Inside the Chinese Meltdown Rocking Wall Street, Part 1
The Skinny on How This Monster Economy Is Losing Steam - and the Worldwide Fallout
Benxi Steel Industries, China Photo credit: Andreas Habich / Wikimedia (CC BY-SA 3.0)
Will these predictions become self-fulfilling prophecies?
In the first trading days of 2016, a full month before the arrival of the Fire Monkey, the world saw dramatic evidence of the collateral economic damage that can be wrought by gyrations in Chinese equity markets. Over 140 China-based companies listed on American exchanges lost $45 billion in valuation, according to USA Today.
China’s regulators spent billions in just a matter of days to try to stabilize their own exchanges. Market watchers around the world held their breath as a Maalox moment become a Maalox week. If we did not know it before, the start of 2016 has made it increasingly apparent that the fate of the global economy, and our shared planet, is tied up in the future of China.
The world’s most populous country, and its second largest economy, China is at a crossroads. Its Communist Party leadership has built a thriving economy based on exporting manufactured goods to the world at prices no one else can match. But that strategy has been paying diminishing returns in recent years, as Chinese production costs rise and new competitors grab a share of the market. But to keep their hold on power, the nation’s leaders need to keep money flowing to people who have had a taste of the good life.
“Since 1979 they have lifted 200 to 300 million people out of poverty and into the middle class,” Michael Santoro, professor of international business ethics at Rutgers Business School and a China expert, told WhoWhatWhy. “But we forget how many really poor people there are still in China. There are more people under the World Bank poverty line in China than the total number living in the United States.”
To keep the economic engine purring, China’s leaders are attempting to pivot from a purely export-based economy to one driven more by internal consumption, along the lines of Western economies like the United States’. But these efforts may run up against structural problems not so easily overcome by central government dictates.
After decades of double-digit economic growth, China is one of the most polluted countries in the world. Air and water pollution has become so bad that the government has had to shut down some factories and reduce hours of operations for others. During some high-pollution days in the last few weeks, all the schools in Beijing, the capital, were closed.
Currently, China feeds 20% of the world’s population but contains just 7% of the planet’s farmland. This already dangerous mismatch is getting worse.
Rapid population growth — China’s population is expected to reach 1.38 billion in 2016 — along with urban sprawl, has put the country’s most productive farmland under severe pressure. According to the Lincoln Institute of Land Policy, the current trajectory of land use raises serious issues about how China will feed itself in the future. “It seems inevitable that the tensions between the Chinese people and the use of their land will only escalate in the next decade or two,” writes Chengri Ding, in a post for the Lincoln Institute. (He is director of the Joint China Land Policy and Urban Management Program of the University of Maryland and the Lincoln Institute)
Historically, Americans, and Westerners in general, have remained largely ignorant of a nation and culture that pre-dates their own by thousands of years. (In the Chinese calendar, next month will begin the year 4713.)
For a glimpse of how the Chinese themselves view the challenges ahead, we can turn to an account in China Daily of the top ten social–policy priorities set by the nation’s leadership.
At first glance, it appears that the government is responding to calls for more openness and freedom of choice in Chinese society.
In a major concession, China will abandon its long-standing policy of restricting married couples to only one child. Now couples will be allowed to have two children — and even more if they qualify under certain regulations.
In addition, authorities will now grant household permits for all Chinese, including so-called “unregistered citizens.” This will allow as many as 300 million migratory workers to register for social welfare programs and, for the first time, take up a fixed address. At the same time, officials will try to direct this transient and rural population to China’s second-tier cities, where the surplus of vacant housing has reached crisis proportions.
The government has also pledged increased support for China’s twenty-somethings who would like to become entrepreneurs.
On the ecological front, officials have tightened existing environmental laws and will impose much heavier fines on polluters. In a nation where cigarettes are ubiquitous — China is the world’s largest producer and consumer of tobacco — smokers will face steeper fines. And to combat endemic corruption, the central authorities are requiring sanctions for municipal officials who conceal pollution, falsify data, or fail to enforce environmental laws.
Under a new water-pollution reduction program, the state promises that 70% of the water in the nation’s seven major river basins— including the Yangtze and Yellow Rivers — will be in good condition by 2020. In addition, China has committed to clean up its most toxically contaminated urban waterways by 2030.
