Guest Post: Do We Have What It Takes To Get From Here To There? Part 2: China

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Do We Have What It Takes To Get From Here To There? Part 2: China

Pull aside the curtain and what you find is a China crippled by corruption and debt.

Does China have what it takes to get from here (industrialized export economy) to there (sustainable growth, widespread prosperity)? The same can be asked of every nation: do they have what it takes to move beyond their current limitations to the next level?

Let's start with the fundamentals, what every nation must have to establish a stable, sustainable, widely shared prosperity. These are not just ethical niceties--these are the foundation of economic security.

Consider corruption. Corruption isn't just a "values" issue: corrupt societies have corrupt economies, and these economies are severely limited by that corruption. A deeply, pervasively corrupt economy cannot get from here to there.

Corruption acts as a "tax" on the economy, siphoning money from the productive to the parasitic unproductive Elites skimming the bribes, payoffs, protection money, unofficial "fees," etc. By definition, the money skimmed by corruption reduces the disposable income of households and enterprises, reducing their consumption and investment.

"Income" derived from corruption is the classic example of "unearned" feudal rights being imposed on serfs, a broad-based "tax" that keeps them impoverished.

The other side of the corruption coin is transparency: thus it is no surprise that Transparency International is the organization that monitors corruption globally and that issues its annual The Corruption Perceptions Index that ranks countries/territories based on how corrupt their public sector is perceived to be.

The top of the least--most transparent, least corrupt--are Denmark, New Zealand, Singapore, Finland and Sweden, with Canada, Netherlands, Australia, Switzerland and Norway close behind.

Germany ranks 15, Japan 17, Chile 21, the U.S. 22, France 25, Spain 30, Souyth Korea 39, Italy 67, Brazil 69, China 78, India 87, Egypt and Mexico, tied at 98, Indonesia 110, Vietnam 116, Syria and Uganda, tied at 127, Azerbaijan 134, Iran 146, Russia 154, and at the bottom of the list (or the top if we are measuring corruption), Iraq, Afghanistan, Myanmar and Somalia at 175 - 178.

There is no way for a deeply corrupt society to get from here (their current level of development) to there (a higher level of development) because corruption limits two essential components of sustainable growth and widespread prosperity: social mobility and innovation.

In corrupt societies, potentially profitable innovations are quickly stolen, copied, pirated or appropriated by corrupt officials and/or criminal cartels. The innovator cannot reap the fruits of his innovation. His only choice is to move to a nation that offers him the freedom to develop his ideas and drive and keep the yield for himself and his family.

If we were to remove every immigrant and their children from the list of influential innovators, entrepreneurs and inventors who have expanded the wealth of the U.S., the list would likely be cut in half.

Since we have many friends in China and India, the two giant economies that many expect to dominate the global economy in the 21st century, we are intimately aware of the pervasive nature of corruption in these societies and economies. If you want to go to dental college in India, for example, you do not need to be a good student; a bribe will do the trick.

This means someone who would have qualified for a slot based on merit is denied the chance in favor of the incompetent who can pay the bribe. Not only does this limit social mobility of the talented and motivated--the very people you want to succeed--it seeds your entire economy with incompetence, laziness and abuse of power.

In China, the way to get a driver's license is not to learn how to drive--what a bother that is! You get the license by paying a bribe. That may be one reason why the death toll from traffic accidents is horrendous in China.

If you work in an upper-level position in an SOE--state-owned enterprise, still the heart of the Chinese economy--much of your salary may be paid as a lump-sum "bonus" that is issued at the whim of your boss. If you alienate your boss, you may not get a bonus or it will not reflect the value you added to the organization that year. This is why young Chinese workers must spend their hard-earned money on Coach-brand handbags to be given to the boss's wife whenever they go abroad, even if they know the wife already has five overpriced "luxury brand" handbags.

Though the luxury item is likely made in China, and the knock-off available on the street corner is identical in look and feel, they have to buy the "name brand," for it is the high cost that matters. In effect, lower-rank employees are paying $800 for the store bag that says "this is the real deal."

The boss, meanwhile, skims enormous sums in "fees" from the enterprises' contracts. His official salary might be $30,000 a year, and he collects 10 or 20 times that in "fees"--or if he is especially enterprising, 100 times his official salary.

