Capitalism with Chinese Characteristics

China is an economic powerhouse on the path towards supplanting the United States…or is it?

About five years ago, the University of Beijing released two interesting bits of data. The first is that government corruption is a drag upon economic development to the tune of 15% a year. The second is that the costs of environmental damage will be so great that about 2040 the Chinese economy will start to shrink. These costs include medical costs, the costs of importing food, and clean up. This assumes no radical improvement in green technology; many countries are working on clean energy and the winner will probably be the next economic superpower (or will remain so if it’s the US).

China’s housing situation is precarious. The bigger the city, the more expensive the homes are, and Chinese are crowding in fast. Two million of Nanjing’s work force are there illegally, because their residency documents have them in the countryside. It can take a lifetime to pay off a housing mortgage. Beijing wants to ease the tension by lowering prices, but the local governments need to keep them up because the leases on those properties are a primary source of government budgets. The local officials have a personal stake in those city budgets because the biggest item is “entertaining” visiting officials. That means the city governments are paying for officials to visit each other, including top restaurants and hotels, and paying a lot.  The State Owned Enterprises also have a stake in higher realty prices because they have been making up for their losses by investing in real estate (SOE for coal, oil, etc. sell their products at a loss to keep the Chinese economy chugging along).

I recently read on Asia Times Online that since the beginning of the world-wide recession, Chinese debt is increasing twice as fast as their economy. It was the price Beijing was willing to pay to keep Chinese working, but is unsustainable.

And investment capital isn’t as in love with China as it used to be. American companies keep their high end manufacturing in America to protect their intellectual property rights. Workers’ wages are cheaper in Southeast Asia, so much so that even some Chinese companies are moving factories there. Japanese and Koreans will think twice about investing in an increasingly assertive China, so even China’s foreign policy, which is using historical claims to grab at oil and gas reserves under the seas, is hindering their economic prospects.

So China is strutting itself for now, but Beijing has rocky waters to navigate. If Washington D.C. can be patient and smart with its diplomacy and invest in its future, in the long run, America had outlast its latest rival. I know that’s a big if in our present political atmosphere, but it’s what I have to say.