China: a stunted giant

By Peter Zhang
web posted September 13, 1999

Many American conservatives pay a great deal of attention to China's military ambitions and potential — and so they should. But to do so while ignoring China's economic situation is to show poor judgement. Beijing fully understands, if most of these conservatives do not, that to successfully wage full-scale war against a highly advanced economy requires an economy at a similar stage of development. His statement that we "should focus our limited funds on cutting-edge areas of military science and technology" will certainly alarm many. But the word "limited" should be carefully noted. China is still a very poor country by any measure. President Jiang Zemin's support for increased expenditure on sophisticated weaponry to counter the American presence should be viewed in this light.

Now a country's wealth is not measured in terms of dollars but in its productive capacity. In that respect, and it's the only one that really matters, China lags woefully behind the West, especially America — a situation that Mao Tse Tung's economic lunacies gravely aggravated. Understanding this fact helps put China's technology imports into perspective. What China lacks is not technology but capital. All the technology in the world cannot help her if she lacks the capital to apply. This is easily understood once we realise that capital embodies technology.

Sure, Beijing has ICBMs aimed at American cities, and this should be cause for concern. However, it was not that many years ago when so-called sophisticated observers mistook the Soviet Union's military hardware as evidence of a robust and growing economy when the very opposite was true. Beijing has not forgotten that it was the failure of central planning to generate the necessary resources that finally caused the Soviet Union to collapse. A collapse, I might add, that was accelerated by the Reagan military build up. The military giant was found to be an economic pygmy in a state of terminal decline. A military equivalent of a gigantic Potemkin village.

The similarities between China's apparent military strength and the situation in the Soviet Union shortly before its demise should not be neglected. This is not to suggest that China is about to disintegrate, only that we figures and appearances should not be taken at face value. To get a better understanding of China's situation requires the examination of some economic facts that readers might find surprising and even heartening — but not if they are living in China.

It should always be recalled that genuine economic growth is a resource generating process. Therefore the greater the growth the greater will be the amount of resources. It doesn't take an economics degree to see what this means for military strength. Now savings is the material basis of growth. Because of this many have assumed that China's personal savings rate of about 40 per cent of GDP should quickly propel her into the foremost ranks of the world's richest and most powerful countries. Growth rate figures of 8, 10, 11 and 12 per cent lent weight to this view.

That progress has been made is true. It is also true that the growth figures are useless. Not even Beijing trusts them, realising they have been inflated by a number of factors. A considerable proportion of output consists of poor quality goods from state companies. Though these goods are go unsold or are 'recycled' they are given monetary values which are then included in the GDP figures. Huge amounts of savings that could go into expanding the capital structure have been wasted in keeping these industrial zombies operating. A clear case of the state consuming capital on a massive scale. Other examples of capital consumption by the state are to be found in all manner of uneconomic projects that various provinces have undertaken. Neverthless, they become part of GDP. In addition, the state has fallen into the grievous error implementing Keynesian policies: credit expansion is rapidly rising and savings are to be taxed in the hope it will stimulate spending. These policies will only succeed in consuming even more of the nation's capital.

Trade and foreign investment figures demonstrate that China's economic success has been greatly exaggerated. China accounts for less than 4 per cent of world GDP compared with about 25 per cent for America. The picture is even worse once we take in to account the fact that China's GDP has been inflated. She is responsible for only about 3 per cent of world trade, lagging behind Holland with a population of 22 million. Even China's volume of internal trade has fallen.

Many point to direct foreign investment as an engine of Chinese growth. They are deluding themselves. No one knows for sure but it has been estimated that 75 to 80 per cent or more of direct foreign investment comes from ethnic Chinese resident elsewhere. This figure is not surprising once we realise that China only receives, despite its size and potential, about 10 per cent of global foreign direct investment and even this figure might be shrinking.

China's present economic situation is grim, something that Jiang Zemin recently admitted. Investment is falling, a great deal of production is wasted, unemployment is rising, capital is being consumed, savings are going to be attacked, etc. What we have is a puny economy standing on political stilts to make itself look bigger and more important than it really is — or will be for some time.

It will be a great many years before China can pose a real threat to the US, unless Americans do something incredibly stupid like handing both Houses over to the Disneyland-Democrats and then continually reelecting the likes of Clinton and Gore. Nevertheless, Beijing's capacity for political and military mischief-making should not be underestimated. Nor should its economic weakness be used to downplay Clinton's military technology transfers. Clinton's actions saved the regime enormous amounts in extremely scarce resources while strengthening the hand of the militarists. A stupid and treasonable act if there was ever one.

Reprinted with the kind permission of The New Australian.

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