You will never hear the truth about the way things really work in China unless the person trusts you--something that takes years to develop. No wonder Westerners who fly in for swank briefings based on lies are so clueless about the Chinese economy.

This is why $300 billion is leaving China every year and flowing to more transparent nations such as Canada, Australia and the U.S. Those who have done the skimming know their wealth--and maybe their lives--are increasingly at risk. So they're getting out while the getting is good, and buying houses and visas for their offspring overseas. China's in big trouble - should U.S. worry?

Reliable estimates from journalists and economists published in October place the amount leaving the country at between $225 billion and $300 billion over the last year - 3 to 4 percent of China's economic output for the period. That is so even though moving significant amounts out of the country is strictly illegal. The outflow is growing larger every year, just as the GDP continues to fall - not a coincidence.

Anecdotally, this probably grossly underestimates the real sums being transferred abroad: if insiders are guessing $300 billion, the true total may be much higher.

This is the other cost of a lack of transparency: all the critical information and data is opaque. How can anyone operate a business when the true nature of conditions is unknowable? You can't, or you make decisions based on dodgy data that ends up crippling your enterprise.

As noted here before in In a Dysfunctional Status Quo, Reform Triggers Collapse: corruption isn't a feature of the economy of China: corruption is the economy. I recommend reading these recent news reports to fully understand the hopelessness of "reforming" corruption in China.

Reform unlikely, says China expert Roderick MacFarquhar (via Maoxian)

MacFarquhar, a professor of history and political science at Harvard University, said the vested interests of the political elite were so entrenched in a corrupt system that an overhaul would amount to dismantling the regime.


Despite hopes the regime can peacefully transform itself into a democracy with rule of law, MacFarquhar said he could not see such a transition, which would require the ruling elite to give up its power and privileges.


Although a political system's inertia often meant a fragile regime could exist for years, MacFarquhar said unpredictable circumstances could trigger its collapse. "You don't know what can unseat a fragile system," he said.

Growing Concerns in China about Inequality, Corruption (Pew Research Center)

Wary of Future, Professionals Leave China in Record Numbers (NY Times)

China's economic destiny in doubt after leadership shock (Telegraph)

The Chinese Credit Bubble (Zero Hedge)

It is here that we get the first glimpse of the true sheer extent of the Chinese credit bubble, which as the chart below shows, is already the largest in the entire world.

Pull aside the curtain and what you find is a China crippled by corruption and debt.

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LawsofPhysics's picture

Enough with the bullshit "growth" meme.  7+ billion people and growing.  It takes energy to do anything.   Is the world energy output growing as fast?  If not, common sense tells you where the world's quality of life is heading.

Matt's picture

This only confirms my suspicion; what we need are PERSONAL nuclear reactors, so we can GROW our way out of debt.

Seer's picture

Bless you!  I read the following from the article (and promptly stopped) and HAD to see if anyone caught this fucking idiocy (and sure enough, you did- thank you for pushing it out here at the front gate so that everyone sees it up-front):

"Does China have what it takes to get from here (industrialized export economy) to there (sustainable growth, widespread prosperity)? The same can be asked of every nation: do they have what it takes to move beyond their current limitations to the next level?"

Do we have what it takes to question our premise (of perpetual growth on a finite planet)?  THAT's the question!

Come on Smith, let's have a REAL discussion.

BTW - I spotted two -TWO- ZH articles talking about pushing the space envelope.  I was too discouraged that such would creep into ZH.  I mean, WTF?  Do people not fucking get what NASA is all about?  it's abouit the militarization of space!  Want more drone attacks?  More spying?  Because THAT is what you will get.  Yeah, there will be the "dancing bear" shit, a mission here or there to make it look like that's the real goal, but any SANE person knows that the probability of getting off this rock on any permanent arrangement ISN'T going to happen (well, I'm sure that the technological god worship might result in most of us sacrificing ourselves at the alter so that TPTB can toss some of their genes out into the universe).  Clowns to the left of me jokers to the right... religion and technology, both pushing escapism!

Cognitive Dissonance's picture

The Big Short (volume 2.0) is China. No country (government) can withstand The Fourth Turning.

malikai's picture

"In China, the way to get a driver's license is not to learn how to drive--what a bother that is! You get the license by paying a bribe. That may be one reason why the death toll from traffic accidents is horrendous in China."

