Why Capital Is Fleeing China: The Crushing Costs of Systemic Corruption

Corruption isn’t just bribes and influence-peddling: it’s protecting the privileges of the few at the expense of the many. Rampant pollution is corruption writ large: the profits of the polluters are being protected at the expense of the millions being poisoned.

This is why capital and talent are fleeing China: systemic corruption has poisoned the nation and raised the cost of doing business. External costs such as environmental damage must be paid eventually, one way or the other.

Either the cost is paid in rising chronic illnesses, shorter lifespans and declining productivity, or profits and tax revenues must be siphoned off to clean up the damage and the sources of environmental degradation.

In large-scale industrial economies such as China and the U.S., that cost is measured not in billions of dollars but in hundreds of billions of dollars over a long period of time.

I have often noted that one key reason why the U.S. economy stagnated in the 1970s was the enormous external costs of runaway industrialization were finally paid in reduced profits and higher taxes.

China’s manufacturing base simply isn’t profitable enough to pay for the remedial clean-up and pollution controls needed to make China livable. That means labor and all the other sectors will have to pay the costs via higher taxes.

Pollution and environmental damage is driving away human capital, i.e. talent.This loss of talent is difficult to quantify, but it’s not just foreigners who have worked in China for years who are pulling up stakes to escape pollution and repression–talented young Chinese are finding jobs elsewhere for the same reasons.

The game-changer is automation, i.e. robots and software eating the world. To understand the impact on China, let’s start with unit labor costs, i.e. the cost of labor needed to produce each unit of output.

If it takes one worker an hour to assemble 10 light fixtures, the unit labor cost of each fixture is 1/10th of an hour’s total compensation costs, i.e. wages and overhead. (Total compensation costs include all overhead such as vacation, healthcare, pensions, social security taxes on labor paid by the employer, etc.)

If an automated machine can produce 1,000 of the same units in an hour, and the only labor is the machine’s one operator, the the unit labor cost of each fixture is 1/1,000th of an hour’s total compensation costs.

When labor’s contribution to production costs drop to near-zero, there’s no labor arbitrage left to make China a low-cost producer. Frequent contributor Mark G. explains:

“Doing business in China has its own set of local costs. In the past, these costs were outweighed by the greater profit potential of dirt-cheap Chinese labor. But once unit labor costs fall to near-zero as factories are automated, the remaining cost inputs for any manufacturer become a proportionally much larger part of the price.

Environmental regulatory arbitrage is the sole exception. But even this advantage must fade as the Chinese consumer middle class acquires influence. Very few Chinese of any class will have a direct profit stake in automated factories. Any pollution emitted by automated factories becomes a direct cost and a form of tax that those living nearby must bear. Therefore I anticipate that even this current advantage of effectively no environmental regulation will soon dwindle as Chinese tolerance for pollution fades.”

Environmental clean-up costs have been avoided due to corruption. Filters are taken off at night, when the smoke is less visible. If local residents complain too loudly, local squads of goons attack them.

The Chinese state exists to enforce the privileges enjoyed by the few at the expense of the many. Paying pollution-remediation costs slash profits–indeed, in many cases, these external costs completely wipe out profits.

Dissenters and anyone daring to question the corruption must be suppressed by whatever means are available, and the central and local governments in China have been liberally deploying every tool of repression.

This systemic repression is the direct consequence and cost of corruption. So by all means, poison the nation and its non-privileged citizens to benefit the few at the top of the heap, and arrest, beat up or silence critics and dissenters.

What China will be left with a poisoned land stripped of talent and capital. That’s the ultimate cost of systemic corruption.

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  • diogenes

    An economy bent on ” protecting the privileges of the few at the expense of the many” — why does that sound so familiar?

  • Brockland A.T.

    Gosh, Hugh Smith just doesn’t get it. China has its own problems and can’t carry the U.S. Empire on its back anymore. China didn’t tank the U.S.; American neocons and the MIC and Saudi Arabia did.


    In the decades since Deng Xaoping opened up China, China subscribed to the same petrodollar recycling scheme Henry Kissinger worked out with Saudi Arabia in the 1970s. That is, Saudi Arabia sells oil only in US dollars, and reinvests the proceeds in American assets. This allowed for a smooth transition from the Bretton-Woods gold-backed dollar, to an oil-backed dollar; the petrodollar.

    This made U.S. dollars in effect, the world currency, the world reserve currency of choice, since everyone buys and sells oil, then prices everything else, based upon U.S. dollars even if not using the currency itself. The dollar became supported not by the American people alone, but every other economy in the world trading in U.S. dollars.

    So, China manufactures U.S. goods for U.S. corporations selling them to the world far cheaper than could be done in the U.S., plus, they recycled U.S. dollars back into U.S. dollar denominated assets. If China was corrupt, well, it didn’t hurt the West at all. Most of us benefited immensely as the owners of value-added ‘invented in America’ patents and buyers of inexpensive ‘made in China’. Then China needed to go further afield to find energy and resources to support this arrangement, and suddenly, China was a threat to the West.

