Book Review: A veteran journalist looks at China

Just as the wings have started to come off of China’s extraordinary decades-long expansion, James Fallows, the veteran national affairs correspondent for the US-based magazine Atlantic, has produced a book that uses the country’s air industry as a metaphor for what is going on inside China itself.

As Fallows has done repeatedly in the past, in Japan, Malaysia and other countries, this is not parachute journalism. He moved with his wife to Beijing and lived in the country from 2006 to 2009, learning the language, in an effort to understand it. The result is China Airborne. The book is a daring gamble, although it probably didn’t start out that way. In recent weeks, it has begun to appear that China is in for a far rougher landing than anyone had thought possible even a few months ago, as its exports collapse. The air industry, from building airplanes to flying them to hopefully selling them overseas as an apex industry, could well be a victim of the downturn.

As Fallows points out, more than two thirds of all the new airports being built today across the world are being built in China, with airlines expected to triple their fleet sizes over the next decade. But that, he points out, is a metaphor for something more ominous. China is addicted to construction.

“The advantage for China is that this investment builds future productive capacity, a better life, a richer society, and so on— and in the meantime, it creates jobs for people who are doing the building, and markets for companies that sell structural steel, cement, and every other ingredient.”

The problem for the Chinese economy has become its dependence on stimulus through investment, he says. “If by the early 2000s the American economy had become addicted to cycles of borrowing, overconsumption, and further borrowing to propel its expansion, China’s was addicted in the opposite way, through cycles of over-investment and the resulting need to export.”

The resulting need to export, Fallows writes, puts them perilously close to where the United States was in the 1920s, when it was an export powerhouse much like China is today. John Maynard Keynes at that time warned the United States was amassing* “all of the bullion in the world” and that governments across the planet were risking imbalance by taking loans and investments from the Americans.

If that sounds familiar, it should. As with the US in 1929, China’s factories today are running and workers are employed only because of foreign customers – or at least were. Locales like Dongguan in the Pearl River Delta across the border from Hong Kong are in severe distress from the collapse of exports.

China today is five times as dependent on foreign customers to create domestic jobs as the United States was in 1929. While the Great Recession that began in 2007 is not as deep as the Great Depression was, the near collapse of the Eurozone, which appears to be gaining speed, and the weak recovery in consumer spending in the United States, have contributed to the biggest slowdown in China’s export industries since they began to export in earnest decades ago.

“Once a new factory is built, the construction jobs are over— and people can keep working and getting paid only if there’s a market for what they make,” Fallows writes. “Or if new construction projects begin, which eventually add even more to the nation’s productive capacity. In 2007, before the world financial crisis began, investment and capital projects of all sorts, including construction, represented 39 percent of China’s economy. By 2010, that share had risen to 46 percent— an astonishing increase, even as investment was being cut back in most of the rest of the world.”

This reliance on building is hardly all bad. Part of the success of the massive investment in infrastructure spending, Fallows writes, “is that it has made every other kind of growth more attainable.” As it becomes more expensive to outsource to Guangdong, manufacturers are more likely to move their operations to Sichuan or Gansu rather than Vietnam or India because Chinese roads and facilities are better than they are in any countries that haven’t followed this breakneck construction path.

There are times when this goes wrong. The billions in investment in super-high-speed railways, at an equally breakneck construction pace, appear to have resulted in shoddy construction that has severely handicapped the entire railway system. Much of the roadbeds are having to be relaid. There are huge ghost towns all over China with no people in them as local satraps* have defined their careers by the building of huge projects.

As Asia Sentinel reported recently, this development binge has put local governments 10.78 trillion yuan (US$1.69 trillion) in debt, equivalent to 27 percent of the country’s entire GDP, according to a study of Chinese local government debt by the Seoul-based Samsung Economic Research Institute. That is putting additional pressure on China’s banks as local governments, constitutionally prohibited from borrowing, created local financing vehicles which borrowed the money by proxy. Nobody knows how that will play itself out.

"Any trend that can’t continue won’t, and at some point the Chinese juggernaut will have to “rebalance” itself with the rest of the world,” Fallows writes. "Whether it can do that, as the imbalances grow in Chinese society, is a good question.”

China aspires to match Boeing and Airbus in airplanes, Sikorsky and Robinson in helicopters, Rolls- Royce and GE and Pratt & Whitney in engines, Honeywell and Avidyne in avionics. It also aspires to match world-class manufacturers in a wide range of other fields as well.

But as Fallows points out, too often China is in too much of a hurry. As with the high-speed rail, too often construction is shoddy. Other critics have pointed out that virtually every aspect of Chinese society today is built on graft – from the lowliest boss seeking a subcontract to supply gravel to a construction site on up.

The political system has been showing its own serious problems with the Bo Xilai scandal. Hong Kong author Frank Ching, in an article in YaleGlobal, the Internet-based magazine of the Yale Center for the Study of Globalization, recently pointed out that both the blind activist Chen Guangcheng and the Chongqing police chief Wang Lijun both made for a US embassy when they got into trouble, an indication of where they thought the rule of law and attention to human rights might reside.

It is an issue that Fallows addresses. At the conclusion of the book, he writes: China is steadily gaining the hard power that comes from factories and finance. Its military hard power is increasing, though from an extremely low base.

“But lasting influence in the world has come more from soft than hard power: ideas for living, models of individual, commercial, and social life that people emulate because they are attracted rather than because they are compelled.

“Soft power becomes powerful when people imagine themselves transformed, improved, by adopting a new style. Koreans and Armenians imagine they will be freer or more successful if they become Americans— or Australians or Canadians. Young men and women from the provinces imagine they will be more glamorous if they look and act like people in Paris, London, or New York. If a society thinks it is unique because of its system, or its style, or its standards, it can easily exert soft power, because outsiders can imagine themselves taking part in that same system and adopting those same styles. But if it thinks it is unique because of its identity— ‘China is successful because we are Chinese’— the appeal to anyone else is self- limiting.

"From the Chinese government’s point of view, soft power has so far boiled down to using money to win other people’s goodwill or acquiescence. Chinese-built roads in Africa and Latin America; Chinese investment and interaction in Europe and the United States. The public- opinion elements of the soft power campaign have often backfired, since they have been crudely propagandistic in the fashion of the government’s internal news management.”

The inability to understand the outside world continues, particularly with Beijing’s astonishing presumption that it can simply appoint a Panchen Lama, Tibet’s second-highest ranking religious figure and the supposed reincarnation, over hundreds of years, of a Buddhist prelate. Its whole treatment of Tibet – although Fallows doesn’t address it directly – is that somehow hard power can supplant soft power. That the 11 percent economic growth reported in the province in the past quarter ought to be enough to stop an anguished people from burning themselves to death on the streets.

There is much in Fallows’s book that hasn’t been covered here. It is worth the reader’s time to obtain it and read it. It is a timely look at a country in a newly dangerous economic and political situation. Understanding that situation is of utmost importance to the rest of the world.

*Spelling corrected 18 May 2012