China boom argument ignores the golden rule
Thursday, February 13, 2003
JAKE VAN DER KAMP
It was a heavy piece of commentary to wade through on our Insight page yesterday but the combination of an Andy Xie Guozhong byline and the headline - "Why China will dominate the world economy for a decade" - compelled me to do that wading.
It was not because I expected to find something new. Mr Xie, a Morgan Stanley pontificator, is a disciple of a discredited school of economic theory known as factor price equalisation (everyone is equal and therefore all wages across the world should also be equal). From this defiance of economic reality he invariably infers a gospel of China boom, Hong Kong bust.
It was the thrust of his argument once again with the difference only of more emphasis on the China boom than on the Hong Kong bust. Essentially what he said was that China's huge workforce is growing ever more productive but its wages remain low and this would continue to give China an edge in clobbering competitors.
I cannot dispute the reasoning. The normal counter-argument that if you pay peanuts you get monkeys clearly does not apply across the border. These people are putting their backs into their jobs and that combination of low production costs and quality goods has clearly been an outstanding success in world export markets.
But just whose success has it been?
As one pointer I refer you to the chart. Foreign invested enterprises now account for 52.2 per cent of China's exports, up from 20.4 per cent 10 years ago. This represents a tenfold increase in their export shipments from US$17.4 billion in 1992 to US$169.9 billion last year. The rest of China's exports showed little more than a twofold increase over the same period.
It should not really be surprising. The key to a successful industrial boom is not primarily low wages and the application of new technology. It is first of all money - the raising of it, the right application of it, the judicious control of how it is spent and the return on investment of it. For this you need a financial system that operates on market principles.
But the mainland has no such thing. Most of the money its banks raise from the public is invested into a growing fiscal deficit, construction of public works of questionable usefulness and the propping up of loss-making state enterprises that should have long been shut down. A good proportion of it is also simply "misplaced". There is not much left over for financing of private sector industrial enterprise.
Thus most of the required money comes from elsewhere, largely Hong Kong, Taiwan and other overseas Chinese sources who naturally invoke the golden law for the use of it - him what has the gold makes the rules. It means they take ownership and control, pay little tax in the mainland and dodge what taxes they still may owe by booking their profits elsewhere.
That was how golfer Tiger Woods became Shenzhen's biggest taxpayer two years ago from just one day's proceeds of touring the links with local status seekers. The status seekers made their money by keeping quiet about where they made it.
It is not just overseas Chinese who have made themselves the beneficiaries of this great willingness by the mainland's workforce to work hard for little pay. If Beijing welcomes foreign corporations such as Wal-Mart to source low-cost quality goods in the mainland at low operating costs then the United States retail giant is only too happy to extract all the profits for itself and book them elsewhere.
Take note that this is not how the Industrial Revolution worked in Britain or America in the last half of the 19th century. Both of these had as sophisticated a financial system as was possible at the time and could apply it to new technologies on their own. They grew wealthy by being the investors in their industries as well as having the workshops of those industries located in their territories.
So when our headline on Mr Xie's piece says that China will dominate the world economy for a decade we need to refine things a little. If China's capital account remains closed and Beijing continues to dictate where money raised domestically will go, then it is more likely that foreign invested enterprises will come to dominate the Chinese economy. In fact they do so already.
What difference would it then make that the workshops are located in China? How does that constitute domination of the world economy?
Things would actually be the other way round. The word you are looking for here is "exploit" in its full unhappy sense of take advantage of hardworking people whose wages are suppressed and of a government willing to make big tax concessions and then laugh all the way to the bank, a foreign bank.
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Email Jake van der Kamp at jakeva@scmp.com. |
