Unravelling China versus Europe - Myths and Misunderstandings

Unravelling China versus Europe - Myths and Misunderstandings

… provides parallel insights for SA.

Commentators – along with many investors - have taken to questioning the ability of democracies to compete with authoritarian China. The case gaining credence is that Europe’s leaders are innately incapable of taking sufficient action to remedy the deep flaws of the euro experiment. But even if most of Europe is destined for a generation of meagre growth, the core problems are not inherent to Western-styled democracy or capitalism. The core problem is that managing the intersection of democracy and capitalism requires transcending cultural differences.

The rapid changes and hyper competitiveness due to globalisation and advancing technologies raise the bar faster than poorly congealed multi-cultural societies such as the eurozone or SA can adjust.

In difficult times pain needs to be distributed by governments between various groups such as, workers and investors. Authoritarian regimes have an advantage when a tiny group of people behind closed doors can quickly decide. The Chinese approach also appeared advantageous earlier this year during Japan’s nuclear reactor melt down. Nuclear power became a radioactive discussion in democracies whereas China’s policymakers were much less overwhelmed.

Self interest is at the heart of both capitalism and democracy. But so is managing factional conflicts. China’s governing apparatus reeks of corruption but its overall track record of managing factional conflicts for the greater good has been exceptional for over 30 years. The legitimacy of the Chinese ruling elite however rests upon being able to maintain approximately 7% economic growth thus maintaining considerable employment momentum. A prolonged slowing of economic activity risks an Arab Spring with Chinese characters.

Moving beyond the typically wafer-thin analyses of brief TV commentaries, to right the European ship involves distributing pain. Lower benefits and pay must be distributed among various worker groups and voter factions while many investors must also be made to suffer. Haircuts on sovereign debts must be negotiated alongside recapitalising banks and concessions from unions and voters.

It is frequently pointed out that China foreign reserves and investments exceed $3trn. But for this reason and the fact that China cannot maintain 7% growth if its export markets are sliding into a deep recession, they have a deep vested interests in seeing the euro challenges being successfully resolved. As a substantial holder of euro denominated assets and a funder of the IMF, China is also directly at risk of having to share in the pain to be allocated.

The ideal scenario for China is that it gains political advantages while more aggressively weighting its European holdings at or near the bottom of asset prices. However, when seeking to manage holdings of distressed assets such greed-induced styles of thinking can be very dangerous. When commentators eye China’s cash hordes as a source of solutions they routinely overlook the generally bleak relationship between China’s overall balance sheet and its income statement.

China’s latest five year plan calls for shifting from extreme reliance on infrastructure investments and exports to a more normal economic mix with domestic consumption playing a rising role. There are reasons however that so many Chinese save so aggressively despite yields on many investments being less than inflation. Life expectancy in China has been expanding at a rapid clip while pension benefits remain scarce. As nearly 7% of the population starved to death half a century ago there are broad fears of old age misery. China’s long-term balance sheet is further diminished by the greatest demographic time bomb of all time brought on by its one child policy.

The income statement desired by China’s five year plan is threatened by Europe’s woes and its starvation-induced savings culture which can’t be overcome without huge pension fund investments. Three trillion dollars sounds like a lot but it works out to less than R20 000 per person.

Nor can China liquidate its accumulation of overseas investments without provoking currency appreciation and thus a contraction in its export income. European leaders would be able to negotiate aggressively with China and all their key investors if only they had a vision for a dynamic Europe.

In SA the key factional divides are among government, business and unions. Just as in Europe there is some alignment of interests and cooperation but not enough to be globally competitive. In Europe the core disconnects are among the higher savings countries in the North versus the deeply indebted nations on the periphery.

On the current path, countries that slip into Greece’s predicament will suffer for a very long time. Instead, four or five like-minded, higher savings countries should exit the Euro in favour of a new currency union supported by formidable fiscal unity. Of course this would be extremely difficult and expensive but it would lead to higher growth across the continent while providing an example for those countries which remain in the euro.

By comparison, SA’s challenges are much more manageable. Government should commit to becoming genuinely pro business. They will know they have become successful when SA becomes a popular destination for foreign direct investment including and beyond extractive industries.

*Shawn Hagedorn is an independent analyst

My thoughts echo the majority of what is stated here. In particular, I agree that SA will not be able to compete with China in any sector of the economy while the playing field remains uneven. The article points out that as an autocrisy (rather than a democracy), China is in a position to quickly implement decisions, especially when compared with Europe and SA. What the article does not point out clearly is that China can also quickly put down any hint of dissent and this puts them in a superior position vis-a-vis the trade unions and other civil society. There is no doubt that lower wages makes China more competative. From a purely economic point of view this puts China in a vastly superior position. The contrary is, however, also true from a humanitarian point of view. The question would therefore appear to me to be: "How much civil liberty are you prepared to sacrifice in exchange for economic superiority." I agree with the writer that ALL role players will need to take a "haircut" including government, shareholders, finacial institutions and workers in order to become more competative.

Gareth Shepperson


  1. Oops, sorry. I misspelled "autocracy". Also, China is not really an autocracy because it is ruled by one group or party and not one individual. What is the correct word?

    It is interesting to note that in Greece they are moving away from their elected politicians to a technocrat in their time of crisis.



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