Ten Myths About China

Ten Myths About China

Ten Myths About China

MYTH 1: The lack of IP rights curbs innovation, so the Chinese economy will remain based on producing cheap knock-offs of superior Western goods.

REALITY: China now focuses on copying products because its technologically lagging, and as such it is much easier and cost effective to reproduce already existing products than to come up with your own. Much the same can (and was!) said of Japan in the 1960′s, or Germany in the 1880′s – but look at them now!

The lack of IP rights makes this assimilation far easier – why waste money paying rent to foreign software companies when you can use their products for free so easily? You’d have to be their stooge to do this! Throughout history, many successful developers, such as Germany and Britain, flouted IP rights and funded industrial espionage to modernize their economies. They only started praising the virtues of IP rights when they got rich to protect their own new interests.

With China already taking the leading positions in sectors such as High Speed Rail and supercomputers, the time when it joins the developed world in “kicking away the ladder” can’t be far off.

MYTH 2: Corruption and inequality is growing rapidly, which will lead to rising social tensions, economic stagnation, revolts, and collapse.

REALITY: Corruption is largely irrelevant to economic growth, unless it is cripplingly high (which it definitely isn’t in China). For instance, only 9% of Chinese reported paying a bribe in 2010, which is actually the same as Japan.

True, inequality has risen sharply, with the Gini index reaching 47. This figure is similar to the US and lower than most Latin American countries, albeit far higher than in Europe. However, a peak in inequality is typical of countries in the middle of their industrial development, and is expected to fall in the coming years. Indeed, this seems to be already happening, with the poorer inland provinces beginning to grow faster than the wealthier coastal regions in recent years.

MYTH 3: The brouhaha over China today ignores its bad loans and real estate bubble, which will explode and sink its economy any day now. 

REALITY: Pundits have been ranting about China’s bad loans problem for a decade, but in reality the issue is less acute now than it was then. In the meantime it is the Western financial that collapsed (and had to be bailed out at huge taxpayer expense). Chinese leaders noticed this problem early and nipped it in the bud with a series of restructurings in the 2000′s.

The real estate bubble isn’t really a bubble because, no matter how many empty apartments there are, half of China’s population is still in the countryside and will continue moving into the cities for decades to come.

MYTH 4: Back in the 1980′s, there was the same hysteria about Japan becoming No. 1, and look what happened to them! This Sino triumphalism is nothing but a passing fad.

REALITY: China’s population is TEN TIMES bigger than Japan’s. Realistically, Japan could have never become the world’s biggest economy because doing so would have required its GDP per capita to rise to double that of the US. In stark contrast, China’s GDP per capita needs only be a QUARTER that of America for it to become the world’s largest economy. Some economists think that’s already happened (see below).

MYTH 5: The Communist Party suppresses all freedom of thought, which will inevitable lead to stagnation, regional rifts, and pro-freedom uprisings.

  1. The idea that the CCP truly suppresses free thought nowadays is a bit quaint. There are plenty of think-tanks – more than in the US – that are discussing exciting new concepts such as deliberative democracy, Comprehensive National Power, and new ways of measuring economic growth.
  2. The leadership is forward-thinking and responsive. To illustrate this, in a recent speech Hu Jintao called for a “circular economy” and “sustainable development.” (Can you imagine Obama voicing similar sentiments? The Republicans would devour him alive.) This is backed by concrete policy measures. For instance, in response to its reliance on coal China invested in renewable energy manufacturing capacity and now produces half the world’s wind turbines and solar panels.
  3. Not only does democracy or the lack of it have no discernible effect on the speed of development – in fact, China itself is a refutation of that theory – but its not even that oppressive compared to countries commonly called “democratic.” So it jailed Liu Xiaobo for 11 years (who claimsChina would be better off under colonialism). But in the meantime, the Marxist activist Binayak Sen got life imprisonment in India, and the US is waging a campaign to shut down Wikileaks and imprison Julian Assange. No talk of a Nobel Peace Prize for those two.
  4. It is arrogant to claim that China will necessarily want to follow in the footsteps of the West. It may well take its own sovereign road to democracy, such as a democratization of the current NEPist model. Even if it does democratize aka Taiwan, then why should it collapse? Its factories and people will remain in place; so will economic growth, albeit with a blip or two during the transition. And according to our “democratists” wouldn’t such a development make China stronger anyway?

MYTH 6: Outside showpieces like Shanghai and a few other coastal cities the entire country struggles on in Third World poverty, illiteracy and immiseration.
REALITY: This is belied by fairly basic statistics. A country with 67% cell phone penetration, 36% Internet penetration, and more cars sold per year than in the US as of 2009 cannot be “Third World” be definition. Nor does a literacy rate of 97% or an infant mortality rate of 16/1000 jive with this description.
As of 2010, the IMF gives China a real GDP per capita of $7,500 (which is lower-middle income by international standards). However, in reality this is probably an underestimate. For instance, Thailand with a GDP per capita of $9,000 had manufacturing wages of $250 per month in 2009, as opposed toChina’s $400 per month. Its consumption stats also indicate a higher living standard (which is all the more impressive given its high savings rate). In any case, China is a decidedly middle-income country.

