China Threatens

Tomohiko TANIGUCHI (Fellow, GLOCOM)

Shelf after shelf of major bookstores in Japan are being filled daily with books about China, as US politicians increasingly refer to their relationship with China, not Japan, as the most important bilateral one in the world. Long gone are the days when Japan alone (in Asia, I mean), was America's beloved pin-up girl. US Business Week recently called Japan "a Toyota-Sony economy", which manages to headquarter some of the brand name companies but has ended up "part of a once-great nation that's slipping into irrelevance" (Business Week, February 17, 2003).

Apparently it is China that is gaining "relevance" these days. A casual observer of its economy may want to compare today's Shanghai, for instance, to Tokyo in the booming 1960s. The truth is that China resembles no other economy, which is why the challenge it poses towards Japan is also distinctly unique.

Shanghai, to start with, is a city that had absolutely no skyscrapers in 1984. Now it has more than 2,000 (some say 2,600) including some of the world's tallest. Although its population exceeds 15 million, one can find virtually no TV aerials, for most houses have long been connected to CATV, enjoying as many as 40 different channels. All this, despite the fact that thousands of houses still have no basic facilities such as kitchens and toilets. Do not be surprised to see houses with no toilet, but with PCs hooked up with broadband Internet connections, and by broadband I mean fibre optic cables. Welcome to Shanghai.

If this is not puzzling enough, there are more anomalies:

-- Income disparities are grotesquely huge, both within major cities and between urban and rural areas. Did Mao Zedong not say that the Communist Party of China (CPC) was primarily for farmers and labourers, and was communism not synonymous with egalitarianism?

-- Where have all the people who used to live on the sites of high-rise buildings and elevated highways gone? How can the government of China build up physical infrastructure faster than any other in the history of mankind?

China is a product of most unlikely combinations. Its market economy seems in full bloom. Yet, in a country that is as large as Continental Europe, no one but the state, i.e. CPC, has land ownership. No wonder, if it takes Japan over 30 years to add a landing strip to Narita Airport due to disputes involving land ownership, China can finish constructing a world-class airport within three years.

College graduates in fashionable suits work like yuppies with Western investment banks and accounting firms, making it appear as if in today's China, one can choose whatever occupation one deems challenging. While this has largely been the case for the well educated, at least for the last several years, this is still a country that divides its populace into two, those who chanced to be born in cities and those born in rural areas.

The sons and daughters of farmers, a less privileged bunch, can spend time in the big cities as migrant workers, but only for a limited duration and under the strict control of the state authorities. They work hard, but their employers do not have to give them pay rises, for they know that after three years the workers will go back to their hometowns some hundreds of miles away, and will be replaced by more money-hungry peasants' sons and daughters. Disgusted farmers have reportedly rioted from time to time in rural areas, but remember, the CPC is like a huge personnel department, stockpiling files on each and every Chinese citizen and amassing information as old as their school report cards. Chances are a rioter's son may not be granted his passport even if he wants to study abroad. It is through such measures that the CPC has succeeded in keeping the nation's wages competitive for a prolonged period.

In fact the CPC may be the most enlightened autocrat that history has ever seen.

Enlightened as they are, the CPC cadre are shrewd enough to realize that they must liberalise the economy, which they are doing step by step in the so-called Chinese way, and that they can build the economy with other people's money in the form of foreign direct investment - which, they also know, would make the investors captive to China. What they provide in return are essentially paper plans: the Beijing Olympic games in 2008, Shanghai World Exposition in 2010 and the like (a Universal Studio and a Disney Land will follow), thereby continuing to lure foreign investors, one of whom will eventually build a Ferris wheel twice as large as the London Eye, to decorate the Shanghai Expo.

Autocratic as they are, they are in no position to allow a repeat of unrest of the Tiananmen scale to happen; otherwise their sovereign risk (apologies for the financial jargon) would soar, disappointing foreign investors. The Shanghainese rumour that police once arrested a man because they thought the flyers he was handing out were suspicious, whereas he was merely telling his customers about a discount sales campaign. The CPC, incidentally, is no longer the vanguard of farmers and workers, who constitute only a fraction of the party. 80 per cent of party members are city dwellers, which is why the CPC can do what Japan's LDP could never do –concentrate resources on the development of coastal cities whilst paying scant attention to rural areas, where even taking a bath remains a lavish consumption.

Put all this together, and there emerges an economy that neither Adam Smith nor David Ricardo would have thought could exist. For China simply resists the cardinal principle of classical economics, that is division of labour. It is an economy competitive on either front; its poorest labour force can beat their counterparts, even in some of the world's least developed nations, while its well educated can match those working in Silicon Valley in the US. In other words, China can produce both potato chips and silicon chips - and can do it more cheaply than any other country. The enlightened CPC is fully aware of this being necessary to keep the nation on a fast growth track, whereas the autocratic CPC educates the populace to pay heed to nothing other than growth, growth and more growth.

Sounds like a behemoth beginning to take shape? It certainly is, leading Japan increasingly to fight a rearguard action. Japan does not know whether it can succeed or not. The challenge German industrialisation posed to Britain in the Victorian era was nothing like this. When Japan appeared in the eyes of American business pundits trying to conquer their industries in the late 1980s, the truth of the matter was that LDP politicians at the time were still earnestly allocating money in their rural constituencies much to the detriment of the urban service and knowledge industries.

Hence the real question to be asked is this: Japan has long been a diligent student of Arnold Toynbee, whose theory held that a nation's strength is gauged in the manner with which it responds to challenge that comes from outside. Does Japan still subscribe to this theory? Is it ready to face up to the unprecedented Chinese challenge? For now, I can only say that the nation is deep in thought.

(Do not quote without the author's permission)