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Foreign Correspondent
by international syndicated columnist & broadcaster Eric Margolis

China — The Giant Awakes

Copyright: Eric S. Margolis, 2004

30 September 2004

BEIJING - On my first visit here in 1975, China was still gripped by the collective madness of the Great Cultural Revolution unleashed by a demented Chairman Mao and the Gang of Four

Red Guards rampaged across China, destroying anything `old:' art treasures, temples, books. Birds, dogs, and cats were exterminated, `capitalist roaders' hunted down.

Mao ordered Chinese to make steel in back yard furnaces while 30 million starved to death during his Great Leap Forward. China's grim, dingy cities resembled prison camps. Everyone wore the same baggy Mao uniforms.

Over the following decades, I was amazed each time I visited China by its rapid transformation from Maoist nightmare to modern nation - thanks to the guidance of the late Deng Xiaoping - whom I regard as China's greatest modern leader. But never more so than on this trip, which is taking me to Dalian, Lushun, Tianjin, Beijing, Shanghai and Hong Kong.

I was awestruck by the changes here since my last visit, four years ago. Beijing has gone from being a large city to a mammoth imperial capital that looks like it was built for a race of titans. Spectacular new office towers, luxurious apartment buildings, gated communities and clogged freeways make this mushrooming metropolis of 13 million one of the world's most dynamic - and heavily polluted - cities.

Who, I wondered, was going to buy all the marbled-clad apartments, many selling for US $1-3 million, or lease all the office towers being erected by crews working 24/7? I recall having the same thought in Bangkok just before the Asian financial bubble burst.

How many Chinese can afford Lancome cosmetics and Fendi handbags at twice the price they sell for in Europe? Many, evidently, at least in coastal China. The Beijing Bentley car dealership is the world's busiest.

China, with 1.3 billion people, has accounted for over 20% of world economic growth in recent years. Its economy has been rocketing at 9-10% per annum, propelled by a tidal wave of entrepreneurial energy and consumerism. China's appetite for imported metals, oil, timber, and ores is gargantuan - witness its $5 billion offer for Canada's Noranda mines.

Chinese are rushing to make up in a few short decades three lost centuries of foreign plundering and stagnation.

Interestingly, China's ruling Communist Party has proven that communism can produce economic prosperity - provided it ditches Marxist economics and adopts free market policies. Total political control and party self-preservation, not economics, are the essence of the communist system.

Western critics said such a hybrid was impossible, but so far, it is working. Credit must go to the Chinese Communist Party for managing the economic boom and knowing when to get out of the way of free enterprise, and, of course, to the high intelligence and energy of China's people.

The recent resignation of former paramount leader Zhang Zemin from his last post, and the assumption of full power by President Hu Jintao, means the process of timid political liberalization may accelerate, though China remains a rigid authoritarian state,

But behind China's unprecedented growth lies growing danger. The boom has been fueled by uncontrolled credit expansion and massive foreign investment. Taiwan is said to have invested US $100 billion alone. I believe Japan's investments in China may be larger, far in excess of what is commonly believed. Overseas Chinese money is also pouring in, often into massive show projects.

China is making some efforts to restrain runaway growth, using both market and command techniques. But its banking system is weak and very fragile. Heavy US pressure on China is growing to revalue its fixed-rate currency, whose under-valuation has created a huge trade surplus with America. But revaluation upwards could bring down China's entire rickety banking system and cause massive business bankruptcies.

China, in my view, is facing a dangerous financial bubble causing by too much frenzied investment that is outpacing both demand and good business sense. Chinese financial reporting is highly dodgy, concealing many explosive problems.

The biggest challenge facing China's government is to cool down runaway hyper-growth and produce a soft landing before this bubble bursts, an event that could shake the entire global economy and financial system.

To read previous columns by Mr. Margolis: Click here

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