But how will the people of China, or for that matter the rest of the world, know whether the country’s leadership is living up to these ambitious goals?
In a country where even “official” statistics are, to put it mildly, suspect, this fundamental lack of trust may be a major impediment to the planned restructuring of China’s economy, environment and society in the coming decades.
What has kept the peace in China in recent decades is an unspoken agreement between governed and government: the Chinese people cede political control to a self-perpetuating elite in exchange for ever-increasing material rewards. If the authorities fail to deliver on the promised bounty, this agreement may unravel. Should this happen, the profoundly destabilizing consequences will be felt around the world.
This is Part 1 of a three-part series.
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Part 2
Inside the Chinese Meltdown Rocking Wall Street, Part 2
Controlled Press, Out-of-Control Pollution and Corruption
Shenzhen landslide in China 2015 Photo credit: RT / YouTube
Under China’s authoritarian power structure, the media, including the Internet, is tightly controlled. The most professional-appearing media outlets with the largest audiences are all state-sanctioned. As for Western media companies, their ability to operate within China is wholly reliant upon approval of the authorities.
Without a free press, China became a black box that, until the recent economic slowdown and stock market slide, consistently produced double-digit returns for multi-national corporations and eye-popping bargains for global consumers. But news about the corruption and sometimes deadly malfeasance that underlay this boom rarely reached the general public.
An August 2005 New York Times article summed it up with the headline,“Media Executives Court China, but Still Run Into Obstacles.” The story described the vigorous lobbying efforts by Disney, Viacom and News Corporation to clear hurdles with China’s Propaganda Department and Ministry of Culture to access the vast Chinese market.
Rupert Murdoch — Flattery Got Him Everywhere
.Consider the narrative arc of NewsCorp mogul Rupert Murdoch. In the early 1990s, the global media baron, already well established in Australia, Britain and the US, set his sights on Asia. In two stages, in 1993 and 1995, Murdoch spent a billion dollars acquiring Star TV, which used a satellite (AsiaStat 1) that had been launched in 1990 atop China’s Long March III rocket.
Murdoch’s strategic acquisition gave his conglomerate control over what Joseph Straubhaar, a professor of global media at the University of Texas at Austin, describes as “the most prominent regional satellite and cable operation in the world.” Star TV’s reach extends from the Arab world to East and Southeast Asia.
NewsCorp’s plans for Star TV were nothing if not ambitious, and the politically conservative Murdoch was not shy about giving them an ideological, free-market twist. He proclaimed in 1993 that “advances in technology have proved an unambiguous threat to totalitarian regimes,” while “satellite broadcasting makes it possible for information-hungry residents of many closed societies to bypass state-controlled television channels.”
In October of 1993, Chinese Prime Minister Li Peng moved to outlaw the private ownership of satellite dishes, putting Murdoch’s plan for Asian media market domination in peril. The next year Star TV dropped from its lineup the BBC’s World Service, the world’s largest international broadcaster, whose unfettered news coverage did not meet with the Chinese government’s approval. And Murdoch went on a charm offensive aimed at getting back in the good graces of China’s leadership.
As reported in the New York Times, the Murdoch-owned publishing house, Harper Collins, released a glowing biography of Deng Xiaoping, at the time China’s most powerful elder statesman. NewsCorp and its subsidiaries helped Chinese official state broadcasters with their website and helped get the People’s Daily, the Communist Party’s news outlet, on line. Another Murdoch-linked company helped the Chinese develop an encryption capability to facilitate the development of payTV.
By1998, Xinhua, the state’s news service, was reporting that China’s President Jiang appreciated Murdoch’s efforts at reporting on “China objectively and cooperating with the Chinese press over the last two years.”
Bloomberg Censors Itself
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The difficulties of reporting from China under the regime’s tight media controls was highlighted by another case, this time involving Bloomberg News.After earning a reputation for hard-hitting coverage of high-level corruption in China, Bloomberg backed itself into a public relations nightmare. As chronicled in a 2014 Columbia Journalism Review article by Howard French, a former New York Times Shanghai bureau chief, Bloomberg pulled the plug on an investigative project near completion that would have exposed an “extensive web of corruption ties between one of China’s wealthiest businessmen and elite politicians.”
