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Tell me where have you been? Around the world and I'm back again.


First order of business: Thanks to my terrific guest bloggers. You can continue reading Kate Sheppard at Mother Jones, Mike Konczal at Rortybomb, Jonathan Bernstein at his modestly named Plain Blog, and Dylan Matthews at Minipundit.

I'll have some further thoughts on China in the coming days, but there are two things to say in advance of that. First, it's a big and complicated country, and my observations are just that: my observations. They're not definitive judgments. Instead, they come from things I saw and people I talked to and books I've read. I was lucky to get a chance to go to China -- which also gave me a chance to think and read about China -- and my posts here are an attempt to share a bit of what I learned from the experience.

That said, my trip was organized by a group that's sympathetic to the Chinese government, which meant we met with a lot of government officials. But meeting with Chinese government officials is, for Western journalists, a fairly ineffective form of propaganda: They don't tell you anything, and so it's hard for them to influence your thinking on much. What did influence my thinking a lot was a book I read, Susan Shirky's "Fragile Superpower," and some of the interviews I did with ex-pats and businessmen and academics. Check back tomorrow for an interview with one of them.

I left China feeling pessimistic about the country's economic prospects, though I sincerely hope that I'm wrong. Pessimistic, in this context, isn't meant to imply the country's collapse. Rather, I think that economic growth will drift down from the supercharged numbers China's put up over the last decade to something more in the mid-single digits. All in all, that seems normal, even inevitable. Saying China's growth will slow down is simply saying economic reality will assert itself. Countries grow more slowly as they get richer. But in China's case, this could be a problem.

First, it looks like China is firmly in the grips of a real estate bubble. China has a high savings rate and few investment opportunities for individuals, and so people are buying what they know, and that's real estate. What's odder about this is that they're not buying and selling, or even buying and renting. They're buying and holding, in the hope that the property will continue to appreciate.

That's in part because there's no tax on holding a property, as there is in most Western countries. And so the coastal cities are thick with empty office buildings and uninhabited luxury condos. China is now flirting with a property tax in order to tamp down on this sort of thing, but it's hard to say how effective it'll be. Meanwhile, a lot of money that could be productively invested is being pumped into condos that are unlikely to sell at the prices developers are promising.

Contrary to the American experience, these real estate purchases aren't very leveraged. Residential real estate is a cash business in China, though commercial real estate is somewhat less so. So that's good. But real estate is used as loan collateral, so if this stuff goes bad, the banks are going to have a lot of bad debt on their hands. That's not so good.

Second, China is at the point where it needs to transition out of low-wage labor and into high-wage labor, and it knows it. One Chinese economist told me that "China builds iPods that sells for hundreds of dollars, and keeps three or four or five dollars of that total. That's the reality of China's economic miracle." That frustration suffuses the news coverage of all sorts of events. The Foxconn suicides, for instance, are front-page news because they're being sold as a reflection on the grim reality of the country's labor strategy rather than a story of mental disturbance at a particular company.

I'm skeptical, however, that the transition to an innovation economy can happen very quickly. The rapidity of the growth following the country's economic liberalization was because China had a lot of labor that was ready to work. The supply matched the demand. It does not have the same storehouse of economic talent that's simply lying dormant, waiting for someone to ask it to innovate.

Both Chinese officials and American businessmen admitted that the country's human capital is not where it needs to be, and it's not clear how fast you can upgrade human capital. Let's say you want to teach English to 1.3 billion people, as the Chinese government does. Who's going to teach it? How quickly can you train a corps of economic teachers that large?

The country also seems better at encouraging foreign investment from large companies than homegrown investment from small companies. The stories I heard about the difficulties of setting up a small business in Beijing were darkly comic, and bore no resemblance to the hefty tax incentives and red-carpet treatment afforded to multinationals who want to open a large manufacturing plant. And without doubt, the weirdest part of the trip were the many, many empty malls and storefronts we found ourselves in. The only explanation for the survival of some of the businesses was low rents and cheap labor, as turnover didn't seem nearly large enough to sustain the enterprise.

So let's say that growth slows in the coming years, falling to 5 percent or 6 percent. In theory, there's nothing wrong with a slower economic rise. But that's not the Chinese government's take on the matter: They seem to think that growth below 8 percent will imperil the whole project. The country's development has been terribly unequal, with the coastal cities becoming akin to a developed nation while the western interior remains mired in poverty. Slower growth could lead to political unrest, and in a one-party state, political unrest isn't an easy problem to solve. I don't know if they're right about that, but they seem to believe it strongly, and that makes me worry about how they'll react if it does come to pass.