This is categorically wrong. Many of my wife's family members in China got their licenses through driving school.

Also, the reason traffic accidents are so high in China is because there are too many new drivers. Not because of too many untrained drivers.

Come on.

BlueCollaredOne's picture

The reason they are bad drivers is poor eyesight.  I mean cmon, you can blind these people with dental floss.  

akak's picture

I blame Chinese Citizenism for orientals being bad drivers .... you know, the eternal nature of their on-the-road blobbing-up being the mattering thing in their attempts at monolizing the 'american' driving means.

TheFourthStooge-ing's picture

Those roads in the orient have an additional hazard if they are in a Chinese citizenism zone. The effluent-burdened roadsides have a significantly lower coefficient of friction than the main road, leading to a higher risk of loss of control should one's car slightly drift out of its lane.

Chinese citizenism roadside skidmarks aren't limited to the pantaloons of Chinese citizenism citizens.

Buckaroo Banzai's picture

Q: How do you cut off a Chinese person's peripheral vision?

A: Put them behind a windshield.

williambanzai7's picture

I don't think the Chinese are listening to Charles Hugh's Smith or the hypocrites that represent our great transparent and uncorrupt nation.

malikai's picture

I was about to go to work on the handbags line as well, but I am coming to realize that understanding cultural norms would just spoil the fun.

williambanzai7's picture

Well I've been around the block with the mythical perfect knock off. It is a myth and the Chinese know it better than the foreigners who look for them.

You want to know what the difference between the Chinese and us. We have a system that only allows corruption at the top instead of up and down the line. Moreover, we have perfected the art of legitimate corruption in the eyes of the law.

falak pema's picture

we have perfected the art of legitimate corruption in the eyes of the law....

Spot on; Regulatory capture like a Rolex watch. Its this matrix that is going to stifle innovation in first world, as the Oligarchy does not want that. The inertia effect of all despotic empires is their own sophistication at looking inwardly at their own precious belly buttons.

What is fascinating to outsiders in this amorphous structure of China today; half of it controlled by a disciplined party structure and half "profit crazy" entrepreneurial oligarchs, and we don't know where the dividing lines lie, who controls them, and how these conflicts get resolved to move on. 

The role of party is obviously determinant but its arbitrations stay opaque, and all true progress requires that this arbitration be in the general interest for mal invesment not to accumulate. 

Let us remember that in China like Brazil, other BRIC, 50% plus of national riches is controlled by 2% of the population. This is an awesome pyramidal structure and will be subsequent stumbling block. 

If China becomes the new USA and its economy dominates, we will be in a similar conundrum, even worse,  as today with US economy : every time China coughs the world will get pneumonia!

Why worse? We don't know how this economy works!

Whereas the US economy is open and its markets totally  accessible. 

malikai's picture

"Whereas the US economy is open and its markets totally  accessible."

I pretty much agreed with everything until that. You don't really believe that do you?

falak pema's picture

for foreigners yes; and the manipulation that exists is not comparable to that in a one party system. 

I deplore the regression of the US capitalist system, but it is not yet at par with where China is, that's my point. 

As WB7 says its a different type of corruption at a much higher level at the top of the pyramid. 


AnAnonymous's picture

But I thought that the US was in a one party structure.

The big difference with the US and some other parts of the world: any foreign investor know that the investment they make in the US can be repoed instantly with not much resistance to put out.

Any foreign country know that repoing on US investments made in their country wont go without much resistance and retaliation.

That is the asymetry here.

TheFourthStooge-ing's picture

AnAnonymous said:

But I thought

I seriously doubt it.


akak's picture

Asymetry only exists in the alternate universe of AnAnnoyingUS, in which parallel lines somehow always manage to intersect at either a shat-upon roadside or else in a massive crash-up of anti-American bigotry.  Often, the two intersection points are the same.

onebir's picture

Nailed it*. Where's the pictorial form?

WB7 laurels his rest upon not can!

Seer's picture

"Moreover, we have perfected the art of legitimate corruption in the eyes of the law."

It's that blind-fold thing!