Defending the decision not to publish the piece, Matthew Winkler, Bloomberg News editor-in-chief, likened the situation “to the need of self-censorship by foreign bureaus in Nazi Germany to preserve their ability to continue reporting there.”
This year Freedom House, a nonprofit civil-liberties advocacy group, reported that China “was sentencing journalists to long prison terms,” “ignoring due process” and shutting down popular Internet-based messaging systems “used to disseminate news.”
And the Committee to Protect Journalists recently declared that, for the second year in a row, China led the world in the number of jailed journalists, holding a quarter of the nearly 200 incarcerated reporters worldwide.
Air Pollution Kills 4000 Per Day
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Under cover of censorship and self-censorship, the consequences of China’s role as the world’s factory — air too toxic to breathe and water too foul to drink — were regularly eclipsed in Western corporate media by stories about how investors could best profit from the China boom.For decades, local grassroots protests over political corruption, labor rights and environmental justice gathered momentum but were kept largely out of the public eye, for fear of falling into disfavor with China’s gatekeepers.
According to Peter Kwong — a distinguished professor of urban affairs at Hunter College and one of the nation’s leading experts on Chinese politics — the number of local protests throughout China rose from 8,700 a year in the early 1990s to 180,000 by 2010.
Kwong was one of the producers of the Oscar-nominated HBO documentary China’s Unnatural Disaster; The Tears of Sichuan Province, The film recounts the protest movement sparked by the collapse of schools in a May 2008 earthquake that killed more than 5,000 children. The parents say the schools failed structurally because they were cheaply constructed by builders who cut corners to make illicit profits. The film shows how office buildings and shops adjacent to collapsed schools withstood the earthquake, prompting parents to dub the schools “tofu construction.”
The same year that the parents of Sichuan risked it all to seek redress for their dead children, air monitors placed on the US Embassy in Beijing gave the world the first independent confirmation, available in real-time on social media, of just how bad China’s air had become.
“It all really got started with the air monitors on the US Embassy. That was a real game-changer,” says Barbara Finamore, senior attorney and Asia director for the Natural Resources Defense Council.
In the run-up to the 2008 Olympics in Beijing, officials resorted to drastic but temporary measures to clear up the skies, shutting down heavy industries and restricting driving in the smog-shrouded capital.
In the years since, pressure has been mounting on China’s top leadership to recognize that the mainland’s degraded natural-resource base has come to a tipping point.
The most recent comprehensive air-quality survey, conducted by Berkeley Earth, a scientific research non-profit, blamed China’s toxic air pollution for 4,000 deaths a day, roughly 17 percent of the nation’s mortality rate.
To put that in a global context, a report from the Max Planck Institute recently estimated worldwide deaths from air pollution at 3.3 million — with roughly half of those occurring in China.
“Now breathing air in China can be like smoking 40 cigarettes a day,” says Kwong. “For years the export industry was subsidized by not having to deal with the environmental costs, and the export trade had access to relatively low-cost land.”
“Environmental quality is the major source of the middle class’s dissatisfaction, and failing to improve it will only accelerate the ongoing brain-drain and capital flight,” says Taisu Zhang, a professor of contemporary Chinese law at Duke University.
The NRDC’s Finamore finds a glimmer of hope in China’s the burgeoning environmental movement: “Activity is happening at the local level when the rivers run black and the farmers and fishermen protest. You can tell what colors are popular in Western fashion based on the color of the dye in China’s rivers.”
Finamore believes China’s leadership is finally committed to shifting the economy away from heavy industrial production and toward consumer goods. This would mean reducing China’s carbon footprint by cutting back on the use of coal, while encouraging the growth of its middle class.
But phasing out inefficient coal-burning factories will not be easy. “Local governments often drag their feet, either because they rely on the company for tax revenue or have some other kind of relationship with the owner,” Finamore told WhoWhatWhy.
Rooting Out Corruption — How Deep Does It Go?
.Sometimes, it takes a major disaster to trigger real change.
Duke University’s,Taisu Zhang contends that the July 2011 collision of two high-speed trains that killed 35 and left 190 injured was just such an event.“The train disaster was a turning point,” Zhang told WhoWhatWhy. “After that, the state changed the way they handled these kinds of catastrophic events.They came to realize that by trying to keep things under wraps it only made things worse.”
