Memo From Beijing; From the New York Times, May 25, 2010, by Michael Wines
That it never happened hardly foreshadows China’s future prospects. Yet as outsiders behold China’s transformation from peasant nation to economic colossus, the risks of extrapolating from China’s robust present into an indeterminate future are not to be ignored. China’s rise is doubtless an economic miracle. But like Japan’s, China’s state-driven economic model may prove more useful in earlier stages of development than in guaranteeing sustained growth well into the future. |
“Japan had an economic model that worked phenomenally well for, what, 40 years? And then it stopped working,” Arthur Kroeber, the managing director of Dragonomics, a Beijing-based economic forecasting firm, said in an interview. “Does that prove the model for the first 40 years was wrong? No — it proves that it was right for that stage of Japan’s development.”
Many of the complaints that United States officials brought to this week’s Strategic and Economic Dialogue in Beijing — about markets closed to foreign competition; about unfairly appropriating hard-won American technologies; about rigged currency values that swell American trade deficits — may ring familiar to those who followed United States-Japan relations two decades ago.
For much of the postwar 20th century, Japan built an empire of private companies closely tied to and favored by the state. It erected a trade colossus whose exports were pumped up — American critics said — by an artificially depressed yen. Japanese manufacturers were accused of arrogating American technologies to churn out low-cost electronics. Japan’s retail and financial markets were all but impenetrable to American competitors.
The United States trade deficit with Japan outraged Congress and helped prod Washington in the 1980s to orchestrate a wholesale appreciation of the yen’s value against the dollar to help protect American manufacturers.
China today also has a stable of mega-corporations, although unlike Japan’s they are explicitly state-owned and often viewed as instruments of government policy. Broad sectors of the economy, including finance, communications, energy and some crucial manufacturing sectors, are effectively off limits to foreigners and even to most domestic competitors.
The renminbi, China’s currency, is in global opinion — save in China — held unduly low to keep China’s export machine revved up. When Treasury Secretary Timothy F. Geithner arrived here on Sunday, an opening argument to his counterparts was that Chinese rules were forcing American companies to surrender their technological jewels just for a ticket to compete in the Chinese market.
Some of these tactics come straight from the playbook of Japan and other developing nations that have sought to raise their export-driven economies to a higher level.
China is different in two respects that may seem contradictory. On one hand, major industries like oil, telecommunications, banking and aviation are deemed strategic and are under tight state control. Of the 22 Chinese corporations listed on the Fortune Global 500, 21 are controlled by China’s central government or state-run banks. Just one, Shanghai Automobile, is run by a local government. None are privately owned.
These "national champions," as the government deems them, are the vanguard of China’s push into global markets, and the evangelists of Chinese economic values.
On the other hand, light industry, retailing and the nation’s booming export sector are more free to play by Adam Smith’s rules. In contrast to Japan, in China Western retailers and consumer goods, from Wal-Mart to Snickers to Tesco, are ubiquitous and compete vigorously with homegrown competitors. And many of China’s leading exports, like iPods and Nike sneakers, are manufactured by or for foreign multinationals that retain most of the profits from their sale.
By Chinese logic, there is no contradiction. Like free speech, human rights and any number of other societal basics, private enterprise in China is vibrant and open to outsiders, but only as long as it does not threaten the state’s interests.
If this formula seems anathema to Western capitalists, Beijing’s three decades of jackrabbit growth speak for themselves. Even a senior Treasury Department official in Beijing for this week’s meetings said that China’s fiscal stewards had basically perfected the art of balancing conflicting forces in an economy of 1.3 billion people.
Less clear, many economists allow, is how long this formula will work. China itself is rapidly changing: already, low-cost competitors like Vietnam are siphoning some of the labor-intensive industries that powered Beijing’s rise. The worldwide economic slowdown and the fact that China already dominates some crucial industries suggest that it can no longer count on ever-rising exports as a major source of growth.
Beijing has pledged to ease its reliance on exports by raising domestic consumption. But that requires a turnabout in spending habits by a population accustomed to saving for contingencies, like education and medical care, rather than spending. Turning that around may take time.
And then there is China’s debt. Some influential economists argue that China has grown in part by seizing people’s savings to finance high-speed trains, steel factories and speculative real-estate investments.
How productive that state-led investment will turn out to be is a matter of debate. It has clearly aided China’s development up to now. But just as exports cannot increase endlessly, at some point the returns from building new roads and factories are likely to diminish as well.
The central government has surmounted several debt crises in the past decade, bailing out its banks after unwise investments. Many analysts anticipate more bailouts after the government flooded the economy with cheap money in the wake of the 2008 financial crisis.
Japan’s economic miracle ended with the collapse of a phenomenal real-estate bubble and was worsened by a series of policy errors that led to a long period of stagnation. China’s economy is still at an earlier stage of development, and its government is likely to seek to avoid the mistakes that exacerbated Japan’s slump.
But whether the state-driven investment and export-led development that has made China an economic power can be replaced soon by new sources of growth has become a more pressing question.
"The Chinese fundamentals are good," Huang Yasheng, a professor at the Massachusetts Institute of Technology’s Sloan School of Management, said in an interview. "All I am saying is that the policy has not changed. You cannot rely on an artificial external stimulus to keep your economy going."