Comments on Back in the Saddle

In Back in the Saddle we note Chinese President Hu Jin Tao as saying China's competitive advantage is being eroded in the current economic climate. I have long argued on this blog that for China to remain competitive they have to be innovators and not copiers. Anyway, one of our regular blog readers Dr. Bob Vaas (my MBA supervisor) commented on Back in the Saddle via email and gave us permission to publish his thoughts which I thought are insightful. His comments are below:

The Chinese are in real trouble - the constant expansion and growth model the government relied on is already foundering, and having chucked out all Communist ideals a couple of decades ago, the Party has a major problem. The powerbase is being eroded rapidly - no basic faith other than wealth creation and higher living standards has been promoted, and these are dropping rapidly. I saw something in our paper here today reporting Chinese wages as now being only 45% of GDP cf 52% a year ago, so the average worker is going backwards, and as output slows ....... There were riots last month in various places, and these will heighten. I just hope the Party does not decide to channel frustrations into anti-foreigner and expansionist moves - against Tiwan and Japan, for example. If I were the Chinese I'd move inot Siberia, I think, although most Russians seem to think that their Far East is actually a Chinese country with Russian troops stabilising it !

In a later email Dr. Vaas observes:

The Party has painted itself into a corner - back in Mao's time there was a moral compass (distorted, abused and cynically manipulated) with espoused societal values that, I guess, harked back to Confucian times and the co-operation of the hutongs. Despite the immorality and gross corruption of Mao's regime there were values and standards, I thought, but good ole Deng threw those out a long time ago. You end up in an Enron position very quickly going down that route, and really the Party has embarked on a Ponzi promotion for the whole country. When this sort of scheme collapses, it does so very quickly, and civil unrest will not be far behind. If the Party promises just one thing - better individual wealth and living standards - as soon as it fails to deliver on this measure, it has no other goals or objectives which it can point to as counterbalances to the lack of cash today. Unlike African countries like Zimbabwe where a completely corrupt government can beggar the nation, but the individual can revert to subsistence farming as there are no very big city populations, China cannot rely on the masses heading back to the paddy fields as the city's masses were never there. An urban population the size of Shanghai's will not suddenly take up agriculture and feed themselves - especially if they have large monetary debts overhanging them.

So far, I have been very impressed by the Party's management of growth - they have maintained civil order in most areas, delivered inproved living standards for a large chunk of society, and avoided inflation and monetary and fiscal problems. Their investment in infrastructure is in stark contrast to Russia, where all the novel wealth has disappeared into the Kremlin and the oligarchs offshore accounts, and nothing has been invested at home. Not a new high speed railway line between St Petersburg and Moscow, even ! This was planned 15 years ago, work started about a decade ago, and was abandoned 5 years later - compare that to the Lhasa railway ! I know, the Lhasa railway is there to get the PLA into a hotspot quickly, but it is a mind blowing piece of infrastructural development.

Insightful food for thought! Many people refuse to see the underlying issues that are related to China's economy. Many of these issues have been covered in the press in a very small way but there is the potential for massive strife in China. A declining population will eventually put a dent in the growth of the economy and gender imbalances in the male/female ratio have the potetential to cause civil strife are just a few concerns. Since China is so firmly established in the global supply chain, any strife or disruptions in that economy have the potential to rapidly ripple accross the globe.