If you look at the prevailing wisdom in business magazines, the view is that through the Chinese govt’s massive pumping of solvency into the economy beginning in November 2008, China has acted as a responsible global citizen, saving the world from a massive global meltdown which, left uncontrolled, would have forced the global economy back into the Stone Age. Without this massive stimulus package, Chinese factories would have had to lay off many more workers leading to more social problems, and maybe even social instability. And social instability is a no-no in China, especially when the stated policy goal is a harmonious society.
In order to maintain this top-down version of the harmonious society, the Chinese government, especially the media, has taken an active role in heading off issues which would be taken up by consumer rights organizations in other countries. Instead of trying to put a lid on dissent, reporters have acted more as investigators, giving lead coverage to stories such as lead poisoning by a government-owned smelter.
The thinking behind this new government pro-activism is that if government ministries can act pro-actively to head off issues before they become explosive social issues, then Chinese society can head off the kind of activism which is led by grassroots consumer organizations in other societies. At the same time, the Chinese government can clean itself up, shutting down companies which do heavy damage to environment and society, and replacing old-school bureaucrats with more modern technocrats who really know what they are doing.
The government’s job is helped and hindered by the Internet, which it has a love/hate relationship with. With more than 338M Chinese users on the Internet now, it has become the place where many bored and under-employed Chinese find entertainment and gossip. It helps the government keep an eye on local officials, since people will complain anonymously on the Internet. At the same time, rumors can spread very actively on the Internet, as was the case of Uighur women in Shaoguan being attacked in a Guangdong factory, which led directly to the deadly riots in Urumqi in early July.
The fundamental underpinning for China’s growth into a major locomotive of economic growth has been globalization, which until last year, was led by the US consumer sector. The problem now is that, for all practical purposes, the US consumer does not exist anymore. Basically, the US consumer had hocked its own future to the banks. Then the future arrived, and the banks put the screws to the consumer. Now, Americans are (re)learning the virtue of frugality.
Frugality and savings were a virtue which the Chinese have been well-acquainted with for a long time. Since China was dirt-poor only 30 years ago, most Chinese still know what it feels like to be poor and have squirelled away savings for a rainy day. However, more savings was not what the economy needed when the global economy tanked last year.
So, in order to keep the economy sailing smoothly, the Chinese government pumped liquidity into the economy. I have had my own doubts about the effectiveness of such a policy since much of the money has found its way into the Chinese stock markets and real estate, both of which continue to rise in defiance of their underlying business economic fundamentals, which are not that attractive. In a recent conversation with the partner of a private equity firm, I voiced my doubts. He said that in China, most of the money was going to companies, mostly state-owned, which were cash-rich. These companies really did not need more cash, but almost had it forced on them from the state-owned banks. Lacking a place to put this money which from their perspective, fell from the sky, they re-invested it in the stock market and real estate. Anyone with any investment experience in these markets is aware that the general rule for these two markets are “early in, early out”. Sure you can play, just don’t be the guy without a chair when the music stops.
The trouble with this policy is that it turns companies whose growth is based on cash flow into speculators. These companies got a windfall, and in order to protect their windfall, are encouraged to make short-term moves which basically speculative.
At the same time, this money is not going to companies and individuals who have poor credit or no credit, even though in all fairness to the government, there are smaller government policies in place to help people exchange their cars or buy electronics if they live in the countryside. The net result is that the rich/poor gap in China, which is already wide, will widen even more in the future. A society which has too wide an income differential between the rich and poor is not good for social stability in the long-term.
So, if you want to figure out who are going to be the winners and losers, all you have to do is figure out who is going to be left standing without a chair when the music stops?