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Having seen some of the historical facts and the leadership of China in Part I, in this part, we would consider the spectacular Chinese economic journey through the years.
TIMELINE : 1972-2008
On a fateful February 1972 morning, a meeting was organised in Beijing, between the US President Richard Nixon and Chairman Mao Tse–tung of China. The U.S. wanted to bring China out of isolation(till this time China was not recognized as a country by America) and prop it up, so as to undermine the USSR. That meeting changed the fate of China and the world. The cost of isolating USSR would be heavy for the world in general and the United States in particular(which we would see later). This was going to be a repeat of ‘Marshall Plan’, with a different connotation(Marshall Plan, also known as the European Recovery Program, was a U.S. program providing aid to Western Europe following the devastation of World War II – history.com). The US corporate greed, individual profiteers, and lack of understanding of the Chinese mind by American(and western) politicians would lead the world to a conflict(Thucydides’s Trap: The idea that the rise of a new power, as a competitor to an existing superpower, likely leads to the escalation of political tensions and war. The term was coined by Graham T. Allison, an American political scientist and is named after the 5th century Athenian historian Thucydides). The rise of China would have serious consequences if these prophecies come true(for more on Nixon-Mao meeting refer to book ‘Nixon and Mao: The Week That Changed The World’ by Margaret MacMillan).
Nothing much changed economically and strategically after that meeting, till the time Mao was alive. Baton was passed to Deng Xiaoping in 1976 after Mao’s death. Chinese Premier Deng Xiaoping started economic reforms in December 1978. At that time there were many hardliners in the party, who were opposing the reforms. The feeling was that the reforms would be reversed anytime soon, since they were going in the reverse direction of what the ‘Cultural Revolution’ was all about. Deng was aware of the discontent amongst peasants and he was also aware of the presage from the party hawks. He called his reforms “crossing the river by feeling the stones”.
While the world gives full credit of reforms to Deng, factually the reforms were pushed from bottoms up. The vast majority in the countryside was alienated during the ‘Great Leap Forward’ campaign of communist party from 1958-62. During this period Mao pushed the country from the agrarian to socialist society leading to ‘Great China Famine’(The Great Chinese Famine, began in late 1958 and lasted until late 1961. Though ostensibly caused by drought and weather conditions, the Great Famine was undoubtedly worsened by the communist policies. The death toll, which has been obscured by the Chinese government was around 30 million). It’s a well-known fact that most of the reforms around the world were forced upon the leadership of any country due to circumstances, rather than some great strategy. China was fortunate enough to have good administrator in Deng during those testing times of 70s, when the discontent amongst the Chinese populace was at its peak. A modicum of an initiative by Deng and huge business opportunities presented by the U.S. government & corporate houses changed the fortunes of China and concomitant wealth for the countrymen(similar situation existed in India in 1990’s, wherein the adverse ‘Balance of Payment’ and foreign reserves crisis forced Indian leadership to go in for reforms and it was India’s good luck that well-known economist, Dr. Manmohan Singh was finance minister of India at that time).
In 1980 Deng took first concrete step towards reforms when he made Southern city of Shenzhen, the first ‘special economic zone’ ever, to experiment with more flexible market policies. In a matter of years, the city transformed from a fishing village into a manufacturing and shipping powerhouse(that is the period when Chinese per capita income surpassed India’s, however its GDP was still just 8% of US GDP: statisticstimes.com). Deng had no intention of making China a democracy, neither he had any intention of loosening grip over Chinese people, so he dismissed Hu Yaobang in 1987, the reformist Communist Party chief who was seen as too liberal for his actions against protesting pro-democracy students. Year of 1990 saw the opening of the Shanghai Stock Exchange, first ever stock market in Communist China. Yuan was made convertible on the current account, enabling the free flow of money for imports and exports in 1996. Deng died in February 1997 and Jiang Zemin took over as his successor. Under Zemin’s watch, in 1998, China kicked off a $500 billion bailout of its banking sector, rescuing them from a legacy of bad, often politically directed, loans made in the early years of reform. China joined the World Trade Organization in November 2001 opening floodgates of opportunities. China’s nominal GDP surpassed that of Italy in 2000, France in 2005, the United Kingdom in 2006 and that of Germany in 2007, before overtaking Japan in 2010. In 2008, Beijing hosted a hugely successful Summer Olympic Games, illustrating China’s arrival on the world stage. And the story goes on…
HOW DID IT ALL HAPPEN
“Never attempt to win by force what can be won by deception.”
