China Data.

            During the late 1980s, Judy Shelton, a researcher at the Hoover Institution, began an examination of the public documents on the Soviet Union’s budget.[1]  Communism’s centrally-planned economy had spent decades setting unreachable production targets and then hiding the failure to achieve those targets.  The huge Soviet arms build-up after the humiliation suffered at the hands of the Americans in the Cuban Missile Crisis had long term effects.  The military (the “metal-eaters” as they were called) creamed off resources that could have been devoted to either civilian consumption or investment in production.  Economic stagnation went hand in hand with mounting popular discontent behind a veneer of great military power.  Shelton concluded that massive inflationary forces were being held back by controls, but eventually the dam would burst.  In the meantime, she argued, Mikhail Gorbachev sought to stave off the disaster by obtaining Western credits and technology.[2]  As Shelton predicted, collapse followed. 

            Twenty years on another financial crisis arose in Greece.[3]  Following a historical pattern, Greece had borrowed a lot of money from foreign lenders, spent the money on a higher standard of living in the short-term without investing in higher productivity in the long-term, cooked the books to cover what they were doing for as long as possible, and then loudly bemoaned their unjust fate when the sheriff finally showed up. 

            The common thread here is that reality and perception differed widely.  Both the Soviet Union and Greece worked hard to project an image that concealed grave problems.  Only a handful of budget experts could—with much labor—discern the truth.  The reason these historical cases matter is because not everyone today is happy with the state of data from China.   

            In the eyes of one analyst,[4] it is necessary to do a lot of digging to figure out what is going on.  On the one hand, Chinese government officials and managers are under continual pressure to meet certain quantitative standards.  In this situation, “real” growth (adjusted for inflation) is more important to managers than is actual new output.  So they may tend to overstate “real” growth.  Calculating inflation is a coarse art in China when compared to Western industrial countries.  This facilitates overstating “real” growth.  In addition, the government suppresses existing, reliable data reports when they diverge too much from the government’s line.  In 2016, the government halted publication of lending to public versus private borrowers; in 2018, it halted publication of purchasing managers indexes in Guangdong province. 

            On the other hand, this manipulation of data can makes things really difficult for people who are just trying to do productive things.  Obviously, it hinders the work of foreign observers who are trying to understand and anticipate the performance of the world’s second largest economy.  However, it can have the same effect on Chinese managers struggling to run their firms.  If uncertainty about economic performance piles up year after year, there’s going to be a reckoning.  Also, this isn’t public finance, but it may be true there as well. 


[1] On Shelton, now a controversial figure and notable spoil-sport, see: https://en.wikipedia.org/wiki/Judy_Shelton   

[2] Judy Shelton, The Coming Soviet Crash: Gorbachev’s Desperate Pursuit of Credit in Western Financial Markets (1989). 

[3] Carmen M. Reinhart and Christoph Trebesch, The Pitfalls of External Dependence: Greece, 1829-2015 (2015), Brookings Papers on Economic Activity, https://www.brookings.edu/wp-content/uploads/2015/09/ReinhartTextFall15BPEA.pdf 

[4] Nathaniel Taplin, “China’s Growth Data Dazes and Confuses,” WSJ, 5 January 2021. 

The Asian Century 15.

            Analogies hand us a useful device for understanding the unfamiliar in terms of the familiar.[1]  The key thing is to pick the right analogy.[2]  In Summer 2019, Walter Russell Mead offered the early Soviet-American Cold War as a useful analogy for understanding the contemporary relationship between the United States and the Peoples’ Republic of China (PRC).[3]  He emphasizes that the Soviet-American relationship plunged down-hill so fast that it caught the American public flat-footed.  Mead suggests that today China and the United States stand on the edge of a similar precipice.  If we go over the edge, no one can predict the duration or nature or outcome of the struggle. 