    So what happened? The neocons and their xenophobic hatred of other sovereignties happened. Iraq destroyed by needless war happened. Wall Street out-of-control banksterism happened. The neocons then went bear hunting and the Ukraine civil war happened. The Pipelinistan wars flared up over who would own it; an anglo-Western American Saudi alliance, or a Russian-Syrian- Iranian alliance.


    American neocons and the Saudis forced a change in the global economic system; China’s along for the ride and protecting its interests. Part of which rests in a secure United States, its largest market, ironically enough. But China can’t do that unless it partitions the U.S. dollar from direct influence, because the neocons have not only weaponized it, they wield the currency weapon totally ineptly.

    China is now liquidating significant amounts of its $USD1.2 trillion U.S. debt to defend the Yuan; it has no other means of doing so since world trade is collapsing. Fortunately, China is also receiving top price, with the $US at all-time highs versus other currencies being torpedoed by their own governments, in an attempt to spur investment is what is on paper, the only currency offering investment return.

    The Yuan-to-dollar peg was moved from 6.2 to 6.4, but the Yuan is still supporting the U.S. dollar. Should it float free, then a major world currency is no longer officially supporting the U.S. dollar. A corresponding mass unpegging of the $US from emerging markets would officially degrade the viability of the U.S. dollar as a world currency.

    So naturally, the Western militaries are needed to lean on those fleeing this threat of its own creation and keep the petrodollar recycling scheme alive, except, it died. Those who were under the shadow of the corrupted leviathan, are racing to escape the falling corpse.


    All this chaos is fine for the economy of war, which is just one big broken-window fallacy, diverting the wealth of the People to the neo-aristocracy of the military-industrial-financial complex aiming to be the last man standing in the carnage.

    • nick quinlan

      Excellent post!

    • jadan

      Lucid analysis! Pity Smith and his cartoonish China-bashing!

      • Brockland A.T.

        The Chinese are interested in stability. The Chinese Dream is, officially at least, to develop a true middle class.


        A real middle class is not just about income, its about middle class values of hard work and fairness. From there, democracy can flourish, but not before that. Otherwise there is just a population of greedy people willing to sell out to the highest bidder. China has seen what damage a sell-out class can do to a nation. Americans leery of their own internationalist aristocracy should take heed.


        The middle class is the foundation of true democracy in the U.S. and everywhere else anything approaching true democracy exists. When it breaks down, then the loyalties of the less-than-patriotic, who don’t have any care for the communities in which they live, become apparent.


        China does not appear to want the destruction of the U.S. dollar, only that the world economy operate from a basket of the worlds’ leading currencies, the U.S. dollar being one of them, a multipolar arrangement. As opposed to the U.S. dollar being the only one; a unipolar arrangement.


        The neocon aristocracy wants to be the favoured princes of an inequitable world, and for this they need U.S. hegemony, not a multipolar world. None of the existing the SDR currencies, the Euro, British Pound Sterling, Japanese Yen, are truly independent of U.S. hegemony.

        The timing of the Chinese stock market crash happened just when the IMF was beginning evaluation of China’s inclusion in the SDR basket. Naturally, China was then asked to defer their request for inclusion. On the surface, its a reasonable position; a pegged Yuan would be redundant. In reality, an independent nation in the SDR basket (that would likely agitate for other powerful independent currencies inclusion into the hegemonic club) is obviously undesirable.

        Its not clear if China will ever be able to convince the IMF to become a balanced basket of currencies. IMF de-dollarization moves may simply be a bankster threat to keep the U.S. in line.

        • DelmarJackson

          “Otherwise there is just a population of greedy people willing to sell out to the highest bidder. China has seen what damage a sell-out class can do to a nation.”
          I think the term you are looking for is open border globalists or AINOs, Americans in name only.

  • Deanna Clark

    I was proud as a child of relatives who had immigrated to the US in the 19th century. They came to build, to contribute, and to join communities. They became members of churches and local organizations…and they wanted above all to be American citizens.
    But I got to know many immigrants later…mostly from eastern Europe. And I got to know many musicians who came here to play in the orchestra. They had no love for my country, no interest in participating in our culture or churches or civic organizations. Most of them just wanted to get rich and buy lots of bling. They wanted to move up again and again to other places. They were users…

    The nicest were Mexicans, perhaps because they are also from North America and often come to church or volunteer, when they aren’t working all the time.

    There are people in China saying the same thing right now: Does anybody love China anymore? Is it just money, money and individualism? As strict and difficult as their Revolution was, there was a spirit of otherness and service to the community that is too rare now….many have noticed it.
    Even France, such a bastion of family life, let thousands of elderly die of the heat while their families vacationed and lived it up in the August holiday. I saw their police shed tears over the country…