The China boom and straight line projections

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See the Sol Sanders Archive By Sol Sanders SPECIAL TO WORLD TRIBUNE.COM

ChinaÕs nominally Communist leadership appears to be on a roll. The new president, Hu Jintao, emerged from his cocoon wowing his audience at the Asian Pacific Economic Conference. Noted for hiding in the shadows of the interminable Party personality conflicts, he was if not exactly an extrovert, the center of attraction for the one-on-one meetings with other world leaders. He then went on to Australia where his Parliament speech put President BushÕs visit [and speech] a day earlier in the shade.

Hu was magnanimously preaching ChinaÕs role as a soaring market for Southeast AsiaÕs raw materials [and a megabillion Australian gas deal]. He offered new free trade agreements [even if some of his neighbors worried they might be swamped with ChinaÕs labor-cheap, subsidized exports]. And with BeijingÕs continuing role as handmaiden to a five-nation effort to halt North KoreaÕs nuclear armaments, he preached that China would be a benign [if suzerain] presence in East Asia taking care of WashingtonÕs problem, too.

At home, even if there was circumstantial evidence he and former President Jiang Zemin [still heading ChinaÕs military] might be quietly kicking each other in the shins, the new Fourth Generation leadership appeared taking over without the violence that has marked Communist handovers. Commentators after commentator ø including some in Tokyo itself ø joined the Greek chorus on how China was becoming the premier power in East Asia, rapidly replacing Japan. There was even the successful launch of ChinaÕs manned space flight [if only a duplication of the original Russian system Òwith Chinese characteristicsÓ of 20 years ago].

There was relative quiet about the Òreunification of the motherlandÓ, the reining in of the rebel province of Taiwan. Polls were showing President Chen running behind in next yearÕs elections to the [at least momentarily] reunited Kuomintang, which, after all, does still profess a belief in Òone ChinaÓ. And although it issued the obligatory blasts at ChenÕs threats to write a new constitution, Beijing was handling the whole issue with more discretion than earlier threats which had only mobilized Taiwanese ÒnationalismÓ. After all, Beijing could smirk over the fact that the Taiwan business community, once Chen and the independence movementÕs chief backers, now had pushed trade with the Mainland to U.S. $28.6 billion in the first eight months of 2003 ø a 22 percent increase over last year ø with Taiwan industrial investors still clamoring to put more money into Chinese production facilities to hold on to their worldwide markets.

When American delegations came asking something be done about the undervalued yuan and export subsidies which would probably bring the U.S. trade deficit to $130 billion this year, that old Chinese Òhospitality geneÓ kicked in: Beijing allowed as how it would be sending off a trade delegation to put in some tens of millions of orders for transport aircraft, food, and other American exports. That would be the calling card of Prime Minister Wen scheduled later this fall in his first U.S. official visit.

There were feature articles in the Western press about the glories of Shanghai as a new world city, with appropriate sidebars on how there were more dogs going to salons to have their hair clipped than being eaten in Beijing. And there were projections of how China would move ahead with a continuing nine or 10 percent GDP growth rate now that Chinese leadership in the hands of technocrats instead of tired old warlord hacks from the 20th century.

Yes, it was all true. But one had to look further. Nonperforming loans were down as a percentage of total lending ø but wait, wasnÕt that because massive new loans were being extended to the bankrupt State Owned Enterprises. Then there were record exports of corn, but also a 25% increase in the domestic price of soybean cake and oil brought on by export subsidies. There was the successful new Chinese government bond issue, huge foreign exchange holdings [$316 billion in April 2003, second only to JapanÕs]. But what about the fact that overall borrowing by enterprises that Beijing sometimes calls government, other times not, the multinational subsidiaries from abroad, semi-government municipal and provincial companies, and private companies in the hands of ÒPrincelingsÓ [scion of Communist leaders], was enormous ø and probably unknowable.

It all took me back about a dozen years ago to a conversation in Tokyo with an astute Japanese woman with the best connections among the mandarins at the Okrashow [then the all powerful Ministry of Finance] and in business. No, she said, she had not spoken to anyone who didnÕt see the Japanese boom and its dominance in so many world markets as something that would continue indefinitely. As one long since too old to believe in prophecy, I simply replied, ÒPerhaps. But I can tell you that straight line projections are very dangerousÓ. And so they turned out to be for many of my Japanese friends.