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History suggests that when an economically-oriented theme finds its way onto the cover of a mass market publication, it signals popular acceptance—and the beginning of a contrarian turnaround. Examples include last June’s Time magazine cover, “Home $weet Home,” which essentially marked the peak of the U.S. housing boom, and the March 2005 Newsweek cover story, “The Incredible Shrinking Dollar,” which hit newsstands at about the time the greenback began a 9-month rally off lows that have only barely been seen since.

With that in mind, this week’s Time cover story, “China: Dawn of a New Destiny,” should give cause for concern for those who’ve been unfailingly bullish on the emerging Asian superpower. Consider this snippet from the accompanying article:

You may know all about the world coming to China--about the hordes of foreign businesspeople setting up factories and boutiques and showrooms in places like Shanghai and Shenzhen. But you probably know less about how China is going out into the world. Through its foreign investments and appetite for raw materials, the world's most populous country has already transformed economies from Angola to Australia. Now China is turning that commercial might into real political muscle, striding onto the global stage and acting like a nation that very much intends to become the world's next great power.

In the past year, China has established itself as the key dealmaker in nuclear negotiations with North Korea, allied itself with Russia in an attempt to shape the future of central Asia, launched a diplomatic offensive in Europe and Latin America and contributed troops to the U.N. peacekeeping mission in Lebanon. With the U.S. preoccupied with the threat of Islamic terrorism and struggling to extricate itself from a failing war in Iraq, China seems ready to challenge--possibly even undermine--some of Washington's other foreign policy goals, from halting the genocide in Darfur to toughening sanctions against Iran.

China's international role has won the attention of the new Democratic majority in Congress. Tom Lantos, incoming chair of the House of Representatives Foreign Affairs Committee and a critic of Beijing's human-rights record, told TIME that he intends to hold early hearings on China, on everything from its censorship of the Internet to its policies toward Tibet. "China is thinking in much more active terms about its strategy," says Kenneth Lieberthal of the University of Michigan, who was senior director at the National Security Council Asia desk under President Bill Clinton, "not only regionally, but globally, than it has done in the past. We have seen a sea change in China's fundamental level of confidence."

Blink for a moment and you can imagine that--as many Chinese would tell the tale--after nearly 200 years of foreign humiliation, invasion, civil war, revolution and unspeakable horrors, China is preparing for a date with destiny. "The Chinese wouldn't put it this way themselves," says Lieberthal. "But in their hearts I think they believe that the 21st century is China's century."

Or maybe not. Coincidentally, several recent articles have detailed structural issues and other developments that could represent major stumbling blocks on the path of China’s quest to be king of the hill. Among the concerns:

Demographics

From the Sydney Morning Herald:

The ticking time bomb that is the Chinese population has been underlined by a report describing the huge challenges its sheer numbers - 1.3 billion and rising - will present to the country over the next 30 years.

Despite almost three decades of the one-child policy, the population will reach 1.5 billion by 2033, well in advance of previous estimates of 2050, a study by the State Population and Family Planning Commission has found.

The country is already straining from shortages of basic resources such as water and habitable land as the population grows, but the total figure is not the worst of China's problems.

By 2020, the commission's study says, the imbalance between the sexes caused by a preference for boys over girls means there will be 30 million more men of marriageable age than women.

Between now and 2016, the growth in the number of people of working age will increase by 10 million a year, meaning that much of China's remarkable economic growth will be taken up simply with finding them jobs rather than making them richer….

"The increasing difficulties men face finding wives may lead to social instability," the study says, echoing one published internationally in 2004 that traced links between societies heavy with "bare branches", as unmarried men are sometimes known in China, and war.

Politics

From The Guardian:

To the west, China is a waking economic giant, poised to dominate the world. But, argues Will Hutton in this extract from his new book, we have consistently exaggerated and misunderstood the threat - and the consequences could be grave….

The truth is that China is not the socialist market economy the party describes, nor moving towards capitalism as the western consensus believes. Rather it is frozen in a structure that I describe as Leninist corporatism - and which is unstable, monumentally inefficient, dependent upon the expropriation of peasant savings on a grand scale, colossally unequal and ultimately unsustainable. It is Leninist in that the party still follows Lenin's dictum of being the vanguard, monopoly political driver and controller of the economy and society. And it is corporatist because the framework for all economic activity in China is one of central management and coordination from which no economic actor, however humble, can opt out….