            Looking back at the Soviet-American rivalry for lessons, Mead asks about the impact of ideologies, the future “hot spots” of the competition, the impact on American society, the role of and impact on the high cultures (meaning higher education and technology) of the rivals, and how the densely woven relationship between China and America will affect and be affected by such a competition.[4] 

            Just as “the emperor counsels simplicity,” Mead counsels Americans to give much thought to understanding both themselves and China.  First, how do Chinese leaders see China and its place in the world?  Since the death of Mao, China has experienced tremendous economic growth under the leadership of the Chinese Communist Party.  That economic growth created a large and self-confident middle class.  Some observers, applying the analogy of the European bourgeoisie in the 18th and 19th Centuries, believe that this middle class is showing the first signs of restlessness with the Party’s leading strings.[5]  Will Beijing pursue an assertively nationalist foreign policy to squelch dissent?  What might be the outcomes of such a policy?[6]    

            Second, how can Americans forge a consistent and effective China policy when the country is so deeply divided?  Here Mead penetrates much less deeply.  On the one hand, the origin of our discontents has not yet found any satisfying explanation.[7]  On the other hand, he doesn’t broach the subject of whether America even has the resources to rise to the challenge.  So, coming to know ourselves may be a lengthy undertaking.      


[1] See: https://plato.stanford.edu/entries/reasoning-analogy/ 

[2] Ernest R. May, “Lessons of the Past”: The Use and Misuse of History in American Foreign Policy (1975). 

[3] Walter Russell Mead, “Americans Aren’t Ready for Cold War II,” WSJ, 11 June 2019.  It’s an encouraging choice of analogy in the sense that the Cold War never turned into a full-scale direct military conflict. 

[4] At this point, it might be useful to start building a library of Cold War history books.  Aaron L. Friedberg, In the Shadow of the Garrison State: America’s Anti-Statism and Its Cold War Grand Strategy (2000); John Lewis Gaddis, The Long Peace: Inquiries Into the Cold War (1989); and Geir Lundstad, East, West, North, South: International Relations since 1945 (2017) can all be recommended.   

[5] On the European analogies, see Eric Hobsbawm, The Age of Revolution, 1789-1848 (1962); and William L. Langer, Political and Social Upheaval, 1832-1852 (1969).  Sure they’re “old” books.  That’s because a couple of really smart guys got there first.  Everybody since has been nibbling around the edges. 

[6] For this analogy, see Volker Berghahn, Germany and the Approach of War in 1914 (1973). 

[7] Kevin M. Kruse and Julian Zelizer, Fault Lines: A History of the United States Since 1974 (2020) and Thomas Friedman and Michael Mandelbaum, That Used to Be Us: How America Fell Behind in the World It Invented and How We Can Come Back (2012) fall into the Blame Republicans First camp.  Charles Murray, Coming Apart: The State of White America, 1960-2010 (2013); and Stephan and Abigail Thernstrom, America in Black and White: One Nation, Indivisible (1999) are conservative interpretations of one theme in the conversation.  Reading the Conclusions and Recommendations of The 9/11 Commission Report (2004) would be a good way to begin. 

The Asian Century 12.

            China has a huge stake in continuing economic growth.  For decades, Communism delivered little to the Chinese people but poverty and suffering.  Only a brutal police state kept the Chinese Communist Party (CCP) in power.  After the death of Mao, the CCP re-founded Chinese Communism.  Prosperity gained through rapid industrialization and entry into the global market would legitimize CCP rule.  Having made this bargain, the Party would have to keep the economy growing faster than either population or the expectations of the Chinese people.  A crash or even a serious slowdown would strain the Party’s claim to both omniscience and power. 

            China has an unbalanced economy.[1]  China laid the foundations for its post-Mao economic ascent with investment in heavy industry and mass production of consumer goods for export.  The Chinese have a high savings rate that limits the domestic demand for consumer goods, while also limiting the impact of foreign lenders.[2]  The government pursued a policy of easy money with interest rates held down regardless of market conditions. 

China’s excess of enthusiasm led to over-investment in productive capacity.  Even before the 2008 financial crisis, political considerations forestalled a clean-out, so mills and mines proliferated beyond actual demand.  The same forces prevented raising interest rates. 

            China responded to the global recession triggered by the American financial crisis of 2008 with a gigantic stimulus program.  After 2008, government-owned heavy industry splurged on adding more productive capacity in basic industries.  All of this happened because the central government provided easy credit.  Local governments did the same with their own locally-controlled businesses.  Private industry—notably property developers and construction companies—built whole “ghost towns” on credit. 

