Clearly, such “enlightened” leadership is not for America, or any liberal democracy, to emulate. Even so, President Obama warned in his 2011 State of the Union address that China’s meteoric economic rise threatens to leave America in the dust and exhorted Congress to substantially increase federal investments to increase American competitiveness.
Such thinking ignores the serious problems lurking beneath China’s economic glitz and spending onslaught. To combat the financial crisis, Beijing pushed out a 4 trillion yuan ($619.1 billion) stimulus package and encouraged lending by state banks that totaled, by some estimates, 20 trillion yuan ($3.1 trillion) in 2009 and 2010. Two years later today, Beijing is staring at piles of bad debt that may imperil China’s broader financial health.
Much of the problem stems from the fact that China’s local governments turned out to be some of the most avid consumers of state lending. Though facing legal constraints on borrowing from state banks, they created financing vehicles to serve as intermediaries, incurring off-the-books liabilities and using the funds largely for infrastructure projects that they could not afford.
Earlier this month, Moody’s Investor Services estimated that China’s local government debt totaled over 14 trillion yuan ($2.17 trillion), more than 35% of the country’s 2010 GDP. The Wall Street Journal reports that Beijing agreed on May 31 to assume as much as $436 billion in bad loans made to local governments. Though the figure is only about half of the U.S. Troubled Asset Relief Program of 2008, it amounts to a far bigger percentage of China’s GDP.
China’s central regulators are now attempting to stem local profligacy, but their mad scramble should remind the world that swift and decisive policies pushed by the full weight of authoritarianism can sow swift and decisive problems.
In the end, all of China’s problems cannot take away from the country’s breathtaking economic growth and liberalization. Yet China’s state-directed capitalism presses forward without any political accountability and imposes inherent obstacles to the free market. The country continues to produce not just persecuted religious believers, jailed political dissidents, and a censored media; it is also home to immense waste and jarring inefficiencies. As a U.S.-trained economist turned Chinese official observed recently, China’s economic inefficiencies are caused by its political contradictions.
Instead of ogling Chinese authoritarian chic, Americans would do well to recognize the same. Meeting China’s rising global influence requires sensible policies. Fashioning them would first require seeing China and its limitations more clearly.