Wednesday, July 06, 2011

China's Second Great Leap Forward

The People's Republic of China's first Great Leap Forward thrust it forward at the cost of some 40 million lives. And while its Second Great Leap Forward appears to come at a smaller cost in lives, it may prove to be equally fragile.

The saving grace of the PRC economy has been the willingness of Western companies to use it as a cheap labor market. Capitalism accomplished what Communism could not, giving its industrialization focus. But beneath that China is still a Party oligarchy which is stuck thinking in terms of giant projects and major goals. The New China is on its Second Great Leap Forward and still trapped in Mao's legacy.

China has achieved Mao's vision of becoming the world's dominant steel producer. China produces a third of the world's steel. Almost eight times as much as the United States. And its dumping of steel on the American market, along with domestic overregulation, has helped break down the American steel industry. But the Chinese steel industry is government subsidized and protected. Like so much else, it grows out of a command economy.

China's command economy depends on an undervalued currency which uses exports to fund industrial investment. More industry, more cheap exports and more revenue. The cycle of aggressive growth that follows is impressive, but also completely unstable. The growth is not natural, it's government funded. The costs of the growth are dispersed and hidden, but they are still there. Like most pyramid schemes, the numbers look good so long as a high rate of growth continues. But a setback exposes its weakness and topples the whole structure.

The PRC's official budget deficit isn't so terrible, but its real spending is often hidden behind a convoluted organizational web of state owned banks and investment corporations set up by local governments to lend themselves money from state owned banks. China's official budget listed revenues of 1.149 trillion and expenditures of 1.27 trillion. Not so bad compared to America's insane 2.092 trillion in revenues and 3.397 trillion in expenditures. Except when you start accounting for nearly an additional 4 trillion in debt that the PRC used to "stimulate" its economy via its own banks. This puts our own "stimulus plan" into perspective. The Chinese version is much worse than our own.

Obama suggests that we look to China. But that may just be because the Chinese model is his own taken to the worst possible extreme, more reckless, less transparent and headed for disaster. Massive infrastructure investments, irresponsible currency manipulation, piles of hidden debt and unrecognized long term consequences.

The disasters of the original Great Leap Forward were fed by a political bureaucracy, that like its Soviet counterparts, refused to acknowledge failure or pass along news of negative outcomes up the ladder. There is no sign that this has changed. The Russian and Chinese Communist command economies passed unworkable orders down to the fiefdoms of local officials who hid their failures until they couldn't be hidden anymore. The same thing is happening now under a capitalist veneer. And there is every sign that the disasters of the Great Leap Forward are repeating themselves.

Massive population displacement, home demolitions and land seizures in the countryside were a feature of the Great Leap Forward and they are a major feature of the Second Great Leap Forward. But this time the peasants aren't starving to death by the roadside, they're protesting loudly. While Westerners still think in terms of Tienanmen Square, there are tens of thousands mass anti-government protests happening every year in China. Some of them featuring crowds in the tens of thousands. These are not democracy protests by students. The modern Chinese students tends to be pro-regime and optimistic about making money. The peasant thrown out of his home by local officials does not.

The displaced populations and a gender gap that will leave millions unable to marry represent a ticking social time bomb. Mao's China solved it with the mass murder of millions. The modern PRC is willing to evict millions from their homes, but not to actively execute or starve them all to death. Instead it plans to outgrow the problem. And its growth plan pumps money into local industrialization which leads to more evictions. More significantly it leads to the loss of arable land.

The original Great Leap Forward saw famine deaths in the tens of millions. Since then China has put a great deal of focus on self-sufficiency in wheat production and stockpiling wheat reserves, but its wheat, corn and even rice imports are rising dramatically. That is a dangerous sign in a country with a high population, devastating droughts and a long history of famines.

But China's own government funded industrialization is partly to blame for it. The PRC's Second Great Leap Forward has pumped money into rural development, throwing up power plants, dams and factories, and wiping out millions of hectares of arable land. Their solution to the problem is more government funded agriculture through farm subsidies, while raising the minimum purchase price on crops.

