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The Chinese economy seems to have performed remarkably well both during the “Asian financial crisis” of 1997-98 and the recent global economic slowdown. One might conclude that the present Chinese economy is robust and in a position to perform well over the course of the world business cycle — that is, if you choose to believe official reports.

Many observers suspect that Beijing has been overenthusiastic in its economic performance. This is because gigantic state-run companies comprise a significant fraction of the Chinese economy that are overwhelmingly in basic sectors and in heavy industry, like iron, steel and metal manufacturing. At least half of these companies are losing money and have been for a decade or more.

How such weak companies have been able to withstand the recessionary waves sweeping through the region since 1997 is not readily clear. This is especially unclear since world markets for products produced by the state-owned companies have been weak. If the present U.S. administration felt it must protect its steel industry with 30 percent tariffs due to global pressures, it takes a huge leap of faith to believe that China’s steel companies are faring better.

Yet, there are structures in the Chinese economy that have made it less vulnerable to external shocks and recession. Most importantly are private and nonstate enterprises. These enterprises have a “Taiwanese-style structure” in that they are small and numerous, and are often geared for the domestic market. Since they tend to operate principally in light industry sectors, they were less affected by successive waves of recession.

Now consider that these two sectors have opposite and offsetting effects on overall economic performance. On the one hand, state-run dinosaurs tend to act as a drag on the entire economy, especially during slowdowns. On the other hand, the nonstate sector is less susceptible to such pressures since smaller enterprises can keep growing even during significant downturns in overall economic activity.

It is not easy to know the true balance between these two contradictory tendencies in the Chinese economy. But it is likely to result in very low overall growth. Despite official reports stating the opposite, the Chinese economy has probably been growing at a lower rate than before 1997.

Now consider the consequences of this reality check on China’s ability to deliver high economic growth. One area concerns Beijing’s expansive policy for the East Asian region.

Compared with the most obvious example of Taiwan, Beijing must be seen as the natural regional leader so that it has the sufficient degree of freedom to get away with its plans. However, China can only be the regional leader if it becomes the economic dynamo of the region. This would imply that China could swim successfully against strong currents to pull along other economies.

Some voices in both the East and the West insist that China has achieved its goal as a regional economic powerhouse. This is based in part upon the observation that interregional trade between China and several other East Asian countries has grown faster than trade with the West since 1997. It is also true that China has captured more international capital than all other East Asian economies.

Care should be taken before accepting an interpretation that China is the “natural link” of East Asia for the advanced economies and can thus act as a hub for new technology and advanced knowledge to be channeled to the region. Before accepting such a conclusion, consider that the regional leaders of East Asia — or any group of countries — must generate at least two continuous flows of economic services.

The first requirement is to offer a growing export market for other East Asian economies. Trade flows would be such that the leader would generate a new division of labor through its more sophisticated economy. Less-developed economies could then specialize in lower-tech sectors that would generate export incomes from the more advanced, leading economy. Their export incomes would then allow them to finance a modernization similar to that of the leading economy.

If this a growth pattern that has applied to regional developments in the modern world, it does not fit the hypothesis of China as a regional leader. In a deeper economic sense, China might lead a very heterogeneous group of countries like Myanmar, Vietnam and Laos. But it certainly does not qualify as a natural economic leader for the rest of the region.

Instead, the traditional pattern of East Asian growth since 1985 involves decentralization. City-states like Singapore and Hong Kong functioned as “hubs” to channel capital movements and technology to Southeast Asia and China respectively. This successful pattern would have to be replaced by a regional leader that is advanced, both economically and politically. China does not fit that description.

The second requirement is that China becomes the financial intermediate for the region, channeling capital to its most profitable position in the region. This implies that China would emulate Japan in recycling a trade surplus into regional investments, or function as Singapore and Hong Kong did before 1997. This is unlikely to happen anytime soon.

This is simply because China is capital-starved and there is no well-functioning capital market. Losses from state-owned enterprises absorb all surplus capital in China with state banks functioning to dole out subsidies to them. Since it will be many decades before state-owned enterprises become a significantly smaller part of the Chinese economy, it is an illusion to believe that China will develop anytime soon as a natural regional leader in East Asia.

It is possible that China might soon become a dominant regional military power. But without the “natural” element, it will face the unenviable task having to use force and suppression to contain both its own restive population as well as its neighbors in East Asia.

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