August 18, 2003

A clever RAND report makes the worst possible case

LOS ANGELES -- Behind the facade of the emerging giant, just how fragile is China? A provocative book, published here, raises serious questions about China's future. And, one wonders, the intentions of its authors.

On one level, "Fault Lines in China's Economic Terrain" is quite brilliant. At a time when everyone and his investment advisor are singing China's economic praises as if it were the second coming of '80s Japan, a Santa Monica-based RAND group strings together a lot of sour notes. What if everything in China went wrong economically? How might China's remarkable 7-10 percent annual growth rate evaporate and head into the red? What factors, in short, could bring China up short?

The authors--led by the internationally respected Charles Wolf Jr., with K.C. Yeh, Benjamin Zycher, Nicholas Eberstadt and Sung-Ho Lee--posit eight major tectonic plates along which China could slide backward big-time.

-- If unemployment, now running at a staggering 23 percent, worsens, it could knock China's growth rate down by 0.3-0.8 percent.

-- Should corruption (already a big issue) become more prevalent, Beijing might expect another 0.5 percent loss off the growth rate.

-- If the AIDS epidemic continues to increase at an annual rate of 20-30 percent, annual growth diminishes by something like 2 percent.

-- Overall, China has plenty of water, but not for the one-third of its population unluckily living on its northern plain. If authorities don't address this water crisis in the next decade, shave perhaps 2 points off annual growth.

-- Thirst for oil and natural gas is also growing. If China gets hit by even a ''moderately severe'' global energy shortage, it's down at least 1 percent growth-wise.

-- If the cancer eating away at China's banks (many bad loans and little willpower to clean them up) turns out to be as serious as Japan's, the predictable financial and crisis squeeze could drain the economy of 1 percent growth.

-- Consider the effect of a reversal of fortune with foreign direct investment (FDI), which since 1985 has helped fuel China's astonishing growth. Should foreign investors be frightened by negative political developments, or increasingly attracted to other investment options (in India, Pakistan, Indonesia, Russia, elsewhere), say hello to another 1 percent or so drop in growth.

-- And if the ever-present overhang of tension with Taiwan does trigger a cross-strait crisis, it could cost Beijing up to 1.0-1.3 percent of growth.

The study's authors -- sophisticated scholars and economists -- readily admit that the probability of all these disasters happening at the same time, sliding China into negative growth, is very low. But they also hold that the probability that none of them will erupt is also very low. And even a relatively small cluster of problems -- say, more unemployment and more AIDS, or a Taiwan crisis and a consequent FDI slide -- could bring the much-vaunted Chinese economic miracle down to earth with a globe-shaking

[...] In truth, China does have serious problems (without even mentioning the usual Western obsessions -- issues such as human rights violations, iron-fisted management of Tibet, shakiness with Hong Kong and ham-handedness over Falun Gong).

RAND has hung out for all the world to see China's dirty-laundry list. Whether or not the provocative RAND study is read in China, few, if any, of the problems cited are going to disappear on their own.