Interviewed by guest host Stefan Molyneux
Guest host Stefan Molyneux speaks with Forbes Columnist Gordon Chang about the current economic and cultural state of China.
[For more on China, you don't want to miss this month's issue of The Casey Report. It contains an in-depth analysis of China's predicament by Bud Conrad and an another interview with Gordon. A ninety-day trial subscription is completely risk-free – start yours today!]
Stefan Molyneux: Hi everybody, it's Stefan Molyneux of Conversations with Casey. I'm talking with Gordon Chang, author of The Coming Collapse of China. Thank you so much for taking the time.
Gordon Chang: Well, thank you very much.
Stefan: You made some great points in the book. One I thought was most interesting was dispelling the myth that rebellion or change comes after a worsening of conditions, because in a lot of cases, it's when things improve that you see a strong desire to loosen the bonds of tyranny. Could you talk a little bit about how that applies to China?
Gordon: Yes. Revolutions occur under many conditions, but especially when political institutions do not keep up with the social forces unleashed by economic change. Tocqueville noted that peasants in pre-revolutionary France detested feudalism more than their counterparts in other portions of Europe where conditions were worse. Discontent was highest in those parts of France that had seen the most improvement, and the French Revolution followed an economic advance.
Chinese leaders shouldn't say, "Well, Tocqueville was 18th-century France – another continent, another century," because we saw all these same trends play out in late 20th-century Thailand. More important, we saw it in the Confucian societies of South Korea a mere two decades ago, and in the Chinese-dominated society of Taiwan a little bit later. Indonesia saw economic advance and then when there was a slight slowdown, Suharto was gone.
So really, the problem is that Chinese society now is very dynamic. It's changing faster than any society on earth and what's essentially going on right now is that most Chinese people believe that a one-party system is no longer appropriate for a modernizing society. That's very dangerous for the Communist Party, because although people are intimidated, it also means that when fear is gone for whatever reason, then the regime can't last.
Stefan: It's also struck me that after liberalization of the economy, you get a multiplicity of choice in Chinese society, which does not match the one-party political system.
Gordon: You have no choice about the political system and that really is a problem. Nicholas Kristof – the New York Times columnist – said he went to some backwater city in Manchuria and he saw 15 different types of coffee people could buy, but only one Communist Party. People say that places like North Korea have to be unstable – and in a certain sense they are, but people there are too poor to resist. They don't have the means because they're spending all their time just trying to survive. I think North Korea, as bad as it looks, is probably more stable than China. And China is obviously so much more dynamic and prosperous than poor North Korea, but I think that China is less stable because people are starting to get it into their minds that they have choice.
Stefan: According to classical Marxist theory, Marxism was supposed to take root among the disaffected and disenchanted proletariat of the industrialized West. It didn't happen at all. It tended to infect the most rural and in some ways the most backward societies, at least philosophically and economically. Do you think there was something in China that led it to be more susceptible to Marxism?
Gordon: I actually don't know. I mean, that's a terrific question – it goes to the heart of so many issues. China was a turbulent society in the 20th century. They had their first revolution in their history 100 years ago in 1911, and that destabilized society. Chiang Kai-shek's Nationalists, the Republic of China, couldn't hold society together, so China was inherently unstable at that point. There may be certain things to your argument, but China was just so unhinged about a hundred years ago and it never recovered. It's no coincidence that the two revolutions in Chinese history occurred very close to each other – 1911, 1949. So we're due for another Chinese revolution, but for very different reasons than we saw the first two times.
Stefan: It's everyone's hope that China can make a transition like some other Asian nations, to a more peaceful and stable, quasi-democratic country. You've written that you feel that Marxism is too strong a virus to allow for that transition. What do you mean by that?
Gordon: The regime in Beijing is resistant. What we saw in Taiwan – which I think is a great example, because Taiwan also had a Chinese element in society – is a small country where the United States midwifed democracy, as it did in South Korea. Well, the United States can't do that in China. China is too big, too powerful, too resistant. The Communist Party is going to hold on for as long as it possibly can. I don't think that we are going to see nice, peaceful transitions as occurred along the periphery of China – you know, South Korea, Taiwan, Thailand. There is a different dynamic going on. Part of it is because it is a Marxist and especially a Leninist society. It's no longer totalitarian, because it doesn't control everything, but the state still maintains totalitarian mechanisms of control, which it does impose every once in a while – as we saw, for instance, in the SARS crisis in 2003 and some other events.
