Stumbling Giant - The Threats to China's Future

(Kirkus Reviews)
  (Steve Forbes Forbes)

A truly scholarly view of modern China. There are three parts: 1. a critical review of China's many present problems; 2. A geopolitical analysis of China in the world;3. A comment on China's future as a superpower. The book is up-to-date and has numerous references (they make up about a third of the Kindle edition). It told me all I wanted to know. Indeed, the geopolitical section was pretty hard going--graduate -school material. Those with economic and cultural interests in China must read this.

What started as a relatively dry read ended up as a “page turner”.

A key motive for reading this book was to be better informed for investments. However, I soon discovered Beardson was painting on a far larger – and more ambitious - canvass. This is not one of those books about doing business in China or of China’s impact on business in the rest of the world. It is much more.

It is an informed and well researched view about the course of the world in the next ten to twenty years seen through the prism of China’s past, present and various possible futures; projecting forward by applying the lessons of history to current economic and social trends (with a cautious investigation of available data). As Beardson makes clear, this book is also a plea from a sympathetic critic for China to do the right thing, for its own good as well as the world’s.

As one moves through the chapters it is apparent that the author is processing his information with the disciplined mind of both an historian and a financier. The result is complex. He does not pander to his readers with black or white statements (rather he presents in multifaceted Technicolor). He reminds us that selected facts and superficial ‘spin’ is the enemy of true understanding, from whatever side of the world such propaganda comes. He clearly outlines inescapable facts and their implications that today's leaders of China must face, especially demographics. He reminds his readers of Deng Xiaoping’s admonition to "Seek truth through facts" and appears in this book honestly to do all he can to live up to that.

Many of Beardson’s sentences are nuanced, conditional and seem laced with an ironic tone-of-voice. Across the chapters there are repetitions.Read more ›

China is the country that has changed fastest over the last 30 years, taking a quarter of the world from communism to an essentially market-based economy. Its people possess an ages-old heritage that values society over the individual, and its recent governments have a strong record of meeting and solving challenges that place them among the most successful governments ever. Beardson, however, believes China will not overtake the U.S. as 'the superpower' this century. China now has the same proportion of poverty and slightly greater income inequality as America. Its greatest risk to regional relations (S.E. Asia, India, Russia) come from plans to divert Tibetan-sourced waters to northern China, along with an aggressive posture vs. several islands in the South China Sea. The bigger problem, however, will be its need for change vs. new vested interests, the lack of a charismatic leader such as Deng Xiaoping, and Beardson's belief that China's consensus leadership style will make change more difficult.

Beardson begins with a summary of China's long history (mostly not needed), continuing with its recent economic transformation initiated by Deng Xiaoping in 1979. Deng directed that the military budget be cut almost 25% between 1979 and 1981 to help generate funding for economic growth, and at the same time worked to avoid international confrontations. Deng also realized that a key underlying need was ending the existing welfare structure and allowing income inequality to increase.

Agricultural communes were allowed to wither away after 1979 and were almost extinct by 1984. This reform created a massive labor wave (similar to what had been experienced in Taiwan, South Korea, Singapore, and Japan) that ensured wages in new sectors (encouraged by new government policies directed at encouraging funding and learning from foreign firms) did not rise for 12 years. (There are now over 260 million domestic migrant workers in China.) It is estimated that 20% of 1982-1997 growth resulted from this internal migration. In addition, China supported its new manufacturing sector by devaluing the renminbi from 1.49:$1 in 1980 to 8.64:$1 in 1994, an 80% drop. Rising house prices in the West made Americans willing to spend more, and government-managed low Chinese interest rates enabled huge investments and helped the transition to a new private sector. In 1979 China's private sector accounted for about 3% GDP, 70% by 2005, and 68% of exports. (Beardson also cautions readers about the accuracy of much Chinese economic data.) Growth was also fueled by a rise in savings from about 6% GDP in 1978 to 20% for the decade up through 2008. Social initiatives, especially in health care, would have a huge effect on consumer saving and spending - much of China's untapped household saving is for unpredictable events such as hospitalization. Another savings encouragement - wages fell from 52% of GDP in 1999 to 37% in 2008.

At the end of the 1970s, China, America and India all had the same investment efficiency - requiring about 6% of the economy invested to produce 1% economic growth. Since then the U.S. has become less efficient - now almost 8%. Roughly 43% of the labor force works in agriculture (11% of the economy). U.S. agriculture employs 1.5 people for every square mile of arable land, vs. China's 500. Thus, up to 275 million farm workers could be freed up, but this would require consolidating plots and allowing farmers to use their land as security to acquire work animals, better yet, tractors.

