Twelve months ago, a well-known bear on the Chinese economy revealed to me that a China-sceptic such as himself was treated by his colleagues as a bit of a crackpot, an angry old man, or sometimes, more patronisingly, as somewhat of a curiosity. Arguing that the Chinese model was seriously flawed was almost like denying that global warming was occurring, he said wryly. Only unreformed socialists were on his side, he quipped. But in the first two weeks of 2009 he has been invited to speak at more conferences and approached to write more articles in prominent publications than the whole of the previous year.
The American model of free markets may be on trial, but so is the Chinese model of “authoritarian capitalism”. Today is officially Chinese new year. It will usher in the Year of the Ox, symbolising prosperity through fortitude and hard work. But prosperity is increasingly hard to come by. The Shanghai Exchange has seen its index decline by two thirds. The Chinese export sector, responsible for 40 per cent of Chinese growth over the past decade, is tanking. Some estimate that 20 per cent of factories in the Pearl River delta area have already closed down and half will be gone by the end of the year.
Overall economic growth is likely to dip below the 8 per cent mark - the point at which unemployment (and therefore unrest) begins to rise dramatically. If we look at informal but probably more accurate indicators, such as power consumption, the Chinese economy is close to stagnating and even contracting. Power use in China fell 9.4 per cent in November 2008. December figures have not been released.
This is despite the trillions of dollars - in addition to the half-trillion- dollar stimulus package - that its state-owned banks regularly but inefficiently pump into state-controlled businesses to maintain the growth levels enjoyed up to now. Domestic investment (from bank loans) was responsible for around half of Chinese GDP growth. Even before the onset of the financial crisis, there was an estimated one trillion worth of bad loans in the Chinese financial system as a result of this flawed investment strategy. A new and massive spate of bad loans is inevitably around the corner for Chinese banks.
Even before the global financial crisis, those in absolute poverty (earning less than US$1 a day) doubled in China over the past decade. More than 400 million had seen their net incomes decline over the same period despite record GDP growth. It is no wonder that domestic consumption growth has been slow and will not be able to take up the slack as the export sector suffers. Instead China must rely on state-led fixed investment to keep growth at 8 per cent, despite acknowledging that this strategy is becoming more inefficient and wasteful, and therefore increasingly unsustainable. The general economic outlook is so dire that the Chinese President, Hu Jintao, has increasingly issued warnings about the possibility of political and social collapse.
The persistent idea that the Chinese economy was “decoupling” from the West and would provide a buffer for Asia now seems absurd. The Chinese model is clearly not as sound and resilient as many believed. But the amazing thing is not that China is suffering. The facts and figures always suggested that it would in the event of an American and European slowdown. The amazing thing is that so few experts saw it coming; and those that did were dismissed or ridiculed.
In a 2005 essay on why intellectuals tend to get the big questions of their day wrong rather than right, Owen Harries argued that intellectuals are “slaves of fashion” and that they essentially “think in herds”. So, too, do economists and policy wonks, it seems. The question, as far as the hype behind the China model is concerned, is who led the herd? I would hazard a guess and say that there are three distinct groups.
The first are those with economic interests in the continued hype surrounding the Chinese economic miracle: businesses and their “strategic advisers” who benefited from activity in China, investment banks who made a bundle from multibillion-dollar deals and consultants advising clients how to make it in this world of 1.3 billion people and unlimited possibilities. Even high-profile and very credible people who served in presidential administrations got in on the act.
The second are national and NGO policymakers and wonks who have wisely advocated engagement with China in order to encourage Beijing to rise peacefully. The reward of engagement for the Chinese was said to be prosperity for all and a more peaceful and contented China that would please the rest of the developed world. No need to focus on flaws in Beijing's model when much larger political objectives were at stake.
The third are made up of a diverse group of intellectuals (and a few malcontents) who were seeking an alternative to Western and American-style capitalism as the way to go. Most believed in the Chinese model of “authoritarian capitalism” in good faith and saw the “Beijing Consensus” as an alternative that avoided chaos, corruption and indecision when it came to developing countries. Unfortunately, the inconvenient truth is that chaos, corruption and indecision (in the form of a stalled reform process) are precisely the problems with the Chinese model that have been largely ignored until now.
The China story is far from finished. China will eventually still rise, but it will need a different model to to do so. Its “authoritarian capitalist” model has almost gone as far as it can go.
President Hu put a positive spin on 2008 by concluding that “for the Chinese people, 2008 was a very extraordinary and uncommon year”. For 2009, the omens are much more ominous.
Dr John Lee, foreign policy fellow at the Centre for Independent Studies in Sydney and the author of Will China Fail?