The Shanghai Illusion

“Asia Minor” by Joshua Kurlantzick, in The New Republic (Dec. 16, 2002), 1331 H St., N.W., Washington, D.C. 20005.

“China’s economic development is just mind-boggling,” says an enthusiastic Chinese-American executive based in Bei­jing, and many other foreign businesspeople agree. So do publications such as BusinessWeek and Forbes. But Kurlantzick, The New Republic’s foreign editor, says the emperor has no clothes.

“The country’s growth rates are vastly overstated, the result of cooked books and massive deficit spending,” he writes. “Companies selling to the Chinese market—foreign and domestic alike—are struggling just to break even. The economy is plagued by persistent deflation and a useless banking system.”

Yes, China has made some impressive strides since 1978, when it began to open its economy to the outside world. Shanghai, then a drab metropolis of Mao-suited servants of the state, is now “a vibrant city boasting dozens of European fashion outlets.” The Chinese middle class—less than 10 percent of the country’s population—has experienced a sharp rise in affluence.

But Shanghai and other flourishing coastal cities are the glittering exceptions. The government claims that the overall economy has grown by seven to 10 percent a year for the past two decades. But except for the “economic bright spot” of exports, Kurlantzick says, “the government’s numbers do not add up.” The official, Soviet-style statistics are gathered from provincial data, and local officials are under intense pressure to meet targeted goals. In 2001 alone, the government itself said there were more than 60,000 reported falsifications.

Over the past five years of supposedly breakneck growth, points out economist Thomas Rawski of the University of Pittsburgh, China has experienced deflation, rising unemployment, and declining energy use. He calculates that the actual annual rate of economic growth between 1998 and 2001 was only four percent—not enough, with millions of peasants leaving the farm, to keep the rural jobless rate from exceeding 15 percent, according to several Chinese economists.

Foreign companies that use China as a place to manufacture and export goods are doing well, but Joe Studwell, editor of the China Economic Quarterly, and other leading specialists figure that less than 10 percent of the foreign companies that sell to Chinese markets are making profits. “Major Chinese companies often are doing even worse,” according to Kurlantzick. Smaller domestic firms can’t get loans because “China’s indebted banking system remains focused on propping up state-owned enterprises backed by the Communist Party.” As its recent five-year fall from 21st to 31st on the World Competitiveness Scoreboard shows, “China’s economy is becoming less efficient and competitive.”

“Ultimately, China’s economic façade probably will crack,” Kurlantzick concludes. “And, when it does, the consequences may be disastrous.”