China's ability to create higher-value via branding has been hampered by quality scares. The U.S. has rejected substantial quantities of food consignments from China for public health reasons. Even nationalistic Chinese frequently choose to buy foreign products for quality reasons. A high-speed train crash (July, 2011) and a Shanghai subway crash (Sept., 2011) have reduced the likelihood foreign nations will buy its high-speed rail technology.

Official Chinese research reported in 2007 that 88% of those with assets exceeding $14 million were children of high-ranking officials. State companies still have most of the nation's economic assets, fill oligopolistic (profitable) positions, receive virtually all bank credit, represent most of its stock market capitalization, and generate most of the profits in China. Private firms now dominate the number of economic firms, provide most of the jobs, dominate exports, and represent two-thirds of the nation's economic activity.

Beardson believes China has an ongoing jobs problems, for several reasons. For example, by 2005, 68,000 of its state-owned enterprises (SOEs; 58% of the total) had closed. State industry reforms put 70 million workers out of their jobs between 1995 and 2005, and an estimated two million more redundancies were created from 2007 - 2010 from additional closings and downsizings. Another factor - a decade ago 1% economic growth may have also brought a 1% employment growth; today, an associated 0.1% employment growth is more likely due to increased use of capital. Anti-pollution measures, especially in steel, iron, and electricity generation have also cost jobs. Beardson tells us that around Lake Teihu alone, 1,000 factories were closed - the smallest and proportionately greatest polluters. Another problem - jobs leaving to lower-cost areas or moving to Mexico or even back to the U.S. In the long run, however, Beardson sees China facing a worker shortage as an outgrowth of its one-child policy. Associated with this will be a projected tripling in the elderly to over 300 million by 2040 (high health care and pension costs), and a surplus of 40 - 50 million males vs. females over the next 20 years (extending the shortage of young workers, rising crime).

China's voracious use of coal is a major problem. Only 12% of U.S. energy consumption is coal and coke, compared to 52% in China. Additionally, Chinese coal is mostly highly sulphurous and contains 3X U.S. mercury levels. The U.S. has a similar amount of grazing land vs. China, but only 9 million sheep and goats, compared to China's 283 million. An official 2008 survey estimated China was losing 4,500 million tons of topsoil each year. This January Beijing's air pollution index hit nearly 1,000, vs. a WHO level of 25. Researchers estimate China has 1.2 million premature deaths/year due to air pollution - double the world average. The majority of children in its orphanages now have birth defects.

China's main environmental problem - inadequate implementation of existing laws. SOEs are largely ignored by regulators, and factories owned by the families of Party officials are also left alone. (However, China's levels of perceived corruption put it only in the middling ranks of global charts.)

The Education Ministry revealed that 25% of 2010's 6.3 college graduates were unemployed or in jobs not requiring a college degree; state media contend the real rate could be as high as 50%. China's unemployment may have hit 12 - 25% in early 2009 - despite official claims it was only 4%. A 2005 McKinsey survey found 85% of Chinese graduates were judged unsuited for international work - excessive reliance on rote learning, poor English, and low mobility were the primary problems. China does not yet have a university in the world's top 100.

Beardson doesn't see China financing the growing U.S. deficit - its holdings of U.S. Treasury securities in 11/2012 were barely more than those of Japan, and the interest rates they pay (about 0.33%) are well below its estimated 2.13% domestic cost of borrowing. (China holds $3.4 trillion in foreign exchange reserves, primarily denominated in dollars, euro and yen.) Meanwhile, China's currency has steadily risen against the dollar - 33% from mid-2005 til 2013. While China's public debt was estimated at 26% of GDP in 2011, off-balance-sheet liabilities of lower level governments are estimated to range between $1 and $4 trillion. Beardson estimates its real total debt-to-GDP ratio at 60%.

China's total government revenue proportion in 2011 - 23%, vs. 34% in China and 52% in France.

It's export figures are often misunderstood. For example, China had $4.6 billion in iPhone exports in 2009, but only 3.5% of that represented value added in China - the rest comes from components manufactured elsewhere and imported to China for assembly.

Beardson's detailed and interesting accounting continues, providing an excellent resource for anyone interested in China. He sees China becoming bogged down by the 'middle-income trap' that has gripped Japan for the last decade or so.