Don't Mistake China For A Market Economy

Includes: FXE, FXI
by: Karl Denninger

Nobody could have seen this coming, right?

“We have on many occasions expressed our readiness to extend a helping hand, and our readiness to increase our investment in Europe,” Wen said. At the same time, “they should recognize China’s full market economy status” before the 2016 deadline set by the World Trade Organization. “To show one’s sincerity on this issue a few years ahead of that time is the way a friend treats another friend,” he said.

Mercantile nations are not "friends." You may negotiate with them, you may trade with them under some set of terms, but one can never mistake what one is doing for "friendship" when engaged in and with these nations.

Reality is this:

  • China is a not a "market economy." The nation demands that firms who wish to sell goods and services employ local labor to manufacture, uses local resources (e.g. raw materials) where possible and often simply expropriates technology and designs. (The less-polite word is "steals.")
  • China's sham cities and other so-called "fixed investment" make our ponzi housing crap look like a girl scout picnic. Corruption in the economic picture there is beyond the wild idiocy of Florida swampland sales in the early 1900s and 1920s, and just as idiotic.
  • China is becoming more aggressive on a military basis by the day. We're financing it with our trade imbalance. There is something particularly insane about buying your known-nutso next-door neighbor a gun that he is likely to eventually shoot you with.

At its core the problem resides in per-capita GDP differences between China and developed nations. There is thus no particular policy, standing alone, that addresses the problem. The only fix is time - and China's transition into a market economy - something that they have not done and in fact are not doing today. Pretending that all is well (or getting better) is like averting your eyes when you know damn well that the oil-change joint in town has piped its waste oil into the sewer and is employing illegal aliens while expecting the legitimate company next door to do "just fine." Refusal to face reality will only make global trade imbalance problems worse and risk eventually turning trade and currency disputes into trade wars and ultimately shooting wars.

China has monstrous problems with their own economy - malinvestment and fraud are off the charts along with labor exploitation and environmental destruction. The labor rate is rising (price paid per-hour) there, but unfortunately this is exposing the soft underbelly of the "Chinese miracle"; there has been no miracle at all but rather there has been a short-term exploitation of Chinese workers and the environment for the benefit of a handful of multinational and Chinese corporations. We must stop these practices, not enhance them.

China is nervous over the European problems, and with good reason. They buy a lot of Chinese crap, and a collapse over there will hurt China. But this is not the time to cement yet more trade imbalances into the European continent along with North America. Rather, it is time for the nations of the world to face the fact that capital drains and trade imbalances that have driven much of the Ponzi Finance, along with hollowing out and destroying the long-term ability of western governments to fund the services their citizens demand, is under no set of circumstances constructive.

Europe should tell Wen to go wang himself - but I'm willing to bet they don't.