Matthews Asia: China Will Keep Thriving… For Now by Andy Rothman, Matthews Asia.

Prominent China scholar David Shambaugh has turned very bearish, writing in The Wall Street Journal (WSJ) in March that “the endgame of Chinese communist rule has now begun.” This provides a good opportunity to review our thinking about China’s prospects. But in my view, Shambaugh does not make a compelling case to support his about face in perspective.

As head of the China Policy Program at The George Washington University, Shambaugh is a respected analyst of Chinese Communist Party (CCP) affairs, so his WSJ op-ed, “The Coming Chinese Crackup,” has received much attention. This op-ed is also a big departure from Shambaugh’s earlier view of China’s prospects.

In his 2008 book, “China’s Communist Party: Atrophy and Adaptation,” Shambaugh was fairly sanguine about the country’s prospects:

“The central conclusion of this study, however, is that the CCP is adapting fairly (but not entirely) effectively to meet many of these challenges, has learned the negative lessons of other failed communist party-states, and is proactively attempting to reform and rebuild itself institutionally—thereby sustaining its political legitimacy and power. Whether the CCP can continue to make the necessary reforms is, of course, an open question. So far, so good—but this is no guarantee of continued success.”

In the WSJ commentary, Shambaugh wrote “times change in China, and so must our analyses. . . We cannot predict when Chinese communism will collapse, but it is hard not to conclude that we are witnessing its final phase.”

Continued Strong Economic Growth

But Shambaugh’s argument is flawed, especially when he looks at the health of the Chinese economy, which he describes as “stuck in a series of systemic traps from which there is no easy exit.” He doesn’t elaborate, but it’s important to note that real (inflation-adjusted) income rose about 8% last year (compared to about 2% in the U.S.), while wages for migrant workers, who move from China’s countryside to staff the nation’s urban factories and construction sites, rose by almost 10%. As a result, consumer spending remained very healthy, with real retail sales up almost 11% (vs. 2% in the U.S.).

China Economy

China’s GDP growth has been slowing. But because the base on which last year’s 7.4% calculation was made was more than 300% bigger than the base from a decade ago (when growth was 10.1%), the incremental increase in the size of China’s GDP last year was 100% bigger than the increase at the faster speed 10 years ago.

Shambaugh notes that economic reforms proposed by Party Chief Xi Jinping “are sputtering on the launchpad.” And he adds, “Yes, consumer spending has been rising, red tape has been reduced, and some fiscal reforms have been introduced, but overall, Mr. Xi’s ambitious goals have been stillborn.” By my reckoning, however, there appears to be more of the steady, gradual structural change that impressed Shambaugh in the past.

China continued to rebalance and restructure its economy last year. Consumption contributed more to GDP growth than did investment, as was the case in 2011 and 2012. The tertiary sector (services, retail and wholesale trade in addition to finance and real estate) was larger than the secondary sector (manufacturing and construction), as was the case in 2013.

The most important “rebalancing” is the shift toward an economy that is driven by private sector entrepreneurs, and away from the model of an economy led by state-owned enterprises. Last year, state firms accounted for 32% of total fixed asset investment, down from a 58% share in 2004. Investment by private companies has grown faster than that by state firms in 59 of the past 60 months, which should lead to far better investment decisions.

I expect this reform process to continue, in part because China’s leaders have no choice. They must continue to improve the operating environment for private firms, which account for about 80% of all urban employment and almost all new job creation. I have modest expectations, however, for further progress on the reform of state firms, as the government remains concerned about job losses.

Elite Fleeing, or Trying to Get Their Children into UC Berkeley?

Additional evidence cited by Shambaugh in support of his view is that “China’s economic elites have one foot out the door, and they are ready to flee en masse if the system really begins to crumble.” He references a Hurun Report survey that found that 64% of 393 “millionaires” polled said they were either leaving China or planned to do so. But is this evidence of an impending crisis in China?

According to the Hurun Report, those rich Chinese said, “education is their main reason for considering migrating. Fees are one factor: in many countries, tuition fees for foreign and domestic students are different; thus over a number of years, the cost of emigration evens itself out. Another factor is the rapid fall in the average age at which children go abroad to study: many parents have realized that if children leave home too early, this can have a negative impact on their development. Therefore they want the whole family, or at least the mother, to accompany their children when they go abroad.”

While this reflects significant problems with China’s education system, it does not signal that the political system is crumbling. Moreover, while I don’t have hard data, my anecdotal experience is that rich Chinese who establish a second home in the U.S. to facilitate their kids’ education have not abandoned China; they have continued to run their businesses in China while pursuing their dream of their children graduating from a prestigious American university.

And, according to the data, many of those Chinese students will eventually return home, in large part because of the job opportunities in China. In 2013, 414,000 Chinese students went abroad to study, while 354,000 returned to China. The Ministry of Education estimates that since 1978, about three-quarters of Chinese students and scholars who went abroad returned to China.

China Economy

Political Repression and Corruption are Real Problems . . .

Greater political repression by President Xi Jinping is another reason Shambaugh cites for his new pessimism, noting that “a more secure and confident government would not institute such a severe crackdown.” I agree that during his first two years as Party chief, Xi has further reduced the already very limited space for even modest political dissent, and it probably does reflect “deep anxiety and insecurity,” as Shambaugh notes. This is very troubling and, over time, must be improved, but is this a sign that China is closer to a “breaking point?”

. . . But Chinese are Fairly Content with Their Lives

Shambaugh accurately cites corruption as a major problem, which he says not only “riddles the party-state and the military” but “also pervades Chinese society as a whole.” Data from interviews of more than 3,000 Chinese in 2014 by the U.S.-based Pew Research Center, however, found people pretty content, despite strong concerns about corruption. Fifty-nine percent of respondents described themselves as highly satisfied with their lives, compared to an emerging markets median of 50%, and 65% in the U.S., 47% in South Korea and 43% in Japan. Sixty-four percent of high-income Chinese said they

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