The China Crisis. How China’s Economic Collapse will led to a Global Depression

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James R. Gorrie (2013). The China Crisis. How China’s Economic Collapse will led to a Global Depression

The China Crisis


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Those of us who believe China is on its way to its next crisis after the recent June 2015 stock market crash are divided in two main groups: some understand, myself included, that the conditions needed for a “Chinese spring” are just not there anymore, because the Chinese population is brainwashed by state-sponsored nationalism to such an extent that they will swallow anything from their dear Uncle Xi –by the way, doesn’t this recall North Korean’s paternalistic politics? Just saying…–. Others, as it is the case with the book under review, are of the opinion that China is heading to an impending economic collapse of epic proportions that will even shake international economics and cause a global depression.  James R. Gorrie, a political economist and leading financial journalist, presents us with this controversial thesis in his last book, The China Crisis. How China’s Economic Collapse will led to a Global Depression. Don’t say we didn’t warn you.

Gorrie’s book is divided into nine chapters in which the author addresses the causes and consequences of a forthcoming economic crisis –the causes being the corruption, interventionism and incompetence of the Chinese Communist Party, and its most probable consequence the End of the Economy as We Know It… with the permission of Mark Steyn. In fact, the whole book reminds me of an old article by this Canadian conservative journalist, “Who can stop the rise and rise of China? The communists, of course.”

Chapter 1, “A World on Edge,” offers an historical description of Chinese economics from the Great Leap Forward onwards, focusing on some of the recent problems the mainland is dealing with within its “Great Wall.” Here the author accepts the thesis, proposed by Mr. Xi Jinping in his infamous speech to a group of Chinese overseas in Mexico, according to which the financial crisis of 2008 was caused by China. Mr. Xi, at that time Vice-President of China, boasted in front of a group of perfectly brainwashed Chinese fellow countrymen that the financial crisis was “the greatest contribution towards the whole of human race, made by China, to prevent its 1.3 billion people from hunger” because bored “foreigners” –yes, he meant the American people living in America– were messing around in China’s affairs by “pointing fingers at us” –because we all know pointing fingers at someone is so bad that you should retaliate with an international crisis. By the way, the story only came out because it was filmed by some Hong Kong reporters, so it was not meant to be witnessed by the public. Of course, Mr. Xi’s belief is that China provoked the crisis because they are just so awesome and, look at that, they were not highly affected by it! But as Carl E. Walter and Fraser J. T. Howie point out in Red Capitalism, the only reason China was unaffected by the global financial crisis is that they were walled up from international capital markets, having little, if not zero, exposure to the dangers and benefits of free market.

Chapter 2 and 3 try to persuade the readers that China is using a model of Western (state) capitalism at odds with its own tradition that will eventually collapse. This model would have been introduced in the late 1970s by Deng Xiaoping and resulted in the family planning policy known as “The One Child Policy.” Of course, it is true that Chinese politics since the fall of the Qing Dynasty have been mainly Western in essence: whether it was the Chinese Nationalist Party or the Chinese Communist Party, they both shared ideas that were ideologically linked to Republicanism and Socialism, two different doctrines based –for them– on the Republican nationalism of Benito Mussolini and the Marxist theories of Lenin. And, as we have explained before, quite a few Communist believed that the only way to preserve their socialist state was to sponge on capitalist societies. The “One Child Policy,” which can be traced back to early efforts in the 1970s under the leadership of Mao Zedong, is just a development of the Malthusian thesis of a population pressing upon the food supply –we should remember that China had endured a Great Famine in the early 1960s–. There is nothing capitalist about the whole thing, unless we apply a rather idiosyncratic definition of capitalism.

Chapter 4, “Is China’s Economy Sustainable?,” develops two important concepts which are fundamental for the author: The Beijing Model and “Cannibal Capitalism.” According to Gorrie, Chinese leaders saw the global financial crisis as the moral collapse of Western liberal capitalism (I just love when they put these three words all together) and responded with their own model based on capitalism, but in a very crooked way: they bring foreign companies, foreign investment, and foreign ideas and cannibalize them. So basically, you go to China and try to do business with them, but just as it happened during the Qing dynasty, you are merely an inferior foreigner and, of course, the highly superior and all-mighty Chinese government is not gonna make a deal with you under equal conditions. So you gonna need a Chinese partner and you are gonna make business with him, earning a lot of money and feeling the “Chinese Dream,” until one day you realize that you have been actually sleeping for real, while the Chinese partner has stolen your product, business model, or ideas, that is, he has “cannibalized” it. Of course, ideas should freely flow in a libertarian society, but let’s not forget that pacta sunt servanda, and the Chinese are not keeping them at all. Now, of course, the Western cannibalized company may endure some problems, but it is not that bad for them. In fact, the ones taking the brunt of the blow are the Chinese cannibals, because they are just like animals in captivity getting used to humans feeding them: they become highly dependent and, although they save a lot of R&D money, their creative energies just die out. The author is wrong when he calls this the “Beijing Model” or “cannibalistic capitalism”: it is, purely and simple, communism, as it was defined by Mises in Liberalism:

