No, this isn't about Chinese militarism, or nationalism. Instead, it underlines some points made in Winds of Change.NET's long look at China's possible futures.
The projections re: China's "inevitable" economic rise to surpass the USA by 2040 or whatever fool date miss a whole lot of things, but here are two:
- The rural time bomb
- The demographic/ pension problem - which points toward the real second time bomb
We'll start with the rural time bomb:
"A peasant "time bomb" threatens to stunt China's rise to global economic superiority unless immediate measures are taken to fix the problem, say experts. The Chinese state has lost much of its legitimacy with the country's rural majority, a turnaround that could have increasingly adverse effects on the long-term socio-economic development of the country, according to Joshua Muldavin, an Asian studies expert at Sarah Lawrence College in New York.
With greater land seizures by the state and reduced levels of rural subsistence, more peasants are having to migrate to urban areas in search of work where disappointment often awaits, making "peasant landlessness ... a time bomb for the state," Muldavin told an audience Thursday at the Carnegie Endowment for International Peace.
"There are two Chinas," he said. One is for investors, and the other is the "rural hinterlands," where official corruption, a growing gap between rich and poor and unemployment led to some 87,000 incidents of unrest in China last year, said Muldavin. It is believed that many more go unreported."
This is not entirely uncommon as industrialization takes hold, but when you combine it with China's environmental capacity (Industry needs water. People and agriculture need water. What if there isn't enough for both?) and the subject of the next time bomb, things could get "Chinese interesting" fast. So, on to the demographic/ pension/ investment time bomb:
China's pension system is facing a demographic time bomb -- the consequence of the one-child policy -- which could seriously damage its future economic prospects, says a new report from Deutsche Bank's research department.
"Low retirement age compounds the demographic problem. China is graying fast but at a very low income level. Low effective retirement ages will see the working age population already reaching its peak between now and 2010 and will lift the old-age dependency ratio much higher than conventionally thought," says the report.
In effect, China is getting the demographic profile of an advanced industrial country with a mature welfare system, but with an economy still clambering out of developing status. And repairing the existing pension crisis is going to cost a minimum of 7 percent of its gross domestic product.
The DB survey lists three structural challenges in today's system that need to be addressed. The first is that the pension system is burdened by a large amount of legacy debt (i.e. unfunded liabilities from the old pension system).
The second is that decentralization of economic planning has led to fragmentation and a lack of transparency; and the third is that China's "immature capital markets make it difficult to find suitable investments with high returns."
Fixing that last bit will mean fixing a whole lot of things. Many of which are intrinsic to the kind of state China is. Which leads to an unenviable dilemma:
- In order to continue advancing economically, China will have to change.
- As part of that process, the Communist Party is going to have to loosen its grip and make the Rule of Law mean something.
- But serious rural unrest makes that a dangerous thing to do; the natural impulse will be toward more control and centralization of power.
- But if that tight grip means China's economy is hobbled by a poor investment environment because of corollary effects, and growth begins to choke, that will cause unrest among the displaced rural population.
And round and round the merry-go-round we go....
Yes, Joe, that's why I posted on these issues nearly a year ago when I posted my series on “China's Time Bombs”. A fundamental problem for China is that one of the linchpins of the reforms that they've made over the last 25 years has been gradualism. That's consistent with a traditional Chinese predisposition for maintaining order.
But gradualism presupposes time and time is running out on this particular time bomb.
With respect to the pension system in particular although it comes as a shock to those who expect China, as a Communist state, to have a universal state pension system analogous to those in the old Soviet bloc, but there is no such thing in China. Communism in China is Communism with a Chinese face and very few in China are covered by a state-supplied pension (there isn't a universal health care system there, either).
No universal state pension system; almost no private pension system at all; the legs kicked out from under the traditional pension system (children) by the One-Child Policy (not to mention mobility); an economy that makes it unlikely for the old to be able to find work; poorly developed securities system; banks that are notoriously corrupt and continue to be burdened by “non-productive loans”. It's a tough situation.
Joe, thanks for a very helpful analysis, I don't think these issues are widely acknowledged. (I'm impressed.)
Is it me, or is the Chinese Communist State at present not too far away from what China was prior to WWII?
The demographic factors may be distorted due to brutal "one child" policies, and the burden of an aging population somewhat different.
But if China's rulers react as they will likely react -- let poor rural peasants suffer and die without an effective state response -- might not the despair, resentment, and lack of options for the rural poor be enough to lead to the same conditions that made Mao possible in the first place? Only now, the target of hatred would not be the Emperor or the Feudal system, but the Communists and their Feudal systems.
