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Source link: http://archive.mises.org/4154/capitalism-in-china/

Capitalism in China

September 30, 2005 by

My wife and I briefly visited China two years ago, as part of a cruise that started in Hong Kong and ended in Beijing. We spent a day in Shanghai and 4 days in Beijing.

We had been to Hong Kong twice before and had been tremendously impressed by it. But we didn’t expect very much in mainland China. In fact, when the ship stopped in Seoul, Korea, I stocked up on American candy bars, thinking that we would have to live off them during our days in China.

We were very pleasantly surprised by what we actually saw. Shanghai and Beijing have skylines rivaling or even surpassing New York’s. Beijing has elevated highways running through its center which seem far more modern than those in Los Angeles. I think there must be some significant element of economic freedom in important parts of China to make this possible. As for having to live off candy bars, not so at all. It turned out that Beijing has quite a number of brand new 5 star hotels belonging to major global chains. Ours served some of the most lavish buffets we’ve ever seen, either in the US or in Europe. (Cruise passengers staying at a different hotel reported the same thing at theirs.)
Our tour guide in Beijing, who could not have spoken contrary to the policy of the Chinese government, stated that the economic system of China was now capitalist. In my judgment, the most significant piece of evidence he offered to that effect was when our bus passed a prominent McDonald’s in the heart of Beijing (there’s a large number of them in the city and, if I remember correctly, many other similar American fast food restaurants as well), he related how a former mayor of Beijing had lost his job by trying to revoke McDonald’ lease on its site in order to turn the use of the property over to some crony. This indicates that there is some serious enforcement of contracts in China, which is very important.

I want to add that to get to Beijing, our ship docked in Tientsin, which is a considerable sized city in its own right. It possessed a substantial number of high rise buildings too. We got from Tientsin to Beijing by traveling over a modern 4-lane highway. (The distance was roughly a hundred miles.)

More important was what I saw from the ship as we left Shanghai: mile after mile of factories, power plants, wharves, an incredible number of cargo cranes and containers. (About once a year, I get a view of the cranes and containers in San Pedro, which is the port for Los Angeles and by some accounts the busiest in the US. I’m sorry to say that I think it’s dwarfed by what I saw in Shanghai.)

As the 2008 Olympics approaches, which is to be held in Beijing, I think there’ll be a major discovery process with respect to China. The television cameras will be working overtime to show the sights in the city and probably elsewhere in the country.

I have to conclude by noting that I think our four days in Beijing must have been subsidized by the Chinese government. The four days were offered as a freebie by our Japanese-owned cruise line, which I don’t think would have been possible otherwise. I didn’t come to this conclusion until after I saw Beijing and realized that a shipload of well-to-do American and Canadian tourists had been shown sights most of them would probably not otherwise have seen and which could not help but lead them to report very favorably on the economic development of China. As you can see, this is exactly what I’m doing.

I’m confident that what I saw was not a Potemkin village. But I also know that to have a reliable appraisal of China’s development, it would be necessary to be fluent in the leading Chinese dialects and to spend a few years traveling extensively throughout the whole country. Then one might form a judgment as to whether spectacular development in some places was part of an overall process of improvement or was at the expense of decline elsewhere in the country. We ourselves saw major poverty along the highway to Beijing, with farmers carrying buckets from their shoulders and having to use draft animals. And, of course, there’s major, widespread poverty in Beijing and Shanghai themselves. But such poverty has always been there. Given a knowledge of the desperate poverty of China in the past, it’s difficult to believe that there could have been room for decline elsewhere in the country on a scale sufficient to provide the wealth I saw.

What I believe is that the provision of modern capital goods to millions of hard working Chinese by foreign investors has resulted in a substantial increase in China’s overall production, an increase an important part of which consists of further such capital goods or goods to exchange for such capital goods, with the result that more millions of Chinese workers become similarly equipped, and so on and on, in a process of rapid compound growth.

{ 23 comments }

Wild Pegasus September 30, 2005 at 4:34 pm

Why are you so sure you weren’t seeing a Potemkin village? There’s certainly no question that China is still a repressive dictatorship with regard to political dissent, religious liberty, and information dispersal. I find it hard to believe they’re granting broad economic freedom when they’re still so obsessed with controlling personal liberty.

- Josh

G.H Wellber September 30, 2005 at 6:11 pm

See what the workers at these hotels and factories think. Once you see the conditions in which they work, the export of Capitalism won’t seem so glorious.

R.P. McCosker September 30, 2005 at 8:54 pm

Josh:

A Potemkin village is just that: a village. It isn’t metropolises with vast skylines. It isn’t “mile after mile of factories, power plants, wharves, an incredible number of cargo cranes and containers.”

