Guest Article: Where China Is Headed

by

Iliya Atanasov*

India on the Rise?

The trend is your friend, but all trends come to an end. China’s resurgence is no exception to this time-tested maxim. Rising powers tend to get mired in multi-decade crises, often never to re-emerge. Such is the nature of the world and of human hubris. Yet, the consensus – including much of China’s own political and intellectual elite – gleefully extrapolates from the country’s meteoric rise. Just about everyone appears certain that within a decade or two China will surpass the US economically and mount a credible challenge to American military dominance in the Pacific. Reality and history, however, beg to differ. The foreseeable future is obvious: China’s current path ends in India.

To be sure, a quarter-century of breakneck economic growth has made China the envy of the world. Some half a billion people found new homes in its mushrooming cities. From skyscrapers and bullet trains to satellites and fighter jets, China quickly adopted just about every advanced technology. The country seemingly sailed through the global financial crisis of 2008-2009 as if it was happening on a different planet. More trillions of dollars of foreign ‘investment’ poured in at the tail end of a multi-decade industrial and real-estate boom. Invincible China’s omniscient leaders could make no misstep.

This mythic ascent to global pre-eminence has been just that – a myth. The reality is much less lustrous. Since the late 1980s, the state-controlled banking system has undergone several wholesale bailouts. China’s rulers blazed new ground in mathematics and statistics as the total of provincial GDPs quite often surpassed the central government’s nationwide figure. In leaked diplomatic cables, then-future Premier Li Keqiang was quoted as smiling that GDP numbers are ‘for reference only’. Yes, China’s economy has grown spectacularly, but probably much less so than widespread perceptions. And it happened on the wings of the most epic debt binge in human history. Years and decades of uncorrected malinvestment have inflated colossal bubbles in stocks, real estate and industrial capacity.

As the facts become too loud to ignore, the mainstream groupthink has struggled to find a counter-narrative. Chinese apparatchiks and foreign pundits peddled ‘soft landing’ as a substitute for the unravelling myth of economic miracle. But years of empty talk about rebalancing the economy have only added up to more – much more – of the same. China’s growth story was mostly based on debt-funded fixed investment: plants, real estate and infrastructure.

By 2014, fixed capital formation remained stubbornly anchored at about 45% of GDP, according to the government’s own statistics. In 2015, China still accounted for 57% of global cement output. The much-touted shift away from investment did not materialize. The country produced 30% more cement in the past three years than the US did in the past 116 years

Here is the problem. Any ‘rebalancing’ would require the instantaneous transmutation of tens of millions of semi-literate factory workers into computer programmers. Or laying them off. Neither is feasible, so Beijing has had to backtrack sheepishly every time real reform was attempted.

Every move to put the brakes on the rabid debt inflation that keeps China’s multiple bubbles from imploding has sent shockwaves through its banking system and the global economy. After housing showed signs of slowing, Beijing ushered in a stock bubble by allowing mom-and- pop day traders to lever up to the hilt. When that bubble burst, the prospect of social unrest forced a ham-fisted government takeover of the securities markets. Reports have surfaced that the authorities are busy inflating still other bubbles – this time in venture capital and commodities. Meanwhile, official statistics say fixed investment grew over 10% last year. Some rebalancing indeed.

Historically, explosive growth has invariably led up to a protracted and painful crisis period to correct for its excesses. China today is deeper in debt than the US at the outset of the Great Depression. Some recent data put Chinese bank ‘assets’ alone at 367% of GDP, up from 196% in 2007. A bank’s asset typically is someone else’s debt. And it is anybody’s guess how much more unserviceable debt festers on the balance sheets of local governments, state-owned enterprises and the shadow-banking sector, which collectively financed much of the fixed-investment rampage. The People’s Bank of China tallied new ‘total social financing’ at a neat $1 trillion just in the first quarter of 2016. Japan, with its measly 450% debt-to- GDP ratio, must have long been left in the dust by all-conquering China.

What China is experiencing is neither a rebalancing nor a landing, hard or soft; it is a crash. If American experience is any guide, the peak-to- trough contraction in China could easily reach 40% of GDP. It took the US stock market a quarter-century, a world war and a baby boom to recover to its 1929 levels.