Two recent man-made disasters illustrate the extent of the problem in a country as vast as China, where buying immunity from government regulation is a long-hallowed business practice. Last month, in the southern Chinese city of Shenzhen, a sprawling high-tech boomtown, scores were killed when an avalanche of dirt and debris from a construction landfill enveloped 33 factory buildings and displaced more than a thousand people.
For months before the breach, two private inspection firms, under contract to monitor the rapidly growing mound of rubble, warned municipal officials of a looming disaster. Their warnings were ignored, as additional construction waste was piled onto the site. After the so-called “industrial accident” the official responsible for managing the district committed suicide.
This past summer the city of Tianjin was rocked by a series of blasts and a subsequent chemical fire that killed 114 people, injured almost 700, and damaged 17,000 homes. The source of the explosion was a warehouse where sodium cyanide and other lethal chemicals had been stored — despite zoning laws that prohibited their presence in such close proximity to residential neighborhoods.
The state-sanctioned Xinhua news agency reported that the operator of the warehouse was arrested, along with his silent partner, the son of a former police chief, who had wielded his influence to get permits and licenses for the facility.
In an official statement, President Xi Jinping used the massive disaster to call for “safe growth” and to promote a national business ethic that put the “people’s interests first.”
Professor Zhang noted that much will depend on how Beijing deals with the on-going exposure of just how deep corruption runs in the Chinese economy: “The anti-corruption campaign has helped reinforce the legitimacy of the central government but it also opened up a can of worms they can’t close up easily because, if they try to control the press around it, they run the risk of it appearing to be a sham.”
Just last year, a hard-hitting documentary about the pollution generated by China’s oil and coal industry, called “Under the Dome,” rocked China’s Internet. Featuring China Central Television newscaster Chai Jing, it registered 150 million viewers — until Chinese censors took it down.
This is Part 2 of a three-part series. For Part 1, please go here.
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Inside the Chinese Meltdown Rocking Wall Street, Part 3
Photo credit: Adapted by WhoWhatWhy from Max-Leonhard von Schaper / Flickr (CC BY 2.0)
Xi’s high-flown sentiment came after years of widening public distrust of the 90-million-member Communist Party. Fueled by a conviction that bureaucrats routinely use their offices to enrich themselves and their families, this deep divide between governed and government was felt to be undermining the legitimacy of Mainland China’s only party.
Greedy Urges Led to Purges
By 2012, the Central Commission for Discipline had punished over 400,000 officials and criminally prosecuted over 200,000. In one province alone,15,240 officials were convicted. This war on corruption led to a significant decline in spending on luxury goods, because conspicuous consumption was seen as a potential career-killer.More recently, as the stock market convulsed and authorities spent hundreds of billions in an effort to stabilize it, investigators have been zeroing in on members of China’s billionaire class.
“The key point about all this is that what we see with China’s super-wealthy is very much like what we saw with the Russia that emerged after the Soviet Union,” Peter Kwong, a professor at Hunter College and an expert on Chinese politics, told WhoWhatWhy. “These billionaires that emerge get their wealth as a direct consequence of the political protection or influence they have within the power structure.”
Whether the Chinese state will have the stomach to prosecute the super-rich moguls created by its own policies remains to be seen.
Western Traditional Law Versus Guanxi
The origins of the current mess go back to early US aspirations to lead the Gold Rush into the vast untapped wilds of the Chinese state. This was backed by the considerable muscle of American corporations, and any strategy that could shift the political winds in favor was welcome.During the Clinton Administration Congress, China’s boosters insisted that the only way to get China to embrace human rights was to integrate it fully into global trade. (China finally gained entrance to the World Trade Organization at the end of 2001.)
Plenty of “experts” were willing to step up and endorse this course. In April 2000, one of those, Michael Santoro, author of the book “China 2020: How Western Business Can—and Should — Influence Social Change in the Coming Decade”, testified before Congress in support of normalizing trade relations between the US and China. He argued that encouraging trade between American corporations and China would promote the concept of private property rights and the rule of law that secures them. But Santoro says that is not what happened.
Instead of introducing the Western business tradition of contract law, multinationals closed transactions according to the precepts of guanxi. This is the Chinese social principle that treats all deals as an exchange of favors rooted in personal relationships.
