Wagener: China’s paper tiger

Praxis Makes Perfect

As I approach the end of my Yale career, the International Monetary Fund forecasts the end of American economic dominance. According to the IMF, China will overtake the United States in 2016 as the world’s largest economy. Given China’s meteoric rate of GDP growth and its enormous population of 1.4 billion — almost five times America’s population — it seems inevitable that China will overtake America in total GDP at some point during our lives. The media certainly seems to have bought this hook, line and sinker, as American declinism has permeated every communications medium. However, there are countless reasons to suspect China’s economic soundness and data reporting, despite the near-absence of skeptical inquiry by a media that seems intent on cheerleading America’s relative decline.

China’s economy is liberalizing, but political priorities are still the most important determinants of capital allocation in its underdeveloped and Communist Party-led financial sector. Corruption is endemic, and state-directed capital investment seems to have exactly one setting: overkill. While Paul Krugman and Tom Friedman proclaim that China has gleaming bullet trains all along its Eastern seaboard and hundreds of shiny new airports, travelers have noted that the trains are more than half empty, many of the new airports have virtually no flights and the fastest-expanding mode of intercity transit appears to be ultracheap bus lines, despite the highly subsidized tickets for the bullet trains.

Indeed, in America’s debate over the effectiveness of stimulus spending, Keynesians on the Left often pointed to China’s seemingly incredible results from government investment in infrastructure, accepting without question China’s self-reported numbers. In a system as opaque and state-controlled as China’s, in which the people reporting the statistics are the same people who ordered infrastructure spending in the first place, there is every reason to suspect that data has been massaged to make the decisions of Party commissars look wise in hindsight.

Fully half of China’s GDP consists of investment spending, much of which is influenced by the commissars who have final say over bank loans; just a decade after China’s banks were forced to admit staggering losses and receive a government bailout, the commissars report that China has a default rate and a behind-on-payments rate lower than that of the developed world. That’s despite reports acknowledging that many publicly financed projects are losing millions of dollars per year, including one bullet train project that loses $100 million per year. The accounting doesn’t seem to add up, and it’s no surprise, since China’s bureaucrats get rewarded for reporting good results. When the offices that make decisions also produce the statistics that are used to judge the wisdom of those decisions, the incentive to bias the results is likely overwhelming.

In a system where accountability is nearly nonexistent — that is, besides the occasional public execution of one or two obvious embezzlers — the rule for officials is that pigs get fat, while hogs get slaughtered. Every public official unlucky enough to find himself at the end of a firing squad publicly embarrassed the regime. But the regime would have no reason to discipline officials for adjusting data to systematically overreport success and underreport failure, since that improves its public image.

Indeed, China’s Bernie Madoff-like tendency to report positive results in a narrow band should have raised eyebrows long ago. Ironically, the IMF report predicting China’s ascension in 2016 came out just after Chinese officials attempted to lower growth expectations for 2011 and acknowledged that inflation might rise yet further. Given that the Chinese government maintains tight control over all information in the country, one must assume that if they feel compelled to lower growth expectations below the 8 percent benchmark they’ve used for years, then the actual rate of growth is probably going to be even lower.

The most damning figures are China’s declining export surplus, its rapidly rising inflation and its very low consumption rates, which according to some reports may have fallen below 30 percent of GDP. Surging investment year after year in projects that remain woefully underutilized may make China’s GDP numbers look incredible, but if China’s consumers aren’t actually buying anything, then the unrestrained optimism of the media seems rather unfounded. Eventually, there must be a reckoning; if China has actually invested in boondoggles rather than productive projects, the defaults will somehow have to be dealt with.

China is an enormous country with a gigantic population, and it is quite likely that its GDP will outmatch America’s in a decade or two. However, cheerleading by the media on the matter should be replaced with highly skeptical inquiries. America’s relatively transparent, democratically elected government is subjected to endless critique and analysis; the same standards should apply to the notoriously opaque autocracy in Beijing. I suspect that time will prove that state-directed economies, especially ones with autocratic governments, cannot actually produce economic miracles; many analysts will wish they’d been less credulous about Beijing’s narrative by the time the truth comes to bear.

Trevor Wagener is a senior in Pierson College. This is his final staff column for the News.

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