Book Review: ‘The China Crisis’ by James Gorrie

The China Crisis cover (James Gorrie)

James Gorrie chose to start his book “The China Crisis” with a quote, a Chinese proverb.

“Men in the game are blind to what men looking on see clearly.” Written in 2012, the zenith of China’s power and popularity in the world, the book could not have a more fitting opening.

Everybody, except for maybe human rights activists, thought growth in China would continue forever, that the Chinese regime had somehow invented a new economic model far superior to everything else history has ever seen.

Gorrie did not think so. He set out to prove to the reader that almost every mainstream assumption about China’s economic power and political system are naïve at best and flat out wrong at worst.

Now at the beginning of 2016, the tapes of global stock markets are painting China Crisis in red ink almost every trading day. And although more people are seeing clearly now, this is a good opportunity to revisit a book written with the right ideas at the right time, weaving history, economic theory, and up to date examples together to offer a compelling case for a China in crisis.

What’s Wrong

By now, most people know that China’s GDP numbers “are first and foremost political propaganda tools, not economic tools, as they are in the West,” according to Gorrie.

Since the middle of 2015, we also know China indeed ran into trouble for manipulating its currency for decades, as Gorrie pointed out.

We also know the government and the Communist Party are “corrupt in every way possible,” as highlighted by the ongoing anti-corruption campaign.

Eventually, as China loses its tight grip on Xinjiang and Tibet and the internal situation deteriorates, the CCP will lose all ability to control China as a whole.

Most people also know about inefficiencies in the old economy, the overcapacity, and some people are waking up to the immense debt bubble China created.

But “The China Crisis” goes far deeper than that, explaining important and often underestimated issues, like the moral degradation of society, the tragedy of the commons (think of the destruction of natural resources), the inability to produce enough food, as well as the political inability to reform, even when absolutely necessary.

“The China Crisis” also explains how this will lead to massive civil unrest (already happening) and eventually a collapse of the whole corrupt Chinese political system and economy, as well as its impact on the rest of the world.

It’s the Party, Stupid

Unlike some other economists who apologize for human rights abuses in the name of economic development, James Gorrie says the Chinese Communist Party is at the heart of all problems in China, not just the economic ones.

“The country and its people experienced enormous tragedies borne of the unbelievably damaging and misguided economic and development policies made exclusively by the Chinese Communist Party leadership,” he writes.

The “tragedy of the commons,” still happening today is a great example. Gorrie explains how the corrupt incentive structure of the CCP encourages economic actors to overuse and downright destroy common property such as farmland, rivers, lakes, oceans, and air.

The abuse and destruction of nature in general and the conversion of farmland for industrial uses in particular have led to a situation where China is dependent on food imports to feed itself, and Chinese people cite food shortages as the biggest threat to their well-being.

Natural destruction is just one side of the unsustainable economic model of overinvestment and credit expansion. Gorrie notes that China’s practices of stealing technology and market share in global trade through underhanded means have hit a brick wall and don’t provide the economy with the juice anymore to keep it going.

China’s Beijing model “is instead a process or policy of Cannibal Capitalism… The various parts of the economy—rather than synergistically growing and expanding the GDP and wealth-creating processes of a nation—actually feed upon one another, destroying the wealth-creating factors in the economy through waste, neglect, graft, and corruption at the highest levels,” Gorrie writes.

The Collapse

The Beijing model is also thoroughly unbalanced, making a few corrupt CCP cadres better off at the expense of the middle class. The unequal distribution of income in a slowing economy, as well as the decline in traditional Chinese values due to CCP campaigns, will eventually lead to social unrest doing away with the CCP empire altogether.

Gorrie offers an account how it could play out, which does not include reform from within the CCP, which he deems to be improbable if not impossible.

Food shortages, as well as social dissent because of land grabs or unemployment, may lead to riots so numerous that CCP cannot control them despite the use of the army.

One or several of China’s renegade provinces such as Xinjiang and Tibet may declare independence, and China will increase its sabre rattling toward Taiwan and Japan, possibly drawing the United States into a regional conflict.

James Gorrie

A recent photograph of the author (James Gorrie)

Capital will start leaving the country through Hong Kong, which sounds eerily familiar in 2016. Gorrie thinks wanton selling of treasuries by China may also crash the U.S. bond market, something that hasn’t happened in 2015 despite more than $500 billion of foreign exchange reserves sold by China.

“Eventually, as China loses its tight grip on Xinjiang and Tibet and the internal situation deteriorates, the CCP will lose all ability to control China as a whole,” writes Gorrie.

As a new “anti-ccp” leader emerges and transitions China towards democracy, the rest of the world will suffer from a dollar collapse brought about by Chinese selling, as well as a collapse of world trade, with widespread bankruptcies starting with the financial sector.

So far the U.S. bond market is holding up well, although the crash in European banks in 2016 so far should give us some pause. But then again, China is not officially in crisis yet.