Tuesday, April 17, 2012

The Chinese Bubble

The socialists and communists never seem to learn that central planning and government control is a failure, is expensive, and never seems to accomplish any of their objectives. Currently the feeling seems to be that China (formerly known by the politically incorrect but accurate title – The People’s Republic of China) is taking over the world. Everything seems to be made in China and the PRC seems impervious to the economic woes of the world. But is this real? Is the PRC the economic success that they want you to believe or are they practicing the tried and true strategy of the USSR, which is that if you say it’s true then it must be true?

It is important to understand that there is no private capital in the PRC and that everything is controlled by the government. This means that all new construction, production volumes, and imports are strictly controlled and subsidized by the government. Given this strict control and oversight by the government the PRC must be a booming success but alas – it is looking more and more like the PRC may have created a bubble that is nearing a tipping point.

The Central Planning philosophy seems to be “if you build it they will come”. Meaning that if you build a mall or apartment complex the consumption will follow which has left the government holding empty buildings, empty malls, and ongoing construction projects which will yield even more empty buildings and malls. You must remember the bedrock philosophy of socialism is employment not efficiency so the harsh rules of capitalist supply and demand are ignored and not viewed as relevant. The result is that there is a housing glut with substantially more housing available that is needed, but that really only applies to the coastal region. The interior of China continues to be rural with a standard of living equivalent to most third world countries.

But this problem of excess capacity isn’t limited to housing but is prevalent in manufacturing as well. Chinese manufacturers continue pumping out huge amounts of steel, cement, aluminum, and other products to the point that it is unlikely the economy can absorb the output. When the world economy took a down turn China did not cut back but continued churning out massive amounts of product. Now the world economy has cut back and the domestic Chinese market cannot absorb the surplus. In a capitalist economy the individual businesses would simply reduce output, eliminate inefficiencies, and reduce headcount but these solutions are not possible with central planning, because employment is the objective. Furthermore, Chinese industry is heavily subsidized and relies strongly on imported raw materials. The pressure on the Chinese government is tremendous and the question is – how long can they maintain this drain on their economy?