China Shakes the World by James Kynge

China Shakes the World by James Kynge is another hugely impressive book on China.  Like Peter Hessler, James Kynge is fluent in Mandarin.  But instead of looking at the social aspects of life in China, James Kynge concentrates on the economics, and how China's burgeoning prosperity has impacted on the rest of the world during the first few years of the twenty-first century.  Although it was written before the 2008 economic crisis, I feel sure that most of what it says still holds true today.

The first chapter looks at the acquisition of a German steel mill by a self-made entrepreneur on the banks of the Yangtze.  Its owner, Shen Wenrong, was born a peasant.  But having worked out that who you know rather than what you know is important, he worked his way up through a factory until, by the 1970s,  he had risen to a senior rank.  It was a company that needed steel to expand, and since steel was in short supply Shen, with others, made his own secret backyard furnace.  They successfully counted on the Beijing government not noticing.

In the early 1980s China started to become a Capitalist state.  The new Premier,  Deng Xiaoping, allowed some individuals to indulge in a minor private business and become a 'getihu'.
Shen predicted that steel not wooden window frames would be needed for the property boom that China was experiencing then, and sent engineers to leading manfacturers to copy the technology of other Chinese manufacturers.  His company soon became a leading window frame manufacturer.  Shen then took advantage of the decline in Western manufacturing to acquire cast-offs: first an electric arc furnace from a town near Liverpool and then, after a Premier-initiated boom, the steel mill from Dortmund.  His ventures were paid for by readily available bank loans.

Chapter 2 looked at the history of Chinese trade and ecomomics, from its zenith in the Tang dynasty.  Until the end of the fourteenth century the Chinese were more wealthy than people in the West.  The decline set in afterwards. Part of this, it is thought,  was due to isolation from new ideas, but also the stultifying effect of the civil service which took away the brightest people, may also have been important.

Chapter 3 considers the huge population of China, its effect on the economy and market, and how it dictates growth.  China is like 'an elephant on a bicycle'.  If it slows it will topple.  Manufacturers have to keep producing to prevent unemployment and unrest.  Until recently, bankruptcy has not existed in China and so loans are hardly ever called in.  Consequently, there is a massive surplus of goods, which is why places like Tesco and Walmart are able to buy and sell so cheaply.  There was also a fascinating section on fakes and piracy, which is rife.

Wages are lower in China than in the West, partly because the workforce is plentiful.  Wages in the West are better, and every year there are Chinese willing to risk the arduous journey of an illegal immigrant and land a job in a place like Prato in Italy.  Chapter 4 describes how established Chinese workers soon branch out independently to establish factories that compete with former employers by outsourcing to China.  Inevitably, the European firms are put out of business.

Chinese industrialists view Europeans as lazy, relying on services to keep themselves going,  and have little industry left.  They were also sceptical of the point of the European Union.  Western industrialists, meanwhile,  blame their misfortune on unions, and the amount of tax they have to pay for health care.  China has none of these problems.  Communist China is  nowa less socialist country than any in Europe. State-financed social welfare has been eliminated, reduced or privatised.  120 million migrant workers receive no welfare at all.

Chapter 5 looked at the effect of Chinese commerce on the town of Rockford in Illinois.  The small and medium businesses have closed due to Chinese competition and takeover.  Furthermore the town centre has shifted too.  The most popular shop is Walmart which feeds on cheap Chinese manufactured goods and does very nicely thanks to a whopping mark-up on just about everything.

Apart from the cheap labour force and liquidity of funds in China, the Eastern manufacturers have many other advantages: poor safety standards, low concern for the environment, an artificially low price for water and electricity, and something that perhaps angers Western businesses the most: the Chinese fix their currency against the US dollar.  This keeps it undervalued  and gives their exports a greater competitiveness.  

Rockford shows that it is the middle classes that lose out under China's impact.  The work force cannot move to companies that need them, but the top managers do not lose their jobs - they still manage from head office - in fact the upper managers benefit from increased bonuses.  It is the lower levels of management and the factory floor jobs that are lost.

The net result in Rockford (and elsewhere in the West) is that the middle income demographic is shrinking.  This shrinkage has been restricted to manufacturing so far, but service jobs could soon follow.  It is this shrinking middle class that may, ultimately, prove to be the force for change.   It could force the government shut out the Middle Kingdom.  Or it could be that a critical shortage of resources has the same effect.

There is an environmental crisis in China: deserts of the north are encroaching, waterways are drying up, food is contaminated with hormones and chemicals, there are strange new diseases e.g. SARS, air pollution causing premature death. Chapter 6 starts with dramatic accounts of how owns and cities sinking into underground holes and plants and animals becoming extinct.

China's appetite is also increasing world prices.  One fifth of humanity crowded into 7% of world's cultivatable land.  The newly wealthy Chinese (the Chinese middle class is increasing) are demanding materials not available within the boundaries of their environmentally exhausted nation.  The maintenance of a good fuel supply is also becoming critical.

The world does not have the resources for the huge Chinese population to emulate the American way of life.  In the end China may be forced, for lack of an alternative, to recycle, conserve and use clean fuels.  This will be expensive  and erode the country's competitiveness.  This may take some time and in the meantime international tensions may increase rapidly.

Chapter 7 starts with a very interesting case of identity theft - this is just part of a large and growing underground economy which has been estimated to be one third of official economy.  Dishonesty seems to be endemic: extramarital affairs, paternity tests and private detectives are some symptoms.  More seriously, fake baby food and HIV infected blood have possibly caused deaths.

Chapter 8 considers how China's political system exacerbates the problems outlined in the rest of the book by allowing scandals, controlling the banks and company shares, and contributing to the corruption in the environmental agencies and legal system.  Corruption, James Kynge says, is jeopardising both Party and State and there are increasing number of protests against the problem.  However, complaints are often ignored and only 1 in 2,000 petitions receive attention.  Change in China comes at a cost, and requires a huge amount of patience.

The last chapter weighs up the pros and cons of trade with China.  While many areas of the world have benefitted from China trade, the relationsip with America and Europe has been more tumultuous.  Most people in US and Europe do not appreciate the fact that China has brought down prices although they are aware that competition with cheap Chinese manufacturing firms are responsible for the shortage of middle class jobs.  The West may yet turn away from China because resources are scarce and China and America are likely to find themselves in competition.  For most of the last millennium China turned its back on the West.  In the future it may be the West that turns its back on China.

Next: another novel - The Vagrants by Li Yiyun - another book on my book pile that  I've been dying to read for ages.