Just a thought. I'm no expert. Keep up the good work Joe!
And of course, Dave's work can be found noted and linked in our China's futures post. Click the very top link and away you go... it's in the socio-economic section.
Very nice, Joe.
Both are issues that people should be aware of, but which get shockingly little play in the American media. The greying of the Chinese deme, in paticular, is something that seems like it should be of huge impact.
A third might be the entire nature of China's financial system-- I'm not an expert, but my layman's read on the system leads to me to describe it as, "The Japanese gambit, but bigger, harder and faster!" Which means, an artificially cheap supply of money, plus incestuous banking/industrial relationships, leading to mountains and mountains of bad debt.
Now, on the one hand, that's a really good way to damage other economies on the way up, so it's not a problem to be trivialized. Japan did a lot of damage to other people along the way, and China is demographically bigger and therefore potentially more dangerous. On the other hand, it's just not sustainable, and the warning signs can be seen as soon as the local "smart money" starts investing abroad. It was thought that Japan was trying to financially conquer the United States by investing in it, in the late 80's and early 90's. In reality, they were voting no confidence in local Japanese enteprises, because the system ran on cheap credit rather than profits. And in Japan's case, it ended up with a decade long vortex of deflation and the biggest government debt load that anyone's ever seen, anywhere... all in the name of short term social stability.
It gets frustrating seeing the inverted priorities of the American media. We have the same problems or concerns as China and Europe-- a grey bulge in the demographics, energy security concerns, assimilation, etc-- but in so many cases it is made to sound as though the American version of the problem is the worst in the world while others' get glossed over or ignored. And often, the American version of the problem is actually the milder one, or the one with the more palatable solution.
To a point, I guess it's a good thing. The relentless focus on problems affords us a much greater chance to do something pro-active and fix them. The opposite would be a fingers-in-ears "What, me worry?" approach that would be a disaster overall.
I just wish it didn't sound so damned defeatist all the time.
Yes. Everyone who is so worried that China will surpass the US is fooling themselves. I see China plateauing in the same manner as Japan, which would still be pretty good for them, but not enough to dominate the world.
Read here about countries that love America vs. those that don't.
China, like Europe, has a failing socialist system, which results in envy of America.
Don't forget its banking system.
Good point, Matt. This is, of course, tied to the investment and pensions issue.
Consider the potential problems if tens of millions of Chinese who put their money in Chinese banks (the only option) start to find out that their savings are essentially gone, as they look forward to a retirement without state support.
A little unrest there? Yeah, maybe.
This is good AND bad news.
Bad news, in that a regime that has cultivated an aggressive, victimized nationalism is likely to be tempted to unleash it at an extrenal target as a distraction.
Good news, in that the absence of any meaningful state support for an aging population means the buden falls on family. Thanks to a one-child policy, every combat casualty China suffers means one more family with, essentially, no support at all in its old age. And if the other stuff like banking fails along the way, they'd have no savings to draw on either. It's possible that a successful military campaign would accomplish all objectives, but the backlash from failure or very high casualties could be a level of unrest that even China's jack-booted apparatus would be challenged to control. Especially if it's building on a pre-existing level of unrest for other reasons.
I'm going to ask something kinda rude here, but it needs to be asked: we're kind of assuming that Chinese domestic politics plays out like ours would, I think.
"If the Chinese bureaucrats simply decide to let older Chinese suffer and die in large numbers will anybody care? (in a politically meaningful way)"
Seriously, gentlemen. Look at what happened to the life expectancy for Russian men... and Russia is still pretty stable. If that happened in Europe or America, there'd be hell to pay. Now take a country whose kindest version of "labor relations" makes Dickens' "Hard Times" look like a tour guide of social harmony and benevolence... incoming human tragedy aside... do the officials in the Chinese government care about human tragedy? Is there really sufficient prospect for unrest to make a difference? Or will the younger Chinese simply blow off their older generations?
Joe and Matt,
The banking issue is worse than you think. The Chinese are saving like crazy because there is no pension or retirement system. They are putting their savings into banks, which loan the money out for further development. Much of China's economic growth is due to domestic savings.
But the banking system is corrupt. A lot of the domestic loans are going to state-owned enterprises which are effectively bankrupt.
What happens to the personal retirement savings when Chinese banks start failing? The state will have to prevent banks from failing lest the Chinese people start "bank runs", yet the problem of uncollectable loans will remain.
IMO the Chinese Communist Party simply cannot afford the political price of a transparent financial system.