Stefan: I've heard some commentators talk about the ruling party in China being basically a gang of criminals with an ideological cover. They're not specifically dedicated to Marxism in the same way the original revolutionaries were. With that comes some glimmer of hope that when they see society begin to collapse around them – or at least the justifications for the one-party system –they might take their bagful of money and an airplane ride to some other place. Do you think that might happen?
Gordon: It certainly is going to happen for many of the cadres. I live in New Jersey, and if you go to 25 miles south of where I live, which is Princeton, you will see the perfect American family. You know, it's got the beautiful home, it's got the wife, the two or three kids, the Mercedes – actually a couple of cars in the driveway – and undoubtedly everything is paid for. It is perfect, except one thing is missing, and that's Dad. Dad is an official in Beijing who is stealing as much money as he possibly can. At the first sign of real trouble, Dad is going to be on the United flight to New York to go back to home. And home isn't in China, home is in Princeton, New Jersey. So, yes, I think the regime could fall apart very fast.
Clearly what we see right now in China is a lot of corruption – enormous amounts of money. We know that because Macau is now the world's largest gaming destination – not Las Vegas – and Macau has just a few casinos, but what's going on there is that the cadres go down and they launder their stolen money in Macau at the high-stakes tables. They turn it into chips, which means they turn it into cash. It goes out of the international banking system. It becomes untraceable. That's why Macau is doing so well at this moment. It's because there's so much corruption; and it's not like the corruption in the first part of the reform era, where corruption really sort of greased the wheels to permit business to occur. People are stealing tons of money – very short-term perspective, just like the guy who's on the plane to Princeton. That's really the problem for the regime right now.
Stefan: You could make the argument that the end of a regime can be predicted by the amount of predation that is occurring. It's like in Indiana Jones when he's got this room full of treasure and the door is starting to come down, he just grabs whatever he can and runs out. Your original estimate for the collapse of China was by 2011. I know we still have a couple of months, but how accurate do you feel that was? Do you feel it's relatively close?
Gordon: I think it is very close. When you see what's going on right now… I might be off by a month or two.
Stefan: That's pretty good, though, still.
Gordon: I think it's going to be close, because the economy is starting to turn down. If you look at year-to-year figures, there is still growth in the single digits, but if you look at month-to-month figures, the economy is contracting or flatlining. The real problem is that we see the protests in China increasing. Last year, according to one report, there were 280,000 mass incidents; that's well up from what we saw about five years ago, which were 80,000 to 90,000.
Stefan: I'm sorry, what do you mean by "mass incidents?"
Gordon: Protests and demonstrations.
Stefan: Oh, I see; wow, okay.
Gordon: These numbers, we don't know if they're accurate, but we can see the increasing numbers of protests. But this is not just a numbers game. What is really worrying for the regime is the increasing violence of protestors. So we not only have demonstrations and strikes, we have mass insurrections, bombings. And many of these bombers, these protest leaders, are really the heroes in Chinese society. That's a real problem for the regime. It is the increasing violence, the social disintegration. When you put that with perhaps an economic failure – which could easily come because the Chinese economy is in real trouble right now, it's very fragile… Anything can happen. I believe that we will see a failure of the Chinese regime in a very short period.
Stefan: The lag of information, at least to the average Westerner, is quite high. Everyone thinks that China is still growing like gangbusters, but there seems to have been a shift over the last decade from allowing people to operate in the free market, to traditional socialist big-project malinvestment – you know, the ghost cities and that kind of stuff. Is that where you think the economic dislocations is going to come from, the inevitable Austrian correction from malinvestment?
