The China Paradox

China is emerging from rubble of the economic crisis looking better than any other country I can think of. In terms of policy, it is pushing all the right buttons. The fiscal stimulus packages are working: The Chinese stock market has taken notice and it is up +40% for the year; the government has announced plans for full medical insurance for 90% of the rural population by 2010--thereby unlocking the high savings rate and unleashing China's huge consumption potential; but perhaps most important of all, China does not have an insolvent banking system riddled with complex derivatives resulting in bottomless liabilities.

Yet, few in the West are willing to concede the following paradox. Communist China (as Lou Dobbs would say), appears to be better at this "capitalist game" than many would like to admit. The US and the UK have long dominated economic ideology by way of the free market system. Few could challenge this until it recently became evident that a hefty portion of the Anglo-Saxon economic miracle can be attributed to consumers and major financial institutions over-gorging at the credit buffett table. While the developed world is anticipating negative growth in 2009, China is widely expected to maintain 8% growth and that figure is forecasted to rise to over 10% in 2010.

So how has China landed on its feet while the G7 takes a painful tumble? This is the second paradox: I suspect leadership may have something to do with. And by that, I plainly mean that China has had great leadership. Western commentary on China is often blinded by political rhetoric colored by human rights, Tibet, Taiwan, the environment and a whole host of other issues. The insistence of the Western media to link ideological disagreements to every news report has led to an under reporting of China true strengths. Complex issues become oversimplified into a "we are good, they are bad" vilification, playing straight into the Chinese strategem of "Hide your capability and bide your time".

Now, I am no expert on the Chinese political system. But China it seems, for all the valid criticism about the lack of democracy and rampant official corruption, has a system which places the best people in the highest offices. Take the following interview with Chinese Premier Wen Jiabao for example, at roughly 7:00 into the video he enters into a jaw-dropping explanation of Adam Smith's classic works. Am I hearing right? Is the leader of "Communist China" quoting the bible of capitalism? At roughly 22:30 into the interview, he goes on to quote Marcus Aurelius. He knows his stuff.

This is fascinating to me because 99% of the people I know, have at best, glossed over the classics in search of soundbites. By contrast, it really seems to me that Wen has really spent time on them. Most people cite Adam Smith's Wealth of Nations and talk about the 'invisible hand' of free market systems, refusing to acknowledge (probably because they never read it) Smith's other important work, The Theory of Moral Sentiments. In the moral sentiments, Wen identified the need for a 'guiding hand' in addition to the 'invisible hand'. While this all sounds academic and irrelevant it could not be more true--a 'guiding hand' could have well prevented the senseless deregulation responsible for our current mess.

I know it sounds like a stretch when I praise Chinese leadership after watching an interview. There is also much I don't know about Hu Jintao, Zhang Zemin, Li Peng and every significant Chinese leader since Deng Xiaoping, other than the fact that they are all technocrats. What I do know is that consistently sound policy, including the lifting of 700 million people out of abject poverty; and transitioning from a planned socialist economy to a capitalist economy without the problems that plague the former USSR, over two decades is not the result of mediocre leadership. Just take a look at the eight years preceding Obama and see if you agree with me.

The transcript for the interview can be found here.