China's Troubled Transition

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Anyone who goes to visit China today sees the progress that has made headlines. Officials who take you on a tour will be happy to show you the sparkling new office complexes and industrial parks that line the impeccably landscaped highways. But the sprawling new factories and luxury shopping malls add up to only part of the picture.

According to a recent report from the Carnegie Endowment for International Peace, if you dig beneath this glittering surface, you find a nation that is being run from on high by an elite cadre of politicians who are ignoring the needs of most of its citizens. In fact, according to a report in the latest issue of The McKinsey Quarterly,1 China suffers from a stagnant rural economy, widespread poverty, unemployment, an unstable financial system, social disorder, and rampant corruption.

But it’s easy to overlook the reality when the country’s economy seems to be booming. Earlier this year, China’s gross domestic product topped that of Great Britain and France, putting China in fourth place among the world’s largest economies. Late last year, China became the largest exporter of technology in the world. In the process, the Chinese economy is gaining on the U.S., and some believe China will actually be the world’s largest economy by mid-century.2

For this and other reasons, China has become a magnet for investors from all over the world who see that nation as both the world’s greatest manufacturer and the world’s greatest potential market. Investors have been snapping up Chinese investments and, thereby, driving up the prices of Chinese companies.

For example, the largest banking institutions in the world are buying into Chinese banks, ignoring the fact that they are sitting on billions in bad loans. Among the players are Bank of America and Citibank. In addition, every big auto company has either built or is in the process of building factories in China, even as the car market appears over-saturated.

To justify such moves, businesspeople point to China’s amazing record of advancement and growth. But, just how good is that record? Not nearly as good as some would lead you to believe!

If you examine the cold, hard numbers, you find that Japan, South Korea, and Taiwan have actually achieved much more impressive growth than China since 1979. For example, China has had to spend 30 percent of its gross domestic product on bailing out failed state-run banks during the past few decades. Nevertheless, its banking system remains perpetually on the brink of collapse...

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