Friday, May 25, 2012

The first brick in the wall comes out.

Chinese ghost city middle of the day
in what is supposed to be a
 major thorough fair
Even the large media centers are reporting on China's slowing economy.  While it's still growing, the fact that Chinese developers are laying off construction workers does not bode well.  As large as the real estate bubble was in the United States, it is many magnitudes larger in China than it was in America.  The reason being is that the Chinese government has placed all its chips on economic growth; in order to stave off unrest and possible rebellion.  The Chinese economy needed, and by needed I mean the CPC needed, to have near maximum employment versus profitability, which how the American economy has traditionally operated.  This results in a lot of redundancy and projects that have no real long term economic value.  China has used three tools to growth their economy. 

The first is one that everyone is familiar with, and that is China's export economy.  China has effectively become the producer of goods for Europe and the United States. However, this means China is vulnerable to currency valuation changes, stability of the ocean seas lanes that are controlled by a foreign power, and demand by foreign markets.  This effectively means that a large portion of China's economy, and economic health, is not in control of China; and change in anyone of these items could severely hamper their economy.  Moreover, according to Stratfor, if it were not for generous subsidization by the state then many of their exporting industries would have negative return rates.

The second tool China has used to grow, and one which many are not as aware of, is internal spending.  China has more control over domestic GDP growth, and large infrastructure and development spending are ways to do this; at least on paper.  As I have said in the past, infrastructure spending doesn't always yield a net positive return if the money is squandered on projects that do not make sense. Moreover, China has many real estate projects, in some cases entire cities, that are near empty. This means millions of dollars, perhaps even billions, are used in the maintenance and debt servicing of 'assets' that do not yield a financial return. China's residential real estate economy has been on life support for a while as well.  The Rutgers article is there more to illustrate how long they have had this issue versus how severe or not the real estate contraction would be.  Many American financial rags also speculated a rather mild decline, they were wrong.

Lastly we have Government money. The Chinese government long used funds to direct the growth of their economy, and after their stimulus, which as a percentage of GDP was larger than ours, has only grown more intertwined.  It's hard to estimate how much bad government money is floating around plaque in the arteries of China's economy.  But its a lot, and for a long time China has been trying to paper over the fact that many municipalities are drowning in debt.  Eventually this will all have to be paid, and that is perhaps when the final domino will fall.

What historically tears China apart isn't so much popular revolts against the leadership, as it is regional governments begin to ignore or outright rebel against the dictates of the central government.  This happened to the Nationalist Government, the Qing Dynasty, and virtually every Chinese dynasty that collapsed.  The very system China puts in place to ensure stability also ensures poverty, and the measures China puts in place to try and counter the unrest that poverty causes, by increasing economic growth that is directed by the central government, causes its fracture.  China could beat this cycle, but that would entail truly free markets; and the acceptance of a short time of instability that free markets sometimes cause.  My friends, we might be seeing the first brick that is, and will,fall out of the great wall that is Communist China.

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Seattle resident whose real name is Kevin Daniels. This blog covers the following topics, libertarian philosophy, realpolitik, western culture, history and the pursuit of truth from the perspective of a libertarian traditionalist.