One way or another, the Chinese people will pay another terrible price for Communist tryanny.
Tom lays out my China banking scenario from #7 better than I did. Yes, this is the core problem.
Their best hope is to allow foreign banks to operate in China, and provide a reliable place for the population to begin saving. But of course, as foreign banks establish more branches one can expect a run on Chinese banks.
You can see the policy whiplash/see-saw to expect here re: China if tyou're a foreign bank - but greed will probably blind a lot of players.
Russ' point is also valid. China may in fact be able to simply write these folks off and say "who cares?" The problem is that Chinese society is strongly family based, and many of these families will have children serving at one level or another in the military. Ruin enough of them, and there could be real trouble.
The "smart" thing to do as a dictatorship will be to guarantee pensions etc. for the families of serving military personnel. With that, it probably is possible to get the army to kill as many Chinese as the regime wishes, since failure to obey any order means the effective ruin of your family.
Most of the scenarios around china's future, far from being "China supasses America" bulls--t, are dark ones.
Yeah... I'm sorry to be the one to fart loudly at the cocktail party, but if there's one thing that Chinese communists are good at, it's murdering the Chinese people.
China is required to open its banking system up to substantial foreign ownership as part of the agreement by which it was admitted to the WTO. IIRC, they're already a little behind schedule on this.
I've been betting that they'll get a waiver. I've been arguing, as Joe put it, “greed will probably blind a lot of players” for nearly 30 years.
I'm really no Pollyanna (people who actually know me will tell you I'm quite the opposite) but I think that we have little to worry about in China on the economic front and, for reasons that Joe touches on, possibly not on the military front. China's got the worries.
The biggest problem that I see is in people deciding that China's economy or banking system or government are too large and important to be allowed to fail…
And Russ is quite right that domestic political considerations in China are different than in the U. S. That doesn't mean that public opinion is completely irrelevant but there is a gulf between the rulers and ruled that's larger than most Americans can imagine.
However, harmony is incredibly important to the Chinese. The rulers typically interpret that as retaining power. But it's not the only interpretation or the only implication.
The Gweilo had a lot to say about the Chinese banking system and bad debts before he up and vanished.
One Question, If the Chinese govt was really worried about the domogrpic bomb, why have they not changed the one-child policy.
I first saw these issues mooted on Samizdata a few months back.
This is the best I have seen so far in the way of a short introduction. Comments excellent too.
#8,
Cellphones
Dave #12:
Also an excellent point. I was going to raise the WTO question myself, but you seem to know more about it than I do, in terms of its present implementation.
The WTO banking regulations are going to be a double or triple edged sword, with most of the edges pointing towrd China. First, the openness will probably start exposing just how egregiously unprofitable some of the businesses in China really are. Second, it will probably start exposing just how over-extended and unprofitable some of the banks are. Third, don't the rules demand some foreign banks be allowed to operate and hold Chinese savings? LIke, citizen savings? With the very real potential for there to be a massive run away from Chinese banks, bringing the whole party to a very abrupt halt?
I don't recall reading very many serious plans to deal with that.
IIRC the WTO rules require a certain, substantial portion of foreign ownership of Chinese banks. That will, in turn, require more transparency than there is now.
My view has long been that the WTO will never actually require the Chinese to comply with their commitments. It's on the horns of a dilemma: do you throw the soon-to-be second largest economy in the world out for non-compliance or do you bend the rules to accommodate them?
Either position renders the WTO absurd.
Their only hope is for the Chinese to comply with their commitments voluntarily and I have my doubts about that.
BTW there's a decent blog (mostly in English) that frequently deals with Chinese banking and politics: Elite Chinese Politics and Political Economy.
http://chinesepolitics.bl*gspot.com/
Replace the '*' with an 'o', of course.
Cell phones? Nuh-uh.
Cell phones are as great an eavesdropping liability to the dissident as they are a commo threat to the hegemon.
I cannot see what this has to do with the Chinese political leadership's calculus on domestic conditions. Given the state of Chinese coal mines, I don't see old sick people being seen by these people as anything other than a burden to be made rid of as fast as possible.
Interesting comments, all.
What impact do the conditions in China have on the projected global use of oil? Seems to me, if banking is enabling unprofitable industry, the house of cards will fall eventually. Current oil use projections are based on Chinese industry continuing to grow ... what if it doesn't? Late-80's gas prices again? I bet not...
Hmm, that's a good point.
But India is still expected to keep growing, so even a Chinese fall may not change the general trajectory all that much.