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5 Myths About China | Ann Lee

Ann Lee Posted by Ann Lee.

Ann Lee is a former investment banker and hedge fund partner. She is now a Senior Fellow at Demos and the author of the forthcoming book What the U.S. Can Learn from China.Ann Lee is a former investment banker and hedge fund partner.

5 Myths About China | Ann Lee

5 Myths About China

Ann Lee, author of What the U.S. Can Learn From Chinadispels the top five myths Americans have about China.

Myth #1: The Chinese only copy; they don't innovate.

Fact: The Chinese government has created incentives and an institutional support system for its people to innovate, file patents, and create technologically-based start-ups.

China has created over 150 technology parks throughout the country that are designed to replicate the support network of Silicon Valley. They also put policies in place so that both academics and entrepreneurs alike will be more likely to file patents. For instance, the government pays large grants -in some cases of up to $1 billion -for ground-breaking research. Professors who file patents can also increase their chances of winning tenure. Others who file can improve their chances of earning official permits to live in their cities of choice. Furthermore, firms can reduce their corporate income taxes and are more likely to win lucrative government contracts by filing more patents. As a result, the New York Times reported that in 2009, China filed about 279,298 patent applications, ranking third behind Japan, which led the world with 357,338, and the United States, which had 321,741 filings.

Myth #2: The Communist Party is a monolithic dictatorship.

Fact: The party has always had competing factions, and leadership emerges only after vigorous competition.

The populists who represent the farmers in western China include the current top two Chinese leaders, President Hu Jintao and Premier Wen Jiabao, who favor balanced growth so that wealth inequality does not become too extreme and that environmental protection does not get sacrificed. The elite factions represent the interests of elite urban coastal dwellers who want less regulation and less taxation. Sound familiar?

The Communist Party's Politburo consists of 25 members and the Standing Committee consists of 9 members. Together, they represent the highest ruling bodies, and their decisions are reached only after much research, debate, and negotiation. However, only seven of them come from any background of wealth or power. The rest of them, including the president and the prime minister, come from ordinary backgrounds with no special advantages. They worked and competed for decades in their careers to reach the top - more so than many American leaders, who often finance their campaigns through personal wealth or special interest group fundraising.

Myth #3: China is a military threat.

Fact: Funding for the People's Liberation Army (PLA) lags far behind the U.S. Department of Defense.

In 2010, the U.S. military spent $1.35 trillion. Estimates for China's annual military budget vary considerably, ranging from $69.5 billion to $150 billion, but it's clear that even under the highest estimate of Chinese spending, U.S. military spending is roughly ten times higher than China's per year.

The U.S. Navy also dominates the world's oceans. China operates no overseas bases and has only a handful of military personnel stationed abroad in embassies, on fellowships, and in U.N. peacekeeping operations. China's spending is mostly for defensive purposes given that it is surrounded by less than friendly neighbors such as India, which spends a greater percentage of its GDP on its military than China does. The misperception of a ‚“threat ‚” is mostly generated by the U.S. Department of Defense who do not want to face budget cuts.

Myth #4: China's economic growth is subtracting from growth of other nations.

Fact: China's growth has increased wealth and jobs in the U.S. and around the world.

China runs a trade deficit with many ASEAN countries, South Korea, Japan, African countries, and Latin American countries. As Vice President Joe Biden pointed out in his OpEd in the New York Times, American companies exported more than $100 billion worth of goods and services to China last year, supporting hundreds of thousands of jobs stateside. U.S. exports to China have been growing much faster than America's exports to the rest of the world. In 2010, American businesses also hit record profits, as the bulk of their sales came from abroad in places like China. The fact remains that many U.S. companies rely on China for their operations. If American companies didn't outsource to China, these companies would go out of business because they wouldn't have been able to compete in today's global economic environment. Trade is not a zero-sum game. All parties tend to benefit -and both the U.S. and China benefit from their deepening trade relation.

Myth #5: China's hunger for resources is the reason for high commodity prices.

Fact: The rise of commodity prices of everything from food to oil are mainly due to speculators causing price bubbles, according to Paul Collier, Oxford economist and author of the book "Plundered Planet" and many additional research papers.

Better Markets reported that in 2011, speculators accounted for a whopping 155% increase in commodity market prices based on data from the Chicago Board of Trade. Professor Michael Greenberger of University of Maryland Law also claimed that when he was working as Chief of Staff with CFTC Chairperson Brooksley Born, he witnessed the ‚“secret deals ‚” that allowed Wall Street speculation to make up 80% of the futures markets.

The journalist Frederick Kaufman also reported that commodity index holdings pegged to commodity futures such as corn and wheat rose sharply from $13 billion in 2003 to $317 billion in 2008 and that the deluge of money pouring into futures had caused futures prices to be bid higher than current prices, causing trading algorithms from speculators to drive up current prices to chase the futures prices in a circular frenzy. Fundamental increases in demand have been met with production increases in supply. Both have been steadily increasing. While some price increases can be expected in the marketplace, the wild price gyrations can only be explained by herd mentality by speculators who exaggerate short-term price movements.