The Chinese Dragon?

Cynical Nerd shared with me a Der Spiegel article on China. The piece highlights China's meteoric rise and predicts the start of a new Chinese century, one that would replace Pax Americana. The Chinese economy grew at an average annual rate of 9% in the past 25 years while Chinese exports to the United States had climbed 1,200% since 1990. China's foreign exchange reserves are estimated at US$ 710 billion. This is more than India's GDP! The United States trade deficit with China had doubled to US$ 162 billion since 2001. This deficit is poised to widen further in 2006. Der Spiegel adds that 440,000 engineers graduate in China each year, which is more than twice that in the United States.

The article refers to Chinese manufactures of cell phones, refrigerators and computers. Chinese firms purchased the computer wing of IBM, endeavored to buy the home appliance producer Maytag and almost bought over the California-based Unocal oil company, a move that was thwarted due to Congressional opposition in Washington. The Chinese had earlier purchased the Canadian oil firm, Petrokazakhstan, for a hefty sum of US$ 4.2 billion. Der Spiegel mentions that China had transformed bloated state-run companies into hard hitting enterprises while its biggest auto-parts producer, Wanxiang, had sales to the United States that exceeded US$ 400 million each year. It then refers to the "turbocharged breed of unbridled capitalism" poised to dominate international energy markets.

This is indeed an impressive account, one that Indian policy makers need to be mindful of. I would add that the nationalistic zeal in China ensures continued funding of an ambitious space program, investment in defence and success in international sports. The Chinese are investing in international energy, be it in Azerbaijan, Bolivia, Burma, Indonesia, Iran, Kazakhstan and Sudan. China will no doubt be a significant player in international politics while its economy will continue to register high rates of growth. Any traveler to Beijing or Shanghai can not but be impressed at the rise of the Chinese dragon. The contrast with Delhi and Mumbai is evident. However, Der Spiegel misses out on other crucial pieces of the jig saw puzzle where predictions of a new Chinese century might be premature. Here's why.

For one, China lacks the intellectual space for cutting edge research and development. Its education system does not provide for creative innovation and discovery, the development of new technology and scientific breakthrough. It is still dependent on the United States in this respect, be it with regards to aviation, biotechnology, pharmaceuticals, software or telecommunications. Like Japan of yesteryear, China excels in the mass manufacture of cheap consumer appliances designed elsewhere, but its system is not well positioned to develop innovative technology.

Two, China lacks the institutional resilience and legal systems that the North Atlantic states enjoy. While its low cost consumer items might have a field day in western markets, the absence of entrenched legal and institutional structures undermines the potential to create, innovate and discover - vital components of the capitalist world.

Three, China's coastal provinces have done extremely well. Fujian, Guangong, Jiangsu and Zhejiang stand out in this regard. Its landlocked interior provinces, however, lag behind in economic and social indicators. Recent accidents in the coal sector illustrate the travails of China's rust belt. The rates of poverty are significant inland. The " Chinese Mezzogiorno" is likely to impede continued economic take off. Vastly differential rates of economic growth between two sections of the same country bode ill for political stability.

Four, I remain skeptical of the overall health of China's banking sector. The state run banks are not subject to the same scrutiny and audit safeguards that financial institutions in the North Atlantic are governed by. Chinese accounting standards have much to be desired. There are reports of double counting and consequent exaggerated revenue figures, not to mention the lack of adequate watchdog functions in the system.

Five, China's restive Tibet and East Turkestan (i.e. Xinjiang in Chinese parlance) are likely to pose problems. Neither territory is ethnic Han Chinese by self-definition and would opt to secede if given the chance. China countered this possibility by settling several hundred thousand Han Chinese in the two regions. But settlers are unlikely to preempt the possibility of secession as witnessed in the recent history of Estonia, Kazakhstan, Latvia, Lithuania, Turkmenistan and Uzbekistan. Even if Islamist extremism were to fade away, a pan-Turkic consciousness is likely to ensure a modicum of sympathy for the Uighurs in the years to come. Furthermore, the question of Tibet would always remain on the international radar screen as the prime example of Chinese hegemony and imperialism.

And lastly, India, Japan, Taiwan, Russia and Vietnam, economically influential in their own right, will not accept Chinese hegemony. The People's Republic - unlike the United States - is encircled. I mention these factors not to deny the inevitable rise of China. The Chinese economy will continue to grow while its international profile is likely to be further strengthened. But to trumpet the dawn of a new Chinese century might be premature. Der Spiegel should perhaps study Asia more closely.