Q&A With Derek Scissors on China's Economy

Peter Sturm: How significant is the divide between eastern and western China in the country's economic development? Does it have the potential of leading to serious political difficulties and the fracturing of the country?

A: There are very significant differences between coastal and inland China and, crosscutting those, between urban and rural China. What we think of as the Chinese economic miracle is actually a miracle of half a dozen provinces, starting initially with Guangdong. This is a serious problem -- you can't be a powerhouse national economy if only 40 percent of the country is participating.

On the political side, unbalanced regional development is three decades old, unbalanced urban-rural development is almost two decades old, and the Communist Party has maintained its grip very effectively since Tiananmen.

Chris: Some analysts have recently asserted that China's dependence on exports is less profound than commonly believed and that its "processing export model" is well placed to weather the current crisis. Do you agree?

Also, what types of investments in China are available to foreign investors, and how are they regulated -- if at all -- by the People's Republic of China?  

A: Think of the Chinese economy as a spear. The shaft is investment, the bulk of the economy, and the tip of the spear is net exports, the leading edge in terms of technology, profits, and wages. Unfortunately, that leaves no place for consumption, which is pretty much how recent GDP data looks, too. I do not think export processing is well placed to weather the crisis, unless you mean that imports will fall just as much as exports and China can continue running a huge trade surplus.  

I'm assuming you mean portfolio investment. Qualified foreign institutions can trade local stocks and, increasingly, local bonds. Other asset markets are immature and largely closed to foreign participation. The main problem is that the markets are either dominated by the state, as in bonds, or warped by poor information, as in stocks.