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Saturday, July 02, 2011

China and Economics

The idea that China is rapidly taking over the world economy is a widespread belief, but like so many things related to Socialism and Communism the realities are frequently ignored by pandering press. Currently the focus is on Greece and Europe where all of those socialist dreams are rapidly becoming an economic nightmare as it becomes apparent that government spending cannot exceed tax revenues. But there are other socialist countries where the stark reality of economics is beginning to rear its ugly head and China is one of those.

China – like so many other nations including the US, unleashed a flood of “stimulus” money in 2008 for the purpose of stimulating its economy which had been hard hit with the global decline. This stimulus money mostly went to local governments with the intent that this money would be spent on the infrastructure. This money vanished but with no real improvement in the infrastructure and by 2010 the local governments were $1.6 trillion dollars in debt, mostly in bank loans with a substantial portion of those loans being bad debt. Many of those infrastructure projects are sunk in debt and incomplete and those that have been completed have done little to stimulate or support China’s economic growth as they are simply “bridges to nowhere”. The reality is that no government can continue to make loans that are not paid back because eventually you run out of money. Greece and Europe (and soon the US) are in the throes of that reality and China is not far behind.

Cart Water’s and American Investment Banker and a specialist in China, points out that 55% of the Chinese GDP was from infrastructure investment – meaning bank loans which in a Communist country means the government. But governments do not make a profit and this is true even in communist countries and the collapse of the USSR is an example of how governments cannot run anything at a profit. So the Chinese government is trying to shore up its economic house by shifting much of the local government debt off of their books while the state owned banks re-capitalize using state guaranteed profits generated by the spread between interest rates on savings and interest charged on loans. Chinese law allows the banks to roll over their bad debts indefinitely so they can gradually pay down these debts. This is a communist country where the government controls everything so it is easy for the government to rig the system, which is just building a house of cards that cannot stand forever.

Of course in a rigged system the banks make money no matter if the loans are bad loans but the reality is those loans don’t go away and as that debt load grows the government will find it harder and harder to lend more money for investment in the infrastructure necessary to maintain their economy. That economy is highly dependent on the industrialized coast cities and their industries which are government subsidized. But China remains a largely rural economy and the disparity in income between the interior and the coastal region is creating unrest and demands for infrastructure and quality of life improvements that the government cannot meet in its leveraged state.

But the work force in the Industrial cities is demanding higher and higher wages which is placing the government into a difficult position. A failure to meet the demands for higher wages will cause the workforce to become even more restive than it already is but raising the wages reduces China’s competitiveness in the world labor market while reducing their ability to satisfy the rural area’s demands for improvements in infrastructure and quality of life. The government has made some attempt to increase wages but this has caused some manufacturers to abandon China and move to lower cost labor markets. This migration out of China is causing unemployment and empty factories which is having an impact in the rural areas because the government can’t fund the necessary improvements in the countryside and those unemployed workers were sending money to their rural families but that has ceased adding to the unrest. There have already been riots and unrest which the government is attempting to keep out of the public eye but they recognize the gravity of the situation.

Socialism and communism alike cannot and do not work in the long term. Europe is nearly bankrupt and faced with the reality that their extravagant government benefits cannot be sustained in the face of higher costs and greater longevity of their populations. Attempts to reduce these benefits even slightly had resulted in riots and instability. This is a lesson not wasted on the Chinese but the fear that China is going to take over the world seems unfounded.

1 comment:

soldiercitizen said...

Royce,

Excellent article. I've been arguing with PHD types over the power of China for a few year; it seems the media is engaging in wishful thinking when it comes to China's real situation. I found a TIME magazine from 1971 and on the cover, it said that China was about to take over the world. I just redeployed from Afghanistan. My boss there, an Army Lt. Colonel, is a foreign area officer (FAO) specializing in China. He is an expert in all things Chinese and he backs up everything you said. He said that China does the classic communist bit, and hides all of its problems from the world and that it is indeed a communist economy. Something in the range of 60% of the population are rural farmers and the central government has very little positive impact on these people's lives--kind of like n Afghanistan.

As much as I believe that America is in decline, I don't see any other country that can come close to filling the void.