US heads toward rehab as China faces a hangover?

I was in Washington last week as the US debt limit drama was at its most intense. Like everybody else, I was transfixed by the television coverage and how politics now blends into the US media blather as just another reality show.

The media is about conflict – and politics is about compromise. But in this day of ravenous and ideological 24-hour cable news, conflict is the key driver of our political culture as it is with the reality shows. It all blends together as you channel surf from Fox News to MSNBC to Jersey Shore to The Biggest Loser to Jerry Springer.

I don’t think anybody in America would be shocked to click on their TV and find Sean Hannity provoking an argument between Snookie and Mitch McConnell about whether losing belly fat or cutting the deficit is the paramount issue facing America. I am sure that more than a few TV viewers last week were disappointed that House Speaker John Boehner and his snarky, upstart majority leader Eric Cantor didn’t punch each other out Jerry Springer style.

While our politics as entertainment may provide mind-numbing escape for a country with 10% unemployment and few signs of impending economic recovery, we Americans should care that we look like a very silly, sad and fast-slipping superpower to both our allies and challengers around the world.

I was recently talking to a European friend in Beijing about US politics. He looked at the ground, shook his head and said he was “very sad to watch America self-destruct.” Others with less affection for the US seem both gleeful and worried.

Our biggest benefactor and debt holder, Chinese central bank governor Zhou Xiaochuan, greeted the debt ceiling agreement by offering some guidance and a warning.

 “China hopes the U.S. administration and Congress would take responsible policy measures to handle its debt issue in light with the interests of the whole world including those of the United States,” Zhou told Xinhua. “China would continue to seek diversification in the management of reserve assets, strengthen risk management, and minimize the negative impacts of the fluctuations in the international financial market on the Chinese economy,” Zhou said.

China’s harshly nationalistic Global Times, published by the Communist Party’s People’s Daily, called last week’s DC drama the “latest Hollywood blockbuster” … “filmed with special ‘democratic’ effects.” The paper said:

“It is too early to cheer for this deal, since raising the debt ceiling simply means the US can now borrow itself into further debt … This is not a selfless sacrifice made to save the world, as debt-holding countries are all chained to the US. They would have to keep the US afloat, or everybody would suffer.

Getting back to the reality show theme, it does appear that American political dysfunction has hit a new low, leaving our addled political organism slouched outside the door of rehab. Congress now has four months to take a few more guzzles and tokes to enhance the hallucination that rebalancing American finances is possible without serious tax reform and significant cuts to the military and entitlement programs.

But they can’t avoid much longer walking into that rehab door. The deal Obama signed on Tuesday creates a panel of six Republicans and six Democrats that by November 23 are tasked with identifying and recommending  $1.5 trillion in deficit reduction. If they don’t reach agreement, there will be an automatic $1.2 trillion reduction in all areas of spending beginning in 2013.

Maybe to make this work we need to include on the congressional panel the producers of the A&E network show “Interventions.” According to its website, Interventions “has conducted 172 interventions since its premiere in March of 2005, 134 individuals are currently sober.” If the show can help clean up heroin addict artists, beauty queens on meth and mothers with a vodka habit, they may have a chance at helping push the American body politic down the road toward recovery.

If America is hanging outside rehab’s door, China is on the 4th year of all-night benders fueled by a cocktail of government spending and debt that is likely to leave a bruising hangover. So China shouldn’t take too much solace in America’s dysfunction. If America cleans up its act, there is an even chance that China and America will be in role reversal a few years from now. Premier Wen Jiabao for several years has repeatedly warned that China’s economy is “unbalanced, uncoordinated, and unsustainable.”

But it appears that Premier Wen has been shouting into the wind. The “China Model” of authoritarian politics and state-capitalism is as rife with vested interests as Washington, and increasingly unable to make the significant reforms that the world is accustomed to seeing from China. The command and planning side of the economy still works fine as long as it involves free-flow government spending, easy credit for government projects and increasingly cushy subsidies and protections for re-bloated state-owned enterprise.

China’s stated debt numbers don’t seem to point out a serious danger of default. But they are certainly nothing to brag about. In a The Wall Street Journal article entitled “Why China Needs a Recession,” veteran China journalist Peter Stein portrays the post-financial-crisis China financial festival.

 “Of particular concern has been the debt of local governments that built bridges, paved roads and erected luxurious new office buildings for themselves as part of the country’s stimulus plan following the global financial crisis. The National Audit Office recently estimated those debts total 10.7 trillion yuan ($1.66 trillion), or about 27% of 2010 GDP.

