In the comments to my Breeze of change blog entry there are some interesting comments about de Gaulle and Roosevelt, defending the former and blasting the latter. I am not a big fan of Roosevelt's myself, but that's a topic I may explore at a later point.

One thing that I have been thinking of blogging about is China. Frequent commenter vaara points to The Coming Collapse of China by Gordon Chang. I haven't read the book and all I know about it is what I've read on Amazon. The book argues that the economic situation in China is nowhere near as rosy as the Chinese government would have us believe. The banks are in trouble, the State-Owned Enterprises (SOEs) are effectively bankrupt and the huge rural population is restive and discontent. Official statistics on the other hand show that the economy has been growing at a high rate over the last years. So what's going on there?

With 1.3 billion people, China is important simply because of the sheer numbers and getting the relationship with China right is going to be important geopolitically. It could set the tone for the next half century. My main problem with analyzing China is that I don't know enough about it. And that's not just in terms of hard data, but it extends to broader knowledge about the country, the cultural intangibles and the habits and customs. I don't speak the language and can't even read it. So China is a relatively big unknown. And gathering hard data on China is not easy either. With a secretive authoritarian regime in total control of economic data, it's hard to know what's real and what's not.

One of my usual sources for keeping up to speed with various economies are the sell-side brokers. Now, even in the best of times you have to take their crediblity with a grain of salt, but in the case of China the situation is worse. All the big investment banks who have equity research departments covering China tend to be positive. If they were to publish research that is too critical of the Chinese, their business would suffer. It's fairly obvious, but you do have to correct for that.

It is clear though that the Chinese economy is producing growth, it is exporting stuff, it is importing stuff and it is consuming stuff. And it is doing so in ever greater quantities. The Chinese can't fake the external accounts to the same extent that they might fudge domestic data, because all its trading partners are keeping track of the exports and imports as well. So there is something real going on, and the special economic zones such as Shenzhen look pretty spectacular. It takes capital and investment to build all those skyscrapers. However, if the developers don't get a return on their capital that is higher than their cost of capital, the building of skyscrapers is adding negative economic value. This applies in fact to all investments.

China's economy does face two big interrelated problems. One is the state of the SOEs, the other the state of the banking sectors. The SOEs are the old communist state enterprises which are adding no value whatsoever and should be allowed to go bankrupt. The Chinese government does not want this to happen too quickly as that would cause massive unemployment, so the strategy has been to let the enterprises go bust one at a time. Meanwhile the state-owned banks are forced to lend money to these SOEs, which has led to the effective bankruptcy of the big Chinese banks. But they're not allowed to go under either because that would cause massive problems for the Chinese economy. So while there are appears to be significant value and wealth creation in the private sector, the legacy of the state sector is still weighing heavily on China's economic prospects. Corruption within the communist party is also a problem that is exacerbating the situation, but the government has been trying to clamp down (or trying to be seen to be clamping down) on that by executing officials convicted of corruption.

The economic growth is China is very localized. In the high-growth zones there is a definite middle class emerging with all the trappings that one would associate with it. But the vast majority of Chinese still live outside these high-growth zones, working either in bankrupts SOEs or out in the countryside. Supposing that all the growth is real, there's still a big challenge ahead to ensure a transition from an agriculture-based rural economy to a modern industrial and service-based economy. But this is the challenge that all emerging markets face. If all the problems had been solved, then the market would no longer be emerging but emerged. I wonder whether a similar kind of book might not have been written about other emerging markets 10, 20 or 30 years ago. If you look at the current success stories like Chile and South Korea, you'll see that these countries also emerged from authoritarian rule through economic liberalization. In the most positive scenario, China would follow a similar pattern.

As always, many things can go wrong. I certainly would not rule out a breakup of the country into smaller states. The high-growth economic success stories could get fed up with central control, subsidizing the poor interior, feeling hampered and held back by a meddlesome bureaucracy hundreds, if not thousands of miles away in Beijing. From a more cynical geopolitical point of view, this might not be a bad thing, as it would break up the collective clout of a country of 1.3 billion people. But at this point I am on really thin ice, because I am speculating about things which I have too little information on.

One big issue will resurface again in China. The faster the economic growth, the sooner it will happen. It's human rights. The current government in Beijing may no longer contain the people directly responsible for the Tienanmen massacre, but the ideological legacy and ruthlessness lives on. The Chinese political leadership consists of odious people. Political dissent in China is still dangerous, and religious repression is routine. If you value your human rights, China is not a good place to live. As I mentioned earlier, the most positive scenario would be that China would follow the example of countries such as Chile and South Korea. Then again, Argentina is next door to Chile. But the human rights issue could also be the catalyst for a secessionist movement in the high-growth areas, and could yet derail the entire economic reform process.

The economic situation in China is improving, at least for a section of the population. The challenge is to spread the growth more widely while staying in control of any social unrest. Unemployment on the one hand, and permeating western values of human rights on the other could make life very unpleasant for the Chinese communists. I don't know how it will pan out, but I do know that whatever happens is going to be of major importance to us in the West.