Monday, July 15, 2013

China Is About To Make A Mistake That May Rival Its One Child Policy

China avoided the world recession that started in 2009. The wise communist party, we are told, ramped up infrastructure spending – unimpeded by the need for licenses, court reviews, or rights of way. The government pumped in just enough infrastructure spending to maintain China’s healthy growth rate.
Skeptics of democracy and free enterprise waxed eloquent about China’s state capitalism, as directed by China’s communist party. We want more of what China is having over here – was the refrain.

Democracy and free markets indeed make mistakes. No one promised free sailing of steady growth, low unemployment, and the absence of business cycles. Bubbles and busts have been a part of the capitalist system since the Dutch Tulip Bubble of 1637. We can debate the role of government in the U. S. housing bubble and in Europe’s banking and Euro crises, but no proponent of market capitalism has promised a bubble-free, recession-free world.

The proponents of state capitalism and a one party system do make such promises. The Soviet Union promised that “scientific planning” would lead to steady growth, innovation, and the eventual overtaking of the United States. China’s communist leaders laud their “socialism with a Chinese face” in which sober and wise party and state officials can be counted upon to make the correct decisions.

History tells another story.  The most disastrous blunders have been committed by the scientific planners of one party states. Miscalculations and errors of the market system tend to be self-correcting if they are left alone. Even when they are mishandled, the damage is minor compared to the blunders of the state capitalists.

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  1. Chinese deracination will have its own unintended consequences. I would not be surprised if this end up to be the proverbial straw that... It is unfortunate that Fogel (1926 – June 11, 2013) is not around to observe the demise of prognosticated hyperbolic Chinese growth rate. We will also miss his rationalization of the forced migration in China.

  2. The next financial crisis will appear as originating in China. In China, the money, which is the mother of all asset bubbles, is equal to the domestic credit from the banking system (net domestic assets) and foreign exchange reserves in the banking system (net foreign assets = 83%). So, money is a foreign exchange reserves phenomenon in China. The Federal Reserves' tapering off is no different than sticking a chop stick in the China's happy bubble. The China's moment of reckoning with the massive bankruptcy of its SOEs, and its crony banks are on the tap. It is unbelievable that Chinese banks are reporting only 1% non-performing loans these days?! The Russian banks did the same thing in the 1994-1998 periods that I know of. So, we may have another liquid shake after our sweet and sour moment.