China: The Ultimate Crony Capitalist State

It is now official, China is in the midst of a “sharp downturn in the economy.” This according to a Chinese cabinet official in Beijing quoted in this article from the New York Times. 

Also in the article the author says; “China’s unexpected economic difficulties are starting to unnerve investors in world markets, especially commodity markets, as China is the world’s largest consumer of most raw materials and the second-largest consumer of oil.”

Unexpected?

For the record we at ACC have been talking about the Chinese slowdown for almost 2 years now.

Not that we were the only ones by any means.

One needed only dig just a bit to see that China was and is in very real trouble. The copper price, which has been driven by demand from China in recent years, and its slide beginning in July of last year was a great indicator that things were getting ugly. 

So how the slowdown in China could be a surprise to anyone who cares about the world economy, and has real skin in the game is a mystery to me. Yet, in the Times article referenced above a China economist for Lombard Street Research , based in Hong Kong, is quoted as saying; “Clearly the economy is much, much weaker than most people thought until recently,” … “They have a real mess on their hands.”

Is the economist here one of the “most people” she refers to? Let’s hope not.

After all reports such as the one below, which we posted earlier this year have been coming out for a while.

If you haven’t seen this video on the ghost city of Ordos yet it is an absolute must. This is an economic catastrophe, and possibly a political one for the Communist Party of China.

This is what happens when crony capitalism becomes national policy.

All the banks in China are run by members of the Chinese Communist Party. As are the biggest Chinese firms outside of banking. Investments by foreign companies are tightly regulated and foreign companies are regularly shaken down by various means.

Years ago I read a book entitled One Billion Customers about doing business in China. The thing that struck me most in the book was the class of cronies which ran everything. They reminded me of gangsters, which in many cases they were. The author of the book openly questions how one is to do business in such an environment. And accounting standards? Fuggetabouit.

So it should be no surprise that many of the newly wealthy of China are jumping ship to Australia and Canada. This has created a real estate situation unlike any other in North America in Vancouver which as the rest of the west has imploded has been red hot ala south Florida circa 2005.

China is the ultimate crony capitalist state. It’s leaders have sought to “manage” the reemergence of China onto the world stage, and in the process may have managed themselves right into a deep recession as only central planners can do.

Between Europe and its straits, China and its massive slowdown, and a United States that is limping along at best, the question is which engine of the world economy will be the first to liberalize?

Really it’s the only real answer. Let’s liquidate the crushing debt, deal with the pain (and there will be a lot of pain,) and then get  back to some semblance of an economy based on real price signals.

The managers and econometricians have failed, like they always do. Let’s let the market work and let human capital that currently is shacked by debt and red tape do its magic.

You want a stimulus? Unleash the market. China (and especially its economic model) isn’t going to save the world.