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Dr. Philip Neches

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The China Syndrome

Posted: 12/22/11 10:21 AM ET

When smart people with very different viewpoints come to similar conclusions, it's wise to take notice. In the Left corner: Dr. Paul Krugman, Nobel Prize winning economist, Princeton professor, MSNBC regular, New York Times columnist. In the Right corner: Dr. Jack Wheeler, aide to President Reagan and both Presidents Bush, author, blogger. The Right loathes Krugman as a soft-headed sell out; the Left regards Wheeler as a self-aggrandizing nut. The subject: China.

In a post on his Website To the Point (subscription required, posted October 14, 2011), Wheeler summarized the situation in China tersely, "No water, no wives, no banks -- and a hyper-dangerous military." Wheeler's writing tends towards melodrama and exaggeration for effect. Still, consider each point in turn.

No water: China's population is about three times ours, in a land area about the same as the 48 contiguous states. But almost 80% of China's land area is mountain or desert, unsuited for cities or farms. Try to imagine three times the population of the U.S. living in an area not much larger than the 13 original colonies.

Further, the headwaters of China's great rivers are not actually in China: they're in Nepal, Tibet, and Kashmir. Small wonder China gets touchy about any hint of losing sway in those areas: China would literally die of thirst.

We in the U.S. are so abundantly blessed by nature that we find it difficult to imagine what a problem water is to much of the rest of the world. Nonetheless, water supply is the greatest threat to civilization in much of the world, including China. Not energy. Not food. Not land. Water.

No wives. Well, certainly a big shortfall: China has something like 100 million more young men than young women. Wheeler writes ominously of the political and military dangers from 100 million bachelors.

But China has an even bigger demographic problem, as I pointed out in my post "The Sun Also Sets". China constrained their birth rate through social policy only possible in a brutal dictatorship. But they also made the same strides in public health that the Western world made in the early 20th century, dropping their death rate by a factor of three and increasing life expectancy from 40+ to 70+ years in just a generation. With falling births and falling deaths, China's population is aging. China is in a desperate race to get rich before it gets old. They will lose.

No banks. Wheeler points out that the Chinese state banks are technically insolvent. Krugman provides more color and detail in his op-ed piece "Will China Break?" Krugman sees the classic signs of a bubble: rapid growth in credit, surging real estate prices, "shadow banking" systems without government regulation or guarantees, and huge increase in investment without corresponding increase in consumer spending. Even through the murky lens of official Chinese economic data, Krugman sees the bubble bursting.

We had our financial crisis in 2008. Experts agree that we still have a long way to go to recover from it, and that many of the vulnerabilities that caused that crisis persist in our economy. Europe seems to be still going into the depths of their problems. Again, experts expect a prolonged recovery.

Is China the next to fall? If so, they cannot expect much help from the U.S. and Europe. A rise in the Yuan, the likely first consequence of trouble in China, benefits the U.S. and Europe doubly: it makes our debt held by China worth less and easier to repay, and it increases the cost of Chinese goods to our consumers, providing a stimulus to local industry and employment. The trouble in the U.S. already shuttered numerous factories in China. But that could just be a fore-taste of what could come.

If you look at raw unemployment numbers, the current problems in the U.S. and some countries in Europe are almost as bad as the Great Depression of the 1930s. But the political and social consequences are no where near the same. The public and private mechanisms put in place since the 1930s feel the strain. But they are holding, in the sense that no one in the US or Europe seriously worries about armed revolution or anarchy, as was the case in the 1930s.

Without similar safeguards in place, China could be a different story. While the economic consequences can be calculated, the political and social results cannot. Speculation and imagination are our only sources of insight.

Dangerous Military. China's military establishment is second only to ours. If one looks at spending alone, it seems no contest: China spends about what Britain and France put together spend, and about 1/6 of what we spend. But China is actually far less militarized than the United States, with 3.4 active, reserve, and paramilitary per 1,000 population, versus 9.5 for us. Most advanced countries spend between 1.8% and 2.8% of GDP on their military. China's military budget is 2.1% of GDP, at the lower end of the pack. Compare that to 4.8% for us.

What is the upshot (pun and all) of these figures? Either the U.S. is spending too much on its military, or China has the capacity to spend a lot more than it currently spends. Maybe both statements are true.

Wheeler speculates on two possible paths for Chinese military adventurism. Asserting more control of the South China Sea represents a reasonably credible scenario, but also one that would quickly unite the maritime world (U.S., Japan, Europe, India, East Asia, OPEC, etc.) to defend the nearly 50% of the world's shipping that goes through those waters. Wheeler offers a more nightmarish scenario: China invades Siberia to gain water, land, oil, and to divert its 100 million odd excess bachelors.

In the long lens of history, this may not be as far-fetched as it first sounds. Much of Siberia was the Maritime Provinces of China until the expanding Russian Empire seized control around 1860. The Russian Empire expanded from its start around Kiev around 950 AD to the height of the Cold War a thousand years later. Since losing in Afghanistan in 1987, the Russian Empire has been in incredibly rapid retreat, losing its Eastern European satellites and West Asian provinces to independence.

The world is full of danger spots: Pakistan, Iran, North Korea. But when I feel really grim about the prospects for the world, my thoughts turn to China.

Finally, my apologies for spiking your holiday eggnog with a few Sichuan peppercorns.

 

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