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COLUMN

China’s Guanxi and Kuan-hsi Capitalism

Basil Enwegbara

The Economist saw it as the twenty-first century economic powerhouse. Experts concurred. And Western investors as a result rushed in an unprecedented manner comparable only to the 1885 European scramble for Africa. Recognizing this new goldmine, most of the world’s leading economists transformed themselves into Chinese experts since they did not want to be left out. Not wanting to be surprised, Washington did not hesitate to assemble its army foreing development experts to keep a close watch on this emerging Chinese economy. Human rights activists and environmental activists quickly took their usual position to fight this new China.

The government of the People’s Republic of China, surprised that all of this could happen so quickly to China, once a forgotten peripheral country, now the center of gravity, advancing industrial and economic competition, seized the newly found power. Today, the Chinese government has built one of the most sophisticated public relations machines, promoting China as the fast emerging economic superpower with a two-digit annual growth rate.

But is the news truly correct - that is, is China really growing so fast to become sooner than later the economic superpower? Or could China wait until about 2050 as Joseph Nye recently revealed in his book The Paradox of American Power: Why the World’s Only Superpower Can’t Go It Alone? Could we simply see China as another Asian false boom? Answering these questions would require a closer look at the realities today, and whether these good changes really are taking place, and whether they are enough to make the most populous country in the world also the world’s most powerful economy.

There is no doubt that China has transformed itself into an impressive and sophisticated industrial economy. This rapid industrial transformation is most common in the central littoral regions and the coastal provinces like lower Yangtze River, Fujian and Guangdong. Aided by a cheap and skilled labor force, good education, and liberal investment policies, China is today attractive to many foreign investments led by Diaspora Chinese and Western multinational corporations. All have given rise to astronomic growth in local industrial expansion. China’s GDP, within less than three decades, is outpacing those of other countries in the world; and Shanghai Stock prices, for instance, are hitting records higher than anywhere else.

China’s strength is in products based mostly on mature product lines and low technologies. Leading in the garment industry, household products and appliances, components such as computer hardware, and automotive parts, China is driving most companies in the newly industrialized countries into bankruptcy. This unprecedented growth has triggered what is today known as a China crisis -- that is, the emergence of a Chinese economy that produces products underselling Chinese neighbors, particularly the former Asian Tigers. In other words, China is doing to the Tigers what the Tigers once did to Japan and what Japan earlier did to the United States and Europe. How could Thailand and China compete in the gem-cutting business, for example, with China’s $50 monthly salary compared to Thailand’s $200 monthly salary? Certainly there is no way.

With everything going seemingly well for China, the communist country now has begun high-powered economic diplomacy to enhance China’s true status as an economic superpower, including belonging to the G-9 and transforming itself from a self-isolated middle kingdom, a celestial empire, an aggrieved victim, and the world’s leading oligarchic-bureaucratic dictatorship to a modern and liberal economic system.

But despite these impressive achievements, the Dragon faces a series of unresolved issues that today threaten China’s emergence as a global economic player. In fact, China is catching the “Asian flu” which recently grounded countries such as South Korea, Thailand, and Indonesia. A bank-dominated financial system, weak central bank regulation and supervision of commercial banks, and excessive lending and nonperforming loans have become common within the Chinese economy. Problems arising from the lack of well-developed capital markets are themselves creating a high potential for systematic underpricing of loans and encouraging excessive borrowing by the state-owned enterprieses with preferential credit access. The state-owned enterprises’ 500 percent debt-to-equity ratio is already threatening this young industrial economy. The continued support of these inefficient, corrupt, and money-losing state-owned enterprises could lead to lack of confidence in the country’s banking system. China is today witnessing a great deal of province-centered tensions caused by central government’s efforts to transfer resources from wealthier provinces to the poorer ones; and province-province tensions also because of the growth in income gap between the booming coastal provinces and the interior provinces. These tensions are even in the interests of the West, who would like China to dismantle communism and become democratic just like the former Soviet Union. And onces tasted the benefits of capitalism, most Chinese would forced to fight communism hands down, seeking more and more social and economic freedom.

Without addressing the inherent denial of human rights and personal liberty, lack of religious freedom, and the sustained suppression of ethnic minorities, China cannot be expected to sustain the kind of social and economic pluralism required of a true capitalist system. Rather than deal with these problems the government prefers mounting a powerful lobbying campaign to hide these social nightmares particularly its free riding on the universal standards of human rights and tolerance for minorities in places like Tibet. Even its powerful neighbors -- including India and Japan --are growing wary of China’s environmental perils coming from industrial pollutants such as arsenic, cadmium, and lead.

China simply confirms Krugmanian economists’ argument that the Asian rapid growth economy is a product of heavy investment spending rather than an outcome of productivity growth. Leading economists like David Zweig are now pointing to the growing destabilizing social impact of China’s huge level of unemployment as large number of people continue to leave farming. Disappointed that the magic never happened, world-celebrated economists like Lester Thurow view China to have run out steam while others like Jeffrey Sachs now head to Nigeria and South Africa, as the their next destination.