Greed and fear have defined the West’s relationship with China over the last two decades. The greed element is expressed by American and European consumers snapping up iPhones and other made-in-China products while Chinese companies make fortunes off their low labor costs and their immense and increasingly wealthy market. The fear is about China growing economic and political power. What kind of world it would be where American and Europe don’t set the tone is anyone’s guess, but it would be China’s to decide. It was just a matter of time. The inevitable rise of China to superpower status, one day surpassing the United States, has been one of the great verities of the last decade.
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Israel joined in the China mania belatedly, only in the last few years starting a major effort to create a network of diplomatic, defense, economic and even educational ties -- and not just because Jerusalem recognized that China was a growing economic power, but because many are convinced that one day, Beijing will be replacing Washington. A few people, like Naftali Bennett, were even looking forward to it, reasoning that China would be a low-maintenance senior ally with little regard for problems like settlements or human rights. China’s stock market crash over the last month would seem to be nothing more than a bump on the superhighway to economic and inevitable political dominance.
Or not. Thirty years ago Japan basked in the same inevitability as China. Back then, the fact that the Japanese stock market was worth half of the world’s stock markets or that a small area of downtown Tokyo was worth more than all the land in California was seen as evidence that Japan was a giant who would only grow bigger.
The numbers are insane
As it turned out, Japan’s real estate and stock market booms were nothing more than bubbles that turned into a lost decade, or even two decades, for the economy. Japan is still a major economic power, but not the master of the universe that was widely predicted in the 1980s, based on straight-line analyses that assumed the country’s stellar growth of the immediate post-war era would continue indefinitely.
Likewise, that straight-line analysis about China, too, will be wrong, too.
It’s no coincidence that China’s stock market crash was preceded by a real estate bubble that burst, just as happened in Japan in the 1980s. In both cases, after years of super-fast growth, their economies had accumulated an excess of capital for investment and no productive place to put it. Interest rates were low, exacerbating the problem for people and businesses looking for a place to park their money profitably and encouraging a lot of needless borrowing. So first the money went into real estate and, in the case of China when the government pulled the reins and caused prices to drop, it went into the stock market.
Like every other bubble, the numbers are insane. In China, the real estate bubble spurred so much construction that China used more concrete between 2011 and 2013 than America did over the entire 20th century -- 6.6 gigatons of concrete to be exact, count’em. At its peak, the Shanghai Composite Index of stocks had risen 150% in 12 months even as China’s economic growth was slowing. The value of loans taken out by investors to buy shares amounted by one estimate to be $360 billion -- a little bigger than Greece’s debt and a stunning 3.4% of GDP.
But like in every bubble, there are experts – not to mention the suckers who risk their money in them – who are sure that this time it’s not a bubble. In China’s case, they explained it was the stock market finally catching up to the size of the economy and/or that the government, whose genius had guided the country so successfully so far, wanted to encourage stock market investment and would know how to handle any crisis that might result.
Once touted as the next superpower, Japan slid into two decades of stagnation: Luxury goods on sale in Tokyo. (Photo: Reuters)
You build a road or a dam
As it turned out with the real estate bubble, the government has indeed contained the problem for now, but it faces an immense and complex long-term challenge over how to pilot the great Chinese economic ship. Generating economic growth in an undeveloped economy is relatively easy: You build a road or dam where there wasn’t one, or a factory based on cheap labor. The government can decide what’s best, which is what happened in Japan, China and for that matter in Israel. But as the economy grows and matures, it gets harder to make the choices that will lead to continued productivity gains and wealth.
In Israel, that fateful turning point occurred in the mid-1960s, though it took the government 20 painful years to acknowledging that and shift to a market economy. In China, they’re working on the problem. China can’t continue as a low-cost producer: it must find ways to move its industries up the value chain, improve services and quality of life, and shift from an export-driven economy to one based more on domestic consumer demand.
Ensuring China uses its capital wisely to make the transition is going to be tough. Big, inefficient state-owned companies will insist they be kept alive on the grounds they provide employment. Apparatchiks will favor high-profile infrastructure projects that generate short-term growth even if their benefit for the economy is marginal. In today’s fickle and fast-moving markets, the big technology champion you've poured money into can be defeated in short order, as happened to Nokia in Finland or Yahoo in America.
China makes a deal
Beijing understands the challenge and has the benefit of being a dictatorship can make decisions without pesky social activists and media getting in the way. But China’s leaders are chronically insecure about their ability to maintain control of their 1.4 billion people. The crackdowns on human rights, most recently arresting lawyers, isn’t a projection of a strength but of weakness.
The deal the government and Communist Party made with the Chinese people is that we’ll deliver economic growth and you’ll forswear freedom and democracy.
No one can accuse China’s leaders of failing to deliver their end of the bargain. For decades the economy grew at an annual clip of 10% and, materially at least, ordinary Chinese are better off than ever before. But those days of heady growth are over, and a symptom of that is the repeated bubbles. In China's next phase, economic growth will be slower and the government will have to finesse some painful realignments of its industry. Will its fearful leaders dare ignite social discontent? Don’t be sure.
From Israel’s point of view, there’s no reason to break off our love affair with China, but we should have reasonable expectations of our partner. Like Japan, China won’t disappear, but it’s premature to say that the 21st century will be China’s alone. Sorry, Naftali, America, and even Europe, are here to stay. We would do well to treat them as the global powers they are and will remain.