China has set minimum purchase prices on wheat and other crops to subsidize domestic agriculture while preventing the United States and other foreign competitors from dumping cheaper wheat on its marketplace. While American wheat was cheaper than Chinese wheat, it cannot be sold for less than Chinese wheat. Like so much else of China's economy, this setup depended on a high rate of growth. But rising global wheat prices combined with rising domestic demand and less arable land are making it dangerously vulnerable. Food prices in China are rising sharply, while its domestic production is unable to keep up.

China's agricultural spending is negligible compared to its massive infrastructure investments, that are often senseless, destructive and wasteful. The mentality was typical of the USSR, of North Korea and of China, which is throwing it has into massive projects without a realistic return on their investment. Like Dubai, China is spending enormous amounts of money and effort to maintain the boom image. But that image is built on massive piles of debt invested against artificial growth. With the whole thing rising like a neon lit deck of cards above a wobbly table.

The final and worst legacy of the Great Leap Forward is shoddy production. The Leap set target goals and tried to meet them by cutting every corner possible. The modern China is no longer trying to beat the UK's steel production numbers with backyard furnaces, as it did in Mao's day, but its steel is notoriously shoddy. So is everything else that is Made in China.

For now America is still putting cost over quality. As San Francisco did when it bought its new Bay Bridge in China. But rising steel prices, a weak dollar and an inevitable clash over China's undervalued currency mean that sooner or later, Chinese industry will be forced to compete on quality, not on price. And when that day comes, industries built on government subsidies and told to turn out products at the lowest price, will suddenly find themselves in big trouble.

Like most command economies, China is strictly big picture. Its higher ups are unconcerned with the details. Mao remained unaware for the longest time that backyard furnaces cannot produce high quality steel. Similarly the men and women at the top are ignorant of the details that keeps their economic miracle on track. Instead they celebrate big picture accomplishments like the opening of the world's longest bridge, the Qingdao Jiaozhou Bay Bridge, which is certainly a big bridge, with some safety issues, and happens to be completely unnecessary.

With debt at 80 percent of GDP, the only plan is to keep moving forward. But the level of growth needed is unsustainable. The "Big Picture" vision of the Second Great Leap Forward is about to collide with economic realities and unspoken truths.

Now as China indulges in military brinkmanship with its neighbors and pumps more money into its military budget, while growing more brazen about seizing entire US companies and hoarding raw materials, its aggressiveness is breaking apart the business relationships on which its economic boom was founded.

China's economic growth is parasitic on American and European growth. It has overinvested in a race against America and Europe, without understanding that it is running a race against itself. That it has not truly broken with the errors of the Great Leap Forward.


Lemon said...

China's only great leap should be taken off a short pier.

Steve Deihl said...

Besides China limiting their exports of rare-earth metals, there are rumors and some evidence that Beijing's State Reserve Bureau is stockpiling large amounts of primary metals -- most notably copper, and also aluminum and cobalt.

cornholio said...

At least their leaders aren't in the back pocket of Islamonazi theocracies. At least the PRC doesn't have incipient Islamonazi mini-states being established within its borders. At least the PRC's government doesn't seem to be rotten w/corruption. I also admire the way they deal w/corrupt government officials. China is on the rise, the amoral, corrupt West is on the decline.

Daniel Greenfield @ the Sultan Knish blog said...

no China is quite rotten with corruption, occasional executions don't change that. The USSR did that too

Lemon said...

They execute far more good people than criminals and sell the organs too.
They are among the coldest and most wicked of nations.

dav said...

The problem is that if china's house of cards falls thay still have the factories. If America's house of cards falls were left holding our breeches

Ciccio said...

