INSIDE SINOKLEPTOCRACY

China is the world's second largest economy after Uncle Sam. It is the world's
fastest-growing major economy, with average growth rates of 10% for the past 30
years. China is also the largest exporter and second largest importer of goods
in the world. China became the world's top manufacturer in 2011, surpassing USA.


China is facing a burst bubble, and the shock will provide a useful lesson in
the limits of authoritarian rule. Monolithic government and state-directed
investment can be effective in pulling countries out of poverty, but not in
building a middle class or in reaching the ranks of the world's wealthy nations.
Economic troubles will spur China's 1.3 billion people to demand more freedom
and more of a voice in the way they are governed.

The private sector hardly dominates the Chinese economy. If anything does, it's
the state again. Derek Scissors points out there have been important changes in
the state sector. It has shrunk and operates very differently than it did just
15 years ago. During the 1990s, state assets were sold off, sometimes replaced
by genuinely private firms.

Scissors notes privatization met serious political opposition. In response,
during the 2000s, state-owned enterprises (SOEs) were instead converted into
shareholding entities, many of which sold stock in Shanghai, Hong Kong or
elsewhere. These shareholding firms took on some characteristics of true
commercial businesses.

Those seeing a dominant private sector often mix up such shareholding firms with
private firms. Neither specifying shareholders nor selling stock necessarily
alters the fact of state control. The large majority of firms listed on domestic
stock markets are state-owned.

Scissors asserts that restructuring was specifically crafted to change SOEs
while steering far clear of privatization. This goal was driven home earlier
this year by Wu Bangguo, second in the Communist Party hierarchy, who scorned
privatization as almost as unacceptable as another party holding office.

The vast majority of mixed firms are designated as limited liability
corporations. The term implies privatization, but the subcategories — wholly
state-owned and non-wholly state-owned — indicate that the incorporation has not
automatically ended state ownership.

Scissors points out SOEs enjoy some amazing advantages over truly private firms.
In 2006, China's Cabinet identified sectors where the state must lead, a
powerful guarantee. Included were power, telecom and aviation. And in practice,
the state dominates many other sectors, including banking, railways and media.

There are other perks as well. SOEs have immediate call on land, while some
private firms cannot buy at any price. SOEs receive state bank loans with no
borrowing costs and possibly voluntary repayment. Party cadres routinely shuttle
between government posts and SOEs, ensuring top-level political access. As it
turns out, the largest firms receiving these benefits — e.g., Sinopec and Bank
of China — are limited liability corporations. These are far better classified
as state-owned than as private.

Profit data reported by SOEs are unreliable, but the money seems to be rolling
in. China National Petroleum and China Mobile together claim profits greater
than those of the top 500 private firms combined. State entities make 95% of
investments in outside bonds. SOEs were pruned back before, and it could happen
again. But it wouldn't be easy, because SOEs can now strongly oppose such a
move.

Some SOEs have become gigantic. Top banks, telecoms and oil companies rank among
the world's largest. They provide the government with much of its revenue, and
generate massive employment — the explicit state share of urban employment is
well over half. They are also run by high-level party cadres or their children.
No wonder the foreign share of investment in China has plummeted. In most
sectors, the Chinese market is only what's left after the SOEs take the bulk.
Subsidies for SOEs are far larger barriers to American goods than the notorious
currency peg.

Scissors points out the policy challenge facing Washington and Brussels is that
China's overinvestment and underconsumption help cause bilateral imbalances. The
PRC touts rebalancing in the new five-year plan, just as it has done since 2004.
But matters have only worsened, and for a reason: rebalancing would undermine
SOEs. The PRC overinvests to ensure that SOEs remain dominant, despite their
inefficiency. To pay for that overinvestment, consumption is taxed through
controlled interest rates and by suppressing competition. To rebalance, Beijing
will have to curb SOEs. That would be in the interests of foreign investors.
But it would be stridently opposed among China's ruling elite. For now,
private-sector dominance of China's economy is a fiction.

China now tries to dominate the Fourth Reich market through Greece. Chinese
officials love former Premier Papandreou of Greece, who is also the President of
Socialist International. Greek assets are now sold at bargain prices, because
Greece is bankrupt. China can easily buy most Greek assets.
China has already bought the Port of Piraeus, a strategic investment for the
transportation of Chinese goods to Fourth Reich. Chinese can easily manipulate
Graecokleptocrats with kickbacks!

China's economy is riddled with vested interests, while free speech is
suppressed. No wonder the regime is cracking down on. But it won't be easy to
maintain the current political model or to reform it. And failure to do either
could knock the economy off its extraordinary trajectory.

Inequality is high and rising. If this inequality were merely a reflection of
the market, the fact that some Chinese are more talented and hard-working than
others, it could be motivational. But a lot is also a result of economic goodies
being grabbed by insiders, sometimes via corruption and in other cases by
excluding outsiders from opportunities. Populations can grow restless when they
think rulers and their cronies are enriching themselves unfairly.