Capitalism is working there, big time. In the heyday of American and British capitalism in the 1800s, there was immense new wealth coupled with remaining urban and especially rural poverty. Budding affluence arises in certain particularly productive sectors, then gradually fans out to the larger society. To the extent that government confiscates from the productive sectors to equalize incomes for the impoverished sectors, it impedes the economic growth that will eventually benefit everyone far more in the long run.

Why is China granting so much economic freedom — perhaps more economic freedom than is currently permitted in the US? Not from any doctrine of natural rights, to be sure. I suspect a pragmatic understanding by the political leaders that wealth leads to power, and free markets lead to wealth. It shows considerable self-discipline by the leadership to resist, as the politicians in the Western democracies (and Japan) are much less willing to do these days, killing the goose that lays the golden eggs.

G.H.:

What, so you think the life of rural peasantry those factory workers (or their recent ancestors) left wasn’t a whole lot worse than what they enjoy now?

Ohhh Henry September 30, 2005 at 10:31 pm

Strong elements of capitalism are there. But much of what you witnessed is an inflationary boom which is not organic, not sustainable, and will inevitably lead to an economic depression which will almost certainly result in greater government power, and perhaps even military adventurism as a means of distracting the population and putting millions of unemployed onto government payrolls.

… he related how a former mayor of Beijing had lost his job by trying to revoke McDonald’ lease on its site in order to turn the use of the property over to some crony.

If I recall correctly, the city official committed suicide over this scandal – a highly unusual thing for a Chinese official to do, and therefore suspicious. And the McDonalds was demolished anyways, for a new development whose backers had better connections with the central government. Hardly a triumph of capitalism. The China watcher who explained these events to me at the time it happened was of the opinion that this was yet another expression of the continuing struggle for supremacy within China between two gangs of businessmen and politicians, one from Shanghai, one from Beijing. Don’t ask me which gang is which, or who is winning.

Mike Linksvayer September 30, 2005 at 11:36 pm

In fact, when the ship stopped in Seoul, Korea, I stocked up on American candy bars, thinking that we would have to live off them during our days in China.

You’re joking, right?

Robert Carlin October 1, 2005 at 10:47 am

Thanks for posting this insightful commentary Dr. Reisman. I’d love to see you post more often to this blog, if not start your own!

Lowell R. October 1, 2005 at 11:53 am

Amen Robert Carlin! There’s a reason Reisman’s posts always garner the most (and most hostile) comments.

R.P. McCosker October 1, 2005 at 1:21 pm

Ohhh Henry:

I have no expertise on China, but I’m surprised to read you dismiss the massive development there over the last 20 years as merely an inflationary boom. Just how does China’s inflation compare with that of the Western countries? If that’s all it was, I’d've expected to see a major collapse by now.

Rather, my impression is that the US is borrowing from the Chinese on a massive scale. It seems to be the US that’s floating on the bubble of credit expansion and massive overseas borrowing. And, whereas you speculate about Chinese military adventurism in the by-and-by, it’s happening right now, on a gargantuan scale (many hundreds of billions of dollars; military presence in c. 136 foreign countries), in the land that was once a great beacon of liberty.

Stefan Karlsson October 1, 2005 at 2:28 pm

Regarding the two points raised by Reisman’s critics:

Yes, the Chinese government isn’t guided by libertarian philospohy and therefore resorts to statist measures whenever they believe it suits their purposes. And yes, this includes a far too high degree of supression of free speech. Although about the last point it should be said that things have improved even in that respect since the days of Mao.

I remember seeing a documentary in Swedish television last week which was advertised as exposing the Chinese government’s human rights violations. That human rights violations which they focused on was however turned out to be the use of eminent domain to make Beijing look nicer for the 2008 Olympics. I remember laughing when I realised this. I mean, imagine that! They violate property rights through the use of eminent domain! What a truly evil dictatorship China is! Good thing those of us who live in democracies don’t have to put up with the government taking our land through the use of eminent domain…..

Anyway, in the documentary they showed how several of the people who were displaced through eminent domain were protesting quite openly and holding vigils outside courts and government officies, not to mention speaking with foreign journalists. This shows that while China is still more repressive regarding free speech issues than western countries, they are not as repressive now as they were in the past and as many other governments still are ( I don’t think that this kind of behavior would have been tolerated in for example neighboring North Korea).

Regarding the Chinese boom as being merely a inflationary bubble, I disagree with that. While it is true that there are some excesses caused by inflationary bank credit, the main driving force behind the boom is the structurally high savings rate in China, caused in part by Chinese cultural attachment to thrift and caused in part by China’s lack of a welfare state. The latter fact also ensures that the Chinese will be hard working, which also ensures continued high growth.

