Pessimism on a Grand Scale

By Dexter Roberts


By Gordon G. Chang

Random House -- 344pp -- $26.95

In The Coming Collapse of China, Gordon G. Chang launches directly into his controversial argument that the country's many woes add up to a terminal illness. He describes China's debt-laden banks and broken state-owned enterprises (SOEs), its beleaguered entrepreneurs and overly cautious Communist leaders--all in an entertaining and generally clear style. This is a familiar, if still alarming, litany for any watcher of modern China. But Chang, an American lawyer with almost two decades of experience working on the mainland, takes his startling polemic one step further: He says that as top leaders drag their feet on instituting necessary reforms and as the pressures of entering the World Trade Organization overwhelm China's economy, the Communist Party will soon collapse--possibly within 5 years--and the country will face enormous upheaval. That's a dubious proposition. Nevertheless, Chang's book is a worthwhile read.

There are lots of reasons to worry about China's future, and one of the biggest is the parlous state of China's finances. Chang does a good job of cataloging the problems, from government meddling in lending decisions, to the bad debts that may represent half of all commercial loans, to the difficulties Beijing has taking the painful steps to clean them up. Chang provides a spot-on dissection of Beijing's troubled attempt to create asset-management companies that can clean up the balance sheets of Chinese banks. Here, he draws an important contrast to the U.S. experience with the Resolution Trust Corp. in the late 1980s and early 1990s, in the wake of the savings and loan crisis. In contrast to the U.S., China has not moved quickly enough with its program, nor endowed it with sufficient resources to deal with the huge amount of bad debt. "Dentists don't fill cavities until they remove all the decay, and partial recapitalizations don't change bad lending practices," he writes.

Equally adroit is Chang's handling of what he calls China's "industrial theme parks." The term refers to about 50,000 state enterprises that still suck up some 70% of domestic loans while producing less than 30% of output. The author shows how the continuing bias in their favor hurts private enterprise, the most vibrant sector of China's economy. Beijing claims that by last year most state enterprises had been made profitable. It's an assertion that has much more to do with political timetables than reality, Chang persuasively argues. "Half the profits were due solely to an increase in world oil prices, which permitted state companies to charge more for China's crude, and a quarter of the profits resulted from direct government subsidies," he explains.

China's top leaders simply are not up to the massive task of reforming their ailing state-run economy, Chang concludes, and that will lead to their downfall. President Jiang Zemin comes in for particular criticism for his obsession with ideological campaigns. Over the past few years, these have at times included mandatory study sessions for all officials, which have interfered with almost all regular governmental functions. Chang even accuses Jiang of being a throwback to the era prior to former leader and noted economic reformer Deng Xiaoping, with whom Chang compares Jiang unfavorably. China's planners, he says, are "misreading the everchanging environment."

Ultimately, Chang misses the obvious: China's present generation of leaders, despite their hesitations and occasional ideological broadsides, have decided to push economic reform, and aren't likely to abandon it. There is no better proof of that than Jiang's and Premier Zhu Rongji's decision to gamble on bringing China into the global economy via the WTO. In a moment of inconsistency, Chang even admits to this: "The leadership in Beijing is using WTO to force changes in SOEs," he writes.

Even Beijing's interminable political propaganda campaigns are sometimes pressed into the service of reformist goals, something Chang overlooks. Jiang's current campaign, the so-called Theory of the Three Representatives, with its emphasis on the "foremost productive forces in society," is mainly intended to justify Beijing's new acceptance of the growing social inequality that is accompanying economic reform. Similarly, in a recent speech commemorating the 80th anniversary of the Chinese Communist Party, Jiang made it clear that Beijing now wants to draw private entrepreneurs into the Party--thus jointly promoting economic reform and the Communists' political monopoly.

Chang correctly identifies potential hot spots that could flare into mass street protests: the leadership's inability to resolve its standoff with Taiwan, the corruption eating away at the government's legitimacy, and the shaky condition of the banks and stock markets. But the author's assumption that protests will necessarily be followed by moves to overthrow the Party seems wrong. While most Chinese indeed do not particularly like the Communist Party, it is likely that even more fear the possibility of its collapse. The absence of a revolutionary mood among the public was noteworthy last month, when hundreds of thousands of people took to Beijing's streets to cheer their country's successful bid for the 2008 Olympics. The celebrants even seemed willing to extend to their leaders a degree of credit for that victory. Hyperbole aside, The Coming Collapse of China provides an able account of the huge challenges ahead for China as it continues its steps toward reform.

Roberts is Beijing bureau chief.

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