China’s future?

BusinessWorld http://www.bworldonline.com/main/content.php?id=21768

Thursday, November 25, 2010 | MANILA, PHILIPPINES
Strategic Perspective -- by René B. Azurin
China’s future?

A corporate executive who pays $349 a year to subscribe to the weekly "global intelligence" reports of the Texas-based firm Strafor gave me entrepreneur George Friedman’s book, The Next 100 Years: A Forecast for the 21st Century (2009), and urged me to read it. I did leaf through it and found many of Friedman’s forecasts badly reasoned. His comments on the "geopolitical fault line" of the Pacific Basin were, however, interesting in the context of the present US-China confrontation on currency and trade.

The increasingly strident insistence of the US that China let its currency appreciate vis-à-vis the US dollar is really a demand for China to raise the price of its exports so that American demand for Chinese goods will contract and US firms can better compete. In this way, the US hopes to grow its economy out of the high unemployment caused by the current global recession. In pursuit of this objective, the US is apparently deliberately letting the value of the dollar slide against other currencies and wants China (in particular) to correct what is widely considered a seriously and deliberately undervalued renminbi. Unmistakably, the signs of a trade war loom on the horizon.

Friedman notes that the US "consumes massive amounts of Asia’s industrial products" and that this "devastates certain American economic sectors and regions by undermining domestic industry. What benefits consumers can simultaneously increase unemployment and decrease wages, creating complex political cross currents within the United States." Friedman therefore contends that, "regardless of the overall benefits of trade with Asia, the United States could wind up in a situation where domestic political considerations force it to change its policy towards Asian imports." He then adds, "If the United States barred Chinese products, or imposed tariffs that made Chinese goods uncompetitive, China would face a massive economic crisis. The same would be true for Japan and other Asian countries." He pointedly stresses, "Countries facing economic disaster become unpredictable."

Asia’s two major powers, Japan and China, "are heavily dependent.... on exports to grow their economy." A shift in American policy to "try to reshape economic relations in the Pacific Basin... (in response to) domestic pressure... is far from unimaginable," says Friedman. He observes, "Economically, the United States is dependent on trade with Asia, but not nearly as dependent as Asia is on trade with the United States." It should be pointed out, however, that the question of who is ultimately more dependent on whom is based on a whole slew of factors and conditions affecting the character and direction of development in each individual country. Still, it’s already an inextricably interconnected world.

"Militarily," Friedman adds ominously, "the United States could shut down access to the Pacific Ocean whenever it wished."

Although Friedman concedes that the Chinese economy’s "surging dramatically in the past thirty years" has made it "a significant power," he argues that China’s growth cannot be "unending" and that the rate of growth must eventually diminish. He then argues that "slower growth means substantial social and political problems." He says that "China’s economy is not nearly as robust as it might seem, and its political stability, which depends heavily on continuing rapid growth, is.... precarious."

Those problems lead Friedman to conclude that China may not even "hold together as a unified country." Just to provide the flavor for this argument, it relates what is happening in China today to what happened in China in the mid-19th century when "the Europeans forced their way in, engaging China in intense trade." This resulted in "dramatic increase in wealth in the coastal areas that were engaged in trade" but also a "massive increase in inequality between China’s coast and the poor interior regions." Observes Friedman, "This disparity also led to the weakening of the central government’s control over the coastal regions and to increased instability and chaos" which lasted until Mao and his Red Army overthrew Chiang’s central government in 1949, assumed power, and closed the country again to foreigners. Friedman notes that Mao actually failed in his efforts to cause coastal trading regions like Shanghai to join the "revolution" and observes that those wealthy areas "preferred close ties to (and even domination by) the Europeans."

In essence, Friedman argues that Deng’s re-opening of China after Mao’s death is a "gamble" that "China could open its borders, engage in international trade, and not be torn apart by internal conflict." He (Friedman) clearly does not believe that the bet will pay off and that China can sustain "an indefinite balancing act" wherein it will "gradually shift resources away from the wealthier coastal regions toward the interior without meeting resistance from the coast and without encountering restlessness in the interior." The basic reason why Friedman thinks this will be so difficult to achieve is that he sees China as engaging in "profitless" growth, pricing its exports significantly below cost. These "(p)rofitless exports drive a giant churning of the economic engine without actually getting it anywhere."

As Friedman sees it, "China is (today) held together by money, not ideology. When there is an economic downturn and the money stops rolling in, not only will the banking system spasm, but the entire fabric of Chinese society will shudder. Loyalty in China is either bought or coerced. Without available money, only coercion remains. Business slowdowns can generally lead to instability because they lead to business failure and unemployment. In a country where poverty is endemic and unemployment widespread, the added pressure of an economic downturn will result in political instability."

The Stratfor founder sees three possible future scenarios for China. In the first, China will continue "to grow at astronomical rates indefinitely." He does not believe this can happen. In the second, there will be a "recentralization of China, where the conflicting interests that will emerge and compete following an economic slowdown are controlled by a strong central government that imposes order and restricts the regions’ room to maneuver." He thinks this probable but "difficult to pull off." In the third, a severe economic slump will cause China to "fragment along traditional regional lines, while the central government weakens and becomes less powerful." He thinks that this is the most likely outcome.
"Any discussion of the future has to begin," says Friedman, "with a discussion of China." All right then.

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