It was the world’s second Superpower. In just 30 years its national income had grown faster than ever before in the history of mankind, even as the influx of population from the countryside to cities unleashed an impressive industrial power. It was a single-party system, and the great English-speaking economists were vying to see who could predict when exactly the country would overtake the United States in terms of GDP. In his renowned manual of macroeconomics, Paul Samuelson wrote in 1961 that it would have happened between 1984 and 1997; in the 1980 edition, he revised the date to this year.
That date has arrived. But in the meantime the USSR, the object of Samuelson’s predictions, has disappeared. Between 1928 and 1960, Stalin’s policies of forced urbanization helped the Soviet economy grow by an average of 6% per year, Great Depression and WWII included. China’s 10.1% average over the past 30 years doesn’t count for much more, and yet it is on this that today’s distinguished Western experts continue to base their predictions of the impending supremacy of a “communist” country over the United States. According to The Economist, China’s GDP will surpass that of the United States between 2018 and 2021. As far as mobile phone sales it already happened in 2001, for liters of beer consumed it was 2002. Steel consumption was in 1999, and since then the gap has grown six-fold, even though the debt of that industrial sector in China today is the same as the GDP of South Africa (400 billion dollars).
Just as with Stalin’s compulsive urbanization, the bill for many years of forced lending to steel foundries by the Chinese party through public banks will come due, sooner or later: those loans fostered wild growth figures as long as all that steel was melted down and set into skyscrapers and bridges; but much less so later on, when those skyscrapers were left empty and nobody was crossing the bridges.
China today has reached that stage, the day after construction has finished. The direction from now on is not clear. Nobody can tell whether a new middle class will ever move into those empty apartments, along with all their aspirations. In spite of the promises made by Communist bosses – worthy of Italian politics – the share of consumption in GDP has even gone down from 40% to 35%, figures worthy of a wartime economy. Everything in China is export (actually it was, when things were going well), or investment dictated by the party via public banks which then bury irrecoverable debts in their opaque balance sheets: a more sophisticated method than in Europe, where debt is in plain sight and immediately labeled as public.
Meanwhile, many of China’s tycoons in construction, or steel, or the glass industry, sit among the members of the People’s National Congress that, in a few days, will mark the transition from Hu Jintao to Xi Jinping at the pinnacle of the communist party. In this context China has also made a stark jump past the United States: Bloomberg has calculated that, just last year, the 70 richest members of this sort of Parliament of the People’s Republic increased their wealth by a sum larger than the total wealth of all 535 members of the US Congress, plus the President and his administration, and the nine members of the Supreme Court combined. Altogether, those 70 members of the People’s National Congress have total holdings of 90 billion dollars. It was to be expected. While it fed investment with political decrees and lived on exports to the West when Europe and the Us were still growing briskly, China underwent a metamorphosis. It became a highly extractive system. Only friends of the Party have access to loans to develop their projects, only they can hope – at times in vain – to not be incarcerated and have their property confiscated. And only the well-connected elite are able to reap the largest slice of the benefits from China’s celebrated macroscopic growth. Victor Shih, a Hong Kong economist now at Northwestern University, estimates that 1.5% of the population controls 67% of all private financial assets.
It’s nothing special, after all. Rome in the first century, England during the industrial revolution, and America and the robber barons of the 1800’s did not become the leading economies in the world by redistributing wealth before accumulating it. The question, rather, is where China is going from here. And the answer is not obvious, now that the great urbanization has slowed down and the West is losing appetite for a glut of Asian goods purchased by increasing debt. An entire growth model based exclusively on building roads and low-cost factories, and exporting products overseas, is coming to an end. Factory courtyards, warehouses, and port depots are ever more cluttered with faucets, washbasins, bicycles, scooters, glass, or toys that can’t find a shred of demand anywhere in the world. The government is launching a plan worth nearly ten billion dollars to rescue the entire solar panel sector, which has by now reached a grotesque level of productive overcapacity. The car factories of the People’s Republic can churn out 42 million cars every year, while no more than 18 million are sold. Dealerships don’t know where to park them, entering conflict with manufacturers who try force them to keep receiving inventory. Even the losses of the Ministry of Railroads make the darkest days of the Italian Ferrovie dello Stato look good. The economy is slowing down, and yet the government this time hesitates to push banks to lends hundreds of billions more for more pointless investment.
Something, somewhere, has to give. Daron Acemoglu of MIT and James Robinson of Harvard write in their book “Why Nations Fail,” that Chinese institutions need to become less “extractive,” i.e. less distorted in favor of the Party, banking and well-connected business elite, and more inclusive towards outsiders. Unless this happens, China’s breakneck growth might slow down, just as was the case for the USSR half a century ago. Alberto Forchielli, founding partner of private equity fund Mandarin Capital, notes that it is no longer a matter of economic policy, but of political decisions: “The power of the lobbies at the top of thousands of State companies and banks should meet some constraint. More money, and therefore more power, should go to the majority of the population”. Only in this way can consumption go up, rebalancing the economy. But growing domestic consumption means developing the service sector, adds Forchielli – something not easy to achieve while maintaining Party control over banks and censorship of the media.
China is approaching a critical juncture. A sure sign is the silent flight of the rich who are on the losing side of power struggles, and of those who have something to fear from the power, or the about future. Their flight, and that of their money, is accelerating. Last year 75% of visa requests by immigrant investors in the United States (they are required to spend at least one million dollars and create 10 jobs in order to get a visa) came from the People’s Republic. That was a record. And when this year Canada opened a similar yearly quota of 700, it was filled in one week: 697 were Chinese. Are these the first cracks in the wall, or hints of a coming Arab-style revolutionary spring? More likely that China is simply losing its optimism. Which, in a way, is even worse.