One has to grant it to Chinese that they knew from the beginning how to exploit capitalism. Once they drew the ‘hundred years plan’ to revive past glory, they got after it with religious fervor. They identified very early during the reforms, the core issues of banking weakness in their system. Today China has the top four biggest banks of the world: Industrial and Commercial Bank of China($4 trillion), China Construction Bank($3.4 trillion), Agriculture Bank of China($3.24 trillion) and Bank of China($2.99 trillion). JP Morgan Chase keeps fluctuating between 6th and 7th spot, in the world ranking.
There is one leviathan of an organization which is not part of the above-mentioned list. The organization away from public scrutiny is called the China Development Bank(CDB). This bank dwarfs all other banks put together. Since the bank is not listed, its worth is not well known but its might is. CDB calls shots in China and even helps out four big banks to clean up their slate in times of trouble. CDB bosses knew, using banks to finance infrastructure projects would improve China’s credit culture and capital market returns rather than funding everything through the budget(which was the weaknesses of the Eastern Block). They also knew that the projects financed by banks would create markets, because in a country moving from communism to capitalism there often were none. CDB also hired big and respectable names of the world as part of its ”International Advisory Council”. Former AIG head, Hank Greenberg, former Secretary of State Henry Kissinger, economist Fred Bergsten and former Bank of Israel Governor Frenkel were some of the prominent names on their payroll. This gave credibility to CDB and it’s opaque transactions, what it did behind closed doors.
Four pillars of Chinese success are Chinese Communist Party embracing Capitalism, China Development Bank, the high rate of household savings, and Chinese farming land. If the communist party is the God in China, CDB is the Prophet. With their blessings, Chinese companies could achieve what Nikita Khrushchev(Nikita Khrushchev led the Soviet Union during the height of the Cold War, serving as premier from 1958 to 1964) could only dream of: “bury their western competitions”. During the first three decades of reforms, almost every person in China became ‘Homo Economicus’ and country could achieve 9-10% of consistent growth. Urbanization started at such a pace that by 2011 China became predominantly urban country, for the first time in the 5000 years of its history.
LGFV: As per Henry Sanderson who wrote a bestseller ‘China’s Superbank’, CBD invented LGFV(Local Government Financing Vehicle) and the secret sauce of ”Wuhu Model”. The LGFV mechanism allows local governments to set up companies that borrow loans from the CDB and other banks, using land as collateral. The authorities pay the interest on their loans by selling or leasing the same land. Therefore the system depends on high land values and on the revenue they generate. The risks for this type of loan could increase if the economy, or the real estate market experience, a slowdown. Locals call LGFV: “Engine of inequality”.
‘Wuhu Model’: It got its name from Wuhu which is a prefecture-level city in southeastern Anhui province in China. ‘Wuhu Model’ was the first of its kind of experiment. Local government with the helping hand from CDB created a virtuous cycle. They started public works like roads and infrastructure which boosted land prices and in turn boosted home prices. Local government forced farmers to sell their land at just 6-8% of the eventual price of that land. Thereafter they built highways, stadiums and such public utility facilities, boosting land prices around those areas. Local governments could sell land acquired from farmers at 10-15 times the acquisition cost to companies(companies again mostly owned by the local governments) boosting their own income. With the help of this virtuous cycle, CDB pushed ’Wuhu Construction’ from a 319 million yuan company to a 21.4 billion yuan company in a short span of time.
Later on, Wuhu model was applied nationwide, and at least 50 million farmers lost their land to the cities, and 60 million more would be uprooted in next two decades as China’s urbanization gathers momentum. Over 60% of large-scale protests in China are land-related(yes they allow protests in China within a rigid boundary). It is a reversal of the core principles of the Communist revolution where Mao redistributed land from rich to peasants.
