When commenting on the recent Chinese stockmarket meltdown, Glenn Reynolds wondered if a prediction posted on Samizdata some time ago could be coming to pass. Whilst exposure for Samizdata on Instapundit is nice, I think Mr Reynolds is wrong if he perceives this stockmarket wobble to be a potential opening salvo of the economic holocaust presaged on these pages early last year. Far from heralding the collapse, it will delay the inevitable.
In spite of a widespread belief in China’s embrace of free-market capitalism, enormous economic distortions characterise modern China’s economy. For example, why is it that, relative to China’s economic footprint, the Chinese stock market is rather pathetically stunted – especially in light of the vast savings pool the Chinese people have accumulated? As mentioned in the above article, the Chinese are great savers and they tend to deposit these savings into bank accounts because alternative investment opportunities are limited compared to those offered to a Western investor. Consider the following:
Why does the Chinese investor not sink his surplus funds into foreign commodities? Because he is restricted from doing so.
Why does he not invest in Chinese stocks? Because he (probably correctly) views the Chinese stock market as being distinctly ropey.
In light of these state-imposed distortive realities, what does one do with one’s savings? One puts them in the bank, of course. Predictably, the banks are awash with deposits. Under these circumstances, the principles of fractional reserve banking have been taken to the extreme in China, allowing the central government to durably zombify huge segments of the otherwise bankrupt state-owned industrial sector by forcing the “big four” state-owned banks to continuously loan depositors’ money to these failed state enterprises, in the full knowledge that these loans will never be repaid.
This fiscal expedience allows the central government to postpone the nasty (and potentially regime-threatening) hangover that inevitably follows a sustained attempt at central economic planning like that witnessed during the Mao era. Unfortunately, it cannot continue indefinitely. Firstly, it provides no market incentive – the only incentive that works – for the wayward state-owned enterprises to reform. If they do not reform into conventional free-market actors, they will always require such charity. Secondly, this charity can only continue if Chinese bank account holders continue to top up (or at the very least maintain) their balances.
Of course, the central government knows the above only too well. If China Inc. in its current incarnation is to survive, it is critically important that the Chinese do not withdraw too much of their savings from the state-owned banks to invest in other pursuits, as this will cause the banking system – and “socialism with Chinese characteristics” – to collapse. The central government probably engineered the recent stockmarket fluctuation to buttress the perception of insecurity that shrouds potential investment targets like Chinese stocks, and are no doubt well pleased with the message that was subsequently delivered to the average Chinese investor. This does not mean that the current Chinese economic model is now secure – it will unravel at some point in the future. However, that point has been postponed with a ‘hair of the dog’-type solution, which will make the eventual hangover even more severe.
The central government has merely bought some time.
Good analysis and I think this makes a lot of sense. Considering how rickety the Chinese state-regulated bank system is, and how much corruption there is, it is surprising that the stock market has not fallen already. There is a lot of hot money chasing “BRIC” investments now – Brazil, Russia, India, China – and yet investors are not, until last week, demanding the sort of premia needed to justify all the risks.
Having said all of which, I do not share the “it will all end in a bloody disaster” view of those who always look for the fly in the ointment. China’s development has obviously been borne on a large raft of cheap money, but the enormous boom along the coastal towns has hopefully planted a bloody great seed of capitalist prosperity which is hardly going to vanish into the night.
There are risks with all the big emerging economies now: Russia is run by a murderous thug emboldened by expensive oil; Brazil has a terrible crime problem in Sao Paulo and has not entirely convinced investors it is a safe place to do business; China (see above), and India is still very poor in parts of the country and there are still a lot of daft rules and regulations.
But the fact is, emerging economies make up 85% of the world’s population but their markets account for only 15% of total market capitalisation. There is still enormous potential for growth.
President Lula in Brazil is not bad by South American standards – but then most of the governments in South American are controlled by very statist people indeed.