Large-scale economic collapse, like market crashes, is not a singular event but a process that unfolds over many years. China’s economy has long been precisely this kind of slow-motion train wreck. And the 2015 stock-market plunge dealt a fatal blow to the soft-landing narrative. Hot money – foreign and domestic – rushed for the exits. Amid plummeting foreign trade, Beijing imposed ever more stringent currency controls while devaluing the yuan, thereby feeding an all-too- familiar vicious circle of capital flight.

According to consensus estimates, some $800 billion fled China in just a year. Chinese looking to park their money out of the country have caused epic property bubbles in major global cities. China’s debt problem is a threat not merely to its economy but the entire world. Yet, in terms of the country’s long-term prospects as a global power, the debt overhang pales in comparison to the demographic and environmental crises that are already baked in the cake. As a consequence of the one-child policy, ever-smaller cohorts with ever-greater job expectations are entering the workforce. China’s higher-education bubble has produced a generation demanding well-paid desk jobs but with even fewer marketable skills than its American counterpart. Meanwhile, millions of illegal immigrants from neighbours such as Vietnam and Burma already toil in China’s factory towns, as local Chinese become unaffordable for manufacturers to employ. This is Japanization writ large.

And then there is the aforementioned concrete. The permanent smog screen over the industrial heartland is one of the country’s lesser environmental challenges. Life in the cities is prohibitively expensive for many migrant workers. As they age and as industrial growth slows and reverses, millions of unlicensed migrants will have to head back, but may not like what they find at ‘home’. The Chinese have literally cemented over large swaths of what used to be agricultural land mostly populated by subsistence farmers.

There is no telling how much heavy metals and toxic chemicals have been dumped into China’s soils and aquifers. The effects of this yet-unfathomed ecological calamity will unfold for decades, impacting everything from productivity to healthcare costs in an already aging society.

Against this backdrop, expectations that China will inevitably subvert US dominance are premature. Granted, economic troubles are not much of an obstacle for nationalism and militarism. But China’s nationalist resurgence and recent maritime adventures are a sign of weakness rather than strength. Careening away from Maoism and towards Leninism underscores the leadership’s acute awareness that the economic story will not last much longer as a source of legitimacy for one-party rule. Such concerns are behind President Xi’s taking direct command of the army. Chinese elites may well decide to inflate a nationalism bubble, just as they encouraged stock-market speculation to deflect attention from real estate. Nationalism is both cheaper and more sustainable.

But then there is the geopolitical context. On the other side of the Himalayas, another giant is awakening from its stupor. India’s economy is much smaller than China’s and shares many of the same pollution problems. But India has three great strategic advantages in the ‘long game’ that China is playing. India has a much younger population and more than twice the population growth rate. It will surpass China over the next decade or two as the world’s most populous country. In addition, India is much closer to the Persian Gulf, where the planet’s most important energy source is concentrated. When it comes to petroleum, India literally stands in the way of China. It also has a tradition of worryingly friendly relations with Japan, which can be a source of capital if an alliance is pursued more actively. Finally, India’s government and economic system are decentralized. In a decentralized economic system, mistakes are more likely to remain localized and less likely to be perpetuated by large-scale bailouts. This is why India has been developing in fits and starts, but also why its growth will be much more sustainable than China’s.

With relatively low levels of debt, India’s explosive surge is just a matter of when. The talk of China’s economic decline does not even begin to capture the size and scope of the global impact. The sheer scale of economic mismanagement puts to shame all previous bubbles, so it is hard to say whether the world as a whole, not just China, will be able to dig itself from this hole without major war. Yes, China’s odds of recovering 20-30 years down the line are not terrible, but in the meantime the new rising power in Asia is going to be India. Per capita, India’s economy is still in its infancy. But watch out – they grow up fast.

*Iliya Atanasov is founder & CEO of moneyfact.org and senior fellow on finance at the Pioneer Institute for Public Policy Research in Boston, Massachusetts.

What I Learnt from La-Isha

La-Isha is the largest and most important Israeli women’s magazine. It is affiliated with Yediot, the daily paper and media empire which sells more copies each day than the rest of Israel’s papers combined. My goal in looking at it was to answer Freud’s famous question: What do women want?

laIsha-coverThe issue I am now honored to have in front of me hit the newsstands on 8 May, just before Israel’s Independence Day. It is printed on quality paper, costs NIS 18 (about $ 4.7) and contains 162 pages. Exclusive of advertisements. The front cover shows a young woman wearing heavy make-up and parted lips. Dressed in a tank top, she may be the dream of many young and not so young women; however, she is also just the kind you do not want in the office. Partly because she looks as if she has never done a day’s work in her life; and partly because you have other hobbies besides defending yourself or your company against sexual harassment suits.

