China's tight control over its economy is one reason why it is facing an economic slowdown of global implications, Stanford scholars say.

China's stock market fall is now in its third week, and share prices have lost a third of their value since mid-June, though the market is still higher than a year ago. China has the world's second-largest economy, with deep financial links to the United States.

Nicholas Hope, director of the China Program at the Stanford Center for International Development, which is part of the Stanford Institute for Economic Policy Research, said the simple answer behind the slowdown is that "nothing grows at 10 percent forever."

However, the dropoff is sharper than the government of China expected or desires, he noted.

Hope said the deceleration is due to the effects of slow growth globally on international trade, slower progress than hoped in rebalancing the Chinese economy toward spending more on consumption and less on investment, and the inefficiency of much of Chinese investment. Another big problem is the debt load of local and regional governments.

Hope does not think the steep fall of China's stock market is comparable to the American crash of 1929 – "so long as the Shanghai market index remains comfortably above where it was a year ago."

Yet the "frighteningly sharp correction" over the past few weeks highlights the fragility of the Chinese financial system, he said. It also serves as a cautionary tale for the many small investors who speculated on high returns with borrowed money.

"Borrowed funds have financed many risky economic investments in infrastructure by subnational [regional and local] governments as well as stock purchases by unwise investors," he said. "The result threatens to be an unwanted increase in non-performing loans in the banking system as borrowers are unable to repay."

Hope believes China can overcome its problems if it adopts economic reforms aimed at fostering more private enterprise and less state control over the market. Back in 1993, China's Communist Party announced those reforms and updated them in 2013, so they are technically on the books.

"Paradoxically, current weaknesses could be a longer-term source of strength, as the shares of income and consumption in Chinese GDP rise, investment is increasingly more efficiently allocated by a transformed financial system and all factors of production – land, capital and labor – are put to more productive uses," he said.

To counteract the market drop, the government ordered state-owned companies to buy shares, hiked the amount of equities insurance companies can hold and offered more credit to finance trading. Hope said this may cause a problem.

"It is introducing considerable moral hazard by attempting to bail out small investors because of the concern over the potential for social unrest if too many of those investors lose all of their savings," he said.

Charlotte Lee, associate director of the China Program at Stanford's Walter H. Shorenstein Asia-Pacific Research Center, says it is too early to tell if the market fall will diminish the credibility of the government and Communist Party in the eyes of the people. China's President, Xi Jinping, does want to maintain his popularity.

"The government's management of the economy is, however, one of the pillars of its credibility," Lee said.

She described this as a "small dent" in that credibility, as the government has many other ways it aids the Chinese people.

Opening up the economy

Stanford Professor Darrell Duffie says that it will be hard for China to maintain its past high growth rates.

"China's growth rate is still very high, but it is less high than it was because most of the giant pool of cheap and underutilized labor that China had 20 years ago has by now been put to work relatively productively," said Duffie, the Dean Witter Distinguished Professor of Finance at the Graduate School of Business.

"Additional sources of productivity gains are harder to find," he added.

Duffie is concerned about excessive leverage in China's equity markets.

"Chinese investors have borrowed a lot of money to invest in equities. This margin financing was used too aggressively. China's corporations and local governments are heavily indebted, and that will be a drag on future growth," he said.

He suggests that China would do well to continue on its current course of opening up its economy to cross-border capital flows and reducing its economy's reliance on state-owned enterprises.

If China's economy slows down, the country will decrease its demand for American goods and services, he added. American businesses that plan to operate in China should learn as much as possible about how China's economy and government works.

And Duffie advised, "Whenever possible work with trusted partners in China."

Asian power games?

With China ramping up its military in recent years, what are the risks to U.S. national security if China's economy plunges?

Amy Zegart, co-director of Stanford's Center for International Security and Cooperation, said it is possible that a slowing economy might make China behave differently in terms of its hard and soft power.

"For all the worry about a rising China, a fragile China is bad for the United States. The Chinese Communist Party's legitimacy rests on a promise of economic prosperity. The more China's growth falters, the more party leaders will be driven to stoke the fires of nationalism to secure domestic support," said Zegart, who is also a senior fellow at the Hoover Institution.

