Upside-Down Propaganda: How China Keeps Fooling The New York Times, The BBC, And Other Wishful Thinkers Upside-Down Propaganda: How China Keeps Fooling The New York Times, The BBC, And Other Wishful Thinkers - Forbes One of the most hilarious media hoaxes of all time was the BBCâ€™s famous â€œspaghetti harvestâ€ spoof of 1957. In a television â€œdocumentaryâ€ broadcast on April 1 of that year, a deadpan Richard Dimbleby, then the BBCâ€™s most prominent presenter, reported that spaghetti grew on special â€œspaghetti treesâ€ and that farmers in an Italian-speaking canton of Switzerland were enjoying a record â€œharvest.â€ The BBC props department did the rest. Many viewers were so impressed that they phoned in to ask how to grow spaghetti trees of their own. They were reportedly told to plant a sprig of spaghetti in a can of tomato sauce â€œand hope for the best.â€ Last week the BBC again hoaxed millions. It was a performance that in time will come to rank up there with the spaghetti harvest as an epic example of the suggestibility of the human mind. But this time, far from being the instigator of the spoof, the presenter, BBC economics editor Robert Peston, was as much a victim as his viewers. In a one-hour program predicting the coming collapse of China, Peston spoke in apocalyptic terms about alleged fatal weaknesses in the Chinese banking system. In doing so he fell for one of the most sophisticated propaganda ploys of modern times. For nearly two decades now, Beijing has worked through various witting and unwitting surrogates, many of them Westerners, to persuade the United States and Europe that Chinaâ€™s rise is somehow an illusion. Beijing is playing on an apparently limitless capacity for wishful thinking in the West and, to anyone who has been following the story, the motive is obvious: to foster complacency and procrastination. The point is that the slower Westerners are to understand how profoundly the map of world power is changing, the less effective will be any Western efforts to moderate Beijingâ€™s ambitions. As Chinaâ€™s rise has been built in substantial measure on theft of Western intellectual property as well as a certain â€œamnesiaâ€ about market-opening promises, Beijing has good reason to try to delay an effective Western response. Hence repeated episodes since the 1990s of Beijing-inspired predictions of Chinaâ€™s financial collapse. At the center of most of these predictions are reports of the supposedly dire state of Chinaâ€™s big four banks, Bank of China, China Construction Bank, ICBC, and the Agricultural Bank of China. With each succeeding cycle, the caliber of victims in the West who are fooled rises. Last weekâ€™s program was a terrible aberration for one of most astute financial journalists in the English-speaking world. Peston has deservedly won several awards for the excellence of his work; and certainly on home ground, covering the British economy, he is a hard to beat. One thing can be said for sure: all previous predictions of Chinese economic systemâ€™s demise have proved premature. Here are some examples: In January 1998, the New York Times reported that the Chinese central bank was dealing with an â€œepidemicâ€ of bad debt. Central bank chief Dai Xianglong mentioned unprompted that rumors were circulating that bad debts were running as high as 40 percent. In October 1998, the New York Times reported that Chinaâ€™s biggest banks were â€œtechnically insolvent.â€ An anonymous analyst with an unnamed ratings agency was quoted saying, â€œthereâ€™s a big black hole, and nobody really knows the extent of the problems.â€ In several reports in January and February of 1999, just as China was in the crucial final stages of negotiating what turned out to an extremely one-sided trade deal with the United States, the Economist reported China was suffering from â€œdeflationâ€ and â€œhugeâ€ corporate debts, the four big banks were â€œinsolvent,â€ and exports were â€œstuttering.â€ About the same time, the New York Times reported Chinaâ€™s state-owned companies, accounting for 40 percent of the economy, were â€œdying,â€ inventories of â€œproducts that no wantsâ€ were piling up, factories were â€œidle,â€ the Chinese budget deficit was hitting â€œrecord levels,â€ and a â€œbrokenâ€ financial system was â€œbucklingâ€ under bad loans amounting to 30 percent to 40 percent of GDP. A Goldman Sachs analyst was quoted saying Chinese citizens were â€œvery jittery.â€ The Times added: â€œThe only big spender in China is the government, which is pouring money into concrete, bricks and mortar for bridges, dams and other projects, even if they crumble thanks to hasty construction or corruption.â€ A few weeks later, Philip Bowring, a longtime Hong Kong-based British observer, wrote an editorial article in the Timesâ€™s international edition asserting preposterously that China was having to make â€œhuge concessionsâ€ to join the World Trade Organization. These were â€œheightening Chinaâ€™s sense of vulnerability.â€ Trade was â€œstatic,â€ and China was suffering â€œthe impact of years of ill-judged investment leading to excess capacity and a bad debt crisis in the banking system.â€ The next big surge of â€œcollapsing Chinaâ€ reports began in the summer of 2003. Perhaps by no coincidence this was in the immediate aftermath of the U.S. invasion of Iraq, when an increasingly beleagured American public began to sense that President George W. Bush had made one of the biggest blunders in U.S. history. Under the heading, â€œA bad loan bubble: Banking crisis imperils China,â€ one editorial page contributor to the Timesâ€™s international edition talked of a â€œhugeâ€ banking crisis and added: â€œDespite two partial recapitalizations in the last five years, at least 40 percent, and perhaps as much as 50 percent, of total loans made by Chinaâ€™s banks are questionableâ€¦..The condition of the banks is eroding largely because Beijing forces them to finance the nationâ€™s extraordinary growthâ€¦.the central government directs banks to extend credit to stimulate real estate development. Chinaâ€™s planners are creating an asset bubble along Chinaâ€™s east coast, the countryâ€™s urban manufacturing heartland.â€ This was followed in September 2003 by a Times report of â€œgrowing alarm that reckless bank lending, reminiscent of the pattern that preceded the American savings and loan collapse in the late 1980â€™s, may be causing an unsustainable boom that could end badly.â€ New bank lending was preposterously reported to be increasing at an annualized rate of 230 percent. Real estate developers were continuing to invest at breakneck speed even as 17 percent of modern offices in Beijing and Shanghai were supposedly empty. Countless other similar predictions could be cited. They continued into the latter half of the last decade and have been reprised with a vengeance in recent months, with Beijingâ€™s dupes and surrogates speaking in almost exactly the same terms as in the 1990s. Yet we now know that the earlier predictions proved not only wrong but the diametric opposite of the truth. Instead of conveniently collapsing, China continued to grow faster than any other major nation in history. The fact is that China is now more than three times bigger in real terms than it was in 2003 and nearly six times bigger than it was in 1998 (when its GDP at market exchange rates was still less than $1 trillion, versus more than $8 trillion in 2012). For policy-makers and trade negotiators in the United States, a more interesting consideration is the rise of Chinaâ€™s exports â€” from $184 billion in 1998 to $436 billion in 2003 and $1,971 billion in 2012. Given the record of previous â€œexpertâ€ predictions, Peston might usefully have sought out the contrary evidence before grabbing a microphone. As it is, his account was riddled with misconceptions about how the Chinese economy works. I will address these in a later commentary. In the meantime I should add that I am not, of course, suggesting that everything in Chinaâ€™s financial garden is rosy. With four times Americaâ€™s population, China is a big place, so big things can happen. The issue is whether such things would sink the ship. One thing can be said for certain: the conditions in the 1980s that induced the financial bubble in Japan are not nearly so prevalent in China today. Click here for an article on how the Japanese financial system already looked two years before the crash. ____________________________________________________________________________________________ China did not fool anyone, but western media did.