Saturday, February 16, 2013

Troubles In China

A casual reading of the news would lead you to believe that China is about to overwhelm the US and the world economy as a whole.  That it is not just a rising economic power but a military one as well.  However, a closer look would indicate that perhaps things are not as they appear and in fact China is struggling with some very significant internal problems.  People tend to ignore that this is The People’s Republic of China, a communist state where the government owns everything and is responsible for everything.  While it is true that the government has relaxed some of their rules on private ownership, the government still controls anything of importance.  Like most dictatorships the people offer passive resistance thereby obstructing government programs, while there is inefficiency and corruption within the government this passive resistance exacerbates the problems.

Perhaps the best example of problems the government cannot control is pollution.  China’s pollution problems are great and increasing.  They have huge energy demands which are being met with coal powered plants and their accompanying air pollution.  In an effort to meet the growing demand for power the government built the Three Gorges Dam which introduced significant environmental and social problems. Not only has this dam created internal problems with the local population it has brought worldwide concern over its environmental impact.  But China's pollution problems extend even further. In an effort to stimulate the economy and stifle unrest the government relaxed their regulations regarding private enterprise.  With this shift came increased personal wealth and with that wealth came more auto’s.  As the number of autos grew so did the smog and a decline in air quality which the government has been unable to control or reverse.  But more alarming is how the managers of the government owned facilities ignore regulations and are pouring untreated sewage and chemicals into their rivers.  

China, even Imperial China, has historically had a long history of corruption and that continues today even at the highest levels. Those who control the government are very rich and their business practices are carefully guarded secrets but that attitude simply percolates downward and spreads across the entire infrastructure.  Nepotism is rampant so organizations are overstaffed with family members who pass business back and forth within the family.  Nowhere is the mismanagement and corruption more evident than in the financial sector where the government banks make loans to other government operations without any due diligence.  These bad loans are not repaid but are carried on the books as assets. So the government makes the loan to the government without creating any jobs or wealth, the result is less money available for capital investment or new endeavors.

Socialism and communism place employment over efficiency and this is certainly true in China.  The means of production in China are located along the coastal areas and are wholly owned by the government.  These factories are subsidized by the government and the production targets are set by the government.  As long as the global economy was growing this was not a problem but as the economies of the US and Europe slowed unsold inventories have accumulated.  This has made many employees redundant in an environment where employment is a primary objective. So the government is faced with unsold inventories and too many workers.  Adding to this problem has been an influx of young workers who are leaving the agricultural areas looking for higher wages and a better life.  The result is a growing unemployment problem which the government is struggling with.  The subsidies are siphoning off money needed for infrastructure improvements needed in the interior plus the agricultural workers are struggling to make a living.  How the People’s Republic of China deals with this problem while maintaining their Communist ideals is to be determined.

In spite of these problems there is an even larger problem facing China and that is their determination to keep the value of the Yuan low.  The Yuan has been tied to the dollar which worked well for the Chinese when the economy and the dollar was strong but as the value of the dollar declined so has the Yuan.  The result has been inflation making foreign goods more expensive to the Chinese citizen just as they are beginning to enjoy their increasing wealth.  This in turn is putting pressure on the government to increase wages just as they are faced with unsold inventories and redundant employees.  Adding to their financial woes is pressure from the US to revalue the Yuan which they resist because it would simply make a bad situation worse.  But the undervalued Yuan is adding to their inflationary pressures so the government is caught between a rock and a hard place. 

How long The Peoples Republic can continue with the central planning demanded by communist philosophy remains to be seen but they have significant problems, which are growing daily.


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