Monday, December 12, 2011

The Continuing Absurdity of Breathlessly Praising China's State Capitalism

Back in April, I posted an astonishing video of China's "ghost cities" - sprawling, brand new cities replete with malls, office buildings and apartments, but with literally no actual residents.  Since then, I've posted other examples of how China's state capitalist system is creating massive distortions in its domestic economy.  At the time of my original posting, I asked a simple question:
After watching this video, how can anyone - anyone! - seriously advocate copying China's state-run approach to economic policy?
Yet people keep doing it.  Indeed, earlier this month former SEIU head Andy Stern praised "China's superior economic model" and added, quite ridiculously, that "the free-market fundamentalist economic model is being thrown onto the trash heap of history."  President Obama's also described China as an economic paradigm (at least on infrastructure spending).

Something tells me that Mr. Stern and his fellow sinophiles hadn't seen that first video and certainly hasn't seen this doozie about China's biggest ghost city, Ordos:



Blogger Unconventional Economist comments on the profoundly negative implications that, if repeated elsewhere, this implosion could have in China:
[A] video from NTD Television shows that Ordos’ home prices are crashing, having fallen by almost one-third. Meanwhile, construction has finally ground to a halt, leaving many construction workers unemployed.

With the real estate market accounting for around 10% of China’s GDP growth, and affecting many related industries, the concern is that the property downturn might become widespread, dragging China into a sharp recession.
Yeesh.

Meanwhile, Carl Walter and Fraser Howie debunk the widely-held myth that China's massive foreign exchange reserves will allow the government to easily fix the huge mess that is the Chinese banking system:
There's a growing consensus that China's banks are in trouble. Having overextended themselves over the past few years in a flood of government-directed credit, banks now must face rising problems with bad loans—a lot of this is basic math. But myths about how Beijing could solve the problem abound. Perhaps the most pervasive is that the government can always tap its $3 trillion in foreign-exchange reserves, and so no one should worry about a financial crisis. The truth is very different....

The role of reserves in any bank bailout is a central question now because if forex reserves can't save the banks, it's possible that nothing can. In the late 1990s, the last time Beijing faced a banking crisis, bad loans ultimately totaled more than four trillion yuan (more than $600 billion in today's exchange rate), more than one-third the size of the economy and four times national fiscal expenditures. That was tough but ultimately manageable for policy makers using a combination of foreign strategic investors, equity raising via partial share sell-offs to outside investors and, most importantly, the country's forex reserves.

But since then, the economy has tripled in size while on-balance-sheet bank lending has reached 130% the size of the economy. As nonperforming loans inevitably increase, the scale will quickly become unmanageable. In the face of ongoing national budget deficits of around $160 billion, the foreign-exchange reserves once again constitute the only pool of capital that would be sufficient for a bailout.

Sure enough, some see this perceived strength as a great comfort. In this view, Beijing could use its forex piggy bank to smooth over any problems in China's export- and investment-led growth model. But this fundamentally misunderstands what the foreign-exchange reserves are and what they can—and can't—be used for.
The authors go on to provide several key reasons why the "forex reserves fix" would be, at best, extremely messy and, at worst, might be totally unworkable for China's troubled banking sector.  They conclude: "A huge part of the wealth that has been created by China is stuck in the wrong place: offshore. To bring that wealth onshore can only create significant inflationary pressure, which, in turn, destroys the very wealth that has been created at home."

So to recap: China's housing and construction sector is a mess, and its bank system is a mess - all because of the glorious state capitalist model that Mr. Stern and others demand the United States emulate.

Yes, yes, let's like totally copy this system.

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