The Chinese Economy's Fatal Flaws

Tyler Durden's picture

Authored by William Hongsong Wang via The Mises Institute,

Dr. Per Bylund’s recently published article poignantly states one of the core problems in the Chinese economy and its the state-manipulated Keynesian foundation. I do agree with his opinion. And if we dig deeper into the exact situation of Chinese economy, we will find that it’s a typical failing of the Keynesian, cronyist system.

By using the perspective of Austrian business cycle theory, lets take a look at China’s real estate industry, which is suffering more and more painfully from artificial credit issued by China’s central bank, the People’s Bank of China (PBC).

During the 2008 global economic crisis, China’s central government issued the famous RMB 4 Trillion Stimulus Package Plan (equaling to $586 billion).

Since 2009, the Chinese real estate economy has already suffered from three small economic cycles. As it is becoming more difficult for real estate companies to live on artificial prosperity, the duration of every business cycle has become shorter than the previous one. We also see more and more ghost cities because of the economic boom in every sub-economic cycle. There were at least 12 ghost cities founded in 2013, and the number of them jumped to at least 50 in 2017! Bankruptcy is happening more frequently among Chinese real estate enterprises. Since 2016, at least three real estate companies — with a combined debt of at least RMB 763 million — have gone bankrupt. The story of bankruptcy is continuing, with one of the biggest real-estate-driven enterprises, Wanda Group, facing financing problems. If Wanda no longer has access to cheap debt, it might not be able to refinance or roll over all its debt again. If Wanda has to face bankruptcy, it could possibly accelerate an end of the the current Chinese boom. 

The data from the Chinese local governments is also not optimistic; their debt levels have reached almost RMB 25 trillion (US$ 4 trillion) at the end of 2014. In 2015, even the PBC admitted in one of its annual reports saying that China’s financial system is facing higher instability and uncertainty.

The above evidence is not a surprise. All these are the consequence of artificial bank credit created by central banking and central planning.

In China, the loans are easy to get from the State Owned Enterprises (SOEs) or the businessmen who are the friends of the politicians in the Communist Party. China’s real estate industry is also the ally of the state and only the people who are friends of those in authority can participate in housing programs. 

Besides the SOE economic system, what we should worry more about is how the Keynesian and crony system hurts small and private businesses in China, who are driving the economy of this country. Compared with the SOEs, and the businessmen who are the close allies of some influential politicians, it is harder for ordinary entrepreneurs who are running small businesses to get loans. Moreover, the recent market squeeze makes it harder for Chinese small business to survive. These entrepreneurs are not only facing an unfriendly bank credit situation, but also the threat of having to bribe the government to circumvent the massive scale of governmental economic regulations.

Consider the story of a small business boss Li Lang, who is a typical Kirznerian alert businessman in China. Several years ago, he observed a shortage of moving companies in the Southwest Chinese town of Chengdu. He started his business to serve the local people. The business is not easy, not only because it requires hard work, but Li also must bribe and maintain good relations with the local politicians to let them “protect” his business and help him introduce some business opportunities. According to Li, if the local bigwigs in the crony system had already discovered the opportunity of earning a fortune by managing a moving company, it wouldn’t have been possible for him to enter the business. Though now that he has earned a lot of money, he still has to carefully maintain the relationship with the politicians to "protect" his business. His is not an isolated case. In China, the less connections you have with the cronyist system, the less business opportunity you have. And even if you become successful in your business, be careful, the state has eyes on your wealth.

Though we know that the private sector is driving the Chinese economy and has improved the living standard of many Chinese individuals despite state economic manipulation, we still have to emphasize that the nature of the Chinese economic model is dominated by Keynesianism and cronyism.

Otherwise, the false prosperity would make us misread what is happening in China.

*  *  *

In other words - don't start believing.

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TeamDepends's picture

Commieconomists simply not wishing hard enough.

HillaryOdor's picture

Hongsong Wong

aka Bill

Hahahaha.  I agree with him though.

moimeme's picture

The Chinese Economy's Fatal Flaws

=

The American Economy's Fatal Flaws

DWD-MOVIE's picture

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malek's picture

We're so lucky the US doesn't have a "state-manipulated Keynesian foundation!"

Corey331's picture

Sell more fortune cookies!

