Twofish's Blog

June 28, 2006

Study in contrasts

Filed under: china — twofish @ 5:10 pm

It’s interesting to put these contrasting articles together

One in which the government is taking a more concilatory approach on rural unrest which has brought down tensions

Another where they government is still covering up an incident in which several villagers died a few months ago

One on which massive fraud has been uncovered in one bank in China

While another is getting billions of dollars in foreign investment

These are all pieces of a messy puzzle, and if you leave out any of the pieces, the picture that you get isn’t that accurate.

Here are some more pieces

1) One key part of the effort to quell rural unrest has been that the central government has started to fund local governments directly for a lot services. One reason that local governments had to resort to land sales was that this was the only way that they could raise money. One curious thing about the new system is that has to deal with public attitudes toward waste and corruption. The thing that made farmers angry was that local governments were taking their stuff (i.e. land) and using it for the benefit of local officials. I suspect that there is going to be much more tolerance of local corruption and inefficiency as long as it is funded from the central government, because the connection between the corruption and the individual is less noticable.

2) The Chinese government takes what has been called a “two handed” policy of being both “nice” and “mean.” If you are just “nice” no one is going to take you seriously. If you are just “mean” everyone ends up hating you and you lose in the end. The fact that the Chinese government uses both methods may seem paradoxical, but it really isn’t. They are just trying to stay in power, and they have enough sense to know that they can’t without being both “nice” and “mean” at the same time.

3) The Agricultural Bank of China is one of the worst banks, and the Bank of China is one of the best. One of the reasons that ABC is in such bad shape is that rural areas are economically in bad shape (Agricultural get it?). Another problem is that you can’t really shut it down since it provides banking services to lots of people in rural areas.
One thing that one has to keep in mind is scale. Several billion dollars of fraud is a bad thing, but losses due to it are not going to bring down the Chinese economy. ABC has about 600 billion US dollars in assets, and a few billion dollars lost in fraud while bad is not devastating. It’s when you start getting into the hundreds of billions of dollars (which is the Russian case) that things are bad macroeconomically.

Don’t get me wrong. I don’t think that corruption is a good thing. But there is still a difference between con-artist who cheats me out of one hundred dollars and one that cheats me out of one hundred thousand dollars. The first is bad, but its an annoyance and I’ll survive. The second could push be into bankruptcy.


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