Supposing you are young and foolish, or for that matter old and foolish, the one place you might want her is in bed. But even there she might turn out to be the type who considers herself too beautiful to be touched by a coarse male hand and only wants to show you off to her friends.

The rest of the issue does not disappoint. I counted: on the list of contents there are thirty-six major items, excluding numerous minor ones that take up just a few lines. Most major ones are grouped into six categories. To wit, “Health and Happiness,” (how to find a restaurant that will offer healthy food); “Tourism” (beautiful places in Israel to visit; this, after all, is Independence Day); “Consumerism” (how to spend your money buying things); “Style” (no explanation needed; this group contains more items than any other); “Design” (just one piece); and “Mini-Chef” (how to cook). Why is this group is called “Chef,” which in Hebrew is the masculine form, rather than “chefit”, which would be the feminine one? Another case of penis-envy, no doubt. If anyone has a better explanation, I’d be very happy to post it here.

Two articles allow readers to ask questions and receive answers. Interestingly, both respondents are male professors. One is an expert on education, the other a physician. The articles on plastic surgery and the one called “In Bed” are also written by a male physicians. Don’t Israeli women trust women to advise them on their problems?

The longest single article, “Standing to Attention,” is five pages long. Five pages? Can women really read that much? Incredible! Calm down: 90 percent of the space in question are covered by pictures. The article, such as it is, deals with young female soldiers who, while on leave, quickly change into more attractive clothes. Needless to say, not one of them is shown standing to attention. Let alone carrying a weapon of any kind; even penis envy has its limits, it seems.

And then there is the standard weekly fare. A letter from the editor, by her photograph another fairly young and quite attractive woman. “The Letter that Was Never Sent” dealing with the musings—would you believe it—of a young female Israeli soldier who, while riding a bus, shared a seat with an Arab woman in traditional garb.

I shall spare the reader the complete list of all items; instead, let me focus on just a few. A woman named Assi Friedman has discovered an art exhibition dealing with, of all things, flour. As well as an easier way to wipe floors and a particularly good spot for buying milk. There is a column called “In Your Free Time” (no explanation needed); one named “In Bed…” (ditto); one appearing under the heading, “Relationships Are Everything;” and one called “The best-Looking [female] Friends.” The issue concludes with more sagacious advice on physical and mental health as well as the inevitable whoroscope (compliments to Erica Jong, who to my knowledge invented the expression).

Incidentally, all twelve weekly fates being forecast take it for granted that readers are of age. Notwithstanding that Israel has the highest fertility rates in the entire Western world, not one so much as mentions motherhood. It is further assumed that women work, and also that none of them are on pension. Though Israel has one of the world’s longest life expectancies, old women do not seem to count. In other words, the only women who count are those who are adult, are of working age, have a career, and are or expect to be in some kind of relationship. So much for sisterhood.

And then, surprise surprise. To repeat, the normal issue consists of 162 pages. This time, however, in honor of Independence Day, readers also got a special supplement containing 124 pages. Free of charge, the lady behind the counter said. What a treat! The name of the supplement? Stiletto. Precisely the kind of shoe many feminists profess to hate as a symbol of male oppression. The contents? Almost exclusively photographs of young ladies in swimsuits. Including three of Bar Refaeli, the most famous Israeli model whose presence is almost as indispensable as the whoroscope. Currently she is pregnant, a fact that the photographs do not show. Hence they must have been taken some time ago.

Not a single word about such “role models” as Hillary Clinton, who currently stands a good chance of being elected the most powerful person in the world. Not a single one about Angela Merkel who, at the moment, may be more popular in Israel than she is at home. Or about Janet Yellen, head of the Federal Reserve (whom the woman-hating Donald Trump has sworn to fire because, so he says, he does not like her). Or about several female ministers, MKs’ and top-level bankers in Israel itself. Why? Let me guess. Because all these women are quite old. La-Isha readers neither want to see their pics nor can identify with them.

Is that what women really want?

