Why China will Not Rule the World

The scene strangely resembles an episode of South Park. Cartman thinks that the Chinese are planning to take over the world and goes into a Chinese restaurant to gather some intel about the upcoming Chinese invasion. When he doesn't hear what he wants to hear (the Chinese were never planning an invasion, even in the twisted world of South Park), Cartman goes on a shooting rampage and then gets himself arrested.

The real life situation is almost a mirror image of that episode of South Park, in a contrived, symbolic sort of way. All over the country, people are clamoring that China will be the world's next superpower, especially economically. Political domination, as it follows, will then be just a step away. And just like South Park, I'm here to tell you that it is all a hoax. There will be no economic or political domination. Improvement? Perhaps. But even if China has the resources and the capacity to become the world's leader, it lacks the willpower for change to realize this dream. Because though China's improving economically, such economic gains can only mask the political sins its leaders have committed.

Before we continue, keep in mind that I'm not some WASP America-Lover. I am saying all of this from the standpoint of a Chinese citizen, someone who has deep respect for his homeland (albeit one that has been able to see what I believe to be the truth about that homeland). However, certain facts must be addressed and grievances made clear. The only way to improve, as it turns out, is to acknowledge one's shortcomings.

The main issue, of course, is China's political system, something that I could write about for pages and pages but will attempt to condense into a few paragraphs. In short, political instability and corruption is in China's blood. The fact that never in China's 5,000 years of existence has it ever had a democratic political system is a telling fact. Taiwan was a ray of hope in China's political history, but unfortunately, managing a tiny island is a lot easier than managing the third largest nation in the world. And that's assuming that the current government is willing to change.

Judging by history, the odds don't bode well. Throughout China's history, the vessel for political change has almost exclusively been revolution. Very rarely have there been peaceful transitions in power. But the more important consequence of history is the mindset of the ruling party that their will is law, that their word is supreme, and that their power can be taken only through revolution (in this regard, the odds are even worse, as the current Chinese military is one of the strongest in the world).

In other words, China's established government, along with its problems and inefficiencies, is here to stay. What are the economic implications of this fact?

First is the supression of information. Free markets thrive on the free flow of information. In most studies of economics, perfect information is a necessity, and often taken for granted. Unfortunatly, without perfect information, complications arise. Robbing the population of an accurate assessment of value, consumers and investors alike begin to speculate. The fact holds at all levels China's economy. Without regulatory agencies and free information about product safety, consumers buy faulty products and unsanitary foods. In September of 2008 a strain of toxic milk was found in China that caused sickness in over 6,000 infants. Such is not an isolated incident. America has certainly learned this lesson the hard way, after receiving toys from China that contained higher-than-safe levels of lead. In China's real estate market, speculation runs rampant. Houses lay dormant, bought purely for the purpose of a speculative investment. The scene in China's real estate market strangely resembles that of the United States before our "Great Recession" and have some experts clamoring over an asset bubble in China. In China's stock market, the lack of information causes minute pieces of information to swing markets in large amounts. Many companies lack statistics and as a result stock market investing in China resembles gambling more than investing.

But bah, you say. Perhaps China will change. Certainly it is impossible to suppress information in our age, where information technology and the use of the internet reigns supreme. I have more than once held on to this thread of hope. And perhaps that interpretation has some validity. However, if Google's conflict with the Chinese government is any indication, China plans on suppressing information for as long as it possibly can. If, somehow, China's stance on censorship does crumble under the political pressures of the interational community, it will a) not be anytime soon and b) be accompanied by a fundamental shift in the role of the Chinese government.

Perhaps another staple of the disfunctional government, China's government is also highly corrupt, which invariably leads to economic inefficiency. Throughout history, its legal system has never been one based on law, but one based on the jurisdiction of those in power. As such, buying of favors, exploitation of the poor, and the institution of lavish programs that benefit only the most wealthy are all uncomfortably common in China.

In just the past few years, local governments across China have been building new houses. A noble enough goal, except for the fact that nobody lives in them. The only reason they were built was to reach China's predicted GDP growth figures. Economically inefficient? You bet.

China's ownership of intellectual property is also hugely limited. Piracy runs rampant (moreso that in Europe or the Americas) and patents and intellectual rights are almost unheard of (you've probably seen the reports of pirated DVDs and fake Rolex watches). The meager laws that do exist can be easily bypassed with a bribe. This, of course, disincentivises research and development and as a result stunts China's growth potentials.

Finally, China's economic relations with the rest of the world has not been quite clean as well. By artificially pegging its currency to the US dollar, the Chinese government has been able to maintain positive net exports. In a way, China has is really the world's spoiled child. Given what it wants to avoid its tantrum, the western world has pacified China by meeting most of its ridiculous desires. But sooner or later, the tides will turn. Sooner or later, the rest of the world will get annoyed by China's incessant whining. Sooner or later, even the most lenient parents will choose discipline. When that happens, China's currency will undoubtedly appreciate, and China's edge in manufacturing will wane. Without business from abroad, the shakey fundamentals of the real Chinese economy will show. And when that day comes, it will be a sad day for China indeed.

But maybe China has come a long way since its communist days. Maybe attempting to mix a capitalistic economic structure with a communistic political structure is a noble move. But as Milton Friedman said in Captialism and Freedom, "There is an intimate connection between economics and politics." It is also possible the demands of 2010 are hugely different than the demands of 1980. Ultimately though, everything all boils down to a single fact: the Chinese economy still lacks the fundamental infrastructure necessary for a sustainable and functional growth.

After all, a house without foundations cannot stand.