THEME: CHINA
Some food for thought...

ORVILLE SCHELL

THE People's Republic of China is a country in precarious transition from one political/economic system to another. Monumental contradictions abound.

Indeed, probably no nation of global significance has more unresolved issues concerning its ruling principles and structures. But what really makes forecasting its future so difficult is not only that recent developments have so often defied prediction, but also that virtually opposite, if logical, scenarios are plausible.

China emerged over the past decade and a half as a paradigm of economic energy, determination and progress. Few other areas in the world have been deemed an 'economic miracle' for so long. Through thick and thin, China has managed to maintain impressively high economic growth rates.

In 1989, China rose from the ashes of the Tiananmen Square massacre. In the early 1990s, it weathered the implosion of the Japanese economic miracle, and maintained a steady course through the Asian economic crisis later in the decade. This year, it came through the Sars epidemic with banners flying. Now it seems to have repelled America's efforts to force it into revaluing its currency.

Anyone who has visited China's large cities over the past few years must be impressed by the energy, pace and scale of development. The sheer number of projects - from highways, ports, railroads and airports to skyscrapers, housing developments, telecom infrastructure and industrial parks - leaves even sceptics gasping in awe.

But behind the dazzling skylines and impressive statistics, another reality exists, one replete with unresolved problems and daunting numbers that suggests a far darker scenario. Consider the following:

# China must create some 12 million to 15 million new jobs annually just to keep up with population growth.

# The government must deal with an estimated 270 million unemployed or underemployed people.

# A 'floating population' (dispossessed rural workers who have moved to the cities to find work) of between 100 million and 150 million is growing by almost 5 per cent annually, representing the largest migration in human history. These migrants exist with no job security, no long-term housing and no health care.

# There are 800 million rural peasants who have been largely left out of China's latest boom, creating rising, but frustrated, expectations.

# China has no functioning pension system, and the cost of creating one is estimated in the hundreds of billions of dollars.

# New stock markets are all too often little more than elite-manipulated casinos, leaving China without the capacity to form the kind of indigenous pools of investment capital needed to power its own development.

# State banks must provide 98 per cent of all financing for local companies. But, having been used to keep state-owned enterprises afloat for too long, the banks are essentially insolvent. Standard and Poor's estimates it would cost US$518 billion (S$901 billion) - 40 per cent of GDP - to clean up their non-performing loans.

# Environmental degradation from rapid industrialisation, overpopulation, and uncontrolled resource exploitation is extreme and, given the pressure to maintain high growth rates, very difficult to remedy.

# Since 1998, the Chinese government has become increasingly reliant on ever larger bond issues for fiscal stimulus, pushing debt onto the next generation.

# Estimates of the government's growing aggregate liabilities (bank debt, unfunded pension plans, bonded indebtedness for infrastructural projects, among others) range from 70 per cent to more than 150 per cent of GDP. The government's ability to collect tax revenue remains weak, yielding less than the equivalent of 15 per cent of GDP.

Fears of an investment bubble caused by uncontrolled, indiscriminate and excessively exuberant investment and growth have led many experts to worry about a meltdown akin to that experienced by Silicon Valley in the late 1990s.

These fears are compounded by the fact that China's Leninist one-party government, now almost completely dependent on its 'economic miracle' for legitimacy, has shown few signs of implementing political reforms to complement economic reform.

So China's entire system is in a state of perilously balanced transition. And since every economy is cyclical in nature, even some of China's most ardent boosters are left to wonder what resources the party and government will have to draw on, should growth rates drop, even to a respectable 3 to 4 per cent.

What would Beijing rely on for legitimacy if unemployed workers begin agitating; if angry peasants begin to besiege local government offices in large numbers; if factionalism incites a crisis in leadership; if conflict erupts in the Taiwan Strait; or if the global economy remains sluggish?

China may have seemed a 'miracle' over the past decade. But good economic times rarely test a political system. The real test is a political system's ability to survive the inevitable cyclical downturns, political shocks or social upheavals that almost inevitably challenge a country, particularly developing ones.

Economists and political observers who are sceptical about the durability of China's 'economic miracle' point to the country's sclerotic political system, its precarious economic institutions, the hazardous balance of hundreds of millions of marginal Chinese, and the economy's reliance on outside capital.

They are right to wonder whether the 'miracle' can continue to survive the kind of shocks that have rocked almost every other part of Asia to its foundations at one time or another over the last decade. China has weathered much, but its big test has yet to come.

# The writer, a noted author on China, is a dean at the University of California at Berkeley. Copyright: Project Syndicate

THEME: CAPITULATION
Michael Sivy, CNN/Money Contributing Columnist

What should you own, if you want to ride the next market upswing?
I argue for picking the dominant companies in America's fastest-growing industries. It's always important to diversify as broadly as possible -- and that means including income investments and inflation hedges to reduce the risk and volatility of your portfolio, as well as some aggressive growth stocks if you want to pump up your potential return.
But your core holdings should be large, seasoned companies in sectors that are growing faster than the overall economy.
I used to maintain a table of 100 blue-chip growth stocks on this Web site. And since we discontinued it, I've received many e-mails asking us to start it up again. We've revisited the list and trimmed it to 70 stocks.
The Sivy 70 will be featured in the December issue of Money magazine and will be posted on this Web site next week. To provide ongoing coverage of these stocks -- as well as to offer general market insights and other stock recommendations -- I am once again writing the Sivy on Stocks column for CNN/Money. It will be published every Tuesday and Thursday.

Another Johnny Come Lately. He was quite negative on stocks earlier this year, but miraculously, he's a bull now! Notice that by popular demand, he is publishing stock picks....