Let Them Slaughter a Chicken to Warn the Monkey as They Please

Tuesday, July 24 2007 @ 05:30 AM JST

Contributed by: Y.Yamamoto

Minxin Pei, Senior Associate and Director of the China Program at the Carnegie Endowment for International Peace, titles his recent essay "Execution may not curb venality in China." (Use of italics is mine.) In the piece that deals with the execution of the country's former chief food and drug regulator on the charge of bribery, Pei concludes:
"Short-term fixes, such as making examples of a few corrupt officials, cannot solve China's food safety problem. To regain the confidence of the consumers of Chinese products, [the Beijing government] must demonstrate sustained political commitment and undertake many of the institutional reforms it has resisted for years."

If you have read an accounting primer, you know that in the Assets part of the Balance Sheet, there is an item called Deferred Charges, or Deferred Costs. (Minxin Pei also refers to them as "huge delayed costs.") What is tricky about the rules of accounting is that some costs incurred in the past are classified in assets, not liabilities, in a special treatment accountants term "capitalization." Since in general, the more assets you have, the more likely it is the B/S of your company whets a good appetite of investors, people are sometimes misled by your B/S when it is bloated with the fake assets.

This is especially true when investors are not used to looking at the other side of the B/S. Professional analysts, on the other hand, will never be misled where unsettled liabilities associated with the deferred charges are still there. But they are sometimes deceived, too, when the liabilities aren't there anymore. You may have already paid them up somehow. But when you can hardly afford to repay your debts, it's more likely that you have duped a benevolent person into shouldering the burden on your behalf. Or you may even have put them off the B/S arbitrarily. (Accountants call such an off-the-B/S indebtedness a "Contingent Liability".) When your company is on the verge of bankruptcy, you, therefore, have a good reason to resort to one or two of these financial gimmicks so the B/S still looks in good shape to you creditors. More often than not this works - unless the auditor you retain is an honest man.

Needless to say, the Japanese are the first to have effectively used these tricks. Now the Chinese are following suit. Actually, though, they are not just emulating the world's second largest economy. Having learned their lessons from the way the "Japanese Century" came to a sudden halt in the early-1990s, the Chinese are exerting every possible effort to make sure they won't fall into the same trap. One typical tactic is to abuse the wartime suffering inflicted on them by the Imperial Japan. They think Japan is the ideal trade partner because it's so vulnerable to blackmailing that it's a piece of cake to make it swallow all the hidden costs entailed in substandard quality and safety of their products. But the Japanese are not alone. These days China looks increasingly determined to pass around the extra costs to every industrialized nation who is ready to act like a sucker.

China is already a done business today. Obviously it can't do both: write off the "huge delayed costs," and survive it.

Given that it's no longer a matter of what the Chinese leadership should do, but what it should have done to straighten out the mess, it doesn't make sense at all to discuss the wisdom of "slaughtering a chicken to warn the monkey," or whatever else Hu Jintao does to gloss over the problems inherent to the hybrid communist regime. It's not China, but the rest of the world, particularly the West, that should consider how to fight these tangible pollutants, and perhaps more importantly, the constant decline in the universal values system and moral erosion which are mostly intangible. In this context it's a shame to see the Carnegie Endowment researcher, or any other pundit, continue examining the vital signs of the behemoth, dying or already dead, when the future of the civilization of mankind is in jeopardy.

If I were in a position, like Minxin Pei, to professionally analyze the China affairs and was expected to take up the issues with the safety of food and drugs made in China, I would focus more on the future of the West than on the history of the communist China. The season for the protracted debate over what Hu Jintao should or shouldn't do to reverse the situation in his domain has long been over now. I would even venture to suggest that maybe it's about time for us to start preparing ourselves for soft-landing on a world without the People's Republic of China by thoroughly internalizing the entire China issue, first and utmost.

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