MYTH 7: The People’s Liberation Army is full of rusty Soviet-era hardware and derelict warships that will be obliterated in a conflict with the US.
REALITY: Now resting on a solid economic foundation, the Chinese military is being rapidly modernized. In recent years it has unveiled its own drones, a fifth-generation fighter prototype, and a “carrier-killing” ballistic missile. It accounts for a third of global shipbuilding capacity, enabling a rapid naval buildup (even as US capabilities degrade due to fiscal problems and cost overruns). A recent RAND study indicates that China is already be able to establish air superiority over Taiwan in the event of a hot war over the straits.

As Paul Kennedy noted in The Rise And Fall Of The Great Powers (of which Chinese strategists are big fans), military power follows naturally in the wake of economic power. The Chinese economy will eventually be so much larger than everyone else’s in the Pacific basin that its neighbors will have no option but to acquiesce to its hegemony, even if it doesn’t win them over by its rapidly growing soft power.
The only military sphere in which China lags the US (and Russia) is in the size and sophistication of its strategic nuclear forces. But even there it may be stronger than it appears. It was recently revealed that it has built 5000km of tunnels in the hills of Hebei province. For all we know hundreds of ICBM’s could be hidden away there.

MYTH 8: The Chinese economy is dependent on exports for its economic growth, meaning that even if the US collapses it will bring the Chicoms down with it.
REALITY: Whereas gross exports are at 40% of GDP, what matters are NET EXPORTS – which are at just 7% of GDP. (In fact this past quarter it even reported a trade deficit). Or if we look at it regionally, those Chinese regions which export a lot are all located on the southern and south-eastern coasts, and account for less than 25% of the population; the rest of the country is far more autarkic.
Now true, a collapse in export demand will lead to a temporary rise in unemployment in those export-dependent regions. But the Chinese can do without the “heroic” American consumer. They’ll just consume more of their own production (as it increasingly the case anyway).

MYTH 9: China will grow old before it grows rich.
REALITY: No, it won’t. According to UN projections, its share of the population aged 15-65 will have dropped from 72.4% now to 68.9% by 2030 (by which time it will be a developed country by its current trajectory). For comparison, Japan’s working age population today is just 64.0% – that’s less than China two decades later!
Furthermore, there are still massive productivity gains to be collected from urbanizing another 20%-30% of the population. As peasants continue moving into the cities, the urban workforce which is the source of most added value productionwill continue growing well past the time China the total labor force begins shrinking. The decline in the numbers of children will enable each one to get a better education.

MYTH 10: Even if it grows at 10% a year, it will take China’s $5.9 trillion GDP decades to catch up to America’s $14.7 trillion GDP growing at 3% a year. That will come no sooner than 2025. And that’s assuming that Chinese GDP figures are accurate (they’re not, of course, given the Communist penchant for lying).

REALITY: This is a very common argument, even in respected venues, but one that shows fundamental economic illiteracy. The $5.9 trillion GDP is China’s NOMINAL GDP, which reflects a very weak yuan. If the yuan were to appreciate against the dollar, growth in nominal GDP will be much faster than real growth – and in fact IT IS, growing at nearly 25% for the past five years.

Its REAL GDP, which accounts for differences in international prices, is far bigger at $10.1 trillion and not far from America’s $14.7 trillion. But even this may be an underestimate. Back in 2008, the IMF and World Bank both reduced their estimates of China’s real GDP by around 40%; these revisions are considered questionable. Using those old figures, China would already be at America’s size. This is supported by comparisons of Chinese consumption (e.g. Internet access; manufacturing wages; etc) to other middle-income countries, which in my approximations give it a real GDP per capita of perhaps $12,000 and implying a total real GDP of $15-16 trillion.

The case for Chinese manipulation of statistics is unproven. One of the primary arguments here used to be that economic growth didn’t track electricity consumption. But that’s not too convincing in light of China overtaking the US in electricity consumption in 2011.

China’s economic growth has tracked South Korea’s very closely but with a 20 year lag (or 15 years using the old, bigger GDP estimates). Its real GDP per capita in 2000 was equivalent to Korea’s in 1980; as of 2010, it was equivalent to Korea’s in1990. (The story for nominal GDP growth is remarkably similar: China’s number for 2010 is equivalent to Korea’s in1988). Now if China continues following Korea’s historical per capita trajectory, it should have a real GDP of $22-$30 trillion by 2020 and $40-$55 trillion by 2030 (former figure based off current GDP estimates; latter off the bigger estimates). This means the US should be overtaken by 2020 at the latest and left in the dust soon after. Assuming a steady rate of convergence to international prices, China’s nominal GDP too should become the world’s biggest by the 2020′s.

The groundwork is secure. Human capital is the foremost determinant of economic growth rates, and China’s today is far higher than South Korea’s two decades ago (recent international standardized tests show that performance even in China’s poorest provinces is close to the OECD average, while Shanghai won global gold prize).

Now…consider that China’s foremost obstacle to global superpowerdom is highly unlikely to grow quickly, is overburdened by fiscal deficits, and may yet default on its obligations – and that by then, China’s currency will likely befree floating. In that case, the yuan will be the most likely contender for the title of world’s reserve currency. Upon assuming it, its nominal GDP – and weight in the global economy – will become every bit as dominant as its real economy of steel mills and factories.

EDIT: This article has been translated into Russian at Inosmi.Ru (10 главных мифов китаефобии).


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