The "Big Picture" vision of the Second Great Leap Forward is about to collide with economic realities and unspoken truths

China’s Second Great Leap Forward

- Daniel Greenfield
Thursday, July 7, 2011
many links on this post

The People’s Republic of China’s first Great Leap Forward thrust it forward at the cost of some 40 million lives. And while its Second Great Leap Forward appears to come at a smaller cost in lives, it may prove to be equally fragile.

The saving grace of the PRC economy has been the willingness of Western companies to use it as a cheap labor market. Capitalism accomplished what Communism could not, giving its industrialization focus. But beneath that China is still a Party oligarchy which is stuck thinking in terms of giant projects and major goals. The New China is on its Second Great Leap Forward and still trapped in Mao’s legacy.

China has achieved Mao’s vision of becoming the world’s dominant steel producer. China produces a third of the world’s steel. Almost eight times as much as the United States. And its dumping of steel on the American market, along with domestic overregulation, has helped break down the American steel industry. But the Chinese steel industry is government subsidized and protected. Like so much else, it grows out of a command economy.

China’s command economy depends on an undervalued currency which uses exports to fund industrial investment. More industry, more cheap exports and more revenue. The cycle of aggressive growth that follows is impressive, but also completely unstable. The growth is not natural, it’s government funded. The costs of the growth are dispersed and hidden, but they are still there. Like most pyramid schemes, the numbers look good so long as a high rate of growth continues. But a setback exposes its weakness and topples the whole structure.

The PRC’s official budget deficit isn’t so terrible, but its real spending is often hidden behind a convoluted organizational web of state owned banks and investment corporations set up by local governments to lend themselves money from state owned banks. China’s official budget listed revenues of 1.149 trillion and expenditures of 1.27 trillion. Not so bad compared to America’s insane 2.092 trillion in revenues and 3.397 trillion in expenditures. Except when you start accounting for nearly an additional 4 trillion in debt that the PRC used to “stimulateâ€