China as an Economic Superpower: 'Watch Out Below'

Since December, China's Shenzhen Composite Index has soared more than 57% amid frenzied buying by investors blithely ignoring government attempts to rein in liquidity and clamp down on wild speculation.

Yet if you compare the graph of the Chinese market over the past year to that of the Nasdaq Composite Index prior to its March 2000 peak, it paints a decidedly less sanguine picture: that of lemmings poised to scurry madly over the edge of a cliff.

click to enlarge

Put that together with some eye-opening commentary from blogger Charles Hugh Smith, in a post he wrote yesterday entitled "China's House of Cards," and my guess is you'll soon be hearing just one thing about the near-term fortunes of nearly everybody's top choice for future economic superpower: "Watch out below."

Take a look at the systemic problems facing China's leadership and tell me the "house of cards" metaphor isn't apt.

There are so many ironies in the current frenzy to "outgrow our problems" that it's difficult to know where to begin. First off, let me say I am not a China basher. We have many, many Chinese friends and would like to see China prosper in a sustainable fashion which benefited all of her 1.2 billion people. But that's not what's happening, nor shaping up to happen.

Instead, the list of extremely-difficult-to-solve problems just keeps growing. Just touching on the fundamentals:

Marxist theory is built on the central contradictions of Capitalism: that monopoly capital creates business cycle extremes which will threaten the entire system, and that even as capital eliminates competitors, it keeps labor costs low by forcing labor to compete against itself.

Despite labor and financial regulations which have taken the edge off the worst of capitalism's excesses (at least until recently), much of what Marx identified remains largely correct: Capital will seek to eliminate competition to gain pricing power via monopolies or trusts, and labor remains in competition with lower-cost providers of labor unless protected by a government-sanctioned labor version of monopoly, i.e. unions.

But the Chinese Communist Party has its own key contradictions. In a one-party state, oversight is inherently weak, for those in power can always squelch any oversight which threatens to limit their benefits or prerogatives. Without oversight and other balancing centers of power, then corruption, mismanagement and mis-allocation of capital are permanent features of any one-party society and economy.

Thus we have the four central banks of China hiding hundreds of billions in bad debt, loans which were issued to government-owned businesses to keep them afloat despite the corruption and bad management which bankrupted them.

Why did the government do this? To offload the workers' pensions and medical care onto something other than the Party or central government. As the government has slowly closed the worst, most underperforming state-owned industries, the workers are being left with no safety net--no pensions or healthcare benefits.

For Chinese workers, they now have the worst of both worlds. They have the limited education and opportunities of a systemically corrupt Communist society, and high "free-market" costs for medical care. Thus you read stories of young women offering to sell themselves on the Internet as a way to pay for their mother's operation. Scams? Maybe. But the problem is real: medical care in China is now unaffordable. The days of the barefoot doctors are long past.

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Comments

[huangjin:]

The problem with China is that they have a Marxist theory of capitalism, which led them to create the wrong kind of capitalism. In a free-market system with strong legal protections, capital cannot form a monopoly because competition immediately competes away a profit advantage. The market is a destroyer of profits. The government, on the other hand, is the greatest friend monopolists have. China is a fascist country run for the benefit of the party and elites.

2007 Apr 05 09:01 AM

[David Boettger:]

"Marxist theory of capitalism"? Um... Huh? I almost don't know where to start here. Free markets and rule of law have nothing to do with each other. As for free markets not producing monopolists... you might check your early 20th century history. Ever heard of Standard Oil? US Steel? Carnegie? Rockefeller? For more modern examples, check out Hong Kong - a free market by any standard - and the handful of tycoons that controls every aspect of the economy. Just try starting a business that competes with one of Li Ka-Shing's businesses and see how quickly you can compete away his profit advantage.

A recurring theme amongst people that speak about China while knowing nothing about the place is that they think it's Communism/Marxism/The Party that's produced the current political-economic situation. In fact, the elites in China have manipulated the political system for their economic advantage for thousands of years. The common people have been disenfranchised for thousands of years. The Communist Central Government is just another Chinese dynasty, with the possible exception that they actually give a crap about the people's welfare (albeit for less-than-altruistic reasons).

And to the point at hand, there are hundreds of thousands of extremely well-connected vested interests in China who will use every last gram of their political power to ensure that something like the chart above doesn't happen. Further, the total collapse of FDI that would occur as a result is too politically risky - and too much of a loss of face - for the Central Government to tolerate. It often doesn't pay to be too rational/mathematical when analyzing Chinese markets; <b>everything<... in China is political.

2007 Apr 05 12:25 PM

[huangjin:]

The Marxist theory of capitalism is that capitalists are greedy profiteers who cheat their customers. Taking a customer for all one can is the way of doing business, in their minds. If the people are indoctrinated for 50 years that this is capitalism, and suddenly the country begins opening up, what will their idea of capitalism be?

Using the definition of free market as the most free market in the world is not the same thing as a totally free market. Every example you cited involved using the courts and laws to their advantage, i.e. with the help of the government. How can a monopolist maintain his advantage if new entrants can enter the field? To fend off the competition, they must constantly offer more value, or lower their price to keep entrants out. That is, unless they can get lots of regulations and laws passed that hamper the competition, or simply enough laws that it becomes difficult for any small business to compete without an army of lawyers.

2007 Apr 18 12:18 PM

[WebWatcher:]

MIchael, you need to check the earning reports. It's just amazing!!! from 80% yoy earning growth to 400% earning growth. This is simply not NASDAQ before dot-com burst. I am not saying that this is not appearing crazy, but it's not going to follow the same patterns. Let's get the data right first.

2007 Apr 18 12:22 PM

[Old Style:]

Is this guy the "Bad News Bear" or WHAT? Take a look at the "Latest Postings by Michael J. Panzner." seekingalpha.com/by/au...

This list of titles is punctuated with words and phrases, such as, "Dangerous Herding; Irrationally Exuberant Bubble; Era of Ponzi Finance; Problematic; Watch Out Below; Hint of Trouble; Anything But Great; Listen at Your Peril; Financial La La Land; Nightmare in the Making;" and my favorite that seems to sum up his whole persona; "Optimism Misguided."

The latter, "Optimism" is the only "positive" word that I could find in the entire list! Can one with such an outlook have any credibility, on any topic, with anyone?

2007 Apr 22 05:45 PM

[Old Style:]

Opps, foolishly I went on to page 2 for more negativism. However, I did find useful, one of Mr. Panzer's words of advice, from his February 26th, 2007 post, that I suggest he consider himself:

"The First Step Is Admitting You Have A Problem"

2007 Apr 22 05:52 PM