THE COLLAPSE OF CHINA, ACT I

By Gordon G. Chang

China has been in the World Trade Organization for just a little over a month. Already the optimists are in retreat. Even in today’s fast-paced world, the reversal in perceptions is stunning. The People’s Republic was an economic superpower at the beginning of December. Now it’s a failing giant.

In November, the members of the WTO met in Doha to admit the world’s most populous nation. Optimism knew few bounds: Pundits saw an almost limitless future for the 143rd member of the global trading body. China, we were told, would be the next superpower, challenging even the United States for economic supremacy. Experts talked about the People’s Republic as “the world’s workshop,” which would drive out higher cost producers around the globe. Nations from Southeast Asia to South America contemplated the loss of their markets.

China may once again assume the mantle as the world’s mightiest country, but that day is over the horizon. Rosy predictions are now falling by the wayside, especially with regard to Chinese exports. The truth is China’s export growth was already stalling in the months preceding the WTO conclave in November. In 2000 China’s exports, at least according to official statistics, zoomed up by almost 28 percent, impressive by any standard. Last year export growth was in single digits, 6.8 percent says Beijing. The trend line definitely points downward: This new year could even see a decline in exports, which would be the first in about three decades.

Those predicting that China will rock the world with its products have somehow forgotten that in the WTO era the country is no longer able to offer generous export subsidies, which have been the only thing keeping the export machine going these past few years. And the experts have also missed the fact that the world’s developed economies were heading into a coordinated recession, which has now been aggravated by the reaction to the terrorist attacks of September 11. As consumers around the world pull back, where will China export to?

The slowdown in exports has consequences that ripple throughout the economy, of course. The precipitous fall in export growth will eventually affect the growth of China’s gross domestic product. GDP would have slumped years ago if the central government had not resorted to massive fiscal stimulus–and incurred the budget deficits that go with spending on a grand scale. China’s technocrats believe that an ever-increasing GDP is needed to absorb the unemployed and new entrants to the workforce: it is said that the country requires at least seven percent growth. The claimed increase for 2001 is 7.3 percent. That’s down substantially from the 8.0 percent increase announced for 2000.

If China experts could be so wrong about export growth, should we question the other wonderful forecasts we have heard? Perhaps we should look at the accepted truths about foreign direct investment into the country. Some tell us that the amount of FDI could double in a few years, and there are others who see an even bigger boom for the People’s Republic. Can these economic wizards be right?

Not likely. The big bonanza of foreign investment after accession was a myth to begin with. China already suffers from industrial overcapacity, and it dwells in a world of too many factories. The compelling course for multinationals in the next few years will be to use existing idle capacity and export to the People’s Republic; its membership in the WTO makes that feasible because tariffs tumble and internal barriers to trade fall. As a result, China might even see trade deficits in the coming years. Moreover, the owners of capital will reconsider their plans to invest in the country when they see the dramatic decline in economic performance. And as the world’s economy stalls, foreign investment will generally decrease around the globe. That unfortunate development has to affect the amount of capital flowing into the People’s Republic. These trends have become evident in the last few months as FDI into the Mainland is not meeting earlier expectations.

So China’s economy is already on the downward path. The situation can only deteriorate in the next few years because the country has entered the World Trade Organization. During this period the worst effects of accession will be felt. China could be a beneficiary of joining the global trading body, but the benefits will accrue only after structural reform has had an opportunity to take effect. In the meantime, there will be the pain of adjustment. That’s inevitable–China is trying to cure five decades of economic mismanagement with the shock therapy of WTO.

Even the Mainland’s own officials know that there is a problem as they analyze the trends. State Economic and Trade Commission Vice Minister Zhang Zhigang, looking at 2002, said “the economic situation is extremely grave.” As the foreigners tell us how well China’s economy will do in the future, senior cadres give us warnings.

What comes after the economy falters? Foreign experts assure us that China is stable. The Financial Times suggested last month that the possibility of widespread social unrest is “remote.” But as the economy slides, social order begins to disintegrate from one end of the country to another. In late November 2001 in Yanan, the inland city often referred to as “the cradle” of Mao Zedong’s revolution, four hundred workers took on the police with nothing more than sticks and crowbars. All they wanted was a job. That was, in the words of the South China Morning Post, a “bad omen.” Rampaging workers “could be a sign of things to come as China opens its markets, cuts tariffs and drops import barriers as a new member of the World Trade Organisation.”

Worse still, beginning in November and continuing through this month there were bombings throughout China. Some were directed at foreign businesses. An explosion at a McDonald’s in central Xian killed two. Two other bomb incidents occurred in stores of the French retailer Carrefour, one in southern Shenzhen and the other in northern Qingdao.

In China’s most prosperous province, Guangdong, in the cities of Zhanjiang and Jiangmen, twenty-three blasts were triggered to avenge personal disputes, state media reported. Five people were killed and seven injured. To the west, in Sichuan Province, a peasant blew up his doctor and three others in November. A homemade bomb went off in December in Guangxi Province, exploding near the home of an official of a collective farm. And, this month, a fireworks factory in Chongqing was bombed, as was the headquarters of a construction company in Shanghai. Disorder has gotten so bad that China’s Foreign Ministry has felt that it had to comment. “Despite these things I would like to emphasize that the general social order in China is sound, and the security situation is stable,” spokeswoman Zhang Qiyue said.

Today there are observers who are all too willing to agree. Some analysts even go further: they tell us that this era belongs to the modern Chinese state. “The century beginning in the year 2000 is China’s,” proclaims Laurence J. Brahm in his book, China’s Century. Look at the facts, however, and we see a different story. The “century” belonging to China will be short, just a decade at most.

Now, as the 21st Century begins its second year, we can begin to perceive the truth: the People’s Republic is failing economically. And starting to fall apart.

Gordon G. Chang is the author of The Coming Collapse of China, published by Random House.