She added, "We've seen this movie before. It stars Vladimir Putin behaving recklessly abroad to win political support at home as his economy stalls."

Clifton Parker is a writer for the Stanford News Service.

Demographic change is fast becoming one of the most globally significant trends of the 21st century. Declining fertility rates and rising life expectancy -- two of the patterns triggering demographic change -- will cause vast socioeconomic strains, especially in the Asia-Pacific region, which has some of the world's most populous countries. Stanford health researcher Karen Eggleston says comparison and cross-collaboration are needed to induce creative solutions.

In an interview with the Office of International Affairs, Eggleston discusses her research approaches and partnerships in the study of healthcare systems and health policy in the Asia-Pacific region. She leads a multiyear research initative that examines comparative policy responses to demographic change in East Asia. Eggleston says the goal is to help move global health policy to a place where everyone has an "equal opportunity for a healthier and longer life."

The Q&A may be viewed in full by clicking here.

Analyzing demographic change in China, Japan and South Korea is the focus of the book Aging Asia, an outcome of a conference between the Walter H. Shorenstein Asia-Pacific Research Center and the Stanford Center on Longevity.

Eggleston also coedited a special issue of the Journal of the Economics of Ageing with David Bloom, a professor at Harvard University, looking at a range of economic issues related to population change in China and India.

For Matthew Kohrman and his students, the war against tobacco needs a new communications strategy.

After all, he noted, three times as many cigarettes are currently manufactured and sold worldwide than were in the 1960s. And the global cigarette industry is the greatest cause of preventable death on the planet today.

That’s why the Stanford associate professor of anthropology decided to teach an introductory seminar this spring, Anthro 182N, titled Smoke and Mirrors in Global Health. Kohrman led his 10 students on a journey into the “strange optics” that the global tobacco industry uses – and what to do about them.

As noted in the syllabus, “entrenched challenges” to global health require society to develop “new methods” to communicate the real truth about tobacco.

Just what are those “new methods?” At the culmination of the class, the students presented some variations on that theme. Their end-of-the-quarter projects were web-based efforts profiling various features of global tobacco. They included exposés on how academicians in China assist the industry in that country, humorous parodies and critiques of Philip Morris, and flawed approaches to tobacco control in South Korea.

They tackled big-picture questions, Kohrman said. For example, they asked what exactly constitutes cigarette manufacturing and how new strategies could help slow the spread of tobacco-related diseases worldwide.

Kohrman, the director of Stanford’s Cigarette Citadels project, envisioned his class as a way for students to offer some thought-provoking and original ideas grounded in solid data. After viewing the student projects, he was astounded – and proud.

“My overall impression has been a feeling of awe,” he said. “Mostly freshmen and sophomores, the students who enrolled in this new course quickly synthesized complex intellectual concepts introduced early in the quarter, conceived their own innovative project ideas, collected relevant data, generously worked with each other, designed apt strategies for evocatively visualizing their messages, and chose and implemented strong interactive media tools – most of which were utterly new to me.”

One of those students was Minkee Sohn, a communication major, who created a video, “Fresh Recruits,” to highlight what he believes is the hypocrisy in the language of some cigarette manufacturers’ recruitment efforts.

“While cigarette manufacturers,” Sohn said, “often frame smoking as an act of free choice, that choice is just an illusion. Free choice is denied to people in all stages of cigarette manufacturing and consumption.”

For example, he explained that children in the African country of Malawi are coerced to work with their families in tobacco fields. “It’s deeply disturbing to hear companies associate freedom with high-paying jobs in cigarette manufacturing.”

For biology major Annabel Chen, the most important thing she learned was to analyze information skeptically. “Industries like big tobacco have influences in unexpected places, so you always need to do sleuthing to find out the truth,” she said.

She chose to examine the links between tobacco and academic research in China. “Seeing as China is the biggest tobacco market in the world, this was a problem we needed to address.”

Kohrman appreciates how students like Sohn and Chen were willing to try an experimental course, never taught before, and which for many was outside of their comfort zone. He said the course will be taught again in 2015-16.

“Looking back, it was the perfect-size group for all the work and one-on-one teaching we did,” he said.

