Weak premises, flawed arguments

Print edition : March 02, 2002

The Coming Collapse of China by Gordon G. Chang; Random House, 2001; $26.95.

AT a time when many people predict for China the status of a superpower in the not-too-distant future, here is a book that, far from endorsing the orthodox view, actually throws doubt on the ability of the country to survive as a nation-state in its present form. Far from a global market swamped by Chinese goods and services (people now even bet on China stealing a march over India in software exports), Gordon G. Chang, in his book The Coming Collapse of China, argues that China itself would be swamped by foreign goods with China's accession to the World Trade Organisation (WTO) regime. All this is supposed to happen in the next five years or so as, in the author's view, China today suffers from a combination of social and economic weaknesses that renders the present regime vulnerable to an assault on its hold over the levers of power. The assault is expected to come from myriad sources of popular support. Or is it? After reading his work one is forced to reach the conclusion that the lawyer in Gordon Chang has not made out a convincing case.

The author contends that the Chinese leadership has lost the revolutionary fervour that characterised the initial years of Mao Zedong's rule. He says that corruption and a penchant for high living among the leaders at the expense of the ordinary people mark the present rule. In the process, Chang claims that the ruling Communist Party of China lost the moral high ground that it needs to occupy for it to continue to rule China with a degree of legitimacy. Simultaneously, he alleges that the party is also suppressing democratic activists and members of the Falun Gong religious movement, besides separatists in the Muslim community in the northwestern province of Xingjian and the Buddhist majority in the Tibetan province in the southwest.

However, he realises that such sources of popular disaffection are not enough to cause a violent reaction that can throw the existing regime off its perch. While it may provide the initial spark, forces of far greater intensity are needed to cause a widespread social upheaval, which alone can pose a serious threat to a regime's capacity to survive. It is in this context that the author enters the argument of poor financial health of the state owned enterprises (SOEs) and the problem of non-performing assets of the country's banking system. The author argues that state-owned banks, which command nearly 90 per cent of the public deposits in the People's Republic of China (PRC), are hopelessly insolvent. They have lent monies to SOEs that not only are non-profitable but also suffer from a weak accounting system which renders suspect their capacity for mid-course corrections. They are kept afloat, he claims, only by an elaborate system of subsidies from the Central and Provincial governments. Hence he is extremely sceptical about the capacity of the SOEs to compete successfully with overseas manufacturers on level terms. Right now, he contends, it is not a serious issue as overseas suppliers have until now been denied access to the Chinese market. At this juncture, the author brings in his argument, namely, China's entry into the WTO. Chang rightly points out that the rules of domestic competition would change with the country's entry into the WTO as the accession binds China to provide a transparent and rule-based regime of internal trade competition.

Thus, the author sets the stage for a grand scenario of unfolding events. As Chang sees it, with the ushering in of competition under the WTO regime, the SOEs would soon fall like nine pins in the face of an onslaught by foreign enterprises. Their collapse would aggravate the problem of non-performing loan assets of the state-owned banks. As non-performing assets mount, banks themselves would be unable to service the claims of their depositors. Soon, the investing public would realises the true state of affairs in the banking system. They would panic and cause a run on the deposits in the banking system, which the latter would be unable to stem. As the banking system collapses, there would be widespread unrest among the public. Such unrest is likely to gather momentum as all kinds of disaffected groups - advocates of democracy, members of the Falun Gong cult, Tibetans, Uighurs and, of course, the common people who would have lost their money in the banking system - would link up with one another, thanks to the spread of communication devices. The author says that the millions of subscribers of cellular devices and pagers and Internet users, who have access to an instant communication infrastructure, are bound to talk to each other and the bandwagon of a new democratic revolution would well and truly have been launched.

As theories go, there is an element of cold logic to the author's reasoning. One need look no further than the collapse of successive regimes in Argentina in January to concede the point that a sound financial system is a pre-requisite for stable political order. Equally, there is merit in the author's proposition that unviable nature of SOEs could potentially drag the banking system to its downfall. However, the key question is whether the SOEs collectively or as a class are really all that vulnerable. Unfortunately, the author fails to present conclusive evidence of an imminent collapse of the SOEs in the post-WTO era. On the contrary, the perceived poor competitive capability of China's manufacturing sector flies in the face of evidence about its enormous success in notching up impressive rates of growth in exports.

One may argue that macro-economic statistics put out by the official agencies in China are suspect. However, international trade statistics, put out by the WTO or other multilateral agencies, which credit China with such success on the export front, can hardly be accused of fudging. If the argument that China is an inefficient manufacturer of goods is true, where then does its competitive success in exports come from? Not all its exports are bicycles, toys and stainless steel cutlery. Hence, there must surely be many things that the Chinese manufacturing sector must be doing right. Maybe even the export success is a mirage. But the book gives no evidence of that either. In fact, there is little discussion on China's export performance as a whole and it is a fundamental weakness of the author's argument. The competitive capability of China's manufacturing sector is the core issue here, for it underpins the author's argument about the collapse of the country's financial sector and the triggering, in the process, of massive public discontent. If the SOEs are not as bankrupt as is made out to be, then the argument of an imminent collapse of the financial system too falls through. In the event, the latent discontent among certain sections of Chinese society (such as Uighurs and Falun Gong members) would not gain the momentum that the author predicts.

Even from a macro-economic perspective, one must discount the 'collapse' theory. After all, China is the third largest economy in the world. Any collapse of an economy of such a size could cause disequilibrium of such enormous proportions that no surplus capacity elsewhere in the world could bridge. For instance, steel. Assume that Chinese enterprises are not as efficient a producer of steel as South Korean or Japanese ones are. (Actually they are, if anti-dumping duties against Chinese steel in the United States are anything to go by.) Yet China accounts for a little more than 100 million tonnes of the global steel output. However, the author argues that Chinese manufacturers would go out of business in the post-WTO regime. At present there is no manufacturer in the world who can step in and meet this shortage. Moreover, there will be shortage as the Chinese or overseas consumers of Chinese steel are not going to stop consumption merely because somebody has decreed that the Chinese steel industry has no business to be in existence. Even if the Chinese industries go out of business, the resultant hardening of prices should see them immediately coming back as viable units. In short, the size of the Chinese economy is its own guarantee of survival.

Even the importance assigned to civil unrest or even an armed insurrection by sections of the Muslim population in northwestern China or the latent protest movement among Tibetans against Chinese rule in Tibet is out of proportion to their capacity to cause a social and political change in China. If civil unrest were to be the sole criterion, India's current political system should have given way to something drastically different. For practically all of its independent existence, India has had to face unrest in Jammu and Kashmir and in the northeastern States. Even today the Naxalite movement is a political force in some pockets of Andhra Pradesh, Madhya Pradesh, Orissa, Bihar, West Bengal and Maharashtra. Yet, predictions of doom for India are as misplaced as they must be for China. Britain has had to contend with unrest in Northern Ireland. Israel is yet another example, whatever be the merits of its Palestinian issue. The fact of the matter is that most countries have had to contend with unrest in varying degrees and at various times. Yet, it has not been a factor in their stability. Hence, in all fairness, one would expect the author to say why it must be different for China.

By far the most ridiculous argument is the one dealing with the rise of prostitution as a factor in triggering social change. The author refers to the highway girls of Hangzhou in Zhejiang Province and the sex workers of Rugao in Jiangsu Province. Since the book is no travelogue, the reference to prostitution can mean only one thing - it too represents some kind of a threat to political stability or the moral decay that would be a forerunner of some politically destabilising consequences. By that yardstick, the Netherlands with its thriving sex trade should have been wiped off the face of the earth long ago.

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