            China ended up with a more distorted economy as a result of that stimulus program.  “Zombie” businesses walked the land like a Chinese opera version of “Twilight.”  This led many Western observers to predict a financial collapse that would shake Chinese politics and society.  Why didn’t that happen? 

            China has robust means to resolve its economic problems.  It’s not a Western capitalist country or a democracy.  Real power rests with the Chinese Communist Party.  Zi Jinping has been consolidating control of the Party and of the government in his hands for some time now. 

China operates a powerful set of controls on capital flows out of the country, so the savings of the Chinese are readily available to the government.  The same controls help shore up the international exchange value of the currency. 

Ownership of so much industry and control of the banks allowed Zi to begin shoring-up the financial system from early 2016 onward.  China did what Japan had balked at doing years before.  It forced mergers and write-downs on loans, sometimes expanding the state’s ownership stake in businesses through taking equity positions.  The government pulled back on lending, both by banks and outside the banking system.   

Will these reforms suffice to hold off disaster?  Probably not.  Political concerns limited the clean-out needed for real stability.  Meanwhile, real estate and consumer debt have ballooned.  There’s always someone who says “This time it’s different.”  It never is different. 


[1] Thomas Orlik, China: The Bubble That Never Pops (2020), reviewed by Edward Chancellor, WSJ, 27 July 2020. 

[2] Foreign lenders, operating with a more capitalistic mind-set, might well have tried to drag on the reins. 

Red Hot China 20 July 2019.

Something I wrote in early 2011, but never posted.

The good news.  China has made extraordinary progress.  Between 1980 and 2010 the Chinese economy grew at an average rate of ten percent per year.  The massive expansion of wealth and comparatively well-paid employment has lifted half a billion people out of poverty in a nation of 1.3 billion people.  China has conquered world markets in all sorts of things.  To take an extreme example, sixty percent of the clothes manufactured in the world are manufactured in China.  Ten years ago a million people graduated from university.  This year six million people graduated.

The bad news.  Progress has come at a cost.  First, China’s economic growth has been driven by exports rather than by an expansion of domestic demand.  On the one hand, this makes China’s economy highly sensitive to down-turns in the world market.  The 2008-2011 recession pushed down Chinese exports by ten percent and forced the closing of 100,000 factories (which involved laying off 30 million people).  Sustained economic growth will depend on a global economic revival.  On the other hand, wages and living standards for most Chinese remain extremely low.

Second, China’s environment has been devastated by rapid industrialization.  China has lots of coal, so it burns it for energy.  Half the rivers are severely polluted.  Drinkable water is running short.  China is home to 16 of the world’s 20 cities with the worst air quality.

Third, contemporary China resembles to 19th Century Europe: there are great and obvious disparities of wealth; poverty-stricken peasants flood into raw new cities which are unready to receive them; and an educated class is being created faster than are jobs for them to fill.

What does the future hold?  That is hard to say.  The government responded to the global recession with a stimulus plan substantially larger than the one approved by the United States (“We are all Keynesians now,” as Richard Nixon said, but apparently some are more Keynesian than others).  The government is allowing wages to rise in order to create more domestic demand and to improve living standards.  The government has announced a commitment to spending over $400 billion to develop green technologies by 2020.  At the same time, there is much discontent.[1]

The average Chinese faces a lot of insecurity.  There’s virtually no old-age pensions; the one-child policy has ended up forcing one child to care for two parents and even for four grandparents, but the kids don’t have the means or the time; private schools are much better than the public schools; public health care is lousy; there’s no unemployment insurance; there is no system of farm price supports, so price or harvest fluctuations can devastate the income of peasants.  For all these reasons, the Chinese save—rather than consume–about a third of their after-tax income.  In most countries, about 70 percent of GDP goes to consumption; in China only 36 percent is consumed.

A further problem arises from the enormous profits of the State Owned Enterprises.  These are re-invested, rather than distributed as dividends, as would be the case in most places.  The result is the creation of excess productive capacity while consumer incomes are held down.  This is a prescription for disaster at some point.  One solution would be to either privatize the SOEs or to heavily tax their profits and shift them to consumers through payment or social security systems that reduced their own need to save.[2]

[1] “The cracks in China’s engine,” The Week, 8 October 2010, p. 15.

[2] Nouriel Roubini, “The Confucian Consumer,” Newsweek, 24 January 2011, p. 31.