The course was a classic collaboration, according to Kohrman, who also credits Claudia Engel, a lecturer in the Anthropology Department who helped with the technology and his own experiences mentoring undergraduate research, all of which proved instrumental to designing Smoke and Mirrors in Global Health.

“It was a great success today,” he said after seeing the student projects on the last day of class. Tom Glynn, a top adviser to the American Cancer Society, was on hand to see the presentations.

Kohrman added, “Students got tremendous feedback, and there was lots of enthusiasm about how this experimental course unfolded.”

Clifton Parker is a writer for the Stanford News Service.

China was for hundreds of years almost entirely an agricultural society, but modern industrialization changed that dynamic, and the impact on health has been startling.

Urbanization, population aging and changes in lifestyle (from mobile to sedentary) have led a transition from an acute to chronic disease-ridden society. Now, 10 percent of China’s adult population is diabetic or pre-diabetic—holding the number one place in the world.

Feng Lin and a team of researchers want to change that reality.

Lin is part of the Corporate Affiliates Program at the Shorenstein Asia-Pacific Research Center. A visiting fellow, Lin leads a research project focused on innovations in primary health care systems in China, a topic that is also the core of his work at ACON Biotechnology. Throughout his research, Lin has worked with health policy expert Karen Eggleston.

“Thirty to forty years ago, people were talking about infectious disease,” Lin says, referring to Chinese society. “Non-communicable diseases (NCDs) like diabetes didn’t even register. They were like the black sheep in the flock.”

Now, though, Lin says that China has reached a critical stage. NCDs have a noticeable presence, and the challenge for China is to create an effective healthcare system to serve its population of 1.3 billion. Its health delivery systems are not equipped to address and prevent diseases at such a high demand.

Lin believes that improving access to care by increasing the relevance of community health care centers, improving the quality of care and integrating IT infrastructure could provide pathways forward.

In pursuit of this, he is part of the team developing an open source health index with Yaping Du, a professor at Zhejiang University, and Randall Stafford, a professor of medicine at the Stanford Prevention Research Center.

The index is one of many activities that Lin is involved with at Stanford. Forging a new type of partnership with the Asia Health Policy Program, his company sponsored a public seminar series this past year.

Restructuring quality care 

Hangzhou, Zhejiang Province, China. Photo credit: Wikimedia Commons

Determining how to restructure China’s healthcare system is a tough challenge because it’s a bureaucratic hierarchy – multiple divisions traverse each province, prefecture, township and village. 

In 2009, the Chinese government laid out aggressive reforms to its healthcare policy. Lin says he believes the most essential part of that plan is the empowerment of grassroots-level community healthcare centers.

“You cannot just deal with primary level, you must look at the secondary and tertiary segments, too—a whole system approach,” he says.

Resembling a pyramid, China’s system has a finite number of top physicians who are mostly located at major hospitals. Patients who pursue services are likely to go to major hospitals in urban areas, instead of their local health community centers. About 90 percent of health care is delivered in hospitals—leading to overcrowding. Moreover, patients choose to self-treat or self-medicate which can lead to misdiagnosis. 

Collecting data in Hangzhou, a coastal city just south of Shanghai (shown in map photo), Lin discovered that these trends could be explained by two reasons. 

Patients have a low level of trust in community health centers, and local facilities lack capacity (e.g. having only 20 bed spaces) and expertise (e.g. employing medical personnel with sometimes outdated training). His analysis reinforced earlier outcomes found by Karen Eggleston.

Lin says the solution lies in increasing access to highly skilled physicians and organizing the system more efficiently.

Comparing China to the United States, Lin believes community healthcare centers should become main hubs for service delivery. The centers would operate as the first and last touchpoint for patient care, like “gatekeepers” in the U.S. system, administering advanced services and prevention programs like wellness education.

And while local centers are becoming more prevalent—China has more than 34,081 centers—development isn’t fast enough, not enough physicians exist, and patients aren’t actively choosing to redirect their services to community healthcare centers.

