Cracks in the Communist Citadel: 12th August 2008

The Chinese citadel appears to have finally developed some cracks. China is now a country that is looked at with a growing degree of suspicion. Curiously, the reasons are both political and economic, with the most recent trigger for dissatisfaction being Tibet. In fact, even the Olympics preparations were marred by tales of distress caused to the local population by the government to placate its own ego. Add to this the sympathies with rogue regimes in Sudan, Myanmar and North Korea, the scales get tipped even further.
With China’s progress now coming under the lens, there are some interesting facts which have been brought to the forefront. First, while Chinese economic numbers have always been suspicious, the theory now doing the rounds is that GDP growth numbers are overstated. This is so because they are collected from the provinces which have a tendency to over-report to be on the right side of the government. Further, growth in industrial production or services does not match with the overall growth numbers of the economy. The relevant question is, where is growth coming from?
Second, inflation numbers that have been quoted at low levels are being attributed to repression in areas of health, transport, education as they are state governed, which tends to understate the true picture. Food prices, too, are partly controlled and hence the country is buffered against the present inflation which has swept almost all nations.
Third, China is supposed to have started a new kind of colonialism wherein it consumes the bulk of natural resources available in the world. China accounts for half of the pork consumed, a third of steel produced, nearly 80% of the copper used, a quarter of aluminium consumed and half of total cereals produced in the world. Its consumption of imported soybean and crude oil has increased by 35 times since 1999. This was what colonialism was all about: in the 19th century it was through conquests, while it is legitimately done through the channel of foreign trade today.
The quality of the growth story does not look good as it involves the running of sweatshops where labour is virtually bonded to produce cheap goods while being kept at a subsistence level. Hence, the manner in which price competitiveness has been achieved would not be politically correct in a free society. Fifth, the quality of goods produced is not always world-class as has been seen in case... of electronics or even toys, where it was found that Chinese toys contain toxic substances. Sixth, China is one of the largest polluters in the world as its quest for industrial growth has led to the degradation of the air as well as water. Curiously, the power consumed in the steel industry is higher than what goes into households, and this has resulted in such degradation.
There are also other economic distortions that have resulted from the process of rapid growth, which will impact its own functioning, notwithstanding controls being exercised by the state. The first is, unbalanced growth in favour of industry which has lowered the quantity of arable land. Land was forcibly used for industrialisation as a result of which there is less space available for cultivation and greater demand for imports. At the same time, China has put restrictions at times on exports, thus tilting the global price scales. The demand for farm products, energy and minerals has pushed up global prices at a time when the world is struggling with a financial crisis and central banks are grappling with their monetary policies. Add to this the policy of not appreciating the currency and artificially pushing down the interest rates—-China has in fact encouraged indiscriminate lending by state-run banks, which have officially reported non-performing loans in the region of 5-10%, though analysts suspect it could be over 20%.
What then is one to make of the whole story? China remains a leader despite the political dogma which still is a hard nut to crack. Considering that future growth will still be driven from this side of the world, there is a need for introspection by the government about cleaning up the mess which is being created along the way as it is bound to rebound perversely at some point of time.