A few weeks ago we examined the source of China’s “meteoric” rise to the rank of second largest world economy, and concluded that the “miracle” was essentially a one-off play based on offering the lowest cost for the production of goods for export.  In this piece I discuss the impact on China and provide some historical context.

While successful, the policy of an export-led economy provided China with short term gains; however, it destroyed both income and assets in countries where production activities were in large part transferred to China. For a time China got richer, but its customers got poor to the extent they can no longer afford to support China’s growth.

The attempted cure was a huge, credit-fueled, fixed investment program – with low or non-existent returns against a mountain of internal debt. China is now attempting to deal with an economic slowdown, financial instability, a stock market crash and a potential loss of public confidence both internally and abroad. The economic news is now as focused on China’s problems as they once were on its extraordinary achievements.

How will it end?

China’s structure – the capitalist, the socialist and whatever lies in between – is too complex and opaque to permit a clear analytical answer. But a historical perspective can provide some clarity.

China has been a great power for well over two thousand years, but not continuously. Between the reigns of great imperial dynasties were periods of decay, civil war, foreign invasion and general disorder. As the imperial state became weak, corrupt and ineffective, the country fragmented into pieces controlled by local warlords, invaders or petty dynasties.  Such periods, often lasting decades, entailed great loss of life, power and treasure.

Such a time could be again at hand if today’s rulers are unable to deal with the current issues. Their task is made harder by the fact that post-Mao China does not have a “national blueprint” to resolve its hodge-podge of Marxism, Capitalism and miscellaneous special interests.

How important this issue can be is illustrated by recent history. In the 1800’s both China and Japan faced similar challenges: an antiquated system of governance leading to weakness in the face of Western imperialism. In both countries there were factions proposing nearly identical solutions: openness to Western ideas and institutions, industrialization, and adoption of Western methods and technology.

Japan found the will to do so, and in the 1860’s launched its successful modernization program, known as the Meiji Restoration. China’s rulers instead chose repression that kindled the Taiping Rebellion – a civil war that raged from 1851 to 1864, cost between 20 and 70 million lives, and fatally weakened the empire.

Now the wheel has come full circle: after the imperial collapse and resulting disorder, World War II, communist dictatorship and the get-rich quick episode of the last thirty years China needs a unifying national philosophy. For both rulers and people the choice is at hand.

Such a choice faced the Soviet Union in the 1980’s, as the collapse of the grand Marxist-Leninist experiment became obvious. In that case the leaders, recognizing their failure to bring about the promised “workers’ paradise”, had the wisdom to relinquish power and dissolve the USSR. Though Russia is not out of the woods yet, the transition from communism was both quick and peaceful.

China soon will have to choose its path, and the consequences will be felt by all.

Because of the position China has so rapidly – and imprudently – taken on the global stage, its decisions will deeply affect the United States. For the U.S. the Soviet Union was a military threat, but our economies were almost entirely separate. What the Russians did with the USSR impacted our national security and high-level politics, but not our material well-being and daily lives.

With China it is the opposite. We are tied together through finance, trade and the supply of products used by every American citizen. An economic and/or political crisis in China would immediately generate its mirror image here, from Main Street to Wall Street and Washington. We may find out that our policies of the last thirty years – meaning our over-reliance on “made in China” products – have been imprudent as well, and that the price to be paid is much higher than we thought.

My upcoming, third piece on China will focus on the consequences for the US of over-reliance on Chinese (and other foreign) products and services. These consequences will affect every American.