My wife is from the Philippines and she got out of there because of the corruption.  She's finally getting it that it's NO different here in the US, that here it's more POLISHED.  I tell her that one need only look to where the most money is in order to find out where the most corruption is.

MrBoompi's picture

It seems we are presented with an enigma.  Money seeks the locations that have the least amount of financial regulation, such as The City of London.  Or winds up in tax havens like Cayman and Burmuda.  And does anyone seriously believe our economy isn't corrupt?  Compared to China, yes, but that ain't saying much is it?



bank guy in Brussels's picture

An ex-American told me about getting his driver's licence in Chicago, Illionois, USA at age 16

They had a parking test where the place to park was not clearly marked ... seems most everyone failed

Then the 'examiner', sitting in the car, told the boy, "Well, ya didn't do too well out there ... But I'd hate to see a young man like you not have the right to drive ... let me see your learning permit again ..."

The boy, having been prepared by school colleagues and neighbours, took the permit-paper out and let a $10 bill fall on the seat (circa 1970, so maybe US $50 equivalent today)

The instructor smiled and said, "Well, you step out of the car a few minutes, and let me add up these numbers here on your test ... "

Boy invited back in, money disappeared, and luckily he 'passed' his exam

That's getting your US driving licence Chicago-style, anyway

Peterpaul's picture

Actually, when I lived in Shanghai from 2002-2006 I knew many individuals who paid to attend a driving school, never showed up past the first class, and still got the requisite chop to get their driver's license.


Racer's picture

"Pull aside the curtain and what you find is a China crippled by corruption and debt."

Not much different from the US then!

Slartibartfast's picture

China is an artificial political construct, much like India, and just as resource-challenged. As a state entity, it is inherently flawed and therefore long-term stability is questionable at best. There are constant internal pressures far in excess of even those now growing in the US. Globalization is the solvent that unbinds states and ethnicities that have been artificially glued together for purely political expediency, often as part of 'empires'. China take over the world? I still laugh out loud over that one...they'll eat each other long before that.

falak pema's picture

China is an artificial political construct, much like India, and just as resource-challenged. ...

I would caution extrapolating that : 

OECD: China's Economy Will Overtake US - Business Insider

Chinese Inflation October - Business Insider

Having noted this : Albert Edwards Global Strategy Weekly - Business Insider

we don't know what this new admin will change to current trajectory. But their growth rate will be higher than in first world and they will lead the world economy consequently, increasing their  trade balance; unless the west takes hard protectionist measures like with solar panel exports  and challenging with sanctions their own protectionist policies on imports via Yuan currency manipulation.

LawsofPhysics's picture

No question China will overtake the U.S. in this centrally planned, state-run shitshow of a world.

I guess the question is whether or not you think the average quality of life will improve in China, or anywhere else.

Sorry, but world war seems more likely to me.

AnAnonymous's picture

Globalization is the solvent that unbinds states and ethnicities that have been artificially glued together for purely political expediency, often as part of 'empires'.

'Americans' know a lot about that. It reduces the reach of the comments.

Dont worry, 'americanism' is spreading in China.

Their new top man is rumoured to be a big fan of the US. And the chinese middle class is eager of implementing 'americanism'.

akak's picture


Dont worry, 'americanism' is spreading in China.

Their new top man is rumoured to be a big fan of the US. And the chinese middle class is eager of implementing 'americanism'.

But if the Chinese are now 'americans' (not Americans, but 'americans', as defined --- and continually redefined --- by AnAnnoyingUs), and voting is an 'american' middle class thing, but the Chinese 'americans' are NOT allowed by their own authoritarian government to vote, then WHAT is the middle class thing in China?  How can Chinese 'americans' exercise their now-eternal nature?

Norman, Norman, please coordinate!

TheFourthStooge-ing's picture


Dont worry, 'americanism' is spreading in China.

Their new top man is rumoured to be a big fan of the US. And the chinese middle class is eager of implementing 'americanism'.

Clever ploy, clever ploy, triple clever ploy. We all know that the avoidance of self indiction is the matteringest thing in Chinese citizenism. Calling the new top man 'american' and Chinese citizenism government actions 'americanism' is classic Chinese citizenism carnival trick of craftiness.  Can kickery, offuscationalizing, denialization, Chinese citizenism citizen actions are never clear cut.

