Much of the hype surrounding China’s massive economic growth reminds me a bit of the tech boom of the last decade. You know you see a bubble when you get internet ads touting the following:

“China’s raw material consumption has gone up a billion percent in the last 10 years; the only difference in the future will be that the sector will grown even more!” Or something like that.

I generally agree with both Minxin Pei and Tyler Cowen about many structural problems the Chinese economy has, including crony capitalism, corruption and inequity (see The China Hype, Part 1; and also Chi-Dooh Li’s punchy Seattle P-I column summarizing much of the same points (h/t Patrick Bell)). My own view is that these structural problems will compound serious social fractures that are occurring in China today and will increasingly pose significant challenges to the political monopoly that the Chinese Communist Party holds.

However, I remain unconvinced of the idea that China will go bust because of demographic problems. The assumptions behind such a prediction are usually about China’s one-child policy and early retirement age (see The China Hype, Part 2), both of which will likely evolve as China’s economy matures. Besides, you know that kind of “not enough cheap labor” argument is stale when even the New York Times gets in on it (Chinese businessmen can always go to Vietnam for cheaper labor; they already do).

In fact, Dan Harris, a Seattle-based international lawyers who knows a thing or two about conducting business in China at the rubber-meets-the-road level, counters the notion that China, and Chinese workers, are getting too expensive:

Wages are rising in China, particularly in places like Shanghai and Shenzhen, but also in less “foreign populated” cities like Dalian and Qingdao as well — but much more slowly. However, productivity increases are still outstripping wage gains and none of these newly reported economic ills are at all new. [snip]

It can be exceedingly difficult to find good employees in China, particularly those with high level management or technical skills, and particularly in the more foreign dominated areas, like Shanghai or Beijing. But this has always been true.

These “China is getting expensive stories” make the mistake of equating Shanghai and Beijing with all of China, effectively ignoring more than a billion people, whose wages are lower than those in China’s ex-pat centers. [Boldfaces mine]

I made the same point about the profitability of smaller cities earlier:

Developing your own network takes a lot of work and much local know-how, but produces very handsome dividends in the end, particularly outside super large cities like Shanghai — in other words medium size-cities where fewer foreign firms venture. Untapped, but still lucrative and has economy-of-scale, apparently.

None of this suggests that the Chinese economy is healthy, by any means. In foreign policy circles, I am usually pegged as a “China-crasher” (as well as a “China-basher,” but that’s another story), and I have very contentious behind-the-scenes arguments with some noted “China-hypers.”

But just as the crash of the tech bubble did not result in all of us going back to using abacus, any future Chinese economic crash will not result in a complete reversal of the economic gains that China has made in recent years. But there will be a great pain, and a lot of Western investors will lose bucketfuls of money as they did in the tech bust. Furthermore, there will be significant economic and social strains on the Chinese polity. My hope is that if and when that occurs, the social reaction will be channeled to a constructive democratic revolution. I call that remaining sober, but hopeful.
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