16 March 2006

China: The Ticking Time Bomb?

I recently posted on an interesting Foreign Policy article that looked at the dark side of China's rise. A few days ago, Winds of Change blog's Joe Katzman posted a look at some specific problems that China is facing.

We'll start with the rural time bomb:

"A peasant "time bomb" threatens to stunt China's rise to global economic superiority unless immediate measures are taken to fix the problem, say experts. The Chinese state has lost much of its legitimacy with the country's rural majority, a turnaround that could have increasingly adverse effects on the long-term socio-economic development of the country, according to Joshua Muldavin, an Asian studies expert at Sarah Lawrence College in New York.

With greater land seizures by the state and reduced levels of rural subsistence, more peasants are having to migrate to urban areas in search of work where disappointment often awaits, making "peasant landlessness ... a time bomb for the state," Muldavin told an audience Thursday at the Carnegie Endowment for International Peace.

"There are two Chinas," he said. One is for investors, and the other is the "rural hinterlands," where official corruption, a growing gap between rich and poor and unemployment led to some 87,000 incidents of unrest in China last year, said Muldavin. It is believed that many more go unreported."


......So, on to the demographic/ pension/ investment time bomb:

China's pension system is facing a demographic time bomb -- the consequence of the one-child policy -- which could seriously damage its future economic prospects, says a new report from Deutsche Bank's research department.

"Low retirement age compounds the demographic problem. China is graying fast but at a very low income level. Low effective retirement ages will see the working age population already reaching its peak between now and 2010 and will lift the old-age dependency ratio much higher than conventionally thought," says the report.

In effect, China is getting the demographic profile of an advanced industrial country with a mature welfare system, but with an economy still clambering out of developing status. And repairing the existing pension crisis is going to cost a minimum of 7 percent of its gross domestic product.

The DB survey lists three structural challenges in today's system that need to be addressed. The first is that the pension system is burdened by a large amount of legacy debt (i.e. unfunded liabilities from the old pension system).

The second is that decentralization of economic planning has led to fragmentation and a lack of transparency; and the third is that China's "immature capital markets make it difficult to find suitable investments with high returns."


Joe's post elicited several fascinating comments, including links to much more commentary and other articles. Read it all here.

Most investors get little gold bars in their eyes when they think of China's billion consumers. Anyone who tries to anticipate the geopolitical trends of the next decade or so needs to think more realistically.

The magnificent scientific achievements of (mostly) western research laboratories rests upon the economies of the western nations. If western economies fall like a house of cards due to a collapse of the Chinese banking system, then all of these miracle cures and devices that are just around the corner, will fail to materialise.

There is a point of no return, after which Communist Chinese corruption and Islamist fanaticism cannot stop the expansion of knowledge and human growth. But we are decades from that point, and very vulnerable yet. Keep a realistic eye on what is happening in those unstable, but critical parts of the world. If caught unprepared, many hundreds of millions of people could easily die in a short period of time. That is what critical instability means, in the modern world. The potential for more dead people than most persons can count.

It will be necessary to "look around" the news media--consider the news media a major obstacle to the acquisition of the valid states of the world. Be very skeptical, develop your own model of the world independent of journalists and journalism. Collect several sources of information and play them against each other.

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