructive collision between it and these centrifugal forces seems almost inevitable.

China's economic miracle is comparable in many ways to the Internet bubble. Such bubbles keep inflating and fulfilling expectations of extravagant growth--as long as investors believe in a pyramid of dreams. But, as in the boom of the late '90s, economic fundamentals in China simply are not solid enough to assure long-term, sustained growth. And should investors ever lose that giddy but unrealistic sense of the inevitability of China as a great and profitable market, the collapse of confidence and the flight of capital could be frighteningly rapid and devastatingly destructive.

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