China shares same problems as other developing nations

But the market has also shown frightening volatility, caused many naive investors to lose their shirts, and now stands at a six-year low, having deflated even more dramatically than the notoriously over-invested NASDAQ in the US. It is seriously affected by widespread abuses, built-in flaws, and populated by many Chinese Enrons and WorldComs. As a result, investor interest in the Chinese stock markets has cooled so much that reforming the stock market has become a major priority for the government.

Why did China fall into this trap? One would think that, being a late developer, China would have learned the hard lessons from older markets elsewhere. Every nation with financial markets has seen great crashes. But the Chinese, instead of learning from past mistakes, are reliving them. It seems that folly knows no nationality, and "the madness of crowds" is universal.

But the Chinese are not alone. In India, certain statements of the New Congress Government caused a panicky selloff, reducing the stock market's value by more than 20 per cent in just two days. Although dramatic new reform policies have now pushed the index to an all time high, what turmoil Indian politicians have created for investors! Russia and Latin America have faced similar problems - wild currency fluctuations have caused all sorts of damage.

The potential instability in the late developers casts new light on the current clamour to revalue the Chinese currency. Strengthening the yuan might provide temporary relief for developed countries facing a trade deficit with China, but China's trouble-prone legal and financial system, with its chronic corruption, means that a revaluation now might seriously destabilise the country. Eventually, there is no doubt that China must free its currency, and have a free flow of capital, but to take that step now without rooting out corruption first would create more problems than it would solve.

Although the late developers' recent progress has attracted a lot of attention from the outside world, in actuality they have made only a small step towards prosperity. China may have 16 million cars on the road, legions of millionaires, and even a few billionaires, but its GDP per person is still only around US$1,200 and the average manufacturing job pays only around US$115 per month. In fact, its economic development remains very much at the early stages. Lifting the standard of living for 1.3 billion people is no small task.

In particular, China is going through a painful transition from a state-run economy to a market-oriented one, and stands uncertainly between a failing old system and a new one which is very slowly being introduced. Moving to the next stage for a country like China is not straightforward: Rather, it is like an aquatic animal slowly evolving to live on land. It would not surprise the Chinese if it took a couple of generations, or even more, to build a functional market economy and legal framework - fair to all, and free from bureaucratic meddling.

So far, China has been undergoing a painful transitional experience, and many of the remaining problems cannot be resolved without fundamental reform. There are just too many barriers to overcome. At the same time, countless people depend on the old system; in 2004 alone, 43,757 government officials were found guilty of corruption. Knowing the depths of these problems is a necessity to understand the tremendous struggle China is going through. Although exaggerating the problems may be harmful, minimising them could be equally damaging.

The developed world, which is hardly problem-free itself, has a great influence on the prospects of the late developers. Indeed, increasingly, the developed world risks losing its historic role as the engine of global growth.

Now, the well-known problems with the anaemic Japanese economy pose a direct threat to global health. What are the possible root-causes of the Japanese mess? They stem directly from the tightly closed Japanese system. This closed system is most effective in fending off foreign interests. Your beef may be five times cheaper than Japanese beef, but the Japanese have invented numerous barriers against your entry. Yet, Japan is most vulnerable to the foes within. Protectionism is a very ancient practice based on a tribe mentality and is now backfiring. Backing out of this mess is easier said than done. So, more than likely, the Japanese economic problems will increase unless it can break the hold of protectionism to make Japan a truly open economy and society.

Furthermore, there is great uncertainty currently over the weakening dollar. What is really troublesome is not the dollar's declining value per se, but what lies behind it.

The United States has become the biggest debt-issuer ever. Spending beyond one's means would spell trouble for anyone, and the US will ultimately be no exception. There is a great need for the US to put its fiscal house in order. Failure to do so risks reduced long-term borrowing power, an economic downturn or both. To express these concerns is not scare-mongering. The US savings rate is flat, but spending keeps rising. At the same time, the US government keeps borrowing from the outside world, with total borrowing now exceeding US$1 trillion. Even some US writers forecast a potential economic doomsday if current trends continue too long.

One way out is for faster development in the emerging economies, which will give rise to more consumption there. In this regard, the high-speed growth in India and China is very positive. China imported US$560 billion worth of goods in 2004, and this statistic could reach US$1 trillion by 2009. India, Russia, Brazil and many other emerging nations have been sharply increasing their consumption of late. One thing is clear, developed nations and the late developers are more than ever in the same boat.