China’s great economic leap forward hits the wall
This was supposed to be the Asian century, but the Eastern boom is dying of exhaustion For many Chinese the promise of industrialisation and prosperity is turning into a nightmare of ill health and curtailed life expectancy
By Jeremy Warner
8:20PM BST 11 Jul 2013
So here’s how it looks. Years of unsustainable, credit-fuelled growth are brought to a halt by a crushing financial crisis which exposes deep structural flaws at the heart of the economy. Rarely has the assumption of ever-rising living standards looked so vulnerable, with younger generations forced to pay not just for the crippling legacy of debt their parents leave behind, but for the mounting costs of an ageing population and the consequences of decades-long environmental degradation. Economic decline, austerity and inter-generational recrimination seem to beckon as populations adjust to the true mediocrity of their circumstances.
I’m referring to the tired old “developed” economies of the West, right? Actually, no: it’s China where these observations seem more appropriate, and perhaps other emerging market economies said to be about to eclipse the hegemony of the old world, with its lazy ways and sense of entitlement.
Western “declinism” of the sort described by Dambisa Moyo in her book How the West was Lost, and more recently by Stephen King, chief economist at HSBC, in When the Money Runs Out, is still the narrative of our times. But sometimes a sense of perspective is demanded; compared with the challenges faced by China and the rest of the developing world, the relatively minor adjustment to expectations that needs to be made in the West is a stroll in the park.
Forecasts that China will overtake the US as the world’s largest economy over the coming years already look like yesterday’s story as once-explosive development in the East slows to a stall amid growing fears of a Chinese credit crunch. The Asian boom is dying of exhaustion.
As ever, public perceptions trail the reality. For the first time in more than a decade, international investors and business leaders are regularly heard referring to the US as a more attractive proposition than China. Investment flows are going into reverse, and while the US banking system is reviving fast, China’s is heading in the other direction after a period of credit expansion that makes our own look positively pedestrian.
Nor is it just the economics of unbridled, politically directed development that are beginning to fracture; for many Chinese the promise of industrialisation and prosperity is turning into a nightmare of ill health and curtailed life expectancy. The social deprivations of China’s one-child policy meanwhile threaten a demographic time-bomb of far worse proportions than that of the supposedly bankrupt West. There is now every likelihood that China will indeed grow old before it gets rich. One shocking story from the past week vividly demonstrates the massive costs that China’s centrally directed dash for growth is fermenting for the future. According to a study in The Proceedings of the National Academy of Sciences, air pollution has caused an average five-and-a-half year reduction in life expectancy for the 500 million people living north of the Huai River, where use of coal in the home and for electricity generation is most prevalent.
The latest study, pretty much undisputed by the Chinese authorities, adds to mounting evidence of industrial poisoning on a hitherto unimaginable scale. The 2010 Global Burden of Disease Study found that outdoor air pollution caused 1.2 million premature Chinese deaths in 2010, or nearly half the global total.
The fumes are so bad that a growing number of Chinese emigrate, setting in train a potentially devastating brain drain. In a recent interview in the New York Times, the mother of a child made sick by the smog refers to the difference between Britain, where she had studied as a student, and China as heaven and hell.
All industrialisation exacts a heavy human toll in its early years. The miseries of Britain’s industrial revolution are well chronicled. But the speed and scope of China’s attempted catch-up are in a league of their own.
There is also a world of difference between the market-determined development that drove the British and American economic miracles and the state-directed variety of China’s great leap forward.
Politically sponsored advancement rarely occurs without gross misallocation of capital, and in China it seems to be happening on an epic scale. The latest example of China’s capacity overhang is Rongsheng Heavy Industries, the world’s largest private shipbuilder. The collapse in the market for new ships has forced Rongsheng to go cap in hand to the government for a bail-out. It’s said to be an important test of China’s resolve to move from the old, unsustainable, investment-led model of economic development to a more balanced form of advancement, but it is almost certainly one that China will fail. Political connections will ensure Rongsheng survives, and the resulting capacity glut will, in time-honoured fashion, simply be dumped on the rest of the world.
On a global scale, the resulting imbalances require that the deficit nations of the West keep spending to absorb the Chinese surpluses, even though they can no longer afford it. The tragedy for China is that when countries and individuals spend beyond their means, it is always the creditor, and not the debtor, that ends up paying. China’s vast, accumulated surplus of foreign exchange reserves will simply be devalued to oblivion.
By relentlessly pursuing the goal of industrial supremacy, China has made itself into the world’s environmental waste dump, and a hostage to back-door default by Western debtors to boot. Once admired for its dynamism, state-directed capitalism is turning out to be a monstrous anomaly. Chances are that this will be another American century, not the much-predicted Asian one.