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Red Capitalism

Red Capitalism

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Published by Mises Fan
The Chinese economic miracle is nothing but a redder version of Keynesianism. Like all interventionism, the Chinese system is destined for a hard fall.
The Chinese economic miracle is nothing but a redder version of Keynesianism. Like all interventionism, the Chinese system is destined for a hard fall.

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Published by: Mises Fan on Oct 03, 2011
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06/27/2013

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The China Model Is Unsustainable
Mises Daily: Monday, October 03, 2011 by Doug French
(http://mises.org/daily/author/627/Doug-French)
While the pols in Europe endlessly consider howthey will paper over their financial crisis, "ringfence" Greece and the other PIIGS
(http://en.wikipedia.org/wiki/PIGS_(economics))
pass austerity programs, and still get reelected,some speculate that perhaps China will stepforward to bail out the eurozone
(http://geofftalk.com/?p=1168)
.In recent years a number of investment gurushave touted China as the new financialpowerhouse, while at the same time the countryserves as punching bag for both sitting andwould-be American politicians. Senator Charles Schumer claims the Chinese aremanipulating the yuan, causing millions to lose their jobs in America. "More than anysingle stimulus program we could pass into law, forcing China to revalue its currency isthe biggest step we could take to protect American jobs," Schumer said
(http://thehill.com/homenews/senate/102365-sen-schumer-makes-new-threat-on-china)
."This is not about China-bashing. This is about defending the United States."Donald Trump unleashed this tirade
(http://cnnpressroom.blogs.cnn.com/2011/01/20/the-situation-room-with-wolf-blitzer-donald-trump-on-china-these-are-not-our-friends-these-are-our-enemies/)
on Wolf Blitzer's CNN Situation Room:They're manipulating their currency. Intellectual property rights andeverything else are a joke over there. They're making stuff that you seebeing sold all the time on Fifth Avenue, copying various, you know, whetherit's Chanel or whatever it may be, the brands, and just selling it ad — adnauseum. I mean this is a country that is ripping off the United States likenobody other than OPEC has ever done before.But is China the capitalist powerhouse everyone thinks they are? This China-is-taking-over-the-world talk makes a person wonder if members of the Politburo of theCommunist Party of China pored over
Human Action
(http://mises.org/resources/3250/Human-Action)
,
implementing a better Misesian capitalist mousetrap.However, Chinese economic growth has exploded on the shakiest of financial systems,Carl E. Walter and Fraser J.T. Howie point out in
Red Capitalism: The FragileFinancial Foundation of China's Extraordinary Rise
(http://books.google.com/books?id=NZLCgg5iP-YC)
. The country's central planners do their best to keep as manyof the 1.3 billion people employed as they can; building vacant cities
(http://www.businessinsider.com/pictures-chinese-ghost-cities-2010-12?slop=1#slideshow-start)
and dozens of large infrastructure projects along with releasing eye-popping
(http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_cd&idim=country:CHN&dl=en&hl=en&q=china+gdp)
"official" GDP numbers. All of this has someobservers believing China will use every barrel of oil, yard of cement, and pound of yellowcake the world has to offer.Nonetheless, reading Howie and Walter's eye-opening book makes a reader wonder
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The China Model Is Unsustainable - Doug French - Mises Dailyhttp://mises.org/daily/5698/The-China-Model-Is-Unsustainable1 von 403.10.11 22:29
 
