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Why China Won’t Throw A Lifeline To The West

Hu Jintao with George W. Bush.
Image via Wikipedia

With all the chaos on world’s markets, it is easy to overlook developments in China. The biggest piece of Chinese domestic news is the decision to give limited rights to land use to China’s farmers. This decision came out of the Third Plenary Session of the 17th Party Congress of the Chinese Communist Party (三中全会), which is now convening in Beijing.

The overall thrust of this meeting is to focus on the development of rural China, which has not fared so well as the east coast cities. If the cities continue to develop, and the countryside continues to stay poor, you have the recipe for social unrest on a large scale.

The salient points about China’s development are that China has about 1/3 the arable land of the developed economies for farming, and about 500M live in cities, while 800M continue to be rural Chinese. National development plans (many of which were formulated under Jiang Zemin, who came from Shanghai) called for the urbanization of China.

China’s first 30 years of reforms required the development of the eastern coast to attract foreign capital, and to make the companies and the westerners who came to China feel comfortable. Only when they had reached some level of comfort, and were attracted by the market potential would the capital follow. They became comfortable and the capital and trade followed.

And now the westerners living in Beijing, Shanghai and the west expect the Chinese with their nearly US2T in foreign reserves to bail out the western economies? Let me tell you why it won’t happen.

  • Successive Chinese regimes have always lost power when they coddled the urban elite and ignored the needs of the countryside. This was how Mao rallied the Communists, surrounded the cities (the strategy was called “using the villages to surround the cities” or “乡村包围城市”), then threw out Chiang Kai-shek in 1949. Hu Jintao and Wen Jiabao know this, and know that they need to swivel around and develop the countryside so that the wealth gap can be narrowed.
  • The Chinese government will focus on developing a new size of town, which in Chinese is called the 城镇 or village town. This will be mainly a distribution, education and trading center for farmers and their families in the immediate vicinity. Population will be 250-500K.
  • For the next 15-30 years, the cities will stagnate in growth. People will not lose their homes the way they do in the US since China does not have foreclosure laws, but their salaries will not go up. Many of the wishes new university grads entering the workforce hoped they had will just become dreams. Somehow they will have to learn to live in this new drastically changed environment.
  • The Chinese government is already talking about the development of rural infrastructure including rural insurance, microlending, etc.
  • Many young Chinese who would have scoffed at the idea of working in the countryside will now go there, simply because job opportunities in the east coast cities will be limited. This, in turn, will help to clean out the party apparatus in the countryside, which has been seen as generally corrupt.
  • Western companies will not benefit too much from this next stage of development because they do not, for the most part, understand how to sell to the bottom 2/3 of the Chinese pyramid. Most only know how to sell to the top 1/3 in the cities. Companies which will prosper are those who sell to the “local local economy”, or bottom 2/3, as Jack Perkowski calls it, as opposed to the “local foreign economy”. The local foreign economy is city-based on China’s east coast; the local local economy is mainly rural and inland.
  • The companies which will survive and prosper are the swift pivoters who can quickly learn how to sell to the “local local economy”. This means that they made some money in export manufacturing, but now switch to sell domestically to Chinese consumers in the new inland towns and cities. Not many companies can do this, but those that do will do well. Most will be entirely new businesses, and local Chinese brands will have an advantage.
  • This next stage of development will require a lot of money. Those foreign exchange reserves of US2T will be needed by China. Now, if you ruled China and you had the choice of 1) lending the money to the west, which has just acted about as irresponsibly as anyone can imagine or 2) investing the money in China to narrow the wealth gap between rich and poor, city and countryside and keeping your regime in power for more than a half century, what would you do? I think that it’s a pretty easy choice.

China may now have the world’s largest foreign exchange reserves, but that is not what makes a country a superpower. The recent tainted milk scandal has shown that it is still lacking controls in many key areas, and it is far short of being a developed nation. Instead, China is a developing nation with rich reserves it needs for its own development.

In order to become a developed nation with a developed economy, it needs to spend that money on building its own infrastructure and narrowing the wealth gap between the developed cities on China’s east coast and the inland countryside. Any Chinese regime which acts otherwise would be making a very risky decision, and would be putting the future of its own rule in jeopardy.

China can manage without export markets, but it cannot survive if its own countryside is in turmoil.

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7 Responses to “Why China Won’t Throw A Lifeline To The West”

  1. Matt says:

    Why not suppose that there are enough reserves to go around and cover all the bases? Clearly if China can use its reserves to carry weight internationally, that is an important goal too.

  2. Joyce says:

    I’ve been working on the financial news desk for the last few months (great time to start THAT new job), so I’ve been reading stuff from all over the world about this crisis. I know more about the minutae than I ever wanted.

    And the idea of China rushing in to save Western economies is just not discussed in any of the circles I move in, or read about.

    The only person who brought this up with me was my dad, who always wants China to do well. There was an edge of indigence when he asked why China wasn’t playing a bigger role in all these fancy G-7-type talks. (China is part of the G-20)

    I guess it’s because the root of the problem is with things like big old investment banks and major stock markets (the major ones being NY, London, Tokyo and HK, with Shanghai as only a very young, small player). China may hold alot of foreign reserves, but it’s not going to pour money into these financial institutions, or help Western governments to do the same. China is still much more manufacturing-focused than financial services-focused.

    Your piece is right. China has to invest in China. And the more developed China becomes, the better it will be for the entire world in the long-run. Wall Street, Washington and Fleet Street have to solve their own problems — and hopefully prevent them from affecting everyone else quite so much.

  3. lee says:

    Please give sources for your points, particularly the third one.

    Just like the title of the guardian article, the premise of this one is getting a bit ahead of itself. Nowhere is there evidence that westerners expect China to bail out their banks. Nonetheless the points made are interesting, if established on any fact.

    Can China do fine without export markets? Their export markets aren’t going to completely disappear any time soon, but as I understand it the numbers don’t support that statement.

  4. Matt says:

    It’s true that there’s been very little mention of China helping to solve the financial crisis, but I think it’s inevitable that they will have some kind of role. For example, I think it will be politically much easier for Chinese to buy up American firms as the crisis progresses, and that will be crucial as American and European firms are unwilling or unable to throw capital around in this kind of situation. Whether this is “throwing a lifeline” I guess could be debated, but mostly it just seems like the smart thing to do. China could also help out by continuing to let its currency appreciate. This will also probably happen, as China makes big investments in developing the countryside. Honestly, China looks pretty well set up on all fronts, and I doubt they’re set on destroying western/global finance entirely.

    Oh and did you see the most recent issue of Foreign Affairs has an article written by Henry Paulson himself? He also just headlined a fundraiser for the US-China Education trust.

    http://tinyurl.com/5b3fd7

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  7. nzxcmbvS says:

    It has made me eat half of what I used to. ,