When a Chinese citizenism government does a thing of questionable fortitude, call them 'americans' in order to push blame to a convenient exterior, even when it the interior obviousness of being.

Once again, cheap offuscation, submission to fabled past, inability to self indiction, more fantasy, more empty talking. Unable to speak about themselves, unable to speak about what they do, always compelled to forge tales, well, those are Chinese citizenism citizens. Oops, I mean 'americans' wink wink.

Nice face savery, Chinese citizenism style of.

Sparkey's picture

The Fourth Stooge-ing, AKAK, Slartinbartfast, Falka perma, Wake up Boys, you've been programed, Pavlo's dogged, every time Anaynomous whistles you guys start to dance, your dance is pretty simple... still...he must get a chuckle from the guy obsessed with shit... I think it is funny, I wonder if he is one of those `Hidden persuaders` who work for TV? Wadda you think? You didn't even know you where being programmed did you? This is the Hallmark of a mind control genius!

smiler03's picture

+1 Two names you mentioned remind me of a film title "Dumb and Dumber", 'though I haven't seen the film.

Seer's picture



I'm not seeing where China OR the US isn't locked into FAIL.

Globalization = FAIL too.  An unraveling will occur (pay attention, these signs are blatantly clear [look at the EU]), leaving a more regional-centric model (which maps to the historical norm for humankind).

Yen Cross's picture

 Japan only rank a "17" on the corruption scale? I picked the wrong week to stop taking amphetamines...

TheObsoleteMan's picture

China is a central gubmint controlled, planned economy. They are screwed, just like every other nation who refuses to allow markets to function as they should. How many countries these days are not centrally controlled,with a planned economy? Gee, I'd say we're all screwed!

dirtbagger's picture

Transparency?  Do you mean like the Lehman Brother's 105 reverse repo?

SoNH80's picture

The Chinese are in the same leaky boat as the "West" (including Japan).  Planet Earth is blue and there's nothing we can do.  Things have been getting dodgy ever since we overshot 1 bln global population.  At least a Chinese peasant knows how to feed his family with minimal resources.


NorthPole's picture

I also used to think corruption is the most significant factor stopping a lot of countries on their road to prosperity. Having spent almost 9 years in the Far East (Taiwan mainly, but also a bit of Japan and a lot of business trips to all the other countries in the region) I am not so sure anymore.


It's not only China - the whole Far East (including places like Taiwan, Korea, Japan) is incredibly corrupt. And despite of this, they are very successful. Do you know that a mere 60 years ago Taiwan and Korea were very poor, with no industry or infostructure and GDP per capita below sub-saharan Africa, and now they are industrial powerhouses with GDP per capita on par with Western Europe and low debt?


In the Far East, you can't do diddly squat if you don't bribe the right guy. Ex-president of Taiwan is doing 10 years for corruption. Ex-president of Korea commited suicite on charges of corruption. It is perfectly normal to openly pay the public bureaucrat who oversees a contract. It is a public secret that the judiciary system in all of those countries is deeply corrupt. Older brother of my wife is a judge in Taipei, believe me, I know what I am talking about. Rich people openly have 5 wifes, throwing a wedding party for each one complete with paparazzi, even though this is clearly forbidden by law.


And yet, they prosper. Actually the longer I stay, the less I understand. They don't have any natural resources. Japan, Korea and Taiwan have to import 100% of their fuels, most of food, they are actually quite disorganized (well, Japan not so much but still IMHO they are less organized than Germany; Taiwan & Korea are clearly below Western Europe in this respect). They are deeply corrupt. They don't really care about the law - personal relations matter much more.


The only thing they do have is work ethic.

Offthebeach's picture

Bribe costs are less than lawyers fees and administration taxes/overhead.

After the New York Tammy Hall take down by the Goo-Goo's( good government )/Municipal movement, people were asked how they like their new, scientific, honest government? They didn't. They said in the old days you went to a bar, handed over money and h
got your decision. After it took forever, cost more. The lawyer/administration rake was more and slower than Tammy Hall.

Seer's picture

"Actually the longer I stay, the less I understand."

Because you're stuck running with a BAD premise.  Fuck!  Do I really have to state it?  For those who don't know me, it's "perpetual growth on a finite planet isn't possible."