Successive governments followed George Orwell’s quote from the book ’1984’- “Power is in tearing human mind to pieces and putting them together again in new shapes of your own choosing”, to the core. Chinese were first made to believe that ‘Communism’ is good for them and then they were made to believe that ‘Socialism with Chinese Characteristic’ is good for them and finally ‘Public Benefit with Capital Market Finance’ was put in their head. Chinese populace is very industrious and they deserve to get their due in the world order. However Chinese leadership is equally Machiavellian and want to deal with their populace on their own terms.
The top five economies of the world in 2018 as per ‘Forbes’ magazine are the USA, China, Japan, Germany, and the UK, however, if economists are to be believed then by 2030 this list would undergo a sea change. The list would read something like this: China, USA, India, Japan, and Indonesia. Even if the economic numbers have been cooked up by China, listed below are some of the indicators which cannot be hidden away from public scrutiny and examination.
Through history, special attention has been paid to the study of the relationship between the energy use of a country and its level of development. In the current context of globalization, the energy used by a country is not anymore a suitable indicator for measuring the total energy requirements associated with its level of development, however, it is still a good indicator. Since 2011, China has consumed more coal than the rest of the world combined. Over the last decade, China’s investment in renewable energy and natural gas has surged. In 2017, almost half of global renewable energy investment came from China, totaling $125.9 billion. By 2015, China accounted for one-third of global wind–energy capacity. China is now home to two-thirds of the world’s solar–production capacity. Since 2017, China has trailed only to France and the United States in terms of nuclear energy generation. China’s demand for crude oil similarly outpaces its domestic production. Since 1993, China has been a net importer of crude oil, and in 2017 it surpassed the United States as the largest importer in the world(source: csis.org). China has shown a similar voracious appetite for metals and minerals, to sustain its industries.
Business magazine Fortune published its latest world’s 500 largest companies list, or Global 500 of 2018, in which China has 120 companies in the list, just behind the US, 126 companies, and Japan, 52 companies. India has only 7 companies in that list. There is another list called Forbes Global 2000. This is an annual ranking of the top 2,000 public companies in the world by Forbes magazine. The ranking is based on a mix of four metrics: sales, profit, assets and market value. In the top 100 comprises in this list China has 18, the U.S. 30, Japan 8 and India has only 1 company. In the top 10 list, China and the United States have 5 companies each, with China leading the pack. China is catching up with the U.S. at neck-breaking speed, and in the areas where is not able to do so, it is buying them out(U.S. semiconductor manufacturing equipment company Akrion Systems was acquired by Beijing-based Naura Microelectronics Equipment Company and insurer Genworth Financial, Inc by China Oceanwide Holdings Group).
Chinese companies have shown phenomenal growth in earnings. The Forbes Global Growth Champions List has 8 Chinese companies out of the top 10. Chinese real estate developer Greenland Holding Group which saw $44.8 billion in sales and $1.5 billion in profit last year, tops the list. In total, the 500 largest companies in China generated more than the US$5.9 trillion in revenue in 2017 – up 18.2% compared to last year – and US$0.5 trillion in profit, which is an increase of 24.2% year-on-year.
China has by far the largest foreign currency reserves with over two and a half times more than the second largest reserve holder, Japan. When China and Hong Kong reserves are considered together, the total is $3.6 trillion. India is at number eight with forex reserves of $403.7 billion. The United States had foreign currency reserves of $123.5 billion and the United Kingdom, which did not make the top ten list, had $187.4 billion in foreign reserves as of August 2018(source: investopedia.com).
This omnipotent economic growth has emboldened China, and it has started working on its ’Tower of Babel”, threatening the present world order. With China at the top, this wouldn’t be a dystopian world. Because the labyrinthine path to the halcyon Chinese world has many pitfalls. Obscurantism is mantra of Chinese dispensation. Everything is opaque in that country, including their economy. In his book ‘China’s Great Wall of Debt’ Dinny McMahon illustrates how this facade of portentous economic progression might come crashing down under its own weight, one day.
Would China rule the world one day? Who is going to stop it, if at all? What are the pitfalls in its economy and society? We shall consider all that in the next part.