China -- economic juggernaut, running scared

The world sees China as an economic juggernaut. It’s growing at a dizzying annual rate of 10% as the rest of the world struggles out of recession. Its big cities are jammed with new cars, new buildings and Prada, Gucci and Cartier boutiques — the real thing, not knockoffs. It just blew past Japan to become the world’s second-largest economy.

China has even offered to build a high-speed railway in California. The state’s first long-distance railroad, in 1869, was wrought with American capital and Chinese labor; this time it could be Chinese capital and American labor. Even for a high-speed rail fan, that doesn’t sound like good news.

In short, China’s on the way up and we still seem to be going sideways. So an American visitor to Beijing, which is where I was last week, quickly feels an unfamiliar and unsettling sense of inferiority, at least when it comes to economic strategy.

But listen to the Chinese describe the world as they see it, and you get a very different picture: They’re running scared.

Yes, China’s economy is growing at 10% a year, but Chinese officials and economists worry that they will someday run up against an ancient American economic proverb: If something cannot go on forever, it will stop.

The country’s communist leadership — it’s still a communist country, remember? — has staked its legitimacy on an implicit bargain: Let us rule, and we’ll create good jobs, increase workers’ incomes and reduce rural poverty.

But in a nation of 1.3 billion, with wild extremes of poverty and wealth, that’s harder than it sounds. To keep expansion on an even keel, economist Fan Gang says, China’s economy needs to keep growing by at least 8% a year for the foreseeable future. And to achieve its long-term goal of becoming a prosperous country without an impoverished peasant class, he says, China must create no fewer than 150 million jobs in the next 20 years or so. You read that right: 150 million. (And here we’ve been arguing over whether President Obama’s stimulus package created a mere 3 million.)

Without all those new jobs, Fan says, “We could face social crises” — a polite term for riots in the streets. Chinese officials don’t talk about the 1989 uprising that led to the Tiananmen Square massacre, but unlike us, they remember that it wasn’t caused only by a new generation’s yearning for democracy; it was also caused, in part, by an economic slowdown that made students and workers angry about a shrinking job market.

In the 21 years since Tiananmen, China’s domestic order has survived hundreds of thousands of demonstrations, strikes, highway blockages and other disturbances, most born of anger about poor working conditions, government land expropriation or official corruption. The national Public Security Ministry used to issue an annual report on what it calls “mass incidents,” but after the number rose to 120,000 in 2008, the reports stopped coming; the Chinese Academy of Social Sciences, a government think tank, now merely says incidents occur “frequently” and are likely to continue rising.

The way out of these problems, the government and its economists say, is to grow China from a low-wage, low-consumption export economy to a middle-income, middle-consumption economy — one that exports solar panels and high-speed rail systems along with appliances for Walmart but that also consumes more of what it produces.

Today, the economy is still set up mostly to funnel national income into infrastructure investment, not consumption. And Chinese households, instead of consuming like Americans, still save an astounding share of their income (around 50%, according to some estimates), in part because the pension and healthcare systems are too meager for anyone with even moderate means to rely on.

So even though many Chinese economists agree in principle that U.S. Treasury Secretary Timothy F. Geithner is right that their currency, the yuan, should slowly rise above its artificially low, export-supporting rate against the dollar, they also sound like St. Augustine after his conversion: “Lord, make me chaste, but not yet.”

That’s why there was no gloating from China after its GDP passed that of its ancient rival, Japan. The Chinese still want to reap the benefits of being treated as a poor, developing country, not a successful global competitor. We’re not rich yet, they chorus, and point out that their per capita GDP of about $4,000 a year, according to the International Monetary Fund, is about one-12th the United States’ $48,000 and ranks them No. 97, just ahead of Albania.

“China is not an advanced country,” insisted Dong Manyuan, a political scientist at the government-run China Institute of International Studies. “Even in 20 or 30 years, China will still be in its primary stage of development.”

That’s a little hard to swallow when China’s “primary stage” includes not only basic industries but 56 high-technology industrial zones to compete in fields from biotech to software services.

Of course, some of China’s poor-mouthing is a tactic to fend off foreign pressure to revalue the yuan, end subsidies of export industries and crack down on intellectual property theft. (The U.S. ambassador in Beijing, Jon Huntsman, says an unlucky street vendor tried to sell him bootleg DVDs just the other day.)

But some of it is the natural legacy of a country that was, until recently, bitterly poor and still considers itself a struggling “latecomer” in the global competition for natural resources, technology and wealth.

We may think of China as a juggernaut; the Chinese don’t.

“China feels cornered,” Fan Gang says. The Chinese know that their economy is inefficient, unbalanced and running on momentum, and that if the momentum flags, they could in real trouble.

When the Chinese play hardball on exchange rates or trade or anything else, they’re simply defending their self-interest as they see it. They’re profit-seeking capitalists in a culture that expects hard bargaining, and (like anyone else) they enjoy fleecing foreigners. And, in their own way, they’re just as scared of the future as we are.