You've got cognitive dissonance going on.  You note that they don't have natural resources.  Yet, you think they are successful.  Well, successful in the virtual growth game.

"The only thing they do have is work ethic."

They haven't been totally crushed by machines yet!  Further, and more importantly, the work that was done to inch them up the gloablization ladder was able to be done because of demographics- THEY (early on) had LOTS of younger people.

Not too long ago I got into a discussion with my wife about Filipinos shes knows who are working in places like Singapore.  They're telling her how great they are doing.  I looked up economic data, trends, and could see declines in several SE countries (Singapore being one of them), and what was in common for all of them?  Aging populations and increases in energy imports.  You see, it's like this, industry moves to where people are more willing to do without higher energy inputs (I needn't have to point out that industry itself desires/demands it); this is almost always a country with younger demographics.

THE question that ZH folks have come to understand quite well is: "Got physical?"  Physical has everything to do with reality, it's not just for PMs.

Seer's picture

Prosperity, as you refer to it, is eroding, and it's for the exact reasons I mentioned, and which are supported by not anecdotals but by facts/data.

South Korea

GDP growth rate:

Populatoin growth rate:

Age demographics:

Energy consumption:


GDP growth rate:

Population growth rate:

Age demographics:

Energy consumption: (interesting to see the sudden drop in consumption; tends to match their drop in GDP)


Go ahead and try this for other countries (Japan is a great benchmark to use), it's fun! (and it removes thrid-party players who are just trying to sell you on something)

Offthebeach's picture

China just needs to follow the US model and codify corruption. For example, tax chinese muppets into serfs, send money to Muppets government and transfer to banksters. Just outright call members of the CP Republicans. Or Democrats and go on tour every four years. Like the WWF. Muppets love it!

onebir's picture

"MacFarquhar, a professor of history and political science at Harvard University, said the vested interests of the political elite were so entrenched in a corrupt system that an overhaul would amount to dismantling the regime." Which is why Stephen Roach's vision of China gradually shifting to a consumption-driven economy is so unlikely: how do you get this with a system so adapted to concentrating wealth in the hand of a corrupt elite?

So expect continued reliance on investment and exports until something goes (probably badly) wrong. Similar prognoses for US, & Europe of course - wo bushi pianjian zhongguo ya ;-)

Seer's picture

The BIGGER corruption lies within our minds, which have all been corrupted to believe that perpetual growth on a finite planet is not only possible, but it's the ONLY thing that we should pursue, there is no questioning this allowed.

Corruption pops out of the seams as resource shortages increase.  Why?  Because people are more willing to snub their noses at any established "law;" and, because there's greater visibility- one tends to open one's eyes more when one is hungry (easier to note those who are running around gorging themselves).

Jack Sheet's picture

Yet another armchair China analyst.

Matt's picture

How else are you going to analyse China? Going to go over there and go to the government, corporations, banks and State-owned businesses, and ask to go through their records?

reader2010's picture

Super Bullish, says Jim Rogers. 

AnAnonymous's picture

Corruption is a delicate topic in 'americanism'.

'Americanism' has so reversed ancient norms that an unaware look at it can lead to false conclusions.

Lets get back to the start:

'Americans' are those people whose founding members hijacked humanity by declaring freedom, property, pursuit of happiness, life unalienable rights to human beings among other rights, just after to maintain slavery of human beings and go into a large stealth streak.

This is the normative 'american' behaviour.
Any 'american' deviating from this is a corrupted 'american'.

In 'american' societies, you are not corrupted when you behave duplicitously. You are corrupted when you act naively You are not corrupted when you lie, you are corrupted when you speak the truth etc...

A total reversal from some ancient standards that existed prior the 'american' grip on the world.

And this 'american' value system still collides with some ancient values standards. And this gives this confusion.

What must be understood is that you do not advance on the 'american' path by growing more sincere, you advance on the 'american' path by being more duplicitous.

All these nations are actually lagging in anything that makes 'american' virtues.
When they grow more duplicitous, more money interest bought, when they grow racist, when they grow imbued with entitlement mindset, their 'american' corruption index will decline and they will appear, by 'american' standards less corrupted.

There is no other way.