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It was the sort of note from the head office that can cause trepidation in a reporter. "Have you seen such-and-such article? What are your thoughts? Should we have done a similar piece?"
I got one of those notes recently from my editors at BusinessWeek after The New Republic magazine did a big takeout on the Chinese economy. TNR's article was downbeat -- to say the least. And it didn't wait very long to get to its point. First page, end of third paragraph: "The Chinese economic miracle, in other words, is largely a house of cards. And when it falls, the consequences could be catastrophic."
For me, reading the article and thinking through its arguments was an excellent opportunity for some reassessing. Has anything dramatically changed in the generally positive economic prognosis many of us now see for China? Worse, could an economic crash be in the offing? In the end, I have to conclude that the answer -- for now at least -- looks to be no.
ODD CLAIMS. TNR rightly highlights some alarming trends: China's rotten banking system doesn't appear to be getting much better, for one. And the situation could get much worse as fears rise that a lot of new loan growth is being funneled into construction, contributing to the possibility of another real estate bubble (Chinese Premier Zhu Rongji himself recently warned of that danger.) Swelling labor unrest as state enterprises lay off workers, growing income inequality between the mainland's coast and the usually impoverished hinterlands, and rampant corruption are all severe problems.
Overall, though, the negative case seems overly alarmist. Indeed, TNR's argument often seems like a rehash of the now-standard "let's debunk the China miracle" line popularized by folks like Gordon Chang, author of The Coming Collapse of China. And in many places, TNR made rather odd claims, particularly in its efforts to explain away what appear to be China's big successes.
For example, the article says gross domestic product must be overstated. No doubt: Beijing officials themselves have openly talked of the need to improve their statistics collecting. But the key in reading China's stats is the trend line. And though 2002 probably didn't reach the 8% GDP growth Beijing is now claiming, it's very likely that the economy has strengthened compared to last year. Shave a couple of percentage points off the 8% figure if you want, but the growth rate is still impressive.
INVESTMENT MAGNET. Similarly, it's hard to explain away mainland China's record in luring foreign investment. The country raked in more than $50 billion in actual investment last year, exceeding the U.S. total for the first time ever. A major reason is the rapid growth many industries are experiencing -- the passenger-car market expanded by 50% in 2002, for instance.
And many foreign investors are turning the corner and finally making a profit. According to an August, 2002, study by the American Chamber of Commerce in China, 64% of the 208 Chamber members surveyed are now generating profits in China (for some reason, TNR quotes a 1999 Chamber study that showed a much lower figure).
The pessimists also tend to underestimate the boost in confidence foreign investors received from the market-opening concessions Beijing made to gain entry into the World Trade Organization, arguably the most important development in the mainland economy in the last decade. Certainly, the concessions are a legitimate investment lure.
AFFORDABLE SPENDING. TNR also downplays the significance of China's high export numbers (up just over 22% last year) by saying they're mainly just low-value-added re-exports of electronics goods. That's true to some extent, but several Chinese technology companies are rapidly rising in significance, including Shenzhen-based Huawei and Zhongxing. Both are now competing head-to-head with Cisco (CSCO
) in China -- and, increasingly, overseas.
Beijing's deficit spending remains a worry, of course. But it's just not believable to assert, as many pessimists do, that China could soon plunge into a Japan-like malaise. China's continuing huge infrastructure needs mean it'll continue to get economic payoff from spending on new roads and rail lines for years to come. Moreover, Beijing can easily afford these projects: It has almost zero reliance on foreign debt, massive foreign-exchange reserves, and a huge pool of domestic individual savings.
In TNR's story, some of the social and political analysis seems a little off as well. Take the likelihood that Beijing will provoke a crisis by invading Taiwan -- the chance of this happening is probably going down, not up, as the pessimists insist. Lately, China has arguably been showing a new maturity in dealing with the island.
"PENT-UP ANGER"? Plus, is the rule of law really deteriorating on the mainland? Why would that be happening even as officials struggle to improve their still woefully inadequate legal system? And how can that claim be reconciled with the hundreds of legal-training seminars that have been held around China? And with the many laws that have been changed to meet WTO requirements in the last year or two, often with the help of visiting U.S. and European Union legal experts?
TNR goes on to argue that "China shares little with the United States other than a desire for commerce," asserting that this alarming fact could lead someday to already "xenophobic young Chinese" releasing their "pent-up anger" against America. While many young people are no doubt nationalistic -- and sometimes unpleasantly so -- hundreds of thousands of Chinese students have also chosen to go to the U.S. and study in its universities, reflecting their admiration of the U.S. At the same time, scores of U.S. colleges have set up joint academic programs with Chinese universities. True, most are MBA programs, but surely those exchanges help lessen the possibility of an anti-American backlash.
In the end, I have to ask myself: If China's economy is really about to fall apart, why is the rest of the region so alarmed by its rise? Fearing a loss of their export manufacturing industries to the mainland, Southeast Asian nations are pushing for a free-trade area with China. Japan is also calling increasingly loudly for a reevaluation of China's currency, the yuan, to make the country's exports less competitive. And South Korea's increasing independence from the U.S. partly reflects Seoul's belief that China will be key to its future. That's not surprising: The mainland became South Korea's biggest trading partner last year.
Very real stresses will be painfully present in China for years to come. But is it a house of cards? That's not what I see -- not by a long shot.
BusinessWeek Beijing Bureau Chief Roberts has been reporting from China for eight years Edited by Thane Peterson
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