The West will soon find out how cheap that Chinese labour has been. The biggest cost of any manufactured products has never been the labour, the biggest cost has always been figuring out how to make it and the tools to make it. Once a tool has been made, it costs little to copy it, once a process has been devised it takes neither brains or money to follow it. What all that outsourcing has done is to give the Chinese 25% of the cost of a product so that they can save perhaps 5%. So when the Chinese come on the market with an almost identical product at three quarters of the cost those great big wise moguls are still surprised.

The very first outsourcing ventures were also the most (to their American owners) impressive. A dedicated hard-working intelligent work force. They only forgot to ask one thing. To whom were they dedicated? I still wonder how many first class engineers were in there at the start studying every aspect of production.Shortly thereafter Chinese owned factories were sprouting up like mushrooms and nobody ever asked how or why now.No trial and error mishaps, no long series of ever more efficient equipment, from back-yard furnace to full fledged industry overnight. Thanks suckers.

jlevyellow said...

Sultan, more respectfully, Mr. Knish, has mentioned Chinese military adventurism as a possible outcome of deepening crises. It may be that China will use its military when it feels that it needs to expand its land holdings or reduce the male population, whichever comes first. But first they will denude Africa.

Their interest in Africa stems from their own potential food crisis as well as their desire to sequester scarce sources of raw materials such as rare earths. They are importing tractors and "leaseing" land for food production that will no longer be available to the indigenous African populations. Indeed, leases in Africa have been made for a standard 99 years. That constitutes a land grab, not reasonable business arrangements. China is a perfect example of dark Darwinianism at work. By the way, China is not the only country interested in "cheap" land in Africa. Those countries include Saudi Arabia, India, Denmark, and even the United States. Africa is viewed as a failed continent open to exploitation. Its rapacious governments disadvantage their own populations for personal gain.

If the NGOs who pay so much attention to Israel were to turn their attention to the land-dispossessed in Africa, they would fill their quotas of exploitation for decades to come. Indeed, the UN could find another raison d'etre for its existence in this process of new colonialism and finally leave Israel alone. Wishful thinking, I know!

Keli Ata said...

"...military adventurism as a possible outcome of deepening crises. It may be that China will use its military when it feels that it needs to expand its land holdings or reduce the male population, whichever comes first."

That almost sounds like a 1950s Sci-fi movie about aliens invading earth because they've run out of resources on their own planet.

But on a more serious note, if this is where China is heading it will be curious to see if the Russian Bear will form some sort of allience with China eventually breaking down at some point in a power struggle.

Mentok said...

@Lemon @Cornholio and the Sultan: NE Asia is a different kind of take out. They don't ascribe to our concepts of (negative) freedom.

It's all about 'justice' or lack thereof. And yes, I'd rather we hung our thieves too.

Finally, the last citation (about 'losing your businesses at the drop of a hat').. that's balderdash. Apple hasn't lost one yet. How? By using an ROC intermediary (Foxconn/Honhai). Chinese deal much better with other Chinese, and Apple knows that.

-Drunken Economist

MichelleInSanDiego said...

The source article for one of your arguments seems to be a copy from an uncredited Epoch Times article.

Your article, "while growing more brazen about seizing entire US companies..."
links to a 22 April 2011:

Google search shows the first posting as April 5, 2011, from

Interestingly enough, the latter gives an April 23, 2011 update status. Still, given its known bias of discrediting the current Chinese approach to governing, it would do well to cite the Epoch Times as the source article.

(You can perform the google search by typing a complete sentence from the article within ""'s into the search engine. At this moment, there are 12 hits.)

Daniel Greenfield @ the Sultan Knish blog said...


Apple hasn't lost it... yet. How many of the chipods use stolen Apple tech is another subject.

Any company that outsources its production to China, is going to eventually lose it to China.

Using a Taiwanese intermediary only delays the inevitable.

Daniel Greenfield @ the Sultan Knish blog said...


you can also google and find the fellowes press release on the subject

obviously Epoch Times is against the PRC regime, but I haven't seen a serious rebuttal of the facts in the article, just defenses of the PRC's right to to what it did, from the 50 cent party

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