Gordon: Yes, this definitely is going to happen. At the end of 2008, Chinese leaders, to avoid this downturn that we can see around the world, decided to spend a lot of money. Their stimulus program, by my back-of-the-envelope calculations, was $1.1 trillion into a then $4.3-trillion economy. So yes, they did create growth, but they also created imbalances and dislocations and it really just postponed the problem. It made it bigger and so therefore much more difficult to solve. Now they don't know what to do with inflation, which is their number-one problem. They have a property bubble and they've got a very volatile stock market right.
Essentially their problem is that the world is going into the second part of a double-dip downturn and China – which still has a very heavy exports component to its economy – is going to suffer. Last year 149.2% of China's overall trade surplus related to sales to the United States. If you look at the United States and think that consumers aren't going to support the Chinese export industries, I think you're probably right, because this time we really are tapped out. This is Christmas season right now in China, but cargo volumes are well down, cargo rates are off. This is a real problem. Export industries in China are suffering. That is going to spread throughout the rest of the Chinese economy.
Stefan: Let me ask you a question, which I think is really the heart of the issue – because we're all interested in the future a little bit more than the past, but we need to look at the past and learn about the future – where is China in terms of its understanding of the free market? Is there libertarianism in China? When the change comes, is China going to go forwards or is it going to be tempted, as all societies are in times of change, to go backwards?
Gordon: Well, China is going backwards right now. Hu Jintao, the current leader, has presided over an era which is, on balance, marked by the reversal of reform. What we saw beginning in 2006 was Hu going back on Deng Xiaoping's policy of reform and opening up, which is the way we see China. What Hu Jintao has been doing is really trying to close the country down.
For instance, in the middle of last decade we saw them trying to prevent acquisitions by foreign companies. Renationalization started to pick up steam when we saw the National Social Security Fund and China Investment Corp., which is the sovereign wealth fund, actually going into the Chinese stock market and buy up shares that once were held by private parties. Then at the end of 2008 with the stimulus program, all of the state money, whether directly or indirectly through the state banks, went into state enterprises and the state-sponsored infrastructure. The private sector has really, really been hurt.
So what we have is a renationalization of the Chinese economy. I believe that that will continue, because there's really nothing to stop it. The political system has become almost frozen because they have a political transition at the end of next year. I don't think they'll actually make it till 2012 in October when they're supposed to have their 18th Party Congress. No one is going to be there arguing for liberalization. Liberalization has been off the table now for about three or four years. It's really hard to see them going back to it unless they think they're going to lose power, but by that time it's going to be too late. They will not be able to liberalize fast enough to create the economic growth which has been underpinning the Communist Party. These guys are gone.
Stefan: I would argue though that the key to change in the future is the general population's perception of what is causing the problem. Here in America you get enormous amounts of propaganda that the economic collapse was caused by the free market, by deregulation. In China, is the general population's view going to be that it was the government that caused it or is it going to be seen as the result of playing around in the free market?
Gordon: We really don’t know what the Chinese people think, because the Chinese government doesn't allow us to know.
Stefan: Oh, right.
Gordon: We can sort of show though what the Communist Party is trying to do, which is blame everybody else. They've done that already, talking about what's going on around the rest of the world, the global downturn.
My view of the global downturn is that regulation failed in the United States, but we have to ask why it failed. It failed because there was too much money, which overwhelmed regulators – and that has always occurred. If you go back through history, regulation has always failed when there's been too much liquidity in the international system.
You know, in 2007 you could see Wall Street and others – they were creating funds for Zimbabwe. You know there was too much money in financial assets, and I think it overwhelmed regulation everywhere, but especially the United States. Part of it was because China had to recycle its trade surpluses, and the reason why they had trade surpluses was because they were manipulating the value of their currency. The Chinese are not the only culprit for too much liquidity three to four years ago, but they certainly were the new factor.
Stefan: So if people want to find out more – and you have got great thoughts about China, an underexplored area – where can people go to find out more about your writings and your thoughts?
Gordon: I archive my columns and my writings at www.gordonchang.com. I write a column for Forbes.com weekly, usually on Sundays, and I write for The Daily, which is the iPad publication of News Corp., and other places as well.
Stefan: Thank you so much for your time. It's been really fascinating. We appreciate it.
Gordon: Thank you.