Some Western pundits have no clue about China

March 19, 2018

Lack of an understanding of China’s history, institutions and leadership style coupled with ideological arrogance explain why the US media,  some analysts and some scholars are wrong about the country’s economy, polity and civil society.

The world has indeed lost count on how many times Western pundits have incorrectly predicted China’s economic and political collapse since Deng Xiaoping took the country on to a reform path. Their wrong if not ridiculous assessments are largely based on wild speculations derived from the forecasters’ own values or ideological biases. Attempts to provide a positive picture on China are dismissed as propaganda or worse.

Wrong about China’s economy and polity

Since China’s opening up to the world and reforming its economy and polity in 1978, China critics have predicted the country’s demise. They were certain that China would implode like the Soviet Union because of the violent crackdown on the 1989 Tiananmen Square “pro-democracy” protests and the implosion of the Soviet Union.

Mainstream Western media, respected analysts and scholars were equally sure that the Chinese economy would collapse because “communists” know nothing about economics and it was “drowning in a sea of debt,” propagating the same message for more than 30 years.

However, history and evidence point to the contrary, in that China is getting wealthier, stronger and more united than ever before. Judging from economic reports and continuous reforms, the country may be on track of attaining the “China Dream,” making it a prosperous, strong country by 2050.

According to the International Monetary Fund and other reputable supranational organizations, the Chinese economy is poised to grow at an average annual rate of above 6% over the next five years if not longer. Since China has already lifted more than 800 million out of poverty and has more than 400 million in the middle class, it is on track to eradicate poverty and put more than 5o0 million in the middle class by 2020.

On the geopolitical and military fronts, China’s influence on the global stage and ability to deter foreign (read US) aggression are already a “fact of life” and growing.

So why have so many journalists, analysts and scholars been wrong on China?

The simple answer is that they had little or no clue about China, instead assessing the country’s economic and political outlooks based on misinformation, debatable assumptions and ideological biases.

Authoritarianism and innovation

China’s more than 5,000-year history was largely influenced by feudalism, a platform in which democracy and individual rights were not only frowned upon, but those who harbored such views were harshly punished. Yet the country was an innovation powerhouse during much of its history, inventing paper, gunpowder, the compass and other technologies.

Innovation in China might not necessarily be related to individual rights; it might have more to do with encouragement and funding, as during the Han and Tang dynasties. The same might be true today,  raising funding for research and development from 1% to almost 2.5% of gross domestic product over the last 10 years has produced positive results.

The fact of the matter is that few Chinese technology researchers are political activists. They will produce and become creative if given an opportunity, explaining why China is fast narrowing the technological gap with the West.

Chinese economic and financial systems

Deng Xiaoping’s “Socialism with Chinese Characteristics” is a hybrid development model composed of both market-economy and central-planning methods. Its success is beyond doubt, for the following reasons.

First, state control of economic development is designed to prevent the kinds of wide business-cycle fluctuations seen in the West. It is also meant to avoid the kind of economic stagnation seen in the former Soviet Union and its Eastern European satellite countries. The “happy medium” is the result of Communist Party adviser Chen Yun‘s “birdcage” model.

The “bird” or economy is allowed to grow within the plan, or “cage,” set by the state. Gradual implementation of market forces to determine demand and supply in the “non-strategic” industries (clothing, non-defense manufacturing, etc) has increased productivity without triggering inflation. Maintaining state ownership of and price controls on “strategic” industries (food, energy, etc) has sustained economic, political and social stability.

That is, state-owned enterprises (SOEs) and state-owned banks (SOBs) exist first to “serve the people” and then make profits. That stance is interpreted in the West as misallocation of resources, which its China critics say could lead to economic collapse at worst and a financial bubble at best.

But what the critics fail to appreciate is that while banks and enterprises make less profit or even incur losses, they fulfill a social responsibility and create economic and political stability.

State-owned banks not at risk

Contrary to what China critics have predicted, Chinese SOBs are profitable, showing no sign of a bubble or systematic risk. Their average ratio of non-performing to total loans of 1.7% is comparable to that of the West and Japan. Chinese banks had more than 155.5 trillion yuan (US$23 trillion) in deposits in 2016 according to US-based consultancy Statista, more than any other banking system in the world, including the United States, with $12 trillion as of March 7 this year, as reported by the Federal Reserve Bank of St Louis. With deposits accounting for almost 50% of GDP, the 2017-18 Chinese bank deposits should be higher than the $23 trillion.

Now US critics are pointing the finger at China’s shadow banking system, which includes loans made by non-banks such insurance companies and wealth fund management and trust products. Depending on whose numbers one believes, shadow banking accounted for between 40% (China Banking Regulatory Commission) and 80% (Moody’s) of the country’s GDP. Even the highest estimate pales in compared to that of the US at $45 trillion or 250% GDP in 2016 (Bloomberg). By the critics’ own logic, the US banks will collapse before China’s do.

Most if not all of China’s shadow banks are subsidiaries of large SOBs, which use their insurance, wealth management and trust businesses to bypass rigid banking regulatory regimes. They have sufficient internal mechanisms (such as adequate loan collateral) to control risk. What’s more, the 2018 “Two Sessions” approved a new financial-system commission to regulate both commercial and shadow banking businesses as a way to curb over leveraging.

China’s four big banks are in fact become the world’s four biggest in terms of assets, suggesting China’s banking system is just as stable, if not more so, as those in the West.

China’s governance platform

The Chinese government routinely polls the population in formulating and implementing economic, political and social policies. The polls consistently show that poverty eradication, environmental improvement, national defense and eliminating corruption are the top issues to be addressed. The government is listening to the people, in light of its policy platforms.

The Chinese government may lack transparency (because it debates policies behind closed doors) but is more responsible and accountable than that of the US or any other government. No government in human history has been as successful in pulling people out of misery or poverty and bolstering the middle class within just four decades. Barring any unexpected adverse developments, China may be on track to eradicating poverty entirely by 2025 if not earlier.

In contrast, poverty has worsened and the middle class is dwindling in the US. A CNBC report this month indicated that 42% of Americans were at risk of retiring bankrupt.

Moreover, US politicians appear more interested in promoting and protecting their own interests and those who financed their election campaigns than the nation’s. Priority is given to defense spending, risking economic and social stability. In spite of the huge numbers of shootings, the Donald Trump administration, the US Congress and some states refuse or are reluctant to toughen gun laws.

In any event, the anti-China US media, analysts and scholars are leading America down a dangerous “garden path.”

Ken Moak taught economic theory, public policy and globalization at university level for 33 years. He co-authored a book titled China's Economic Rise and Its Global Impact in 2015. HIs second book, Developed Nations and the Economic Impact of Globalization, was just published by Palgrave McMillan Springer.

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