ZT:Black Swan Crash Draws China Growth Questions: William Pesek

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You can tell a lot about a country from riding its trains.

Germany’s rail system speaks to its engineering prowess. Japan’s vast Shinkansen network showcases its technological proficiency. Switzerland’s on-time trains demonstrate a nation’s precision, the U.K.’s chronically late system speaks to the patience of a people and Singapore’s spotless subway cars hint at the city-state’s orderliness.

By contrast, India’s trains display the backward state of vast swaths of an otherwise modernizing economy. And the U.S.’s dilapidated Amtrak brand is emblematic of infrastructural neglect and a reluctance to invest that undermines growth.

Until a deadly July 23 crash, China’s rail ambitions were zooming along in tandem with its economic boom. The rail program added new superlatives to the China narrative -- world’s fastest train, longest high-speed system. Now it stands as an apt metaphor for the nation’s economic journey.

Here are five things Saturday’s tragedy says about China:

Hypergrowth’s Risks
One, hyper-growth has its risks. Officials in Beijing are quickly learning that China’s impressive performance post-Lehman Brothers resulted in a number of excesses that the second- biggest economy must now bring under control. Three come to mind: asset bubbles, a surge in local-government debt and holding too many U.S. Treasuries.

China must maintain growth in the vicinity of 9 percent or 10 percent to raise living standards and keep the masses from heading to Tiananmen Square with protest banners. Yet inflation is accelerating, and policy makers need to act fast to make sure China’s long-term economic trajectory isn’t undone by today’s imbalances. The train crash that killed 39 people makes you wonder about the underpinnings of China’s development.

Its economic model champions growth and generational jumps in technologies. China seems to have little time for developing indigenous brands -- it’s more interested in buying established overseas businesses and demanding technology transfers as the price of access to its markets. The trouble with skipping some of the development steps is that sometimes you trip.

Black Swans
Two, beware the lightning strike. Last week’s accident occurred, according to Chinese authorities, after lightning struck a train, causing another to rear-end it. Consider this the transportation industry’s answer to a Black Swan event. Yesterday, new reports suggested that a design flaw in a signaling system contributed to the accident.

The thing is, China is being studied under a microscope for signs of stress that could cause its economy, and by extension the global economy, to unravel. But it’s as likely to be an utterly unexpected event -- an earthquake in Beijing, a rural uprising in Chongqing, a nuclear accident in Qinshan -- that could precipitate a crisis.

When we think about the spark that might lead to a challenge to the Communist Party’s authority, we tend to focus on conventional risks such as plunging stocks or public anger about corruption. If anything destabilizes China, it’s likely to be a bolt from the blue -- like Saturday’s accident.

White Elephants
Three, know your audience. All developing economies that suddenly get cash rich can’t resist building white elephant projects in pursuit of superlatives, be they vertigo-inducing skyscrapers or record-breaking trains. But if China’s effort to balance its export success with a strong domestic market is to succeed, look for the economic development that reflects the economic status of the majority. That’s more likely to be mobile phones and shampoo than high-speed trains.

Even before the crash, this program was controversial because the vast majority of Chinese could never dream of affording a ticket. As much as China’s high-speed rail system demonstrates the nation’s technological great leap forward, it serves as a reminder of the widening gap between rich and poor in a supposedly communist nation.

Learning Experience
Four, transparency is your friend. An accident is a learning experience -- it must be to prevent a recurrence. To learn what happened, you need a full, open and reasonably independent investigation. The opposite is happening.

The clearest indication of that was the burying of parts of the train wreckage. China’s claims that it was merely clearing the area to facilitate rescue vehicles are beyond laughable. Also, the Chinese news media has been directed not to report aggressively on the crash but to focus on heart-warming human interest stories of brave and loyal bystanders rescuing victims.

Really, who do Chinese officials think they are kidding here? Such institutional dishonesty will only increase global skepticism of China’s leaders. Saving face in Asia is very important, but it’s not as vital as the truth.

National Prestige
Five, national prestige is earned the hard way. You can just imagine the schadenfreude in Tokyo this week. China talked big about how it was leaving Japan in the dust. Its train and parts makers had been challenging Japanese and European suppliers, touting experience gained from construction of China’s domestic network. The crash near Wenzhou means their chances of selling high-speed trains are near zero.

This problem harks back to recent safety scares involving seafood, dumplings, eggs, milk, pet food, toothpaste, medicine and toys. China needs to realize that in a world as competitive as ours, the bar is high and it’s being raised with each passing day. If you’re going to talk big, make sure your products really are world class.

The same goes for your economy.

(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)

To contact the writer of this article: William Pesek in Hong Kong at wpesek@bloomberg.net.

To contact the editor responsible for this article: James Greiff at jgreiff@bloomberg.net.