“A socialist state of this kind is not comparable to the state enterprises, no matter how vast their scale, that we have seen developing in the last decades in Europe, especially in Germany and Russia. The latter all flourish side by side with private ownership of the means of production. They engage in commercial transactions with enterprises that capitalists own and manage, and they receive various stimuli from these enterprises that invigorate their own operation” (II.4).

Chapter 5, “China’s Quiet Crisis,” leads the reader through a maze of Chinese banks, bursting bubbles, fake GDP, and yuan devaluation that will result, the author believes, in an incipient and complete meltdown of the economy and the society. One of these bubbles is the real state problem that China is facing as we speak: more than 68 million uninhabited apartments and hundreds of ghost cities. Advocates of centralized government planning believe –and this is one of many objections raised against this book– that there is no bubble at all, because all these cities are going to be filled with millions of people from the countryside who are gonna improve their quality of life overnight.

So ok, wise Chinese government worshippers, please enlighten me, this ignorant and finger-pointing foreigner and unbeliever: What kind of urban job are these countrymen going to do? Farm the pavement? Seed traffic lights? Herd cars? And who is gonna keep the place neat and clean until the new citizens arrive? And who is gonna pay for it? But most importantly, didn’t you say that all these apartments have already been purchased –by people living in other cities!? So, where is the government going to put all those countrymen that are going to be moved in? Under the bridges? Honestly… the whole thing makes no sense at all unless they expropriate the apartments, give them away for free to the countrymen, and put all those lazy expropriated buyers to work for them –kind of a modern version of the “sent-down youth” during the Cultural Revolution. I know I’m being cocky, so let’s move to the next chapter.

Chapter 6 is about environmental degradation and the social instability resulting from it. As the author points out, there is nothing new about this. Pollution started already in the early 1970s when Mao Zedong had the great idea of building small hydro-electric power stations along the rivers that collapsed because of their low quality, causing floods and devastation –again, if they had read some classic works, like Mencius or The Travels of Laocan, they may have avoided this, but let’s not be so picky. They are, after all communists.

Pollution in China takes many forms, and one is water pollution. They may say that 75% of northern Chinese water is undrinkable, but a picture is worth a thousand words, so you can check out how the water in Tianjin looks like in the picture below. This is hot water from the newly installed pipes of Nankai University, Tianjin, and in case you wonder, yes, these are the best ones, because they belong to the building where foreign teachers and guest are accommodated. If you try cold water, this green-tea-like bath becomes more like black tea. So this was our daily shower at Nankai University during the 2014/2015 academic year.

Tea Bath

I cannot stop mentioning another water problem in China: Tea. Tea is consumed daily, almost hourly, and it is of course mixed with boiled water. So all the evil amoebas and bacilli and germs may have perished under the Chinese fire but, how about the toxic heavy metals? 1.3 billion Chinese believe that those metals are somehow “killed” and that the boiled water they drink in restaurants and with their tea is healthy, but the fact is that it is still the same poisonous water they had before boiling it. As any primary school student knows, heavy metals can only be removed from water by condensation –boiling a cup of heavy metalized water will only concentrate them even more! So, basically, billions of Chinese are being poisoned day after day, every time they get theirs thermos and sip their teas.

Another environmental problem is desertification. Some reviewers have criticized Gorrie’s approach stating that there is no desertification going on in China and, since the author does not provide any source for his claims, I would like to say a thing or two on this topic. First of all, just because the government puts five hundred Chinese out there and they have a perfectly green field in just a couple of hours –as it happened in the aftermath of the 2015 Tianjin explosions–, it doesn’t mean that they are all lean and green. Again, when the Chinese government tried to offer an award to the greenest city in China –I do not recall the year–, cities like Kunming started planting trees all along the road. It was impossible for pedestrians to walk so they ended up cutting the trees and left the chopped trunks just there, filling the streets with new obstacles. At the end it doesn’t really matter because, as anyone living in China knows, they barely walk along the sidewalks. And finally, there is desertification happening in some parts of China, and one of them is Yuxi, a beautiful city in Yunnan. They have been planting tobacco and this has resulted in desertification.