Whatever the fundemental problems of the Chinese economy (credit money bubble, uncertain property rights – should the Party decide to turn on people) it should not be forgotten (but it has been – by almost everyone) that the cause of the stock market crash there was a threat to impose new taxes on “speculation”.
Perhaps the reason the media has not tended to report this is that many politicians (in the United States, France and so on) also wish to increase taxes on evil rich speculators.
Where are the numbers that support that theory and assumptions?
They can be found in the previous Samizdata article, linked in this one.
You are the first one I have heard from who thinks that the Chinese economy is anything short of miraculous. I have been suspicious on general principles. Communism don’t work. Planned economies don’t work. Crony capitalism don’t work. In the eighties, I kept hearing about what economic powerhouses The Soviet Union and Japan were. I still like to keep my $ closer to home.
(Just out of curiosity, do keyboards in the U.K. have a sign for pounds?)
Yes, of course they do! I imagine Japanese ones have a ¥en sign too and most new European ones also have a €uro key. US ones have a $, so why would others not be similarly equipped for local use?
Yes, even my keyboard (as primitive as they get here) has a £ sign as well as a $ sign.
As for China its taxes and and regulations are less than those in the U.S. which is one very important reason why enterprises there (and the exporters do not tend to be state owned) export lots of stuff to the U.S.
Of course lower wages can be advantage – but wages and conditions in China are higher than they have ever been (China did not export much when tens of million were starving to death under Mao) and the gap between American and Chinese wages has never been smaller than it is now.
So, if Americans wish to “save American manufacturing”, they should reduce taxes (and government spending) and get rid of the vast web of regulations (including pro union laws, if an employer wants to fire someone for joining a union they must be allowed to do so, and this will mean HIGHER wages and BETTER conditions, not lower and worse ones, over the long term – otherwise they will be no “long term” for American manufacturing). Not complain about low Chinese wages, or unfair exchange rates.
On the weakness side:
Both nations have a credit-money bubble (although the one in China may well be worse).
On property rights:
In America property may be stolen “legally” in various ways – but not all property all at once.
If the Party changed its policy (which it could do overnight) this is not true in China.
Partly this is a tradition of government lawlessness (for those of us who do not accept that “the law” is just another way of saying the commands of government), for example large scale iron and steel production (perhaps on a larger scale than anywhere else in the world at the time) was nationalized in China many centuries ago. There have been many other cases of extensive economic development (Chinese culture being a hard working and creative one) detroyed by government action – sometimes suddenly.
But it is also Marxist ideology. Certainly the People’s Republic of China no longer follows this ideology – but it has never formally denounced it, indeed the rule of the Party is officially justified by it. So Marxist doctrine could return at any time.
Even the greatest mass murderer of all time, Mao, has never been officially denounced in China. Indeed this founder of the People’s Republic is considered a great hero.
I distrust governments that officially base themselves on an evil ideology and present, as their founding hero, a great evil doer.
“…but the enormous boom along the coastal towns has hopefully planted a bloody great seed of capitalist prosperity which is hardly going to vanish into the night.”
There is a hell of a lot more to “capitalism” than piles of working cash. If it doesn’t have a specific ethical foundation and consequent political operating parameters, then it’s still just slavery, even if one has to squint to see it. These distinctions are crucial to why the difference between “capitalism” and, well, everything else, are so important. It’s about life and death — not by the vagaries of immutable nature (hurricanes, earthquakes, etc.), but by human design (i.e.; the power of ideas, good and bad ones).
Very good article, S.I. I would only snit a bit over the word “charity”. The rest of it is admirably precise, but that word — and concept — doesn’t fit at all, of course. That’s not what it is.
P Moore: Communism don’t work. Planned economies don’t work. Crony capitalism don’t work.
Planned economies don’t work. Communism as an economic philosophy doesn’t work either. But as a means of political control, communism (or, for the nitpickers, Leninism – where the leadership represents the people, without actually being selected by the people) works fine. Crony capitalism does work, somewhat. Note that Indonesia and the Philippines, both crony capitalist countries, did not encounter famine, whereas Communist China did.