Bursting China's Bubble

Richard Hornik

From Foreign Affairs, May/June 1994

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Summary:  China's economic "boom" is more mirage than miracle, and rosy predictions are based on its neighbors' successes not Beijing's ability to sustain growth. The regime is more akin to Latin America's hyperinflationary Peronistas than East Asia's ascetic militarists. Beijing has flunked the fundamentals of sound fiscal and monetary policy and proven incapable of accommodating the impulses of a free market. Inflation, speculation and lax regulation are fueling a bubble economy.

Richard Hornik, on leave from his post as Senior Correspondent for Time magazine, is currently Journalist-in-Residence at the East-West Center in Honolulu. He was formerly Time?s Bureau Chief in Beijing (1985-87) and Hong Kong (1991-93).

BEIJING HAS FLUNKED THE FUNDAMENTALS

Part of the problem of analyzing China has long been that any critical view is seen as anti-Chinese. Simply to question the accomplishments of a 4,000-year-old civilization is taken as evidence of bias and, generally speaking, broad-gauge attacks on China?s ancient political culture, particularly by foreigners, are dismissed out of hand. That said, even those most optimistic about the Chinese economic "miracle" should take a careful look at the present regime?s track record before making sweeping predictions about China?s future economic growth.

In the long debate over the best political and economic path to modernization, an East Asian "model" has seemingly emerged overnight. In the eyes of many, East Asia?s success has proven that democracy, even pluralism, is a luxury to be indulged only after substantial economic progress has been made. Not only that, but economic progress itself is best guaranteed by a "soft" authoritarian regime. Only such a system, it is argued, can enforce the fiscal and monetary discipline that so often eludes democracies, which are forced to pander to public opinion or selfish interest groups. The benign intervention of wizened authoritarians can drive and direct economic growth, more easily allocate resources, push through austerity reforms that are beneficial in the long term but unpopular in the short, and all the while create an environment conducive to the growth of private enterprise.

The success of China?s neighbors has provided the rationale behind grandiose projections about the Chinese economy becoming the world?s largest in the year 2000, 2010, 2020, take your pick. This model is widely considered to provide grounds for the political legitimacy that Beijing will need if a new social contract is to be written with the Chinese people. East Asia?s success is also the primary argument against efforts to force China to liberalize its political system. Lee Kuan Yew, Singapore?s senior minister, early last year warned the Clinton administration against meddling in China?s domestic affairs, saying, "I would put that as the greatest error that could be made."

But much is overlooked in this analysis, about East Asia generally and China specifically. In its exhaustive study, The East Asian Economic Miracle, the World Bank recently concluded that while the benefits of specific policy interventions could be debated, "getting the fundamentals right was essential." In other words, key to the success of the East Asian economies are stable macroeconomic policies that emphasize fiscal and monetary stability. Yet, though it possesses a far harsher form of authoritarian rule than any of its successful neighbors, China?s fiscal and monetary policies remain a shambles. Beijing, in other words, has the fundamentals wrong.

China?s government appears no more capable of imposing fiscal and monetary discipline, the supposed advantage of authoritarianism, than a corrupt democracy. The present regime is more akin to the hyperinflationary Peronistas in Argentina than to the fiscally ascetic militarists who wrought South Korea?s rise. Efforts to impose a modicum of financial discipline last summer resulted in but a brief pause before the credit ...

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