Absolute power corrupts, and the Chinese Communist party has become one of the most corrupt organisations the world has ever witnessed. The combination of absolute power and an ideology that palpably no longer describes reality is a virus that is morally and psychologically undermining the regime. And if the regime wobbles, then its capacity to sustain the unsustainable economic structures will wobble and Leninist corporatism will unravel. Beijing's authority could fragment and China's provinces reassert their destructive independence as they did in the 1910s and 20s, or a new and fiercely repressive regime could try to hold the country together abandoning economic openness and market reforms - and even pick some international fights (such as invading Taiwan?) to rally the country to its side. It is because this prospect is so real that the task of peacefully moving to a sustainable capitalism, and building the necessary institutions to do it, is so vital for both China and the world….

All this is obvious to western eyes; what is less obvious is the way the same system of control undermines the economy. Successful businesses have to be successful in business terms - with managers freely exploiting opportunities, developing products and brands and promoting on ability. No such autonomy is possible within Leninist corporatism; party needs come before those of business, enforced by a national system of party committees in every enterprise, finance from state-owned banks and a complex system of accounting and ownership rights that leaves majority ownership of most enterprises with the state. Private shareholders have very limited ownership rights; companies' fixed assets are separated out in company accounts and can still only be legally owned by state and public bodies. And as MIT economist Yasheng Huang argues, government shareholders interfere, especially if a firm is successful. Countless Chinese firms, he says, have been driven to bankruptcy or thwarted in their growth ambitions because the government has exercised its ownership privileges to meet party objectives.

In short, the party state is at the centre of a spiderweb of control of the economy, radiating out from the tight ownership and direction of the 57 sectors the party considers the economy's strategic heart like steel and energy to a more relaxed stance the less important the party considers an enterprise's activity - such as packaging or hairdressing. Even they can be controlled if need be. The general rule is that the more politicised and controlled a Chinese enterprise, the lower its productivity and performance. Thus the performance of China's State Owned Enterprises [SOEs], which control two-thirds of industrial assets, has hardly improved during 20 years of reform. One in three of their employees is estimated to be structurally idle. SOEs are on a financial edge and barely profitable. According to one influential estimate, even the tiniest upward movement in interest rates or the slightest decline in sales would mean that 40%-60% of their enormous bank debts would not be serviced, rendering the entire Chinese banking system bankrupt. They are commercial and business disaster areas.

Even large private companies, although better performing, are still affected. Davin Mackenzie, managing director of iVentures, which is based in Beijing, says that almost no private company, however well run, wants to leave the opaque, informal world of guanxi personal relationships in which the main aim is to hide revenue, cash, and profits from potential political direction. The vast majority, he says, run themselves out of the "cash box in the back of the Mercedes". Most private Chinese companies have three sets of accounts - one for the banks, one for the tax authorities, and one for management. Most do not last long; the average duration is three years. The law of the jungle prevails: you do what you can get away with.

China is the counterfeiters' paradise, where intellectual property rights are neither respected nor enforced. Between 15% and 20% of all well-known brands in China are fake; two-thirds of the imports confiscated by US Customs as fakes were made in China. Counterfeiting is estimated to represent 8% of GDP - eloquent testimony to Chinese business strategies and the ineffectiveness of the legal system.

The cumulative result of all this is economic weakness, despite the eye-catching growth figures. Innovation is poor; half of China's patents come from foreign companies. Its growth depends on huge investment, representing an unsustainable 40% or more of GDP financed by peasant savings. But China now needs $5.4 of extra investment to produce an extra $1 of output, a proportion vastly higher than that in economies such as Britain or the US. But 20 years ago, China needed just $4 to deliver the same result. In other words, an already gravely inefficient economy has become even more inefficient. China's national accounts tell the same story. Hu Angang calculates that China is now back to the Mao years in term of the inefficiency with which it uses capital to generate growth.

Financial Imbalances

From People’s Daily Online:

Beijing should keep its interest rate high and the real estate sector cool, according to a recent report from top research body the Chinese Academy of Social Sciences [CASS].

CASS economists said in the report, 2006-07: World Economy Analysis and Forecast, that it was necessary to keep the interest rate high and real estate cool to avoid the risk of a crisis such as the one Japan weathered in the 1990s.