Happy Birthday, Israel

A year ago at this time of the year, I posted an article arguing that Israel has been the most successful political creation of the entire twentieth century. Demographically, economically, politically, militarily, scientifically, culturally—no other country started from so little and no other achieved so much in such a short time. Let me remind readers that, a hundred something years ago, even the language—Hebrew—was moribund. Used almost exclusively for prayer, it had to be rebuilt almost from the beginning. Today, to celebrate my country’s 68th birthday, I want to focus on a particularly touchy question: namely, the place occupied by, and the feelings of, Israel’s 1,300,000 strong Arab community.

The research was done by Prof. Sami Samocha, a professor of sociology at the University of Haifa. He has been monitorings_a relations between Arabs and Jews in Israel for 35 years, no less. Thanks also to my colleague, Prof. Alex Yakobson, who drew my attention to Samocha’s work.

The following information pertains to the year 2015. It presents, in somewhat simplified form, the responses to 19 out of 178 questions Samocha asked Arab-Israeli citizens. Needless to say, the questionnaires were anonymous.

Bad news first:

61.1 percent strongly oppose or oppose their children attending Jewish schools, whereas only 38.4 percent would strongly like or like them to do so (0.5 percent did not answer this question; since the number of non-respondents to this and the remaining questions is very small, in what follows I did not bother to mention them). 67.9 percent greatly fear or fear serious infractions of their civil rights, whereas only 31.6 percent are very certain or certain that will not happen. 56.5 percent greatly fear or fear they may one day be “ethnically cleansed,” whereas only 44.8 percent do not fear such a possibility or do not fear it at all. 32.2 percent strongly believe or believe in the government, whereas 67.8 percent disagree or strongly disagree.

And now, to the good news:

76.1 percent of Arab Israelis strongly agree or agree that Arabs and Jews should work together in common organizations, against only 22.6 who either disagree or strongly disagree. Working side by side with Jews, 65.8 percent feel completely at ease or at ease versus only 26.6 percent who disagree or strongly disagree. Visiting a shopping center also frequented by Jews, 58.8 percent feel either completely at ease or at ease whereas only 31.11 disagree or strongly disagree. 53.6 percent strongly agree or agree that Palestine is the common homeland of both peoples, whereas only 45.6 percent strongly disagree or disagree. 66 percent strongly agree or agree that Israel is a good place to live, whereas only 35.8 percent disagree or strongly disagree. 59 percent strongly prefer or prefer living in Israel than in any other country in the world, whereas only 40.8 percent strongly disagree or disagree.

75 percent are quite ready, or ready, to have Jewish friends whereas only 24.3 percent reject, or strongly reject, that possibility. 52.3 percent strongly believe, or believe, that Jews have many positive qualities Arabs should adopt whereas only 35.5 percent disagree or strongly disagree. 58.1 percent strongly believe, or believe, that Arab Israelis resemble Jewish Israelis more than they do Palestinians in the west Bank and the Gaza Strip, whereas only 41.2 percent disagree or strongly disagree. 27.5 percent would be very ready or ready to live in a Palestinian State, whereas 72.4 percent would either reject or strongly reject such a possibility. 65.8 percent strongly hold or hold that Israel has a right to exist, whereas only 33.8 percent disagree or strongly disagree.

Finally, 89.4 percent say either that, as Arabs, they had never been threatened or hit by Jews, or else that this had only happened once or twice. Only 10.3 say that this had happened to them more often. 77 percent say either that being Arab never made them feel discriminated against or that this only happened once or twice; whereas only 22.5 percent said that they had felt so more often than this.

Let me end this with two anecdotes. My oldest son lives in northern Israel in a town called Carmiel. Nearby is Dabach, known after the head of the family tribe, a big man whom I last saw while he was snoring peacefully away in his office. The complex includes a supermarket, several shops, a restaurant, and a large parking lot. Currently the family is busy building a second complex in Haifa. Since prices are low, Dabach is frequented by both Arabs and Jews, me—when I get there—included. Never in any of my visits did I witness any problems between Arabs and Jews.