Ohhh Henry October 1, 2005 at 8:52 pm

I didn’t say, “merely an inflationary bubble”. And I know there is a high savings rate and relatively little welfare in China. There was also a high savings rate and very little welfare in America in the 1920s.

Consider this:

“According to official government statistics, 2002 Chinese GDP growth was 8%, and 2003 growth was 8.5% … According to the People’s Bank of China own web site … money supply for 2001, 2002, and 2003 grew respectively 34.2%, 19.3%, and 18.1%. Thus, during the last three years, money supply in China grew approximately three times faster than money supply in the U.S. during the 1920s.” China’s Great Depression

That looks, walks and quacks like inflation to me. Those thrifty Chinese people’s savings are being eroded by inflation. The hardworking Chinese are making DVD players in an awful lot of unprofitable, debt-laden factories, and building a lot more office towers, luxury hotels and condominiums than (it seems to me) would actually be needed in an economy which is growing organically.

Is there an Austrian economist here who would argue that this isn’t inflation, that the new money being created is not being malinvested, and that this is a sustainable boom?

Paul Edwards October 1, 2005 at 10:34 pm

I’m with you Ohhh, I think China is in for a hard crash hard core. They’re pounding out the skyscrappers, and pumping out the yuan to keep the peg up to the USD and there’s too much central bank and government involvement in distributing all this loose credit. They favor their exporters and other of the connected interests, at the expense of their importers and their domestic consumers.

When their major malinvestments reveal themselves as non-sustainable, and things begin to crumble i think we’re going to see a literal revolt over there. And it’s not just an issue of economics either. If i’m not mistaken, they’re manufacturing a shortage of young wives for the men over there.

It just seems like a recepie for disaster in the variety of ways you might cut it.

Cheers.

David White October 2, 2005 at 8:58 am

“It just seems like a recepie for disaster in the variety of ways you might cut it.”

One being what happens here when China stops buying our debt.

Stefan Karlsson October 2, 2005 at 3:40 pm

Ohhh Henry, you are certainly right that there are a lot of inflationary bank credit in China and that this creates a lot of malinvestments. But you overestimate the degree to which this is the driving factor behind the boom andyou underestimate the degree sustainable structural factors is driving the boom.

First of all, the money supply figures aren’t as scary as they appear at first glance. It is quite natural and sustainable for a rapidly growing area to have a money supply growth that is faster than the rest of the world. Such relatively higher growth is what we would see under a international gold standard and is what we see within all currency areas (If we had separate money supply figures within the US, I can bet that money supply growth would historically have been far faster in Las Vegas than in North Dakota). Of course as China is in effect on a dollar standard and as the Fed have inflated the dollar, this also reflects unsound and unsustainable inflationary excesses, but my point is that while it is bad it is not as bad as the headline money supply figures would suggest.

And certainly, as a result of this there are a lot of malinvestments in China . Indeed, many have already been revealed as such.

However due to the extremely high structural savings rate there is still more than enough investment capital to finance the sound investments which are driving growth. Remember, China have a investment rate of 45% of GDP. Even a third of this is malinvestments, that still leaves 30% of sound investments, far higher than the 17% investment rate in the US (a substantial portion of which is also malinvestments btw).

And it is simply not true that the US in the 1920s had anything near the savings rate that China have today. The savings- and investment rate was in fact less than 20% of GDP in the late 1920s.

All of this is not to say that China don’t face problems. When the US goes into its next recession, you can be sure that China (and to a lesser extent India) is likely to be blamed. That in turn will likely provoke much sharper protectionist measures than we have seen so far, something which could hit China hard given how dependent upon exports to America they have become.

Daniel October 2, 2005 at 6:02 pm

Id like to mention 5 things for those who look at China through what appears to be rose coloured glasses.

1. China’s banking system is rotten through and through. The banks have tried to transform themselves from an administrative arm of government (whose purpose was to funnel cash to state owned enterprises) into viable commercial operations. The changes were, quite frankly, half hearted and seemed to be aimed for PR purposes only. Bad debt ratios are still through the roof.

2. A huge property bubble is evident in Shanghai, the commercial capital of the country. Due to the amount of easy credit available, property speculation has driven up prices to unheard of levels, and furthermore the occupation rates of these properties are very low.

3. If China stopped buying US debt, what would be the likely impact of that on China’s economy, being that the US is the biggest single destination of Chinese goods.

