Remnants of Marxism cloud China's future
| • | Map, charts: China's boom slows |
USA Today
BEIJING — On the southwestern fringes of this capital city, miles from the shopping palaces downtown and the sports complexes rising for the 2008 Olympic Games, migrant workers from China's hinterlands scavenge a local dump for discarded aluminum cans that might fetch a little money somewhere.
Most are too poor to afford tuition for their children at local public schools. So they send the kids instead to illegal schools such as Yumiao elementary, tucked inside a dusty courtyard here in the city's Fengtai district. Yumiao and others like it are offering what China's cash-strapped government too often can't: a rudimentary education for the poorest of the country's poor.
The modest three-classroom school is a reminder of the staggering financial problems China still faces as it seeks to take its place among the world's great powers. By some counts, the Chinese government is bankrupt. Its banking system is insolvent. It faces massive unemployment as inefficient government-owned companies try to cut costs. And it can't collect enough taxes to deliver education and other basic social services to many of its 1.3 billion people.
Daunting as they are, the problems are easily forgotten as China strides onto the world stage. China is growing as the rest of the world's economy stagnates. It is attracting billions in foreign investment. It is preparing to join the World Trade Organization, a symbol of its integration into the global system of commerce. It just won the right to play host to the 2008 Olympics. And this weekend, Shanghai plays host to President Bush and other world leaders at the annual Asia Pacific Economic Cooperation conference.
In the 1980s and '90s, China reported the fastest economic growth in the world. But the early gains were relatively easy: Growth was assured once China's leaders began opening the economy to the outside world and dismantling much of the rigid state control that kept the nation in an economic straitjacket during the Mao years of the '50s, '60s and '70s.
Growth is tougher now. The remnants of the old Marxist system still plague the economy, mainly in the form of large government-owned enterprises (producing everything from steel to oil) that have been protected from full-blown competition and have become bloated and inefficient. The communist authorities in Beijing still can't resist the urge to meddle in the economy — protecting favored industries, changing policies on a whim.
Few deny that China faces deep financial problems. And the Chinese government has acknowledged the need to reform the economy. Indeed, many believe the technocrats laboring away in central government here will figure some way out. "They have been muddling through for 20 years," says Carsten Holz, an assistant professor of social science at Hong Kong University of Science and Technology.
Others are convinced that the problems are so intricately woven into the unwieldy Marxist-capitalist economy that the system can't survive the strain. The communists are unwilling to do anything that might force the worst of the state-run companies out of business, and so the economy's basic inefficiencies remain.
"It's toast," says William Gamble, president of the Providence research firm Emerging Market Strategies and author of a forthcoming book on China's economy.
The most-talked-about book among China watchers these days is "The Coming Collapse of China" by Gordon Chang, a U.S. lawyer who spent years working in Shanghai and observing the inner workings of the Chinese economy up close. He predicts China's communist government is doomed.
Taxes are a big part of the problem. China's central government has trouble collecting taxes from its far-flung provinces. Tax revenue fell from 32 percent of the country's gross domestic product in 1978 to 12 percent in 1998, low by worldwide standards. The country has tried to tighten the tax system. Revenue reportedly was up nearly 25 percent in the first-half of 2001 vs. the same period in 2000. But gaping holes remain, the result of massive fraud, corruption and local officials' reluctance to pass revenue onto Beijing. In a continuation of old Marxist policies, local governments often own local businesses and depend on them for their budgets; they have no incentive to pass along business taxes.
Partly because of the tax shortfall, the Chinese government has foisted upon state-owned companies the social obligations — healthcare, education, pensions — usually financed from government budgets. The social welfare costs have contributed to huge losses at many state-owned companies.
The government keeps the companies afloat by ordering state-owned banks to pay them with loans, which are rarely repaid. Result: The banking system has gone bust. Even after unloading $170 billion in bad loans on government-run "asset management companies" set up in 1999, the Chinese banking system is still holding between $240 billion and $603 billion in bad loans, notes Nicholas Lardy of the Brookings Institution in Washington, D.C.
Assuming the banks or the asset management companies can recover 20 percent of the value of the loans through restructurings and asset sales — recoveries so far are running at just 10 percent — the losses could exceed $480 billion.
"A billion people are going to wake up one day and realize they don't have any savings," Gamble says. And an uprising by depositors could shake the very foundations of communist rule.