“That may well understate the size of the problem. Hints by China’s central bank put loans to local-government financing vehicles at close to a third of total bank loans—or 14.4 trillion yuan at the end of 2010. The banks report very low nonperforming loans on this debt. But with much of it incurred with little regard for how it would be repaid, a sizable chunk is expected to turn sour.”

A glimpse into just how exponentially worse this problem may be is being provided by scandals at the Ministry of Railways and the finances of its massive high speed rail build out.  According to Jeremy Warner in The Telegraph:

 “The funding of this grand ambition is beginning to look increasingly shaky too. Financially, the project has already effectively broken the Ministry of Railways. At the last count, the ministry was nearly 2 trillion yuan (£200bn) in debt and clocking up losses at the rate of about £400m a quarter. On any Western definition, the ministry is completely bust. To meet the plan, another 2.8 trillion yuan has to be found in the next three and half years.”

A harsh spotlight hit the MOR following the July 23rd crash of two high-speed trains in Wenzhou. The collision killed 40 and injured 191. Before propaganda officials shut them down on the subject, Chinese bloggers and journalists were exposing how an addiction to fast growth enabled cash-rich bureaucrats, obedient government bankers and bare-knuckle state-owned enterprise bosses to turn the railways spending into a fountain of cash for people with influence.

The scrutiny began with the February arrest of Railways Minister Liu Zhijun. The 58-year-old career bureaucrat oversaw an empire of 2.5 million employees that shoveled out trillions of RMB in contracts to a half-dozen state-owned companies to build the globe’s largest network of high-speed rail. Before the Liu scandal was declared verboten by propaganda authorities, the Chinese media reported that Minister Liu had collected 18 mistresses and pocketed some $20 million in bribes.

As China’s Caixin Magazine reported in March,

 Today, a legacy of Liu is that high-speed railways are spreading nationwide but “almost every project exceeds budget,” a railway contractor said. “The Beijing-Shanghai high-speed railway was initially estimated at 12.34 billion yuan. In the end it cost 21.5 billion.

Construction of the “Guangzhou South Station went from an estimate of a couple billion yuan to 14.8 billion yuan. This is because every project is contracted, subcontracted and subcontracted again,” the contractor said. “If you want to profit from the process, you have to continuously modify the plan.” …

And safety issues are on the agenda for the post-Liu period. China’s rail construction cycle is considered by many industry experts to be too fast, since contractors are laying rails even while ministry experts are still formulating high-speed rail construction standards.

Many in the high-speed rail construction industry have publicly expressed concerns. A foreign supplier of high-speed rail materials, for example, told Caixin that China’s tendency to rush projects raises safety risks: It takes only two years to build 300 kilometers of high-speed railway in China, but a decade in other countries.

The Party has ordered coverage of the crash to focus on heroic rescues and survivors, leaving the rest to come from Party propagandists through Xinhua and The People’s Daily. Nonetheless, Chinese journalists appear to be more angry and defiant than any time in the past decade. Directly defying Party propaganda orders, the Economic Observer published an 8-Page special report on the accident and cover-up — which included an attempt by the MOR to quickly bury without examination the locomotive of the high-speed train that crashed into the back of a train said to be disabled by lightning.

Party controlled China Central TV even lashed out. Presenter Qiu Qiming said as the media clampdown began:

“If nobody can be safe, do we want this speed? Can we live in apartments that do not fall down? Can the roads we drive on in our cities not collapse? Can we travel in safe trains? And if there is a major accident can we not be in a hurry to bury the trains? Can we afford the people a basic sense of security?”



About James McGregor
James McGregor is an American author, journalist and businessman who has lived in China for more than 25 years. Currently, he is chairman of APCO Worldwide, Greater China. A professional speaker and commentator who specializes in China’s business, politics and society, he regularly appears in the media to discuss China-related topics. McGregor is the author of the books "No Ancient Wisdom, No Followers: The Challenges of Chinese Authoritarian Capitalism" (2012) and "One Billion Customers: Lessons from the Front Lines of Doing Business in China" (2005). He also wrote the 2010 report "China’s Drive for ‘Indigenous Innovation’ – A Web of Industrial Policies." From 1987 to 1990 McGregor served as The Wall Street Journal’s bureau chief in Taiwan, and from 1990 to 1994 as the paper’s bureau chief in Mainland China. From 1994 to 2000, he was chief executive of Dow Jones & Company in China. After leaving Dow Jones, he was China managing partner for GIV Venture Partners, a $140 million venture capital fund specializing in the Chinese Internet and technology outsourcing. In 1996, McGregor was elected as chairman of the American Chamber of Commerce in China. He also served for a decade as a governor of that organization. He is a member of the Atlantic Council, Council on Foreign Relations, National Committee on US-China Relations and International Council of the Asia Society. He serves on a variety of China-related advisory boards.

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