The Truth About China

StrategyPage details the frustration Chinese feel with their nominally Communist government — and it isn’t just the financial troubles in Shanghai. The rot goes deep, from Beijing’s corrupt bosses to the recent explosion in Tiajin:

This explosion was not supposed to happen. There were laws about storing so much explosive chemicals (and poisonous) in one place and so close to residential areas. The government ordered the arrest of the owners of the warehouse complex and local officials can expect to be prosecuted, and possibly executed, as well. This sort of thing has happened before. It has happened too many times before and is still happening with increasing frequency despite government assurances that it is aware of the problem and is dealing with it. The problem that is not discussed much is that China has never had a strong centralized government. In the past Chinese empires thrived because the imperial government was able to promptly deal with provinces that became too corrupt and unruly. Chinese see their government as unable to identify, arrest and replace corrupt local officials quickly enough. This failure is seen as a danger to every Chinese. It isn’t just the massive explosions in major cities but the growing air pollution, even in the capital, and less obvious but just as harmful water and food pollution. What good is all this new wealth if the government cannot keep people healthy enough to enjoy it?

China has grown rich. Shockingly so, given how poor the country was just three decades ago. But on a per capita basis China still has a long way to go to catch up to the West, and per capita is the basis Beijing must look at.

The reason is that every individual has basic needs — food, shelter, etc — which must be met before taxes can be collected. When taxes eat into the basics, revolution is going to eventually result, and that’s anathema to Beijing (or any government).

So in order for an ambitious government to finance little things like blue water navies or even clean air, there must be a middle and an upper class big and wealthy enough to pay for it all.

But China might be stuck in the middle income trap:

Chinese productivity growth has gone into reverse for the first time since the Cultural Revolution tore the country apart in the 1970s, according to a new study, highlighting the failure of recent reforms to set China on a sustainable development path.

That means that despite dramatic rises in the cost of labor, energy, credit and property, the average Chinese company has actually been getting less bang for its buck since the global financial crisis – a classic sign of the “middle income trap” that many other emerging economies such as Brazil or Malaysia have found themselves stuck in after promising starts.

“The findings strongly suggest that the over-building, the over-capacity and the ‘advance’ of the less efficient state into private sector markets have increasingly dragged on China’s growth,” wrote the report’s author, Harry Wu, senior advisor at the Conference Board China Center for Economics and Business.

China’s political troubles may be just beginning as the country tests the upper limits of “Market Leninism.”