"The Chinese financial systemwould seem to be built onsand running through a RubeGoldberg hourglass. " 
how the whole Chinese economy hasn't imploded already. The Chinese have developedstock markets and debt markets, pension funds, home loans, and credit cards. Fromafar it looks sort of like capitalism, providing comfort to investors. However, theauthors point out; "[Investors] would not feel that way if China explicitly relied on aSoviet-inspired financial system even though, in truth, this is largely what Chinaremains."
Red Capitalism
is clearly written, but at the same time it is so littered with acronymsstanding for the various government entities that comprise the thicket of stateorganizations that make up the Chinese financial system the reader is constantlyconfused. Take for example this sentence:By 2005, Huijin had become the controlling shareholder on behalf of thestate and enjoyed majority representation on the boards of directors of CCBand BOC and, together with the MOF, of ICBC, CDB, ABC and a host of otherfinancial institutions.Got that?The upshot from following the alphabet soup of entities, created to make loans to thestate sector and friends of the state, is that when the loans go bad, which anextraordinary percentage do, then new entities are created into which to move thedebts: from good banks to bad banks to worse banks."It is a simple fact that China's financial system and its stock, bond and loan marketscater only to the state sector, of which the 'National Champions' represent the reddestof the Red," write Howie and Walter, who go on to point out that "China is afamily-run business."Forget supply and demand; in China, the system serves the country's political elite.While the oligopolies that dominate the economy appear to be private, these entitiesare really state controlled and operate under a patronage system that pervades allaspects of the Chinese economy.The National Champions, explain the authors, along with "their family associates andother retainers plunder the country's large domestic markets and amass huge profits.With nationwide monopolies or, at worst, oligopolies, these business groups do notwant change, nor do they believe that foreign participation is needed."Chinese bank depositors provide the capital tofinance the insiders. But when the loans go bad andthe banks go bankrupt, it's left to the party toprovide continuous bailouts. "In short, China'sbanking giants of 2010 were under-capitalized,poorly managed and, to all intents, bankrupt 10 years ago."As nonperforming loans are pushed from good banks to bad, with China's Ministry of Finance providing its guarantee to the bad loans at par, banking life goes on, and theeconomic miracle remains alive, backstopped by the lender of last resort, the People'sBank of China, levered at 1,233 to 1. The result is underlying assets are neverliquidated and zombie banks and crony-led corporations are left in place to squandercapital.The Chinese financial system would seem to be built on sand running through a RubeGoldberg hourglass.Geithner, Paulson, and Bernanke didn't come up with anything new on this side of thePacific in 2008, but took a page from the Chinese problem-solving playbook — "shiftingmoney from one pocket to another and letting time and fading memory do the rest."European finance ministers are now attempting the same trick.
The China Model Is Unsustainable - Doug French - Mises Dailyhttp://mises.org/daily/5698/The-China-Model-Is-Unsustainable2 von 403.10.11 22:29
 
(http://mises.org/store/Product.aspx?ProductId=10666)
While China looks to be a constant growth machine, as the authors point out, itseconomy has been a series of booms and busts. In what will be strikingly familiar toAmericans, Howie and Walter write, "Putting money on deposit with banks or playingthe bond market is hardly worth the effort; interest rates are set in favor of stateborrowers, not lenders, so they do not provide a real return over the rate of inflation."The money supply grew at a rate of 13.5 percent in August
(http://www.alsosprachanalyst.com/economy/china-monetary-statistics-for-august-2011.html)
, while the price of pork — the meat preferred by most Chinese — increased by over45 percent from last year. And while the Chinese government says prices are up 6.2percent, the price of all food was up 13.4 percent
(http://www.bloomberg.com/news/2011-09-09/china-inflation-slows-to-6-2-as-measures-to-curb-loan-growth-take-effect.html)
in August from 2010.So the Chinese play the stock and property markets, hoping for a big score. "Chinesehistory and bitter experience teach that life is too volatile and uncertain to take thelong-term view," write the authors. Hans-Hermann Hoppe would contend it is theprevalence of government force — stealing through taxation, regulation, and inflation— that have increased time preferences.US investors have piled into the shares of large Chinese companies with some success,but the authors wonder, "how can an investor look at PetroChina and compare it withExxonMobil when it is nearly 85 percent controlled by the state and will remain so aslong as the Party remains in power?"Plenty of Americans are now aware of how deeply in debt their government is. Andcertainly Europe's troubles are well-known. But China too has a debt problem. Theauthors add up debt obligations of various sorts including nonperforming loans nowguaranteed by the Chinese government. The total comes to nearly 76 percent of GDP,exceeding the international standard, and the burden will likely grow.Writing for the
Casey Report
, James Quinn described China's economy as "a house of cards," and pointed out, "Fitch downgraded the country's credit rating and warnedthere was a 60% chance the Chinese banking system will require a bailout in the nexttwo years."In the same issue, Doug Casey wrote,It's not just Europe, the U.S. and Japan that are riding for a fall but also theChinese. What's coming up, in other words, is a worldwide financial andeconomic cataclysm. Let's just hope that the political, social and militaryfallout from the coming financial/economic collapse aren't too severe.So can the Chinese bail out the Europeans? Nothardly.We can't just go save someone," said Gao Xiqing,president of China Investment Corp., China's hugesovereign wealth fund. "We're not saviors. We haveto save ourselves," he said
(http://online.wsj.com/article_email/SB10001424052970204010604576592851514658060-lMyQjAxMTAxMDIwODEyNDgyWj.html?mod=wsj_share_email_bot)
at a weekend paneldiscussion.
The China Model Is Unsustainable - Doug French - Mises Dailyhttp://mises.org/daily/5698/The-China-Model-Is-Unsustainable3 von 403.10.11 22:29

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