Courtesy: Feng Lin

Figure 1. Strategy for community healthcare center reform advocates "strength at the grassroots." Currently patients seek care at major hospitals as their first stop, but in the future system, patients will go primarily to grassroots community healthcare centers. Courtesy: Feng Lin

Creating ease

Chinese people are typically leery of the quality of health care available at community healthcare centers, and overcoming that trust deficit won’t be an easy task. However, Lin says it’s a matter of informing citizens about local services and training more physicians to deliver quality care.

To address quality concerns, the Chinese government has set out to expand medical training programs. Enhancing the expertise of current and future physicians in rural community healthcare centers is essential, Lin says.

The health index aims to empower patients so that they can determine the best medical accommodation available, and also create a mechanism that rewards good work.

The key is to create a participatory system, one that incentivizes the patient and the physician, he says.

Hosted digitally and in the public domain, the index will list all physicians throughout Zhejiang province. Patients and healthcare professionals can login and share their experience, providing a “satisfaction rating” of hospitals and community health care centers.

Beyond external contributions, the index will support data provided by China’s national Center for Disease Control and Prevention, and local centers for disease control, to include mortality rate and cause of death and many other indicators sourced from publicly available data.

“It will build up a kind of system that people can trust – something that people can rely on,” Lin says.

Similar platforms have been implemented in advanced industrialized nations. Lin hopes that the index will offer a model that could be applied nationwide.

“It’s nearly impossible to have a single policy apply,” he says. “But, if there’s a success in one area or a few areas, the central government will pick up that approach.”

Lin expects that his team will unveil the pilot program at a conference on general practice in October 2015. The conference aims to provide practical ways to improve primary care services and the education and training of general practitioners.

Map shown above is Hangzhou, Zhejiang Province, China. Photo credit: Wikimedia Commons

When China first proposed creating the Asian Infrastructure Investment Bank (AIIB) in 2013, it generated considerable anxiety in Washington and many other capitals. Many pundits and policymakers view the AIIB as a bid to undermine or replace the international architecture designed by the United States and its allies since the end of World War II. Although several U.S. allies, including Australia, Germany, and the United Kingdom, have declared their intention to join the AIIB, others, including Japan, have expressed ambivalence. For its part, the United States has made it clear that it will seek to influence the institution from the outside. But it would be a mistake to shun or undermine the AIIB. Rather, it should be welcomed. Both the United States and Japan have far more to gain by joining the AIIB and shaping its future than remaining on the sidelines.

The details remain vague, but the AIIB is meant to be a multilateral development institution that will focus on infrastructure needs in Asia. There is no question that this is a deserving cause. Asia’s large population, rapid growth, and integration with the global economy all generate demand for better infrastructure. A report by the Asian Development Bank (ADB) estimates the region needs about $750 billion annually in infrastructure-related financing. Citing historical underinvestment, McKinsey & Company, a global management consulting firm based in New York City, proclaims a “$1 trillion infrastructure opportunity” in Asia. [...]

This article was originally published on Foreign Affairs on May 7, 2015, and an excerpt has been reproduced here with permission. The full article may be viewed on the Foreign Affairs website.

The damage that Mao Zedong wrought in China made it much easier for that country to move away from a Soviet-style economic model and toward a new market-oriented one, a Stanford scholar says.

In fact, China has been in full retreat for four decades from Mao's disastrous rule, according to a new book by Stanford sociology Professor Andrew Walder, a senior fellow at the Freeman Spogli Institute for International Studies and director emeritus of the Walter H. Shorenstein Asia Pacific Research Center.

"Mao ruined much of what he had built and created no viable alternative," he wrote. "At the time of his death, he left China backward and deeply divided."

Led by Mao, China's Communist Party seized power in 1949 after a long period of guerrilla insurgency followed by full-scale war. Mao launched a bloody Chinese revolution that resulted in the deaths of millions of Chinese over the next few decades. 

In an interview, Walder said that Mao pushed campaign after campaign against the Chinese Communist party and bureaucracy after 1966 – "The bureaucracy was basically flat on its back at the time of his death."

By contrast, Walder noted, the Soviet bureaucracy was powerful and well-entrenched, and had enormous vested interests that thwarted genuine reforms.

"In post-Mao China, the economy was so backward and the bureaucratic interests so weak that market reform was bundled together with a program of national revival – restructuring the economy along market lines while rebuilding the party and bureaucracy," he said.

