The great bubble of China?

It is transforming the way we do business, reshaping markets and threatening uncompetitive companies the world over. It will ultimately reshape the world as we know it.

Is this a fading example of the euphoria and hubris that accompanied and reinforced the emergence of the dot com bubble? If only. This is, in fact, an impression one could get from reading the numerous newspaper articles, blog postings and corporate strategic documents written about China. As commentators around the world resort to hyperbole over China’s growing global stature, it is worth asking if a potentially dangerous set of expectations is being created.

China is a political, economic and military power; and its influence is likely to increase significantly in the coming years. It will, in due course, become a true superpower. Given that it is the world’s most populous nation, anything short of being the superpower would, in theory, be an under-utilisation of its human potential.

However, judging by the journalistic zeitgeist, China is the geopolitical equivalent of Google: not only will it overwhelm the world’s resource markets, but it will also top the medal tallies at Beijing in 2008 and defy the propensity of capital to relocate to lower labour cost locations as Chinese wages increase.

The premise that there appear to be no major obstacles in China’s way is surely inappropriate as the accepted wisdom of sceptical and chastened Western decision-makers who have seen it all before. More ominously, it harks back to the misplaced fear of, and admiration for, that other Communist wunderkind and pretender to superpower status - the Soviet Union - following World War II.

While awaiting the imminent rise of a Chinese Gorbachev may be premature, there are a number of risks that eager investors in the People’s Republic would be well advised to consider.

One of the most drastic threats to China’s rise are the doubts about its territorial integrity. Not only are Taiwan’s majority Han Chinese independent-minded, but Beijing faces two active and long-standing separatist claims by indigenous ethnic minorities. Eventual agitation for the independence of Tibet and Xinjiang would cost China almost a third of its territory, albeit this would arguably have little effect on its coastal economic hubs. Yet it is the handling by the government of any such moves, especially by the Muslim Uyghurs, that could turn Xinjiang into China’s Chechnya.

Mainland China ranks among those with the highest levels of economic and social inequality in Asia, as measured by the Gini coefficient. While visitors to Shanghai leave the airport on the world’s fastest train, the residents of areas “just outside the city … live in what can only be described as pre-civilised conditions”, as articulated recently in the Financial Times.

Such conspicuous inequality has been the driving force behind earlier revolutions, including the one that brought the Communist Party to power. If, however, the idea of a 21st century peasant revolt seems remote at best, one need only consider the escalating and under-reported chronic rural unrest, and the emphasis the government is placing on encouraging development to trickle westward, to understand just how real that threat is.

A by-product of China’s fast-paced economic growth has been extensive environmental degradation. Surging energy consumption and a popular shift from the bicycle to the car have made its cities among the most polluted in the world, with increasingly more visible public health consequences.

Furthermore, the massive toxic spill that recently compromised drinking water in the country’s north was merely the best publicised such occurrence in recent years. As Thomas L Friedman warned in The New York Times last year, unless China acts decisively to address the environmental damage being inflicted by its leaping economy, “it will destroy its environment and its people”.

Finally, the least publicised yet very alarming trend is China’s emerging HIV-AIDS epidemic. Previous dismissals of HIV as a Western problem and the government’s unattractive transparency record regarding SARS suggest that this major public health risk is likely to be significantly understated. Furthermore, the recent disappearance of Hu Jia, a leading AIDS activist, brings into doubt the claims that the government is responding appropriately to this threat.

It would be foolhardy to dismiss the effect an HIV epidemic would have on the economy, as the case of sub-Saharan Africa illustrates its far-reaching socio-economic implications.

China has historically demonstrated an impressive ability to change and adapt. It is, therefore, possible that many of the main risks would be mitigated or managed. Nonetheless, China’s future is likely to be neither as certain, nor as inevitably positive, as it is sometimes made out to be. Even The Economist finds it necessary to qualify its general enthusiasm, stating that “there is no other important country whose likely trajectory over the next 20 years is more uncertain than China's”.

Perhaps a fittingly sober assessment with which to conclude would be to quote a minority view articulated in a 2005 article in the Far Eastern Economic Review, that “without internal reforms, China’s great power status can be fleeting at best”.