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by Jack_Popiel (writer), Colorado Springs, October 29, 2011

In 2007 I suggested that flaws in China’s growth strategy would eventually cause it to self-destruct. As China approaches the end of its frenetic growth cycle, analysis and forecast appear correct.

In September 2007, as our credit bubble was starting its collapse, China’s meteoric rise was the subject of universal admiration. We disagreed with this view, and wrote an essay titled “The Chinese Disaster” outlining the flaws in the Chinese growth model and suggesting a potentially disastrous end to the experiment.

Four years later it is appropriate to revisit both analysis and forecast.

Our first theme in the original essay was the lack of an ethical system underlying China’s current development. After Mao had “burned the books” and destroyed China’s 2500-year old ethical foundation he set up scientific materialism as a substitute. This has not changed. As before the goal of policy is to maintain the absolute power of the Communist Party, a power that is based on ongoing economic success.

This success has been extraordinary, with China acquiring, at extremely low cost, western investment and technology as well as the status of dominant economic power. On this basis (plus low cost labor and an elaborate mercantilist apparatus) it has built a huge industrial economy backed by a massive trade surplus. The internal price, however, has been high, as outlined in the 2007 analysis:

• Economic inequality is worsening, with the new wealth of the middle class being eroded by inflation.
• Environmental degradation has continued unchecked
• Misallocation of capital is endemic, as manifested by the still developing fiasco of the high-speed train network.
• Corruption is now universal, and in certain areas like finance it is beyond central control.

These systemic flaws will not, by themselves, bring about a collapse. But the hardships they impose on the people require some form of compensation. This has been achieved through the cultivation of national pride, founded in turn on continued economic progress.

Optimists expect this growth pattern to continue unabated, with China destined to mature into the reigning superpower of this century, displacing both Japan and the United States.

In our essay we disagreed, and pointed to what we believe is the fatal flaw.

China’s growing GDP has three legs: internal investment, consumption and exports.

• Consumption’s share is shrinking as income is concentrated at the top.
• Exports are subject to the western economic cycle. When the crisis hit China had to vastly increase internal investment in order to compensate.
• Internal investment, however, has limits. There are only so many empty buildings and railroads to nowhere one can build before the return on money invested becomes negligible.
• To overcome this decline on returns, the money supply has to be increased far beyond any safe limit, creating what amounts to a giant credit bubble.

Sucked dry by China’s predatory mercantilism, Western economies teeter on the brink of recession, and political pressure to halt the drain is rising. Thus China will get no relief from increased exports; in fact the trade surplus is likely to shrink even as, internal consumption’s contribution is declining and investment has reached its limits.

Thus Chinese economic growth is coming to an end. If so, the promise will have proven empty, and the hardships endured by the people will go uncompensated. There is no ethical ideal around which the rulers can rally the population.

Historically, this is the recipe for the “end of dynasty” disaster, seen many times in Chinese history. In this scenario, as corruption rises and the economic pie begins to shrink, the ruling class both raises its share and, wary of insurrection, increases the oppression of the people. The end result is desperate revolt, economic and political collapse, and general disorder until a new source of power arises.

In the past such rebuilding was structured around the traditional ethic founded by Confucius, the system that Mao rejected and destroyed. In the absence of a workable substitute China’s descent is likely to be hard, long and deep.

Read more articles on: china , globalization failure , world economy , popular revolt

Jack_Popiel is a writer for BrooWaha. For more information, visit the writer's website.