Want to understand China? (And what investor doesn’t these days?) Start with these two books. First, China Shakes the World by James Kynge, the former China bureau chief for the Financial Times. Second, China’s Trapped Transition: The Limits of Developmental Autocracy by Minxin Pei, director of the China program at the Carnegie Endowment for International Peace. Together they’ll give you a good feel for the realities of China on the ground today and for the limits of the consensus forecast of China’s future.
China counts—no matter whether you’ve got your portfolio tied up in Hong Kong equities or stuffed in the relative safety of U.S. Treasuries. It’s the world’s second or third largest economy (depending on how you count your beans). It accounts for about 15% of all global economic output, according to the International Monetary Fund. Mere rumors that “China’s buying!” are enough to move global markets in everything from iron ore to soy beans. Its huge cash reserves are critical to funding the U.S. deficit. And China represents the biggest challenge to U.S. global hegemony on the horizon.
Kynge is neither a wide-eyed China fan of the “On current trends China will be the world’s largest economy by 2020” school nor a China basher eager to project the collapse of the Middle Kingdom. And that’s the strength of his book. He’s been to enough of China over a long enough period of time so that he has a good handle on the extremely tenuous nature of current trends. For example, projecting from current data China is either going to be the most powerful nation in the world or the globe’s largest—and most underfunded—old-age home. A generation of newly comfortable Chinese consumers will either usher in an unprecedented age of global economic growth or the country’s poisoned environment will cause the collapse of what will be seen, in retrospect, as a brief and unsustainable burst of economic speculation.
Kynge starts his book with a brief wide-angle overview of the puzzle of China’s history and the persistent Western prejudices about China. In 1400 the average Chinese was richer than the average European. By 1820, however, Europeans were about twice as rich as per capita GDP climbed to $1,034 from $430 in 1400 (using 1985 dollars) while China’s GDP per capital had stagnated at $500. By the 1950s, China was actually slightly poorer than it had been in 1400 with per capita GDP of $454 while European per capita GDP had climbed to $4,902. (For my money the classic examination of why the industrial revolution didn’t start in what was then the world’s biggest economy is Mark Elvin’s The Pattern of the Chinese Past.)
On the one hand, this “failure,” Kynge intimates, is at the core of the persistent national myth that the West seeks a return to the centuries of its colonial domination of the Chinese empire. On the other hand, it is also at least partly responsible for the Western amazement at the speed of China’s rise from a backwardness that actually represents a very small part of China’s very long history.
Kynge’s chapters on China’s unfolding environmental disaster and the decline in trust in the justness of the current regime make good background reading to Minxin Pei’s book. Despite a bit of heavy chop when jargon from recent academic theory on political development makes for tough going, this is a startling book. Its thesis is that China’s government is neither a static repressive Communist totalitarian regime nor a transitional way station on the path to democracy. Instead, Pei argues, China is now a kleptocracy, a form of government characterized by rampant theft of national wealth by a powerful political elite (and its children) that is fearful that the system won’t last much longer. Like any other over-arching view of China it doesn’t do to see everything in China through this lens. But Pei’s book does explore the very real limits to power from the top in this command economy.
(For me, Pei’s book reverberates far beyond China. Anybody living in the United States in the era of Enron, Halliburton, and Bernie Madoff will find Pei’s description of how a kleptocracy works a disturbingly accurate explanation of recent U.S. economic history.)