Of course, I hope I'm quite wrong, and that China's rise continues unabated. Why? Put simply, there are 1.3 billion people counting on this experiment. If it works, it'll mean a remarkable rise in aggregate human living standards. And that's well worth rooting for.

By Ezra Klein  |  June 3, 2010; 9:07 AM ET
Categories:  China  
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Next: Long-term unemployment


The author posits several reasons for his conclusion, and they appear to be, in the main, that there may be a real estate bubble, that there is a dearth of human capital potential, and that encouragement of domestic small industrial concerns is as yet ineffective. Moreover, the author states that the fear as regards rate of growth is that it may decline to "merely" normal levels. While there may be some cause for concern, it appears that these are not reasons for great alarm, and here's why.

The government itself is aware of the property bubble issue, which in any event is limited to the coastal regions mentioned in the article. It is also concerned with the development of human capital, as evidenced by strong investment in science and technology. The rules for domestic investment may as yet lag behind the generous terms given to multinationals, but there is no indication that this is an ironclad fact that cannot be changed, and there is indeed some indication that it may be forced to change.

Perhaps least convincing of all is the idea that human capital development is lacking, as the country graduates the world's largest numbers of engineers and similar knowledge workers. Recent decades have also shown a preternatural ability on the part of the Chinese themselves, both on the mainland and in Taiwan, to scale incredible heights of educational and industrial development.

As long as the Chinese government continues its prudent management of the economy, that country's economic future need not be nearly as pessimistic as may be feared.

Posted by: wdgtlage | June 3, 2010 10:00 AM | Report abuse

Dude, that is one hell of a stylish photo. Wrong profession? How about modeling?

Yah, but your wonkery is competent so let us get on with it.

1. I am not clear why Chinese Government program of taxing real estate will not help to clamp down further that bubble. On top of that, they will get a new revenue which they can pour into developing Human Capital.

2. Without a regime which fully protects and respects intellectual property rights as well as individual rights of enterprise (small business) with a conducive environment for that; how in the world any economy can transition to the value addition of Knowledge based Economy? Such a basic lesson is lost on Chinese Communist Party. If so, then they deserve the same fate as like Soviets. Just running some ambitions wild will not make the reality pleasant.

3. "Slower growth could lead to political unrest, and in a one-party state, political unrest isn't an easy problem to solve. I don't know if they're right about that, but they seem to believe it strongly, and that makes me worry about how they'll react if it does come to pass. " Exactly. Your worry is not misplaced. Look at Uighur uprising and brutality with which it was clamped down. Expect more of such violent protests and State reprisal of the same in coming years if China does not find a new opium for 'high growth'. Inner turmoil on the scale of China is really difficult to contain.

4. Building alternative energy centers and export the excess energy could be one new industry they will try; but in itself not sure if that is sufficient to address the slow down in basic mercantile economy. Uneven domestic consumption creates lot of problems as well as fail to compensate for slow down in export.

5. Finally look at the competitive loss of the country when English is so poorly used. Very few in China are able to read this blog or Matt's blog or Megan's blog and as a result they do loose tremendously on the 'cutting edge' political reporting and political analysis consumption.

So then will get more such insights in days to come about China? That will be welcome.

Posted by: umesh409 | June 3, 2010 10:52 AM | Report abuse

Welcome back Ezra! Although that pic does make you look a bit of a db. Couldn't you at least have been pretending to crush Mao's head between your forearms or something? Also, for the record, Wonkbook has been a revelation. Seriously. You left it in excellent hands while you were gone. It really has been a useful resource!

As for China, I am curious about the feasibility of China's alternative energy production, as umesh mentions. I'm not convinced that they are going to be ahead of us innovation-wise, but adoption and implementation of alternative energies should be much easier for them because of their highly efficient form of government. And if they do implement an alternative solution on a broader scale and more quickly than the rest of the world, does that greatly enhance their economic prospects? It seems like it would free them from a lot of constraints, at least. That said, several countries have been implementing alternative solutions for years now and the economic benefits have been mixed. So, I don't know.

Posted by: slag | June 3, 2010 12:18 PM | Report abuse

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