4. China has rightly been condemned for its past histroy of human rights abuse. Yet it was mentioned as evidence that people protesting a development was a sign of growing tolerance. Contrast this to what happened to the Falun Gong protests and the continuing censorship of the internet.

5. To those who wish to draw comparisons between western governments and the Chinese Communist Party on the topic of liberty, I can only say that you have no idea of what you are speaking about. As one who is an adherent to the central ideals of libertarianism, I am distressed like many as to the direction in which modern western governments are heading. But to say or imply that the Chinese government is some sort of progressive example is just pure distortion. Ill cite evidence if is required, but will refrain from doing so now as this post is long enough.

P.M.Lawrence October 3, 2005 at 3:37 am

One point to remember is the typical pattern in history. With that, capital is not only put together constructively but also by forced wealth transfers, usually from changes in land ownership. It shows up in things like the enclosures in England, the Highland clearances, and Irish evictions when tenancies became less profitable than they had been. These incidentally created labour forces at the same time as transferring wealth to potential investors.

In China much the same has happened, only separated into instalments. The wealth transfers from land ownership changes happened under communism, and now that capitalism is coming in that wealth is reaching investment – only, the owners are not the same as the former owners (or their heirs and successors). Unless and until trickle down catches up, today’s gains are in large part at the expense of former expropriations.

Roger McKinney October 3, 2005 at 11:45 am

Mr. Lawrence provides a concise version of the Marxist explanation for the rise of capitalism, i.e., primitive accumulation. Of course it’s not true. If it were, then Spain would have led the industrial revolution instead of England, for Spain stole tons of gold from Native Americans. But it helped them very little. In fact, one explanation for the rise of economics as a separate field of study was the paradox of Spain’s gold and poverty compared to the Dutch lack of gold but amazing wealth.

China is a great example of the fact that even small improvements to the security of property in a country can produce amazing results. China has a lot of problems with government spending and corruption and these will catch up to her. But until then, we should be happy for their progress and enlightenment. Both of us, the US and China, can continue to grow rich together.

Yves Grassioulet October 5, 2005 at 11:06 am

China today is nothing more than the worst of communism and capitalism put together. But the current economic growth is hiding the reality of such structural and cultural change: what is the human cost of such power race? Do people feel more free in the end of the working day?

Mackenzie Campbell October 20, 2005 at 5:17 pm

People you should not be so harsh with your comments, discrediting what has been said, there is no question of whether economic freedom is becoming more prominent in China, one needs only to look at the pro-capitalist members of the CPC and there new institutions, a strong central control is still implemented at intervals to avoid massive problems that come from a capitalist reformation, but as these problems are dealt with the nation becomes more and more ecomomically free.

Cecilia November 5, 2005 at 12:14 am

i hope one day capitalism will be established in China and Catholicism will become China’s state religion
but i just do not know how
my email:050247535@sina.com

Cecilia November 5, 2005 at 12:14 am

i hope one day capitalism will be established in China and Catholicism will become China’s state religion
but i just do not know how
my email:050247535@sina.com

David January 30, 2006 at 11:08 am

I hate to say it but you have it all wrong about China. I spent a month in China in 2000 and adopted two beautiful girls. One was very sick and I had to stay for one month. Yes, the Chinese skylines are modern. So what?

Do you realize how many people have been displaced; and that many neighborhoods and rice paddies were bulldozed over to make room for these modern buildings that you were so enthralled by? People in China are told where to live, where to work and you still need internal passports to travel and live in different areas. There are millions of illegal Chinese citizens living and working in Beijing who aren’t authorized by the Central government to do so.

Did you go see the hovels on the outskirts of Shanghai, next to the beautiful ex-patriot development? Did you stop and look at the conditions of some of the villages not far from the Great Wall.

Yes, the Chinese are putting gold leaf on their buildings and statues but at their orphanages, they line up the children when they give them vaccinations and they reuse needles. This leads to the spread of Hepatitis B & C, AIDS, etc.

Do you know that the average Chinese wage is equivalent to $800 per year and that if a family decides to have more than one child, the family is fined $8,000, the lose their Communist Party papers, which means they can’t work and they become ostracized in their community…. Of course, many government officials have more than one child….

As far as eminent domaine. People in China have no rights to take anyone to court. First, a local magistrate has to accept the legal petition from the lawyer. The judge, in many cases and in most eminent domain cases, just simply refuse to accept the legal petition from the poor farmer’s lawyer.
Therefore the case never existed. By the way, there is only serious enforcement of contracts in China if the government likes you. The naivite of your comments just startles me. Haven’t you even read the articles in the NY Times about how Kafkaesque China is?

