6/29/10 - the future of china

In today's excerpt - China. Most commentators view China as an inevitable world superpower over the course of the 21st century. Noted futurist George Friedman disagrees:

"Any discussion of the future has to begin with a discussion of China. One-quarter of the world lives in China, and there has been a great deal of discussion of China as a future global power. Its economy has been surging dramatically in the past thirty years, and it is certainly a significant power. But thirty years of growth does not mean unending growth. It means that the probability of China continuing to grow at this rate is diminishing. And in the case of China, slower growth means substantial social and political problems. I don't share the view that China is going to be a major world power. I don't even believe it will hold together as a unified country. But I do agree that we can't discuss the future without first discussing China. ...

"The vast majority of China's population lives within one thousand miles of the coast, populating the eastern third of the country, with the other two-thirds being quite underpopulated. ... [After Mao], the coastal regions again became prosperous and closely tied to outside powers. Inexpensive products and trade produced wealth for the great coastal cities like Shanghai, but the interior remained impoverished. Tensions between the coast and the interior increased, but the Chinese government maintained its balance and Beijing continued to rule, without losing control of any of the regions and without having to risk generating revolt by being excessively repressive. ...

"Underlying this is another serious, and more threatening, problem. ... Between Asian systems of family and social ties and the communist systems of political relationships, [bank] loans have been given out for a host of reasons, none of them having much to do with the merits of the business. As a result, not surprisingly, a remarkably large number of these loans have gone bad—'nonperforming,' in the jargon of banking. The amount is estimated at somewhere between $600 billion and $900 billion, or between a quarter and a third of China's GDP, a staggering amount. ... Japan's bad debt rate around 1990 was, by my estimate, about 20 percent of GDP. China's, under the most conservative estimate, is about 25 percent—and I would argue the number is closer to 40 percent. But even 25 percent is staggeringly high. China's economy appears healthy and vibrant, and if you look only at how fast the economy is growing, it is breathtaking. Growth is only one factor to examine, however. The more important question is whether such growth is profitable. Much of China's growth is very real, and it generates the money necessary to keep the banks satisfied. But this growth really does not strengthen the economy. And if and when it slacks off, for example because of a recession in the United States, the entire structure could crumble very fast.  

"This is not a new story in Asia. Japan was a growth engine in the 1980s. Conventional wisdom said it was going to bury the United States. But in reality, while Japan's economy was growing fast, its growth rates were unsustainable. When growth slumped, Japan had a massive banking crisis from which it has not really fully recovered almost twenty years later. Similarly, when East Asia's economy imploded in 1997, it came as a surprise to many, since the economies had been growing so fast. ...

"A businessman in Shanghai ... makes far more money from relationships with Los Angeles, New York, and London than he does from Beijing. As Beijing tries to clamp down on him, not only will he want to break free of its control, but he will try to draw in foreign powers to protect his and their interests. In the meantime, the much poorer people in the interior of the country will be either trying to move to the coastal cities or pressuring Beijing to tax the coast and give them money. Beijing, caught in the middle, either weakens and loses control or clamps down so hard that it moves back to a Maoist enclosure of the country. ...

"A [very real] possibility is that under the stress of an economic downturn, China fragments along traditional regional lines, while the central government weakens and becomes less powerful. ... A very real future for China in 2020 is its old nightmare—a country divided among competing regional leaders, foreign powers taking advantage of the situation to create regions where they can define economic rules to their advantage, and a central government trying to hold it all together but failing. A second possibility is a neo-Maoist China, centralized at the cost of economic progress. As always, the least likely scenario is the continuation of the current situation indefinitely."


George Friedman


The Next 100 Years: A Forecast for the 21st Century


Doubleday a division of Random House, Inc.


Copyright 2009 by George Friedman


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