Chapter 7 deals with politics, Mr. Xi Jinping, liberalization vs. stability, and collective leadership. A lot has been going on in China, but it is not liberalization. The economy, which is “unbelievably inefficient in resource allocation,” is of course under the all-mighty control of the Chinese Communist Party, censorship has increased dramatically during 2015 –from gMail to banned songs– and Mr. Xi has introduced many policies that are clearly Maoist in their inspiration. One of many worries is the collapse of the People’s Republic of China, and Mr. Xi is not willing to become the Chinese Gorbachev, so he is going to increase personality cult and reduce “perestroika” and “glasnosts”-like measures, which on paper means no “openness” for the Chinese people.

This leads us to the final two chapters of this book, “Empire Decline” and “The Fall of the Red Dragon.” If famine from desertification and social unrest from unhealthy conditions were not enough, the author argues, Chinese authorities have to deal with Hong Kong, Taiwan, Tibet and the Uighur Problem. The author sees here a serious menace to the integrity of the “Chinese Empire” and predicts regional fractures all over the country. But such a civil war scenario, which has been the rule for millennia, is in my opinion unlikely. We should remember that China has been dominated by foreign powers since the beginning of the Christian era and, before that, it was not centralized until the bloody Qin dynasty. But after the fall of the last emperor, China has embraced its “minorities” and integrated them into the so-called “Chineseness.” For sure, Tibet and the Uighur territory represent a problem, but the government is taking care of it silently, for example, with massive immigration. Hong Kong represents a problem only locally, because no one outside Hong Kong is advocating for its independence or democracy –and the Hong Kong youth is basically losing the battle without the support of the United Kingdom (again, pacta sunt servanda, so both China and U.K. should be respecting the Sino-British Joint Declaration of 1997, and they are not). The same goes for Taiwan, a.k.a. the Second Hong Kong. There is virtually no one in China who is gonna speak for the people in these territories, and although Chinese people are very racist to each other, they are still united by a very firmly rooted nationalism. During the demonstrations in Hong Kong, many people in the mainland advocated extermination of Hongkoners, and many also spoke of a United Asia under the leadership of China, screaming “We are all Chinese” (meaning Koreans, Japanese, Filipinos, and so on). This is why I am very skeptical about a collapse similar to the Soviet Union’s disintegration.

There are other options, of course. China could experience a new Tian’anmen, but I think the conditions that made it possible are no more: Western exceptionalism has given way to moral and cultural relativism and, whether positive or not for us, the Chinese youth does not have a strong democratic model anymore. Nationalism was not as pervasive in the 1980s as it is today and Chinese economy, although flourishing, was then not so bombastic.

Civil war and Chinese warlords fighting for the land, as it happened in the 1910s, is a very likely scenario, as it is a silent Cultural Revolution which, I believe, has already started in the form of cultural censorship, criticism of Western ideas and instrumentalization of capitalism –including Austrian economics– without the libertarian component. A silent, yet devastating Cultural Revolution of the mind.

Although the book is stimulating and very right in many of its predictions –I didn’t find it repetitive, as some reviewers have noted–, it is a bit oversimplified sometimes. Although its lack of accurate data and references to support most of its claims can be excused because the author wants to write for a wider audience –which is not very convincing–, they make it an easy target. Let’s take the example of the Chinese Communist Party, whose record of past errors is a sign of horrors to come, according to the author. This has been challenged many times, and the criticism is absolutely legitimate. To assert that because the Communist Party committed such and such errors in the past it is going to repeat those errors again is a leap of faith and a logical fallacy –unless it is backed with facts. For example, Mr. Xi is building a personality cult around his “cute” face (!) that clearly reflects Maoism and was avoided by any other president before him. Censorship has also increased: gMail, Hotmail –banned for some time during 2015–, Western books, Chinese unmoral songs, and so on. It is a long list and there are many things you don’t get to see unless you are living in China, but they are there and affect the Chinese people. Control over Hong Kong has also escalated to unprecedented levels and it is very unlikely that the British pearl will remain in the first position of the economic indexes any longer. Before Mr. Xi, everyone thought of Hong Kong as a place that may enrich their poor Communist economy, but now it is a place to be controlled in order to avoid dissidence and division.

Another way to put this is from a libertarian perspective. The problem is not the Party itself, but their excessive government intervention and excessive central planning. It just won’t work. The officials are not experts on the things there are trying to control, they cannot make the right decisions and, of course, as we all know, human action cannot be controlled or designed. Because of the size of the Chinese Communist Party these errors are even worse.

I am skeptical about a global collapse rooted on China’s economic decadence. I am also skeptical about social unrest and national disintegration. But all these things may, of course, change, and even if they don’t, we already know that Mr. Xi’s “Chinese Dream” is gonna be a nightmare for everyone inside China. June 2015 is just the beginning.

Winter is coming.

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