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While the pols in Europe endlessly
consider how they will paper over their financial crisis, "ring
fence" Greece and the other PIIGS pass austerity
programs, and still get reelected, some speculate that perhaps China will
step forward to bail out the eurozone.
In recent years a number of
investment gurus have touted China as the new financial powerhouse, while at
the same time the country serves as punching bag for both sitting and
would-be American politicians. Senator Charles Schumer claims the Chinese are
manipulating the yuan, causing millions to lose
their jobs in America. "More than any single stimulus program we could
pass into law, forcing China to revalue its currency is the biggest step we
could take to protect American jobs," Schumer said.
"This is not about China-bashing. This is about defending the United
States."
Donald Trump unleashed this tirade
on Wolf Blitzer's CNN Situation Room:
They're manipulating their
currency. Intellectual property rights and everything else are a joke over
there. They're making stuff that you see being sold all the time on Fifth
Avenue, copying various, you know, whether it's Chanel or whatever it may be,
the brands, and just selling it ad — ad nauseum.
I mean this is a country that is ripping off the United States like nobody
other than OPEC has ever done before.
But is China the capitalist powerhouse
everyone thinks they are? This China-is-taking-over-the-world talk makes a
person wonder if members of the Politburo of the Communist Party of China
pored over Human Action,
implementing a better Misesian capitalist
mousetrap.
However, Chinese economic growth
has exploded on the shakiest of financial systems, Carl E. Walter and Fraser
J.T. Howie point out in Red
Capitalism: The Fragile Financial Foundation of China's Extraordinary Rise.
The country's central planners do their best to keep as many of the 1.3
billion people employed as they can; building vacant cities
and dozens of large infrastructure projects along with releasing eye-popping
"official" GDP numbers. All of this has some observers believing
China will use every barrel of oil, yard of cement, and pound of yellowcake
the world has to offer.
Nonetheless, reading Howie and
Walter's eye-opening book makes a reader wonder how the whole Chinese economy
hasn't imploded already. The Chinese have developed stock markets and debt
markets, pension funds, home loans, and credit cards. From afar it looks sort
of like capitalism, providing comfort to investors. However, the authors point
out; "[Investors] would not feel that way if China explicitly relied on
a Soviet-inspired financial system even though, in truth, this is largely
what China remains."
Red Capitalism is clearly
written, but at the same time it is so littered with acronyms standing for
the various government entities that comprise the thicket of state
organizations that make up the Chinese financial system the reader is
constantly confused. Take for example this sentence:
By 2005, Huijin
had become the controlling shareholder on behalf of the state and enjoyed
majority representation on the boards of directors of CCB and BOC and,
together with the MOF, of ICBC, CDB, ABC and a host of other financial
institutions.
Got that?
The upshot from following the
alphabet soup of entities, created to make loans to the state sector and
friends of the state, is that when the loans go bad, which an extraordinary
percentage do, then new entities are created into which to move the debts:
from good banks to bad banks to worse banks.
"It is a simple fact that
China's financial system and its stock, bond and loan markets cater only to
the state sector, of which the 'National Champions' represent the reddest of
the Red," write Howie and Walter, who go on to point out that
"China is a family-run business."
Forget supply and demand; in China,
the system serves the country's political elite. While the oligopolies that
dominate the economy appear to be private, these entities are really state
controlled and operate under a patronage system that pervades all aspects of
the Chinese economy.
The National Champions, explain the
authors, along with "their family associates and other retainers plunder
the country's large domestic markets and amass huge profits. With nationwide
monopolies or, at worst, oligopolies, these business groups do not want
change, nor do they believe that foreign participation is needed."
"The Chinese financial system would
seem to be built on sand running through a Rube Goldberg hourglass. "
Chinese bank depositors provide the
capital to finance the insiders. But when the loans go bad and the banks go
bankrupt, it's left to the party to provide continuous bailouts. "In
short, China's banking giants of 2010 were under-capitalized, poorly managed
and, to all intents, bankrupt 10 years ago."
As nonperforming loans are pushed
from good banks to bad, with China's Ministry of Finance providing its
guarantee to the bad loans at par, banking life goes on, and the economic
miracle remains alive, backstopped by the lender of last resort, the People's
Bank of China, levered at 1,233 to 1. The result is underlying assets are
never liquidated and zombie banks and crony-led corporations are left in
place to squander capital.
The Chinese financial system would
seem to be built on sand running through a Rube Goldberg hourglass.
Geithner, Paulson, and Bernanke
didn't come up with anything new on this side of the Pacific in 2008, but
took a page from the Chinese problem-solving playbook — "shifting
money from one pocket to another and letting time and fading memory do the
rest." European finance ministers are now attempting the same trick.
While China looks to be a constant
growth machine, as the authors point out, its economy has been a series of
booms and busts. In what will be strikingly familiar to Americans, Howie and
Walter write, "Putting money on deposit with banks or playing the bond
market is hardly worth the effort; interest rates are set in favor of state
borrowers, not lenders, so they do not provide a real return over the rate of
inflation."
The money supply grew at a rate of 13.5 percent
in August, while the price of pork — the meat preferred by
most Chinese — increased by over 45 percent from last year. And while
the Chinese government says prices are up 6.2 percent, the price of all food was up 13.4
percent in August from 2010.
So the Chinese play the stock and
property markets, hoping for a big score. "Chinese history and bitter
experience teach that life is too volatile and uncertain to take the
long-term view," write the authors. Hans-Hermann Hoppe would contend it
is the prevalence of government force — stealing through taxation,
regulation, and inflation — that have increased time preferences.
US investors have piled into the
shares of large Chinese companies with some success, but the authors wonder,
"how can an investor look at PetroChina and
compare it with ExxonMobil when it is nearly 85 percent controlled by the
state and will remain so as long as the Party remains in power?"
Plenty of Americans are now aware
of how deeply in debt their government is. And certainly Europe's troubles
are well-known. But China too has a debt problem. The authors add up debt
obligations of various sorts including nonperforming loans now guaranteed by
the Chinese government. The total comes to nearly 76 percent of GDP, exceeding
the international standard, and the burden will likely grow.
Writing for the Casey Report,
James Quinn described China's economy as "a house of cards," and
pointed out, "Fitch downgraded the country's credit rating and warned
there was a 60% chance the Chinese banking system will require a bailout in
the next two years."
In the same issue, Doug Casey
wrote,
It's not just Europe, the U.S. and
Japan that are riding for a fall but also the Chinese. What's coming up, in
other words, is a worldwide financial and economic cataclysm. Let's just hope
that the political, social and military fallout from the coming
financial/economic collapse aren't too severe.
So can the Chinese bail out the
Europeans? Not hardly.
We can't just go save
someone," said Gao Xiqing,
president of China Investment Corp., China's huge sovereign wealth fund.
"We're not saviors. We have to save ourselves," he said
at a weekend panel discussion.
"State interference in
economic life, which calls itself 'economic policy' has done nothing but
destroy economic life," wrote Ludwig von Mises.
The Chinese economic miracle is
nothing but a redder version of Keynesianism. Like all interventionism, the
Chinese system is destined for a hard fall.
Article originally published on www.mises .org
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