The Chinese turmoil roiling markets
right now presents a fresh and profound challenge to the world economy: For the
first time, a giant, non-European superpower threatens world financial
stability and the powers that be seem at a loss. If the IMF and World
Bank have stumbled with Greece, how are they going to get a hold on the stock
market travails of Communist China? What tools do we even have to affect how it
plays out?
But if the particulars are novel,
in the bigger sense this is a movie we’ve seen before. Though China has been
the global economic star of the last low-growth decade, it remains a
totalitarian dictatorship, with its economy shrouded in state secrecy.
What we’re encountering in this crisis is the spectacle of a closed society
colliding with the forces of complex, free-market capitalism. If we look beyond
China, we can find a long history of these collisions, dating back hundreds of
years, as both closed societies and capitalism evolved and became more complex.
And the history has a clear but unsettling lesson to offer: When such a
collision happens, it’s a moment to genuinely worry.
Since
the dawn of capitalism, closed societies with repressive governments have—much
like China—been capable of remarkable growth and innovation. Sixteenth-century
Spain was a great imperial power, with a massive navy and extensive industry
such as shipbuilding and mining. One could say the same thing about Louis XIV’s
France during the 17th century, which also had vast wealth,
burgeoning industry and a sprawling empire.
But
both countries were also secretive, absolute monarchies, and they found
themselves thrust into competition with the freer countries Holland and Great
Britain. Holland, in particular, with a government that didn’t try to control
information, became the information center of Europe—the place traders went to
find out vital information which they then used as the basis of their projects
and investments. The large empires, on the other hand, had economies so
centrally planned that the monarch himself would often make detailed economic
decisions. As these secretive monarchies tried to prop up their
economies, they ended up in unsustainable positions that invariably led to bankruptcy,
collapse and conflict.
In Spain, the result was a slow
collapse, which has left it and its former empire suffering from perpetual
economic crisis and political instability. In France, an open society would
eventually be born through monarchial bankruptcy that pulled down banks around
Europe, and ended in violent revolution and the vastly destructive Napoleonic
wars.
More recently, Germany long
struggled with the mix of modern industry, capitalism and
authoritarianism. Throughout the 19th century, and into the 20th,
Germany experienced massive economic growth under the hand of Bismarck’s
central political authority; the result was a period of great strength,
followed by crisis, war, political upheaval and the geopolitical and moral
catastrophe of WWII.
And though we tend to forget this
now, the Soviet Union experienced massive economic expansion for half a
century. America feared it not only for its m military, but for the
industrial might, expanding GDP and technological achievements that added heft
to its ideological challenge around the world. Only after the collapse of
the USSR in 1991 did we fully understand what was really going on behind the
curtain. In financial terms, Soviet secrecy was very effectively shrouding the
massive liabilities of the state.
China
is a new case, for it has mixed capitalism and totalitarianism in a unique
way. Unlike the USSR, there are privately owned companies and public
investment. And yet behind banks, companies and the stock market still
lies the heavy hand of the state. The Chinese government forces
investment in the stock market and bolsters banks, companies and state entities
with secretive cash infusions; it and hides toxic assets in its enormous
and completely secretive sovereign wealth funds.
As
in imperial Spain, or Cold War Russia, there is neither transparency nor
trust. There is no question that China has massive growth potential until
its population curve starts to turn, but what we are seeing in this current
financial crisis is likely to be only the beginning of the political and societal
crisis brought about by a dictatorship’s efforts to simulate the performance of
a capitalist economy—but one that only grows. The stock market is not
real; government financial statistics are fake and obscured.
There
is no historical example of a closed imperial economy facing large
capital-driven, open states and sustainably competing over the long term. That
is not to say that China isn’t an economic powerhouse and a remarkable site of
energy and potential. It is certainly both. But we also know Chinese debt—as
secret as the state likes to keep it—is enormous, and that its financial system
is like any other bubble.
The great “Beijing Consensus,”
China’s absolute commitment to showing 8% growth every year, is unsustainable,
at least through legitimate means. And without it, China is beginning to look
like an enormous totalitarian ponzi scheme—a phenomenon common enough in world
history, but extremely dangerous to be near in the long run.
It’s tempting to look for quick
policy solutions, or—for some political candidates—to wave around threats as a
way to gain leverage. But almost by definition, a society like China is immune
to our efforts . . . In the short term, the best goal to push for is more
transparency, in the hope that sunlight helps mitigate whatever shock is still
coming. And until then, a healthy skepticism might be the best protection we
can offer ourselves.
