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Timothy Beardson interview: It’s urgent that China reforms

25 June 2013

11:32 AM

25 June 2013

11:32 AM

Recent convulsions in China’s banks will not, I suspect, have surprised Timothy Beardson, a sinophile, veteran Hong Kong financier and author of Stumbling Giant: The Threats to China’s Future. He argues that China’s extraordinary growth over the last 30 years has come in spite of its banking system. A dinner party might speculate where China would be if not for Mao; but a more immediate question is: where would China be if its banking system supported the private sector?

“If the economy has grown by 10 per cent for 30 years, as is reported (and I think that the data in China is very frail – it probably hasn’t grown at 10 per cent a year – but it’s clearly grown at a very high rate and that’s all that matters). But if it had grown at 10 per cent a year and the private sector was 3 per cent of the economy [in 1980] and it’s now 60 or 70 per cent of the economy; then, by definition, the private sector has grown at 20 per cent a year. Yet it’s had access to very limited amounts of bank finance: 2/3rds of bank finance goes to state companies and the private sector has to pay a premium (2 – 2.5%) to the state sector.”

Dysfunctional credit systems are not created ex nihilo. While China has immense strength, it also faces severe challenges (many of which are familiar to western democracies): demographic pressures, failing public industry, unemployment, a surfeit of graduates, international competition, domestic security concerns, resource scarcity, and so on. Beardson believes that some of these obstacles are insurmountable, not least because the Chinese Communist Party lacks the will to act seriously when its need to do so is urgent.

The Party’s crusade against corruption among junior officials proves that it’s capable of action; but Beardson explains why this alone is insufficient:

“If you look at the United Nations Human Development Indicators — over the last 30 years, the 12 fastest growing countries that have improved the standard of living of their people (of which China is one) are in the bottom quartile for corruption. So [corruption] may be reprehensible but it isn’t a complete break on success… Every major developing country is worse than China except Brazil… There are more important things to get exercised about.”

The Party is exercised by corruption because it monitors Chinese public opinion closely and responds to it. Beardson says that the Party governs by “tacit consent”: it provides high economic growth, together with political and social stability, in return for obedience. Westerners often assume that material prosperity instils desire for liberal democracy; but Beardson rejects the assumption. The Chinese people have many concerns, but suffrage is not one of them. The Party has, he says, “been pretty good at meeting the people’s aspirations”; consequently it enjoys enviable approval ratings, with Pew Surveys regularly finding that 80 per cent of Chinese believe that the country is heading in the right direction. To the retort “they would say that, wouldn’t they”, Beardson replies that the Party is unlikely to have infiltrated the Pew Centre.

Even if it wished to, it probably lacks the requisite gumption. The Party of Beardson’s book is a cumbersome oligarchy, not a ruthless dictatorship. And there, perversely, is the rub. “It’s difficult to get things done,” says Beardson. The system allows self-interested local elites to override or ignore national policy. Beijing, for instance, knows that the people want action to improve and safeguard the environment, but its efforts are thwarted by the Party’s inept structures.

“The way the environment ministry is organised is extraordinarily poor because virtually everyone works in a local government office, not in Beijing. And they’re actually working out of the budget of the local government, under the leadership of local government. And so they’re told ‘well don’t concentrate on that initiative because we need the local jobs’ or ‘don’t cause trouble at those factories: they’re owned by my uncle.’… And they can’t prosecute anyone in the courts because the courts are under local government control and they won’t hear the case if it involves someone important.”

Inefficiency thrives while the vested interests compete. An estimated 55 per cent of agricultural water is wasted before it reaches an animal or field. Unsurprisingly, in view of this bald statistic, the country has a water crisis. Yet the Party’s confidence in itself is such that it aims only to reduce agricultural water waste to 53 per cent under its next 5 Year Plan. Its favoured remedy is to divert water from the Himalayas, which has enraged China’s already jumpy neighbours and contributed to the arms race that Clarissa Tan described in these pages earlier in the year.

Beardson worries that more trouble at home might encourage more bellicosity abroad because the embattled Party might find some relief by indulging nationalist sentiments and historical enmities. And home is becoming a more troubled place. Beardson notes that China is suffering simultaneously from high unemployment (perhaps as much as 12 per cent) and acute labour shortages in some sectors. Wages are rising, which is driving basic assembly jobs abroad. China’s development has reached the point where it must begin the transition to a knowledge-based economy; but the country is ill-prepared. Confucian heritage dictates that scholars are ‘compilers’ not ‘composers’, so the education system places rote learning far above critical thinking and free inquiry. The narrow focus means that China’s universities are second rate. Shanghai Jiatong University ranks no Chinese institution inside the top 100 world universities, and a recent McKinsey survey found 85 per cent of Chinese graduates are not suited to work in any international context.

The Party is aware of this weakness, but attempts to reform the university entrance exam have stalled, as Beardson explained:

“I was talking to two girls from China Daily about this yesterday, and they were saying it has been looked at but China has decided it’s too difficult to make the change.”

Some liberals might smell only fear of critical thinking in that answer; but that overlooks the lasting influence of Confucius on China. Beardson’s story is one of continuity. The Chinese Communist Party is more Chinese than communist; a fact made clear by its social care policy. Care predominantly takes place in the home. The population, though, is ageing dramatically: Beardson quotes numerous studies that envisage the number of over-65s trebling over 25 years. These pensioners can’t all live with their only child’s family in a cramped urban flat, so the state will have to assume greater responsibility for them, which will require extensive reform of the tax system.

Yet even then Beardson suspects that nothing can be done about China’s population, which is expected to decline by as much as two thirds over the century. Under such circumstances the economy is likely to grow at “European-style rate”, which poses a problem for a regime that justifies itself by high growth. Mass immigration might grant the skills and people China needs; but, as Beardson says, “Chinese culture does not welcome immigration” and humanity appears to have little desire to emigrate there.

The Party, then, will have to master China’s problems as best it can. Beardson’s proposed reforms sound plain: effective policy implementation, rationalisation of the financial system, greater access to capital markets for the private sector, social investment, judicial independence (or, failing that, the centralisation of the judicial system to provide appropriate redress): but they demand enormous political and cultural courage. Time is short, and Beardson’s enthralling account of China’s past and present makes clear that the country does not tolerate instability and failure for long.

Stumbling Giant: The Threats to China’s Future by Timothy Beardson is published by Yale University Press (£25.00)

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