GRDguy's picture

Don't forget that the City of London Corporation financed and guided the biggest part of China's growth from the Nixon Era on up.  Mao had bankrupted China. Where do you think the start-up money came from. Can you even imagine the wealth plundered by JPM, GS, MS, Citi and others.

just the tip's picture

with US private savings at $23 trillion US at the start of this shitshow, and at 4% i would guess $920 billion US per year.  but that's just a guess.

i upvoted you because you said more in 4 sentences than most of the essays posted say.

SeaMonkeys's picture

I don't know the history of China like you, but I think you are thinking along the same lines as I do. Here's an article written in 2014 by a guy named Dan Collins. He has lived in China since 1998. 

http://www.thechinamoneyreport.com/2014/02/27/american-collapse-theory-g...

SeaMonkeys's picture

I don't know the history of China like you, but I think you are thinking along the same lines as I do. Here's an article written in 2014 by a guy named Dan Collins. He has lived in China since 1998. 

http://www.thechinamoneyreport.com/2014/02/27/american-collapse-theory-g...

Wild Theories's picture

it doesn't take 12 months for credit creation to flow into primary resources

companies don't borrow money 1 year in advance to then buy raw materials for production 1 year later, not even if it's interest-free.

there should be barely any lead time, if at all

 

12m lead is only plausible to an academic economist or a desk jockey analyst who's not aware of business cycles or common sense.

or it's just someone retroactively fitting a chart to a narrative

joey stalin's picture

Let's see.  The Chinese economy is growing fast, millions are being lifted out of poverty each year, life expectancy is increasing.  The US economy is stagnating, millions are being forced into poverty each year and life expectancy is falling.

MozartIII's picture

Welcome to the Chinese grand illusion. Stay around for much confussion. They're comand and control economy will hit its bumps. The US is a whole different story, not comparable to china. Comparing the two in the manner that you are, makes no sense.

just the tip's picture

chinese is not a modifier for economy as you use it.  if china had an economy, why are they building ghost cities?  shovel ready jobs?  trying to keep the natives from revolting?  even with china's slave labor producing all the world can consume, they still have excess labor to produce ghost cities.  the proper modifier, then, should have been, "china's ghost economy is".

SoDamnMad's picture

The Chinese are dying to get the "Silk Road" partners to sign on the dotted line so they can send thousands to work on projects overseas that keep the shit-show moving.

Jack's Raging Bile Duct's picture

Forgot to mention that China also attempts mercantilism, which is proven by history not to work. They impoverish their population by degrading the only asset most of them have--their labor. They then use this currency arbitrage to underbid other currencies, which they then use to malinvest via debt fueled expansion. All of the State cronies take their cut and keep it going.

It's not a sustainable model, and not one that can readily be converted into anything sustainable. They cannot turn their production towards internal consumption easily, as they ground the earning and purchasing power of their captives (See: citizens) into nothing. If they allow this situation to improve, they immediately lose their singular trade advantage with most of the world. If they stop malinvesting into overcapacity with State financing, then the companies running on fumes to underbid the world go bust.

China has come a long way and benefited greatly from economic liberalization, but they are caught in a Keynesian trap that will last only so long as they grind their population and environment into dust for the sake of producing the world's goods in exchange for fiat. They are artificially accelerating the natural conclusion where profits go to zero, without the equilibrium that make such a scenario a good thing. Very curious to behold.

Justin Case's picture

So who's winning the race to the bottom, merica or China? merica had a head start too.

the_narrator's picture

I'm really getting tired of the same mistakes in economic analysis of China's system getting made over and over again for the past 30 years.

The Chinese economy is not Keynesian because their central bank prints money electronically without going into debt.  They just print the money and buy the bad debt and sell it off for cheap.  The banks act as partially privatized central planning and the government can maintain control of the financial system by executing and imprisoning people who take advantage of it.   In a western system the tax payer gets austerity to bail out the rest of the system and this trashes consumer spending and creates a simulatenous credit collapse.  The government is also wholly dependent on the banks to create money which they do at their own discretion and not the government's.  In China the government is in control of the banks, not the other way around.

Aussiekiwi's picture

Surely the fix is simple, they need to print more money, lots and lots more, then all Chinese can be millionaires.

divingengineer's picture

China's "National Team" owns 6% of all stocks.
You don't go to that kind of intervention if you aren't scared shitless.
That's why I think you are wrong.

Crusader75's picture

35 years of Keynesianism has worked great for my net worth. Anyone who invests on what they think reality "should" be is an idiot.

Drop-Hammer's picture

The problem with the Chinese economy is the Chinese.

whatisthat's picture

I would observe this post calls out the Chinese Ponzi economy......