"China should not increase domestic demand on the price as it could risk enlarging the real estate bubble," according to the report.

China should draw lessons from Japan in the 1980s, when the country's low interest rates caused domestic demand to rise so much it eventually created a huge real estate bubble for the economy.

"There are amazing similarities between the current Chinese real estate market and that of Japan's in the 1980s," the report said.

The property market fell apart in the 1990s, leading to "the lost 10 years" of economic stagnation. The Japanese economy did not recover from the nightmare until the end of 2005.

"Different from Japan, the Chinese government has adopted many macro regulatory measures in the sector since 2005, with good results," the report said.

"However, the measures have not dealt with all the possible risks. China still has a lot in common with Japan at that time."

Environmental Problems

From Asia Times Online:

China's resolve to abandon its decades-old habit of pursuing economic growth at any cost and instead promote energy conservation and environmental protection has stumbled because of resistance from development-minded local officials and powerful interest groups.

In an embarrassing blow to China's top leadership, which has cast itself as an advocate of green development, the country missed its much-publicized goals of reducing energy consumption and pollutants last year. Despite a target of cutting energy use per unit of gross domestic product [GDP] by 4%, consumption actually increased by 0.8% in the first half of the year and indices for the main pollutants continued to rise.

Last year was "the most grim year for China's environmental situation", Pan Yue, deputy head of the State Environmental Protection Agency [SEPA], said in a statement last week. "The goals set out by the cabinet at the start of the year have absolutely not been achieved."

After nearly three decades of breakneck economic growth, China has some of the most polluted cities in the world. All of the country's major rivers are dangerously contaminated, with millions of people lacking access to clean drinking water.

There was a pollution accident once almost every two days last year, Pan admitted, with authorities receiving 600,000 environmental complaints. The number was up 30% over 2005.

The failure in energy-saving and pollution controls is seen as a result of the diehard attitudes of local officials who continue to tie their career achievements with GDP growth figures. After extolling the virtues of rapid economic growth for 27 years, Beijing is struggling to reverse the tide of its blind pursuit by establishing a "green development index" as a performance indicator.

The new green GDP index attempts to account for environmental degradation and resource depletion caused by economic development. Over the past two years, green GDP projects have been launched in some 10 Chinese provinces and municipalities, including the capital and the northeastern port hub of Tianjin.

Yet central-government officials have conceded that such projects have met with resistance by local civil servants.

"A lack of economic motives is the fundamental reason for the local governments' weakness in reducing energy consumption and improving environmental protection," Chen Qingtai, a senior economic official under the Chinese People's Political Consultative Conference, was quoted recently by the state news agency Xinhua.

The failure has prompted Beijing to get tough with penalties for polluters and energy wasters. Last week the country's environmental watchdog targeted major state companies and provincial governments that missed their targets in 2006.

Four of the country's top power firms will not get environmental approval for any projects until they solve pollution and energy-consumption problems in their existing plants, Pan Yue announced. Without such approval, construction of new plants is illegal.

Four industrial cities were also penalized for lending support to local projects that violated environmental standards and caused serious pollution, according to SEPA. The watchdog said it will suspend approval for all new projects in the four cities.

The new crackdown is bolder than SEPA's previous attempts to safeguard environmental standards because for the first time it targets big state firms, including large steel and power companies.

"It is the first time since the establishment of the administration [SEPA] that such penalties have been meted out to punish those administrative regions, industries or large enterprises," Pan said.

The target list covers 82 projects with a combined value of more than 112 billion yuan (US$14 billion). Top power companies such as China Huaneng Group, China Huadian Corp and China Guodian Corp, which represent the bulk of the country's hydropower-generation capacity, are named and shamed for failing to install devices to remove sulfur and shut down unsafe generators.

Pan said some enterprises had promised to cut pollution and energy consumption when their projects were banned by SEPA, but failed to do so once the local governments relaxed their environmental controls….

China wants to reduce energy consumption per unit of GDP by 20% in the five years from 2006 to 2010. To get back on tack with its targets this year, Beijing is considering higher export taxes to curb exports of energy-intensive or polluting goods, and tax breaks for energy-saving products.

In sum, while optimism about China's long-term prospects is probably warranted, it is likely to be very rough sledding in the near term.

Source: Stumbling Blocks On China’s Path To Power