In China, the class system operates on several levels. At the top of the
socio-economic scale are the princelings, children of important party officials,
who have become multimillionaires by trading on their contacts. Then there are
bureaucrats, who enjoy attractive lifestyles funded by the people's taxes and
sometimes bribes. State-owned enterprises, meanwhile, benefit from monopolies or
oligopolies and pay minimal dividends. The fruits of their economic activity are
therefore largely enjoyed by those who run them.

There is also the hukou system which prevents rural migrants from participating
fully in China's economic miracle. The country has at least 150 million people
who come from the villages but work in the cities. The snag is that they don't
have the right to be resident, so often live in dormitories, and their children
don't get the same access to schooling as local residents, so usually stay in
the villages with their grandparents. The cities want these workers but don't
want to be swamped by the need to house them and pay for the education and
health care of their families. The result is a potentially unstable two-class
society.

China uses a classic mixture of carrot and stick. The carrot has been growth.
Even if the benefits of growth haven't been equally distributed, hundreds of
millions of people have still been taken out of poverty. Meanwhile, the stick
has been to crack down on anybody who is perceived to be stepping out of line.

The problem is that both the carrot and the stick are becoming harder to wield.
Economic growth is going to slow down in the coming decade. It then won't be as
easy to buy off potential dissent. Meanwhile, mobile communications and the
Internet are mutating in ways that Beijing will find increasingly difficult to
control.

What's more, there's a connection between political rights and economic
advancement. This was not apparent in the past three decades, when the Chinese
model was based on low-value manufacturing. Millions of people could be stuck in
factories and told to get on with the job. But it will become apparent as
Beijing tries to switch to a new model based on services and high-value
manufacturing. If this transition is to be successful, people will have to think
for themselves more. They will also have to harness the full power of modern
communications. It will then be virtually impossible to keep a lid on free
speech.

In China, energy and water issues are inextricably linked. Energy production is
a water-intensive activity, and not just in hydropower dams. China is the
world's biggest power consumer and has the largest energy system. It is also the
largest greenhouse gas emitter. If things don't change, China will become a
major energy importer by 2035, having to import fuel to provide 40 percent of
its power.

China is facing enormous issues, but the government has developed a strong will
to address environmental problems. This comes after decades of ignoring the
environment in favor of industrial growth. Those policies allowed polluting
practices to continue, ruining air and water, and creating cancer villages where
people suffer high rates of the disease.

Conflicts have cropped up over water usage. Agriculture uses 70 percent of the
massive nation's water, but contributes just 10 percent to the national GDP.
Industrial consumption is growing, and the redistribution of water from
agriculture to industry has led to protests by thousands of small farmers.

China is also facing water-distribution problems related to geography, because
47 percent of its population is in northern China, along with 65 percent of its
cultivated land, but less than 20 percent of the nation's water supply is there.
Water prices have been kept artificially low, which has kept prices down for
users. But that has also discouraged conservation practices, such as low-water
irrigation and the development of water-saving technology.

Confucius Institutes are dedicated to Chinese language and culture, education
and research, are funded by the Chinese government, just as the UK has its
British Council, Germany its Goethe Institut and France its Alliance Franηaise.
These European organisations don't shy away from their purpose: to promote their
nation's culture and win allies. China had set up over 500 Confucius Institutes
in over 150 different countries. No small feat, as the British Council, set up
in 1934, has only 220 offices in 110 countries and territories.
These organisations, which spread the teaching of Chinese language and culture
and provides advice to people looking to do business on the mainland, are
overseen by Hanban, ostensibly an NGO but broadly controlled by the Chinese
Ministry of Education. In some more prestigious universities the institutes also
sponsor research programs into sinology.

Japan and China have locked horns over islands in the East China Sea, and
Vietnam, Philippines, and other nations have challenged China over claims to
islands of the South China Sea.

China shares its land border with 14 countries; it used to make sense that a
country in such a position maintains strong conventional forces. But in this
nuclear age, it does not really make sense that China continues to build up its
military at such a pace.

China's real total military outlays in 2012 are $250 billion, which makes it the
world's second-biggest defense spender after the United States. There's no doubt
China's new hardware has important symbolic value and important coercive value.
The American navy has to think twice now before getting too close to China's
shores!

The Chinese state tolerates no criticism and has banned Chinese civil society
from expressing itself freely. Human rights abuses occur daily, such as
re-education through labour, arbitrary detention and torture of dissidents,
psychiatric internment, crackdowns on dissidents from ethnic or religious
minorities through imprisonment or execution, control of the Internet,
harassment of lawyers who campaign for civil rights, house arrest with no legal
basis. It should be noted that the 2010 Nobel Peace Prize laureate, Liu Xiaobo,
was sentenced to 11 years' imprisonment.