China at the Crossroads

PART ONE: GULAG OR MIDDLE-CLASS DREAM?

To a chorus of relentless criticism, largely from Europe and the United States, the booming Peoples Republic of China has come to epitomize cut-throat trade. The accusations – from the unionized left and the xenophobic right alike – are a familiar staple of business page headlines, Fox News broadcasts and congressional diatribes.

The indictment of China ranges from artificially suppressing the value of the yuan and dumping products abroad at unfair prices, to the establishment of a gigantic forced-labor gulag that pays starvation wages. The sum result, the critics declare, is a wildly unbalanced Chinese role in international commerce, a bloated juggernaut that is crushing every other economy in its path.

The critics have it dead wrong. Their charges say more about sensationalist, copy-cat journalism and political buck-passing than they do about the realities of the global market.

The Chinese boom is no illusion. At a breathtaking pace, the globe’s largest nation is rewriting economic history. Today, that giant leap forward has reached a critical juncture, and the next passage could either make China’s future or break it, with profound implications for the rest of the world.

This is an infinitely more important story than the one favored by politicians and headline writers. And bloated Chinese exports have little or nothing to do with it:

With more than a trillion dollars in exports last year, the planet’s number one exporter is Germany, far outdistancing the $752 billion recorded by China – which has sixteen times Germany’s population and almost four times its GDP in purchasing power. Canadian firms sold $11,027 worth of goods and services abroad for each of their country’s 33 million citizens in 2006, some 20 times China’s $579 per capita. Holland and Belgium respectively tallied more than $22,000 and $26,000 per person in sales overseas, 38 times the Chinese total for the Dutch and 44 times for the Belgians.

As for the balance of trade, the emotional crux of anti-Chinese sentiment, Germany exported $2,600 per capita more than it imported in 2006. In China the per capita trade surplus measured slightly over $90. An estimated 60 of those dollars belonged to foreign investors.

Where, in this picture, is the ominous juggernaut?

THE NEW CULTURAL REVOLUTION

The point is not that Berlin or Brussels should now become the target of protectionist rage. It is that the real Chinese boom is not the one you’ve been hearing about.

At its heart is an overwhelmingly self-propelled and bottom-up economic miracle, a high velocity replay of America’s leap into the industrial era a century ago.

“Though very open to trade, China's economy, like America's, is essentially driven by its own huge domestic demand,” the London-based Economist noted in a comprehensive study published this March.

In a single generation, that demand has built the second largest economy on Earth, with $8 trillion in purchasing power, a figure exceeded only by the United States. Its engine is a modern, middle-class society that shatters the gulag image at every turn.

As one of the early American reporters in China three decades ago, I crisscrossed a nation where most urban families lived in cramped one-room apartments without running water or flush toilets. “Dinner” in those days meant bowls of rice or noodles tossed with salted cabbage and an occasional ounce of fatty pork. On the streets of Shanghai and Beijing, the country’s biggest cities, there were no automobiles save for the occasional Red Flag limousine provided to senior officials. It wasn’t until 1986 that I saw a privately owned car for the first time in China, an ancient Toyota surrounded by an amazed crowd of gawkers.

On my most recent China assignment, for National Geographic two years ago, I traveled hundreds of miles of superhighways crammed with Volkswagen sedans, Toyota coupes and American SUVs. Chinese auto purchases are rising nearly 20 percent annually, and already exceed 8 million units per year. By 2006, China had passed up Germany and Japan in total domestic motor vehicle sales. It is expected to supplant the U.S. as the world’s number one market within seven years.

There was even a Rolls Royce dealership in Hangzhou, a provincial capital whose luxury restaurants put to shame the most chic establishments in London, Tokyo and New York. France’s Carrefour hypermarches (there are now more than 100 of them in China) did a furious business in every major metropolitan area, as did Ikea, Prada, Louis Vuitton and Ralph Loren. Every city I visited, in a journey from western Yunnan Province, down the Yangtze River to the East China Sea and south to Canton, was forested with cranes erecting apartment towers and shopping malls.

As recently as the mid-1980s, the “Three Big Purchases” that powered China’s shopping dreams were a black-and-white television set, a floor fan and a bicycle. Today they are more likely to be a spacious apartment with central air-conditioning, a new Lexus, and a top-of-the-line home entertainment center.

In 1977, when the market-friendly Deng Xiaoping succeeded Mao Zedong as China’s supreme leader, annual per capita income in real purchasing power was barely $612. Today, it stands at nearly $8,000, a 1,300 percent increase. Even in the rural countryside, income is doubling in real terms every seven years.

These are not the signs of a gulag bent on exports at any cost.

THE BIG “IF”

The real picture isn’t perfect, of course. It never is. The American industrial surge at the end of the 19^th century wasn’t a tidy affair either, nor was the original version in Great Britain 100 years before it. Among other things, China’s consumer revolution has spewed countless tons of pollution into its air and water, and suffered from wrenching scandals over official corruption and poor quality control in manufacturing and food processing. There are too many accidents in the workplace, and too few controls on building.

Yet unlike most developing economies, China has managed its explosive growth without spawning a small elite at the top and a gigantic, mercilessly exploited working class at the bottom, with virtually no one in between.

The widespread conviction in Europe and America, asserted at every opportunity by manufacturing groups and union leaders, is that something very close to slavery accounts for China’s economic success.

“I haven’t been there myself, but my strong impression is that a few Chinese are extremely rich, and the rest are basically chained to the assembly lines,” a former dean at a major U.S. university said the other day, when I told him what I was writing about. “They’re forced to work themselves into the grave, and have almost nothing to show for it.”

That may be a perversely comforting thought for struggling western industries, but the facts don’t support it.

A wealthy elite exists in China, as it does in every society, and there are isolated regions that remain poor and exploited. But both extremes are offset by what could soon be the largest middle class in history, solidly rooted in the ranks of ordinary working people.

According to the United Nations, 10 percent of Chinese live below the official poverty line, as opposed to 12 percent in the United States and 17 percent in Great Britain.

By 2025, predicts a recent report by the international business consultants McKinsey & Company, the Chinese middle class will count a mind-boggling 520 million people, and “make up one of the largest consumer markets in the world, spending about 20 trillion yuan (currently $2.6 trillion) annually – almost as much as all Japanese households spend today.”

There is an enormous “if” in these projections.

If the Chinese boom fails, or even slows significantly, the economic miracle that produced China’s middle class – which, like middle classes everywhere, thrives on rising expectations – will founder. It is much more fragile than its growth rates, no matter how stunning, suggest.

Scarcely one generation into its race down the capitalist freeway, China has arrived at a momentous crossroads. Either Beijing must now undertake a second economic revolution, as daring as the one that transformed it from a Maoist backwater to an entrepreneurial dynamo in 20 years, or it risks economic collapse and drastic social upheaval – with the entire world economy hanging in the balance.

The danger lies in a turnabout that would have seemed utterly inconceivable just a few years ago. With a population of 1.3 billion people, China is about to run out of workers.   – Frank Viviano – barganews staff reporter –

NEXT: THE DEMOGRAPHIC NIGHTMARE