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A great confidence trick

Tyler Cowen notes an unsavoury fact about the Chinese economic miracle:

…of the 3,220 Chinese citizens with a personal wealth of 100 million yuan ($13 million) or more, 2,932 are children of high-level cadres. Of the key positions in the five industrial sectors – finance, foreign trade, land development, large-scale engineering and securities – 85% to 90% are held by children of high-level cadres.

Cowen lifted the above quote from an interesting article that details how the regime in Beijing controls economic data coming out of the Middle Kingdom, which helps to prompt foreign investors to keep funding the great confidence trick that is the modern Chinese economy.

The family connections of China’s super-rich and captains of industry must be considered alongside rosy economic statistics provided that expound China’s development. These filial links between the commanding heights of China’s supposedly private sector and its government betray the fact that China Inc. is the unholy alliance of a dictatorial regime and the application of corrupted ‘free’ market ideals. Such an arrangement will fail in due course, and will probably fail spectacularly since it has come this far.

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21 comments to A great confidence trick

  • I agree: It mainly is a dictatorship.
    I disagree: China does not seem to fail.

    It is possible to combine economic liberalism with despotic politics.

  • It is possible to combine economic liberalism with despotic politics.

    Far far FAR too soon to say that. In reality the more complex the economy becomes, the more the contradictions will start to bite China in the arse and something will have to give.

  • chip

    Better than a dictatorship with no capitalism.

    China is changing and while officialdom is reaping many of the early benefits it’s likely that unleashing market forces and creating a middle class will ultimately weaken the CCP’s power.

  • WalterBoswell

    Such an arrangement will fail in due course, and will probably fail spectacularly since it has come this far.

    The problem with these communist/socialist utopias is they are not as classless as the governing body would have the common folk believe. Eventually people just give up, and the whole thing comes to a grinding halt.

  • China does not seem to fail.

    I agree, it hasn’t yet. I’m saying it will.

    It is possible to combine economic liberalism with despotic politics.

    Even if this were true beyond the short run, it’s an irrelevant point because we aren’t seeing the policies of economic liberalism at work in modern China. The CCP’s favoured description of the current Chinese economic system – “Socialism with Chinese characteristics” – is really rather accurate. There is an enormous amount of misinvestment taking place in China at present thanks to the perverse economic incentives created by the government’s widespread and deep interference in the market. This is exactly what happened in Japan in the early 1990s. However the Chinese model will fail more quickly than its Japanese counterpart did because the Chinese government’s interference in the market is much more pervasive than that of Japan’s.

    Chinese economic collapse will also cause enormous political upheaval – probably chaos, possibly widespread bloodshed and civil war. Consider that the CCP has largely abandoned Marxist-Leninist-Maoist philosophy as a moral mandate to rule – it’s staked its right to power on an ability to deliver prosperity via the reforms it enacted. If the system built under Deng Xiaoping’s rule – a system the CCP ostentatiously takes credit for – unravels, many hundreds of millions will suffer profoundly. It won’t be hard for them to find someone to blame for their woes. Popular revolt is hardly unthinkable in such a circumstance.

  • Neil Reddin

    And no doubt when it does fail we can expect the same old bunkum from the left here about “market failure”.

    I can see the BBC reports now …

  • luisalegria

    Mr. Illuminatus,

    I think you could have said very similar things about Taiwan and South Korea circa 1970, including perhaps the statistics.

  • D Anghelone


  • Pa Annoyed

    Maybe they inherited it?

    I recall another argument between those who said it was unjust and unworkable for the rich and powerful to use their power so that they and their descendents stayed that way, versus those who said that it was the concentration of wealth that made progress possible, and that irrespective of the cause, the industries made possible by the super-rich led eventually to everyone else getting richer too.

    Anyway, jolly good job none of our governments have strong ties with big business, eh?

  • Anyway, jolly good job none of our governments have strong ties with big business, eh?

    Certainly our over-mighty governments in the West have created conditions whereby unethical links between big business and big government can and do form, and we in the West will very likely reap the consequences of such arrangements.

    However, it’s a matter of degrees when comparing the West with China. A few examples:

    Show me a Western government that insists upon forcing the banks it owns into insolvency through propping up hopelessly failed businesses it also owns via loans that everyone knows will never be repaid.

    Show me a Western government that imposes “political cells” manned by agents of the state upon the management of successful private companies.

    Show me a Western government which maintains a legal system so undeveloped that the politics of personal favour is commonly a critical – as opposed to an incidental – factor in the outcome of a case.

    That’s the way things are in modern China. Drawing equivalences to this with the status quo we find in Western nations sounds clever prima facie, but dig a little deeper and there really is no comparison.

  • Paul Marks

    A P.R.C. that allows private enterprise (corrupt though the system is – and remember the West is not exactly free of such political distortions) is vastly more powerful than a P.R.C.

    The Soviet Union relied on its natural resources – not just oil, but every known vital raw material (often greater than all other sources put togther) plus vast amounts of wonderful land.