And speaking of justice, it is more important for the Chinese government to “solve” crimes. So the police just lock up anyone they don’t like, and they may even be executed. Yes, they will get a trial. They may not be allowed to produce any evidence or witnesses, and the government will have tons “evidence.” You may be locked away for years, have a fifteen minute trial, and be sentenced to death.

Go to Tibet and leave the tour group. See how many monks are taken away to the country side and don’t return.

I can go on and on and on….

You had a great vacation with Rose Colored glasses on provided by the Chinese government. You saw what they wanted you to see. You were there for five days and you are an expert? Wake up and smell the chai!!!!

China is an authoritarian country where their are very few rights. You want to be an artist. Be careful. You want to talk about democracy. Watch your back.

The Chinese people appear happy, but they have layers and layers of incredible fear that they cloak in their personalities.

I was very fortunate to have spent a month in China under incredible circumstance. I learnt a lot, and I love China, but please do not be misled by the Chinese government. They are a cruel and harsh government. Don’t ever get in their way or challenge them. For every case you hear about, there are thousands of cases that the Chinese government doesn’t want you to hear about. It is easy to squash a dissident, or a poor farmer who lost his land, or even a village if you have to in the name of Chinese capitalism or communism or whatever you wish to call the economic system sponsored by the brutal Chinese central oligarchy.

David January 30, 2006 at 11:08 am

I hate to say it but you have it all wrong about China. I spent a month in China in 2000 and adopted two beautiful girls. One was very sick and I had to stay for one month. Yes, the Chinese skylines are modern. So what?

Do you realize how many people have been displaced; and that many neighborhoods and rice paddies were bulldozed over to make room for these modern buildings that you were so enthralled by? People in China are told where to live, where to work and you still need internal passports to travel and live in different areas. There are millions of illegal Chinese citizens living and working in Beijing who aren’t authorized by the Central government to do so.

Did you go see the hovels on the outskirts of Shanghai, next to the beautiful ex-patriot development? Did you stop and look at the conditions of some of the villages not far from the Great Wall.

Yes, the Chinese are putting gold leaf on their buildings and statues but at their orphanages, they line up the children when they give them vaccinations and they reuse needles. This leads to the spread of Hepatitis B & C, AIDS, etc.

Do you know that the average Chinese wage is equivalent to $800 per year and that if a family decides to have more than one child, the family is fined $8,000, the lose their Communist Party papers, which means they can’t work and they become ostracized in their community…. Of course, many government officials have more than one child….

As far as eminent domaine. People in China have no rights to take anyone to court. First, a local magistrate has to accept the legal petition from the lawyer. The judge, in many cases and in most eminent domain cases, just simply refuse to accept the legal petition from the poor farmer’s lawyer.
Therefore the case never existed. By the way, there is only serious enforcement of contracts in China if the government likes you. The naivite of your comments just startles me. Haven’t you even read the articles in the NY Times about how Kafkaesque China is?

And speaking of justice, it is more important for the Chinese government to “solve” crimes. So the police just lock up anyone they don’t like, and they may even be executed. Yes, they will get a trial. They may not be allowed to produce any evidence or witnesses, and the government will have tons “evidence.” You may be locked away for years, have a fifteen minute trial, and be sentenced to death.

Go to Tibet and leave the tour group. See how many monks are taken away to the country side and don’t return.

I can go on and on and on….

You had a great vacation with Rose Colored glasses on provided by the Chinese government. You saw what they wanted you to see. You were there for five days and you are an expert? Wake up and smell the chai!!!!

China is an authoritarian country where their are very few rights. You want to be an artist. Be careful. You want to talk about democracy. Watch your back.

The Chinese people appear happy, but they have layers and layers of incredible fear that they cloak in their personalities.

I was very fortunate to have spent a month in China under incredible circumstance. I learnt a lot, and I love China, but please do not be misled by the Chinese government. They are a cruel and harsh government. Don’t ever get in their way or challenge them. For every case you hear about, there are thousands of cases that the Chinese government doesn’t want you to hear about. It is easy to squash a dissident, or a poor farmer who lost his land, or even a village if you have to in the name of Chinese capitalism or communism or whatever you wish to call the economic system sponsored by the brutal Chinese central oligarchy.

Paul Edwards January 30, 2006 at 2:31 pm

The root of prosperity is respect for property. To the extent that the people and the government of China respect property we can expect sustained growth and prosperity there.

My impression is that China is a fascist state. With tyrants, politicians, bureaucrats and political entrepreneurs at the helm in China, we should only expect disaster.

They believe in state capitalism. They believe in the state, in coercion, fraud and theft. They will have their skyscrapers and with them, poverty and suffering. What a world; but what else is new under the sun?

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