Self Interested Politicians Should Keep The Chinese Economy On Track

by: Michael Blair

The Chinese economy has baffled many observers. It behaves somewhat like an authoritarian state and somewhat like a capitalist country. Caught somewhere between Karl Marx and Adam Smith and without clear picture of where on the spectrum of economic theory it operates, its machinations are vital to the rest of the world simply because of its size and scale. Commodity prices, offshore production and long term consumer demand depend to a large extent on the well-being of the Chinese economy.

In many respects it is hard to understand. We hear stories of millions of houses being built and left empty, major banks with massive toxic loans, and uncontrolled industrial development. How do we come to grips with rational forecasts of the state of the economy in China and the implications it will have for western stock markets?

One approach is not that conventional. It is to compare the way Chinese leaders make decisions with the way decisions are taken in the United States. Surprisingly, the real decision making process is somewhat similar if you dig deep enough.

In the United States, the office of the President, Congress and the Senate share power in a system of checks and balances that has its roots in the Constitution created by its founding fathers. To some it is a model of capitalism and evidence that open markets work and produce results that benefit everyone. If only that were the case.

It is not disputed that North Americans are the world's wealthiest people, with wealth per adult more than double that of Europe and six times that of the world as a whole.

In the United States, that wealth is not evenly distributed. In 2008, 90% of American households had an income less than $32,000.

This results in wealth being concentrated as well. In 2009 the wealthiest 1% of Americans controlled 37% of the nation's total wealth while the bottom 80% shared only 12%. In the 25 years from 1983 to 2007, the richest 1% of Americans more than doubled their assets while the bottom 40% had their wealth cut by 63%.

The American system of government has something to do with this trend. The Republican Party is in many respects seen as the establishment party. You can see in its vocal and strident opposition to the Affordable Care Act evidence of a sentiment that resists any move to transfer benefits from higher income taxpayers to lower income groups, even if that means those lower income groups have limited access to something as vital as health care. The stand off between the Republicans and Democrats in Washington today has as much to do with income distribution as with a desire to see the economy grow. More than anything, it is a fight about money.

Adam Smith would be proud but oddly so would Karl Marx. Smith saw market forces as an efficient allocator of resources. Marx saw that unbridled capitalism would bring about extreme inequality leading to failure of the political system. Both predicted inequality in incomes and wealth distribution would create conflict and we can see that conflict in Washington today.

China is at the other end of the spectrum. It is not an open and capitalist society but to a large extent one controlled centrally.

In the Utopian world of Karl Marx, a communist central government used its power to share the wealth of the society more evenly among its population. In reality, it doesn't really work that way.

In China's centrally controlled economy, income and wealth are not evenly distributed and the people who are getting insanely rich are not capitalists but politicians.

The Chinese government may not embrace capitalism but they certainly understand economics. In a society where they exist to serve the people there is at least some evidence they serve themselves. And, the point of this article, they are likely to continue to ensure their economy will expand not out of communism or altruism, but out of nothing more than good old fashioned self interest.

When you have enormous resources, like both the United States and Chinese governments, you can and will get the brightest minds on earth to help you solve your problems. Names like Larry Summers, Ben Bernanke and Janet Yellen emerge as the economic Samurai needed to fight the crises caused by the excesses of capitalism and they are doing a brilliant job of dealing with them. The United States economy is expanding, its fiscal deficit is shrinking, more people are working, and if the massive growth of the Fed's balance sheet is the price, it is a price most Americans willingly pay. And, while it may not have a happy ending, it has made the past 5 years a lot more palatable for a lot of people.

The Chinese also have enormous resources and while the names are different and most of us would not recognize them, they have their own brilliant minds helping them stick handle their own economic challenges. And, in my view, they will succeed. Just as there is nothing like the hangman's noose to focus one's mind, there is nothing like having your own money on the line and lots of it to focus a political leader's policy making.

Accordingly, I believe China will muddle through and long term investors in mines and oils will benefit. Self interest is a great motivator.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.