    This (along with using the price system of the world), allowed to exist for so many decades.

    China does not really have this option.

    To be a great power, the regime must allow some private enterprise – but it does not need to use the power that this economic strength gives it for good.

    Indeed every indication is that it will (indeed already is) using its power for evil.

    Indeed power (not just prosperity) is what the regime is promising.

    The regime intends to dominate as much as it can and will use any tactic to expand this power for powers sake.

    Will the population risist – for example as the “Economist” points out be upset that the rubber stamp Parliament is full of people connected to the regime and demand more influence for the taxpayers?

    The regime is indeed more on tax revenue these days – rather than just taking anything it feels like (like some Dark Age warlord) which used to be the standard practice.

    But how will the taxpayers get any power – what can they actually do?

    Fail to register their income (as the Economist points to) – but this is an ancient practice in China (which the magazine does not understand) – and a strong Emperor can always use harsh means to find and tax the income.

    Also remember that the Chinese regime has not formally got rid of Marxism.

    On the contrary it can use Marxism as an excuse for a campaign against any businessman it wishes to.

    An option that the Republic of China (Taiwan) and South Korea did not have.

    Whipping the masses into hatred of a particular rich person (or “the rich” in general) is ancient tactic of despotisms (various Turkish Sultans did it again and again).

    As soon as taxpayers start to complain too much – some will be picked on.

    And, after all (the regime will point out quietly) – what does democratic control of government get you.

    People in the West have that – and there taxes are far higher than those in China.

    So “keep your mouth shut and pay” – “and we will build a mighty military force (including cyber warfare forces) and you will be proud of your country”.

    “Let the Westerners dream on in their “knowledge economy” based on patents and copyrights (favours of the government which we see no reason to do other than pay lip service to) whilst we Chinese concentrate on actually building real economic strength – making things”. Nations of hundreds of millions of people (or even tens of millions of people) can not afford, in the long run, to make or grow little or nothing – and as for “design” sooner or later design goes to where things are actually made.

    “Beside which, we will become good at services as well – we will make films and provide other services also”.

    Content – “your films are free to say that the American conservatives are evil and businessmen are scum (indeed they say little else) – and our films are just as free to say these things”.

    As for the credit-money bubble.

    Yes there is a big one in China – there also is in Western nations.

    I do not know which credit-money bubble is bigger.

    All rather cyncical?

    Ture, but National Socialist Germany was also deeply cynical – and that did not stop it being a problem.

    And China is a lot bigger than Nazi Germany was.

    I have no doubt that a United States with a government the size it was in (say) 1948 would have little fear of being overtaken by China – even in the very long term.

    But the modern United States – with its vast government spending (mostly on the “entitlement programs”) and endless regulations?

    As for most of the nations of Western Europe – they are more collectivist than the United States is.

    Against decadent Welfare States, China is a serious player.

  • Pa Annoyed

    Oh, I agree. I agree. There’s no comparison in scale. Our days of ‘Dark Satanic Mills’ are long gone.

    But (just for fun) I’ll offer, The World Bank, ‘equal opportunities’ officers, and I can’t talk about the degree of bribery involved in planning law I’ve heard rumours of because that would be libellous without evidence, so I’ll instead merely mention pork barrel spending.

    The Chinese regime is still far more totalitarian and corrupt than any Western government, but I consider a little nepotism the least of their many faults, and not a fatal one. It’s not that they help their families get rich that is the problem, but that they stop everyone else getting rich. Hopefully they’ll grow out of it.

  • Jacob

    “However the Chinese model will fail more quickly…”

    The question is: what will fail ? In the contradiction between a market economy and a despotic regime – which of the two will break ?
    Will they stop the market reforms or will they gradually relinquish political power ?

    I’m betting on gradual political liberalization. Some economic adjustments are bound to happen but I can’t imagine them going back to the Maoist model.

  • Pa and Paul – I agree most certainly.

    China has a great capacity for evil. Their nationalism and racism will create the same errors, wrongs and evils of past Empires 10x larger and 10x faster. They have NO excuse in this modern age where we now have direct and unperishable records of what happened before. Even now in Africa they complain. If ever there was a time for maintaining the Commonwealth, this is it – for all our sakes.

    That said, if someone is smart enough to become high ranking, then what is to say their kids are not also smart and have not learnt or inheritied such smarts? The PRC is jsut a good way to show how it is not about “Capitalism” or “Socialism” but another manifestation of “power”, not even a direct result of power. The same happened in the Soviet Union to a lesser extent.

    However, what is wrong is that the people do not have the choice to even kick out at least part the corrupt structures on a regular basis. That is one advantage of the West, if people bother to pay enough attention.

    Delivery is so important. If you have corruption at least be efficient and competent! IMHO people will forgive an efficient, competent and generally hands-off and benign corrupt dictatorship/oligarchy but will have no time for an incompetent democracy and even less time for a dictatorship that is anthing less than effective for them.

    The above does not mean I agree with corruption, btw. So much corruption can be neutralised and rendered ineffective if Government or its appointed bodies are not the gatekeepers to vast sums of tax revenue and to me prevention is better than cure.

