China bears have company now

Failure to liberalize will cause China's economy to stall

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I've been negative about the prospects for China since at least 2000, when I first began writing about the country. For 12 of those years that was a very lonely position: People thought I was so far off the reservation they didn't even bother to straighten me out. After all, China's GDP had been growing at 10 percent per year for three decades and by 2007 it was growing at nearly 15 percent. What was I smoking?

But, actually, folks, we've seen this movie before. If you want to take an impoverished, almost medieval society and convert it into an industrial powerhouse, the road is well-traveled.

Remember that in 1916 Russia was mainly a collection of serfs dominated by all-powerful czars. Yet, by 1945 -- barely 30 years later -- the Soviet Union was the second most powerful country in the world and a far bigger threat to U.S. hegemony than China would ever become. Other poor societies followed similar paths: Japan, South Korea, Taiwan and so on.

But here's the rub: Moving from an industrial society to a modern, consumer-based, post-industrial society is a whole other enchilada. A fully developed modern economy, like those operating in the United States, Western Europe and Japan, is vastly too complex to be managed by a top-down, centralized system. The Soviet Union learned this to its sorrow, and China is now making the same mistake: By 2013, China's GDP growth had fallen by 50 percent, to just over 7 percent.

Developed societies are so complicated they can work only when capital allocation decisions are made not by government bureaucrats but -- on the fly -- by millions of consumers and the companies responding to them. Imagine a bunch of bureaucrats in Moscow (or Beijing) trying to decide how many silk scarves to manufacture in the latest hot color or how many flavors of toothpaste consumers will want this week.

In short, there are only two paths open to China. The first, and best, is to eliminate the power of the Communist Party, devolving decision-making to a system that is economically and politically pluralistic. This approach would jump-start GDP growth and open a path toward further economic and political development.

Of course, it also might result in the end of China as we know it. There are some regions of China where the majority ethnic Han are a minority, and others where the Han are not appreciated. There are separatist movements in Tibet and Xinjiang. If the power of the Central Committee and Red Army collapsed, China might unravel a la the former Soviet Union.

But the real problem with a move toward liberalism and pluralism is that it would end the gravy train long ridden by members of the Central Committee, their families and minions. Therefore, China is likely to follow the second path: toward ever greater centralized control by the party.

This path would be a disaster for the Chinese people, for the global economy and even (eventually) for the Communist Party, which would face almost continuous rebellion from an outraged populace.

Most China-watchers blithely conclude that China would follow the first path, toward liberalism. The newly installed Central Committee, headed by Xi Jinping, we've been told, would focus on free-market reforms necessary to keep the economy developing. It would crack down on corruption and expand participation in the political process. It would show much greater tolerance for dissent and free expression.

Unfortunately for these China-watchers, Mr. Xi has just distributed the already infamous Document No. 9 (first reported by The New York Times in August). This document states baldly that the liberal path would endanger Communist Party control of the country. Document No. 9 asserts that China is endangered by "seven subversive currents" abroad in the land.

What are these dreaded currents? They include universal values of human rights, media independence, civic participation, free markets, criticisms of the party, disclosures of party officials' (ill-gotten) assets, open discussion on the Internet and in print, and so on.

In other words, Mr. Xi is engineering a radical shift to the left, back toward total control of the economy and the people from Beijing. Mr. Xi and his cronies have blatantly chosen the path of repression. That path will continue to enrich them and will therefore likely remain in place at least for the 10-year term in office of the current leadership. The Central Committee obviously had in mind the fate of the USSR, and they concluded that the Soviet Union had been undermined in part by Western ideas of pluralism.

Now that Mr. Xi has embarked on this path, there is little doubt that Communist rule will continue indefinitely. But this will come at enormous cost, especially in terms of lost economic opportunity and ever-greater suppression. That's a terrible outcome for the Chinese people and it will be a big wet blanket thrown over the global economy.

It's a lot less lonely these days being a bear on China. Still, I wish I'd been wrong.

opinion_commentary

Gregory Curtis is chairman of Greycourt & Co., a Pittsburgh-based investment advisory firm (gcurtis@greycourt.com).


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