The second anecdote goes as follows. The other day I was listening on the radio to the mayor of Umm el Fahem, an Arab-Israeli town of over 50,000 inhabitants adjacent to the northern part of the West Bank. The interviewer asked him about the possibility that, in some eventual peace agreement, the border would be moved slightly to the west so that he and his people would live in a Palestinian State. In response, the man almost got a stroke. With good, reason, too. Given that Arab-Israeli per capita GDP is more than ten times higher than that of the Palestinians in the West Bank and Gaza; and given also the truly terrible things that are currently happening in Arab countries such as Iraq, Syria, Libya, Yemen, the Sudan, and the Sinai.

So have a happy birthday Israel. To expect Arab Israelis to wax enthusiastic about that birthday, let alone celebrate it, would be too much. I do, however, hope that as many of them as possible will make use of it to have a merry day off.

Trillhaase, Or So the World Changes

Visiting an art fair in Cologne, Germany, a couple of weeks ago, I came across an artist of whose existence I had never been aware. He was Adalbert Trillhaase (1858-1936), a retired merchant and amateur painter who did his best work during the late 1920s. Normally he is classified as “naïve.” To me, however, he is anything but; rather, seeing him using crude forms and apparently poking deliberate fun at the world around him, I would call him an expressionist. Another hint pointing in the same direction is provided by the fact that he was close to the much better known Otto Dix, who at one point did a painting of Trillhaase and his family. If so, that would explain why the Nazis, classifying him as a “degenerate” artist, placed him under a so-called Malverbot (prohibition to paint). But this is a point the reader should judge for him- or herself.

trillhaasegerichtThe painting that struck me most carried the title, “A Meeting of the Court.” It shows four judges, each wearing a different expression but all of them men and all of them mustachioed, sitting at the bench. To the left is the scrivener, also a man, who appears be resting from his labors or fallen asleep. There is a male lawyer who has thrown his arm over the shoulder of a woman, presumably either a witness or the defendant. Judging by the number of judges present, the issue at hand must have been quite serious. Completing the painting are five women who form the audience.

Just what stage the proceedings have reached is by no means clear. The lawyer may be leading the woman towards the black volume lying on the table in the foreground, presumably a Bible, in order to make her swear on it. Or what we see may be a recess, or else the woman may already have been convicted. In that case her lawyer may be trying to console her. Or he may not.

Anyhow. The painting made me think, the best thing a work of art can do. First, judging by the way they are dressed, the ladies in the audience seem to be middle class. All five have ample bosoms; obviously the idea that they should starve themselves so as to achieve as slim a figure as possible has not yet occurred to them. Nor is there any reason why it should have. After all, this was the immediate aftermath of World War I. Inflation was gathering steam and many Germans were almost literally starving. Having enough to eat was a blessing, not a shame.

Next, the lawyer. Not only is he male—at that time, female lawyers were almost as rare as unicorns. But he is making the sort of gesture which, today, might cause him to be charged with sexual harassment. And four—four—men sitting in judgment of a single woman? Who has heard of such a thing?

Briefly, what the painting told me was that the world has changed. Follow a few of the changes which, judging purely by what we see, it has undergone:

First, as I just said, in our day and age a court made up entirely of men, mustachioed men what is more, sitting in judgment over a woman would have been all but inconceivable. Except in places like Saudi Arabia, Iran, and some Israeli rabbinical court, of course. Long before the first judge would have opened his mouth for the first time, such a court would have been condemned for being male chauvinist, incapable of understanding women, oppressive of their rights, and generally unfair and unworthy.

Second, the scrivener would almost certainly have been a woman. A young one dressed very differently from the ladies we see. And instead of writing up the record by hand, as he seems to be doing, she would have used some kind of computer or other electronic gadget.

Third, the lawyer would as likely have been female as male.

Fourth, the ladies in the audience, besides being slimmer-looking, would be very unlikely to wear hats indoors. Interestingly enough, except for the fact that they are spectators what they are doing there is anything but clear. Almost certainly they have cleaning ladies to look after the household. Probably they do not hold paid jobs, or else they would hardly have leisure to attend the court. Yet they do not look as if they are oppressed or discriminated against in any way, do they? To me at any they look quite self-conscious, ready to take on anyone and anything.

What Trillhaase is providing us with, quite unintentionally of course, is a door into a different world that has long since passed away. Like the one in which my late grandmother, who was born in 1893, might have lived in while busy having one child after another (she ended up by having six). Was it worse than the one in which we live today? Or, perhaps, better? Who is to say?