  • Unfortunately, if/when China falls the anti-capitalist will use it as a supposed example of the problem of capitalism.

    I’m not surprised that people aren’t already using such disparity as example of the ‘injustice of capitalism’. Perhaps its too easy to refute that sort of example though…

    My hope is that economic reform will lead to a weakening of the government, however, the governemnt could react by clamping down on reform.

  • Paul from Florida

    If China is such a good investment, with such good returns, then how come the Chinese are buying US Treasuries and other low yield investments outside of China? What do they know, that others (foreigners) don’t? Why would a person, or millions, not invest close to home where, supposedly, 30% per year returns can be had all day long? Why would you seek out and buy only ten percent of that return?

    Why? Two words. Ponzi scheme. Manufacture numbers to attract foreign capital. Skim as much capital as possible and send out of the country. Make goods necessary to attract new ‘investment’. Convert private debt into public debt, keep profits private. Rinse, lather and repeat.

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  • “Not using its power for good”

    Power cannot be used for good.
    Power is just the ability to destroy wills.

  • Paul Marks

    “Power can not be used for good” Pietr.

    This is a respectable point of view and many great thinkers (such as Murry Rothbard) have held it.

    It is also true that the “Sword of State” is, by its very nature, a tool of destruction (one of the things that makes such concepts as a “welfare state” absurd).

    However, I dissent.

    There is a “less bad side” in many wars. For example, for all the stress that is (quite rightly) put on such terrible things as the bombing of Dresden and other German cities, it was right to resist the takeover of Europe by Nazi Germany.

    Just as it was right to resist the take over of all of Korea by the Communists (in spite of the civilians who died in that war).

    And just as many other wars have been right.

    Private “protection agencies” are of little use against such things as the German military of World War II, or the legions of the Reds.

    Government may indeed be (by its very nature) a force of destruction, but it may be needed to counter worse forces of destruction.

    The idea is that all governments are equally bad (implied in so much of Rothbard’s work) is, I believe, false.

    So one faces the question – how will a government tend to use the power it gains from a strong economy produced by civil society.

    It is my view (based on the historical record and the study of people who know them) that the Chinese regime will tend to use any power it gains for evil.

    Contrary to Murry Rothbard there are worse things than Washington D.C. in the world – and the P.R.C. regime is one of them.

  • stephan Jukic

    Some commentators above have expressed the opinion that even though Chinas bureaucracy currently controls the key sources of wealth, this will soon filter down to the masses. I’d be leery of this viewpoint! For example, Latin America has for centuries now had such a situation in its countries. And yet, poverty is still widespread, tyranny, corruption, massive theft, etc… Unless China makes security of property and rule of law readily accesible to even its average and poor citizens, there will continue to be big problems

  • Neotopia

    Has anyone placed a graph of the NASDAQ in 1999 with the Chinese market today? China is a bubble within many bubbles surrounded by bubbles. IMHO after the High-tech crash in 00 those people plowed their money into just the opposite; low tech, as Developing economies, Commodities, Real-Estate, etc, all big bubbles centered around the China super-bubble. Replace “.com” in 99 with “China” and you get the same deer-headlight unconditional praise as the former right before it boom… “This time it’s different”… In China you basically have a country with the highest savings rate in the world with the one of the most dysfunctional banking systems. You have a government that fabricates growth figures(every noticed how stable Chinese growth is? four quarters of growth might be 9.8%, 9.9%, 10.3% and 10.8%, but in a much more advanced economy it;d be like 4.5%, 1.9%, 3.1%, 2.8%…hmm…) They talk about the Debt problem here in the US, but Chinese households have literally gone from one of the most debt free in the world to the most indebted in less than 10 years(over 200% of income in Beijing), the largest increase in personal indebtedness in the history of mankind. And now you have millions of Chinese literally betting the farm (real estate in China also being in bubble mode) on their Nikkei/NASDAQ stock market which has added almost $1trillion in value in just a few months (to $1.8 trillion!, in a $2.6 trillion economy) and has a PE now somewhere in the 100 range now. What happens when their market inevitably crashes? and their already insolvent banking system gets more bad loans from people not being able to pay, and when real estate falls too(probably at the same time, from lack of mortgages due to said insolvency)? Or commodities when China apatite goes bust? Or the investor sentiment that will drag the other developing economies down with it? you’re looking at probably the largest financial mess in the history of mankind in the making. Japan Inc will look like nothing compared to this.

    China Inc (which is more of a Crony-Capitalist fascist state than communist anymore) has swindled westerners and their money with the fabricated growth numbers, growth pumped up by bad loans (loaned almost a 1/4 Trillion dollars this quarter alone…), and sweatshop economy almost wholly dependent on trade, into the largest case of popular delusion yet…

    But don’t worry. This time it’s different, China has found a way to beat the business cycle, it’ll grow at 9% forever and rule the world… (thats pretty much what everyone is saying, take a second to analyze how silly it sounds)