China's Future

James Waterton at Samizdata has an interesting essay pontificating about China's future. The comments are well worth reading, as they flesh out some background and give some good back and forth on whether or not China is headed for some sort of major internal crisis soon. I left a comment as well, which I reproduce here, albeit in a slightly cleaned up format.

A nice piece overall, James. I agree that there is plenty of cause for skepticism and concern over the state of the Chinese economy, despite its numerous and real achievements over the past two decades. I offer the following thoughts:

The non-performing loan issue has been at the forefront of worries for the better part of a decade. As you mentioned, the write-offs are simply shifting the bad loans to asset management companies, which have been desperately trying to sell them to investors, including foreign ones, but the are barely getting 25 cents on the dollar for them. And although the loans are off the books of the banks, the real question, as one commentor pointed out, is whether the banks have managed to control the rate of creation of new bad loans. Keep in mind that when you see the latest NPL figures from Bank of China or whomever, that applies only to loans made before 2001 or so. Their excuse is that loans need time to go bad so it's impossible to assess the quality of newer loans and thus they don't have more recent data.

On foreign direct investment, the $50 billion or so China brings in a year is just a drop in the bucket to domestic investment. I think it accounts for maybe 3-4 percent of the total investment. In that sense, the economy really isn't all that reliant on FDI to drive growth. Where FDI is important is in the technical and management expertise foreign projects tend to bring, as well as the prestige China enjoys in being able to tout that it is the No. 1 destination for foreign capital in the world.

I am skeptical that your ATM experience holds much significance beyond the fact that the banking system in China generally sucks. I lived in Beijing from 2002 until late last year, and ATM problems were common throughout that whole time. Often I would have to hit three ATMs near my home and work to find one that had money. It's also more reflective of the fact that China is a cash economy. Checks are unheard of and only a tiny fraction of one percent of people have actual credit cards.

I also think the idea that China's ethnic minorities could forcibly eject their Han overlords from their territories is dubious. I don't discount some surge in violence -- mass protests, lynchings, riots, that sort of thing. But I think it's highly unlikely that any ethnic group could organize an effective force able to deal with the local PLA garrison. In Tibet and Xinjiang those garrisons are formidable and the general populace is unarmed. In Inner Mongolia, the Han outnumber the ethnic Mongols by quite a large margin, and many Mongols have effectively been integrated into Han society, to the point where many of them use Chinese names rather than Mongolian ones. While you hear the occassional lip service to throwing out the Chinese, I doubt the will to attempt that is very strong.

Finally, you say the world has made a grave error by investing in China. I think that view is exactly wrong. Consider the alternative if the West shunned China: an isolated and impoverished country ruled by an even more authoritarian and paranoid regime than the one that exists now. Whatever faults of China's rulers, and they are many to be sure, there is no denying that the average Chinese is wealthier, happier and, yes, freer than they were even 10 years ago. Of course the "peaceful evolution" idea that a democratic transformation of China is inevitable as a wealthier populace demands greater political freedom is unproven. But our active engagement with China has made that outcome far more likely than under alternative, more antagonistic policies.

Any thoughts?