“I thought corporations would insist on a higher global standard for China, but they went native,” Santoro told WhoWhatWhy. “I thought they would advocate for the rule of law, and not guanxi-type relationships that set the stage for a soft kind of corruption.”
As a result of this soft corruption, experts say, the influx of hundreds of billions in outside investment dollars — and the wave of greed that came with it — has called into question the very legitimacy of the Communist Party, the bedrock of the state itself.
“The concern was that, if the pervasive corruption was not stopped, the party itself would collapse,” says Peter Kwong.
All this creates strange bedfellows. But now China needs the United States’ surprising help in limiting how dirty things get.
It may sound strange to hold up the US government as a model for enforcing above-board business practices, but over the last several years, federal prosecutors with the Department of Justice and regulators at the Securities and Exchange Commission have cracked down on US multinationals for dealings in China that violated the US Foreign Corrupt Practices Act. Settlements with major companies — including Avon, Bristol-Myers Squibb, Eli Lilly, Diebold, IBM, and Pfizer — produced hundreds of millions of dollars for the US Treasury.
The Dawning of a Chinese Dream — or Nightmare?
Notwithstanding the staggering obstacles, China’s latest “Great Leap Forward” cannot and should not be written off.Despite the slowing of its rate of economic growth, the nation’s influence around the world continues to increase. If anything, the impact of the slowdown proves just how important China has become to the day-to-day economies of dozens of emerging-market nations, as well as to major economies like Brazil’s.
In 2013, the world’s four largest construction companies were Chinese. Chinese contractors are building massive infrastructure and development projects around the world, with a special focus on Africa, where China hopes to secure a steady flow of natural resources.
Beijing has also been flexing its military muscles. Over the last decade, China has increased its military spending by nearly 10% every year. Its decision to create landing strips and infrastructure on contested islands in the South China Sea has neighboring Vietnam, Malaysia, Brunei, the Philippines and Taiwan in a diplomatic uproar. A similar Chinese gambit on the Senkaku Islands, southwest of Japan, has also raised alarms.
China insists its off-shore intentions are peaceful, but the US has responded with increased surveillance and the deployment of naval assets in the disputed regions. The stakes are high: each year more than $5 trillion in international trade moves through the South China Sea, which also has huge deposits of oil and natural gas.
Debt Relief: Generous, or Self-Serving?
China has reinforced its growing geopolitical influence in less obvious ways as well. It has forgiven billions of dollars in foreign debt obligations held by struggling emerging nations. Some critics contend that what has been touted as China’s effort to behave as a better global citizen is ultimately self-serving.In an economically interdependent world, loan forgiveness is a relatively cheap way to gain geopolitical clout.
“Significant transparency into China’s secret ‘debt relief’ programs — and how the Asian nation uses debt relief to obtain exclusive rights to a nation’s natural resources and build military bases — should come to light,” says Eric LeCompte, a United Nations sovereign debt expert and executive director of the debt-relief organization, Jubilee USA.
But China insists it has no hegemonic agenda. “I want to make clear one point… China will never follow the track of Western colonialists; and all cooperation with Africa will never come at the expense of the ecology, environment or the long-term interests of Africa,” Wang Yi, China’s Foreign Minister said during a five-nation swing through Africa in 2015.
As China Goes….
Given all its recent moves, there is no doubt that China aims to become a major global player across the board— not just as an economic powerhouse. Its leaders clearly hope to serve as the ascending counterweight to a stagnant United States. During a visit to the National Museum of China in November 2012, President Xi Jinping sounded a Kennedyesque note when he proclaimed what has since been short-handed as the Chinese Dream: “Dare to dream, work assiduously to fulfill the dreams and contribute to the revitalization of the nation,” Xi said.Of course, this formulation papers over the deep-rooted contradiction in the current Chinese system. It is this: you have a top-down, nominally Communist ruling party riding herd on an endemically corrupt, crony-capitalist economy.
How will China resolve the inherent tension between pursuing one’s own self-interest while maintaining a collective social consciousness? The answer to that question will shape what is to come –.not just for China, but for our entire planet– in the Year of the Fire Monkey.
This is Part 3 of a three-part series.
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