Is China Doomed?

I’m going on intuition here, but I think a tipping point may have been reached. China is going to blow.

This week’s Economist features a cartoon in which the American Pentagon fears a “Worst case scenario”: “Russian bombers dropping Chinese toys.” As I read this, on TV, the BBC features pictures of “Chinese chocolates” crawling with worms.

It looks like the world media has latched on to this image of China: the consuming world now will soon have a fixed idea that “made in China” means dangerous.

It is one thing to have, for a while, a reputation for making shoddy goods—Japan, Hong Kong, and Korea all survived that. People will accept poor workmanship and lower-quality materials as a fair trade in return for low prices. But how easy is it to get past a broad general reputation for making dangerous goods?

How’s thalidomide been selling lately? Ford Pintos? DDT? Zeppelins?

Granted, there is no sign of economic trouble in China yet. And people are saying China is too big a part of the world economy now for it to be allowed by others to go down, and so it will not. Investing in China is a sure thing.

That is what they always say. That is always the general line just before an economic collapse—that is just what might be characterized as “irrational exuberance,” in Greenspan’s famous phrase. It is investors all thinking it is a sure thing that makes economic bubbles possible.

Does the world really need China? Not as far as I can see, in any practical sense. China is now a middle-income country; more than half the world’s countries now have a lower GDP per capita than China at purchasing power parity. That means they have more room to grow; there is actually a lot of potential competition for China as a possible source of low-cost goods. This is not to say that the collapse of China would not be painful; it does not touch on how China has woven herself into the world financial system. But she is not irreplaceable. Accounts on paper do not supercede realities on the ground.

Yes, China is big—one fifth of the world’s population. But India standing alone is just as big, and less developed. Then there are many other quite large nations, currently poorer than China: Indonesia, Vietnam, the Philippines, Pakistan, Bangladesh, Morocco, Egypt, Sudan, Yemen, all of Central Asia, all of Africa south of the Sahara, most of Central and South America… cumulatively they are much larger than China. In theory, in order to be competitive, Chinese goods must be higher quality than anything this list of nations can produce; for they cannot compete on price. If they are not, we have a bubble, which is going to blow.

Are they? It’s starting to look as though the answer is no; and we do not know how many more revelations of defects and corners cut are to come.

As a result, I expect foreign clients as a group to tilt quickly now to preferring non-Chinese suppliers, even if they cost a bit more. It will actually be worth a premium to be able to claim no Chinese components.

And so investment and income will go elsewhere.

So the Chinese economy should suffer, as this loss of sales and investment is felt.

I have expressed my belief often, in this column, that the Chinese economy is a pyramid scheme, held together by perpetual growth and lack of transparency. It fits that historical pattern too well. The reports of annual growth have been too regular, too consistent, too high, not to look suspicious, and China has all the lack of transparency to allow a Ponzi scheme to occur. We know for a fact that the official figures do not add up.

The durability of the modern Chinese growth has never yet been tested by any major economic setback. It is a recession that exposes such things. If it is a pyramid scheme, any serious interruption in growth will bring it down. Quality control may be the least of China’s worries. We could have a general Chinese economic collapse.

This in turn raises special problems for China. Its “Asian tiger” predecessors, Japan, South Korea, Hong Kong, Singapore, Taiwan, Thailand, all segued fairly smoothly to an open, democratic system of government. Except for Indonesia; and Indonesia, once recession came, suffered the political upheaval of revolution, and mass bloodletting, as well.

This, or probably much worse than this, can be expected in China. A regime that operates openly and with popular consent can withstand an economic shock. A secretive regime without a formal mandate tends to collapse. A sudden dip in the economic expectations of the middle class is identified by Craine Brinton, in Anatomy of Revolution, as the classic prelude to a revolution.

China’s government is notable, in fact, for its lack of a popular mandate and of transparency; much more so than Indonesia in 1997. It has accumulated a lot of historical skeletons in its party closets, that the average Chinese has managed so far to overlook only by a kind of willing suspension of disbelief. It has made no moves or proposals to convert itself into something more open or participatory, nothing that might earn it more patience from the middle class. It looks a bit old and doddering from sheer longevity. It is justified solely by the “economic miracle.” If that miracle evaporates, it will, in its turn, collapse. Economic trouble will be matched, and exacerbated, by a sudden lack of organization throughout Chinese society as a whole.

Revolutions are dangerous things; they rarely improve matters. It will take some time for any new government to form, restore order, and develop the sort of popular trust to put through the painful measures that will be necessary to restore the economic structure. There will be a temptation to resort to a “strong man,” and another Ponzi scheme. The matter will be made more difficult because, to ensure its own hegemony, the Chinese Communist Party has been pretty diligent in preventing the development of any other strong organizations of any kind in the land. Chaos threatens.

And then comes the next factor: historically, revolutions, in China, have not been quick or simple affairs. Largely because of China’s vast size, they have usually involved long and bloody civil wars. A governmental collapse, plus the lack of ready alternatives, could easily allow this to happen.

It could all easily knock China back another hundred years.

To prevent this, a great deal of international forbearance might be necessary—of the sort Russia, Gorbachev, and Yeltsin managed to get during the breakup of the Soviet Union.

Can China hope for that? With luck. But there will surely be a strong international lobby to insist on the independence of Tibet, and a strong Muslim lobby for the independence of Sinjang (Sinkiang). Mongolia would naturally desire the secession of Inner Mongolia; Korea, Vietnam, Central Asia, India, all have territorial claims of some sort on land now held by Beijing. Taiwan would, at a minimum, probably seize the opportunity to declare independence, as might Hong Kong and Macau as well. And the spectacle of “foreigners” biting off parts of “China” would not help any struggling new government to re-establish order and authority. Any more than it did for Weimar Germany, or the Qing at the beginning of this century.

This actually all seems to me the most probable path ahead. I would not want right now to be investing in China.

Nor would I even be counting on attending the Beijing Olympics. Believe it or not, even that is a bad omen. Such events tend to be the sort of big blowouts that mark a doomed regime, someone running on hype.

I do not refer only to the famous Berlin Olympics of 1936. Recall also that the 1940 Olympics had to be cancelled--they were set for Tokyo. So was the planned Roman International Exposition of 1942.