The likeliest doomsday scenarios

PUBLISHED : Monday, 10 January, 2005, 12:00am
UPDATED : Monday, 10 January, 2005, 12:00am

In this column, we spend a fair bit of time debunking ill-conceived doom scenarios for the Chinese economy. This might lead some to believe that we hold a naively optimistic view of China. In fact, there are a few things that worry us, and today we will discuss some.

The three biggest risks to the Chinese economy can be summed up as protectionism, politics and environment. By now, it is clear that most narrow economic problems - cyclical overheating, state-owned-enterprise reform, financial-sector woes, and the like - lie well within the competence of Beijing to solve. So these do not worry us unduly.

Difficulties arise, however, when the problems are of a more political or social nature and require a more than merely technocratic response. So far, for example, China's absorption of manufacturing capacity from the rest of the world has created only relatively mild murmurings of protectionist sentiment. But as China rises inexorably from 6 or 7 per cent of world manufacturing capacity (the present level) to 15 or 20 per cent, and starts pilfering ever more advanced production lines not just from its Southeast Asian neighbours but from the US, Europe, Japan and South Korea, protectionist pressure may rise dramatically.

The result could be a global protectionist backlash aimed at dramatically slowing the flow of capital around the world. This would also substantially slow the growth of global trade. This could hurt China in two ways. First, China's growth is heavily dependent on rapidly rising trade volumes. Second, sustained lower growth would imperil the financial system, as manufacturers losing their main source of demand (US and European markets) collapse and leave the banks with a fresh mountain of bad debts.

This scenario is not extremely likely, but it would be dangerous to discount it simply on the grounds that the trend of the past three decades has been towards steady liberalisation of trade and capital flows.

The political problem we foresee is not, as generally discussed, some sort of popular uprising against Communist Party rule. Rather, it is a backlash against the foreigners who control ever-greater swathes of the Chinese economy. Foreign firms control a large (55 per cent) and ever-rising share of China's exports, and are even more dominant in hi-tech fields. Foreign companies are likely to be major buyers in the manufacturing-industry consolidations that will occur over the next decade as the cost of capital rises.

At some point, the charge that the government is selling out the country to foreigners could become a mobilising force among the armies of Chinese who are disgruntled by rampant corruption and rising inequality. The likely outcome would not be the government's overthrow, but its adoption, under popular pressure, of a more aggressive militaristic and nationalistic stance.

Finally, as China's rape of its environment continues unabated, the health and livelihood costs to the citizens - in the form of respiratory illness, poisoning from industrial toxins, and a lack of water - could escalate. The damage could be economic, as more government resources are diverted into cleanup costs. The World Bank estimates that such costs already amount to 8-12 per cent of gross domestic product each year; in fact those costs are not being paid, but are simply allowed to accumulate. The longer they are deferred, the harder it will be to pay for them.

The damage could also be political. Recent reports suggest that the collapse of rural health care is a big factor in the popularity of religious cults that offer alternative healing methods along with spiritual solace in a grindingly materialist society. As we have seen in the recent past, such cults can form the basis of an effective and disruptive political force.

Research by the China Economic Quarterly