Therefore, the politics of reform were much easier for a Chinese leader like Deng Xiaoping than for a Soviet leader like Mikhail Gorbachev, who had to contend with an entrenched bureaucracy still proud of the fact that the USSR was (until the late 1980s) the second largest economy in the world and an undeniable superpower, according to Walder.

He noted that Mao's initiatives repeatedly led to unintended and unanticipated outcomes.

"What is so remarkable is that after 1956 this was a recurring pattern. His initiatives repeatedly ran into trouble, forcing him to backtrack and change direction constantly – although he always insisted that things had unfolded in ways that were according to his plans," Walder said.

Class struggle, imaginary enemies

Mao's China, he added, was defined by a harsh Communist Party rule and a socialist economy modeled after the Soviet Union. Mao himself intervened at almost every level, despite a large national bureaucracy that oversaw this authoritarian system.

"The doctrines and political organization that produced Mao's greatest achievements – victory in the civil war, the creation of China's first unified modern state, a historic transformation of urban and rural life – also generated his worst failures: the industrial depression and rural famine of the Great Leap Forward and the violent destruction and stagnation of the Cultural Revolution," Walder wrote.

He said that Mao misunderstood China's real problems in advocating a top-down "class struggle" against capitalism and imaginary enemies.

"At the time of his death (in 1976), he left China backward and deeply divided," Walder wrote.

The result was a gradual transition to the market-oriented system of today, he added. Almost immediately following Mao's death, his most fervent followers and supporters in the party were arrested and detained – all of which opened the door to reform and opportunity.

China has overcome widespread poverty to become the second largest economy in the world within the span of just a couple of decades. Still, according to Walder, China's rulers seek to cling to a sanitized version of Mao as a way to buttress their legitimacy.

"The damage of his misrule, and the incompetence on his part that it reflects, are not part of the official story anymore, and certainly this is not what is taught to school children or in party manuals in the present day," he said.

World War II and Stalinism

On two other key issues, Walder said his book challenges the conventional wisdom about China and Mao.

First, he says that Mao's forces did very little of the fighting against the Japanese in WWII.

Walder said that the victory of the Chinese Communist Party in 1949 over the Chinese nationalist forces has usually been traced to the strategy of guerrilla warfare in rural regions championed early on by Mao.

"But that was simply a strategy of survival during the Japanese invasion – and Mao's forces did very little of the fighting against the Japanese, in stark contrast to the popular myth of rural resistance." (Only 10 percent of China's military casualties were Red Army, he said.)

What Mao's Chinese Communist Party (CCP) excelled at was mass mobilization for all-out warfare during the Chinese civil war of 1945-49, Walder said.

"And this – pushing your organization and the population for all-out mobilization for war – is the real source of the CCP's success over the Chinese nationalists. This was more like the Soviet Union's war against German armies during World War II than a 'people's war' led by a party that was close to the rural people and built support by catering to their needs," he said.

Second, Walder describes Mao's thinking as frozen in Stalinist doctrine, despite the conventional view of him as an original thinker.

"In fact, Mao's core ideas were absorbed from late-1930s Soviet pamphlets put out under Stalin, and his thinking was very much frozen in that earlier era," Walder said. "The core idea that he absorbed from these pamphlets in creating 'Mao Thought' was that socialism had to be built in an all-out mobilization, like warfare, by extracting huge sacrifices from the population."

The most pernicious idea that Mao absorbed from these old Soviet pamphlets, Walder said, was that class struggle actually intensifies after the means of production are put under public ownership and former exploiting classes are liquidated.

"The sad corollary to this idea is that the Great Leader is the fount of correct ideas, and those who doubt or oppose him represent class enemies who actually oppose socialism," said Walder.

Based on this logic, Walder pointed out, the class struggle had to be waged against "incorrect ideas" as judged by the Great Leader.

"Mao's personality cult was an imitation of Stalin's own," he said.

And so, the Chinese leader held on to old Stalinist ideas long after they were rejected by the Soviet Union as crude distortions of Marxism.

"Mao was actually insisting on keeping to the old and tattered Stalinist playbook," Walder said.

Clifton Parker is a writer for the Stanford News Service.