Neither Left Nor Right

In the US, I always found it interesting that there are people from both the leftist camp and the rightist camp who idealize China.

Some people from the left admire China's big government, and assume it means more regulation of the free market and more welfare and equality for the public. But in reality, the state-owned companies in China enjoy most freedom in exploiting labor or environment, and private companies might enjoy the same freedom if they form the right alliance with government officials. China's spending on welfare, in terms of percentage of government income, is one of the lowest in the world. It's inequality in living standard is one of the highest in the world according to UN surveys. Not to mention its unions are also much weaker than those of most capitalist countries.

Some people from the right admire China's lack of union and loose regulation on labor rights and environment, they think that's good for business. But in reality, if you want to do business and you don't have the right connections with government officials, not only the tax will be high, you will also face many obstacles set by all kinds of government regulatory institutions. No law can fully protect your contract or property rights. There is no free competition, only unlimited previledge for those who have both money and political power.

That unique model of "big government-low welfare-low freedom" is the reason why the Chinese government is much richer than the US government (which is actually in huge debt) although the US's GDP is 4 times bigger than that of China. And it's the reason why Chinese factories have much lower labor cost than countries with high welfare and strong unions. But this model now face its demise because the economic crisis has destroyed the export market of Chinese goods, while most Chinese people cannot afford all those things produced in China. That's why China can only recover from the crisis if the government starts to give the wealth back to the people and reduce the obstacles that prevent people from making a living with their abilities, in other words, smaller government-higher welfare-more freedom. (It needs to be more environment friendly too, that's another complicated issue.)

The Worst Scenario I

1. China's stimulus package, which emphasizes government investment on infrastructure, only leads to even worse over-supply of airports, highway, and industrial goods.

2. China's banks, following the order of the government, keep lending to projects with vague values, which leads to huge toxic assets just like those crippled the western financial system.

3. The real estate bubble might eventually burst. Although banks are lending to developers so that they can maintain the high selling prices without cash flow, although home-ownership is the foundation of family value in China, the current price still cannot hold as fewer and fewer people can afford it.

4. The golden age of Made in China is gone. Protectionism becomes wide-spread as politicians around the world blame international trade for the job loss in their own countries. Factories in China also lose competitiveness because their exploitation of cheap labor has reached a limit, and they don't have the creativity or technology to raise the quality and appeal of their products.

5. Unemployment reaches unprecedented level and people's income drops. Neither peasant workers nor college graduates can find jobs. The only people whose jobs and income are not affected are government officials. Social unrest might follow.

6. All the money injected into the financial system leads to inflation.

7. Environment protection becomes even less a concern for the society as the priority was given to economic development at any cost.

8. Government officials continue to send their kids and money abroad, so they don't need to worry about the future of the country they rule.

To be continued.

Spectacles of State Capitalism:Easy Way Out of the Recession

Here is a quick summary of the unique tools of China's state capitalism to achieve a fast economic recovery:

1. Government investment. Spend the tremendous wealth accumulated from the people on constructions of more airports, railways, freeways, skyscrapers etc. This will generate short-term employment and help the state-owned steel and cement companies get rid of their stocks. But nobody knows whether these infrastures are truly useful.

2. Easy Bank Loan. China's major banks are all owned by the state. So when the state demands them to open their gate of lending, they will do it. Actually, we have seen an explosion of bank loan in the past 3 months, the total number--4580 billon RMB--already exceeds that of the whole 2008. When banks are acting upon state order, they don't care so much about the safety of their loans. They mainly lend to projects of state investment anyway, the only credit they rely on is that of the state. This is in sharp contrast with the finanical system of the US right now, the US government want the banks to start lending, but the banks are reluctant to lend despite the low interest rate, while the consumers and companies are also reluctant to borrow.

3. Boost the income of bureaucrats. Who will consume all those things produced by increasing state investment? Though the government is implementing some programs to improve public welfare, but those programs take time to develop and they will not make people more willing to spend in the short term. People's income are not rising and most private companies are struggling. But there's one group whose spending power will only rise, that's the state employees.

4. Create fear of inflation and another bubble circle of real estate and stocks. The state and banks are instilling more and more money into the economy, and in this weak economy these money cannot actually find promising places to invest, so they are ready to fuel another round of bubbles in real estate and stocks. If the media again talk about the oversupply of money and the potential threat of inflation, common people will again be willing to move their money from the banks to the real estate market or the stock market.

Given the above tools, it's possible that we will soon see a thriving China economy, in which numerous construction projects continue to emerge and consumption rises due to the virtual wealth created in the real esate and stock market. Of course this type of prosperity does not seem very sustainable, but neither the government nor the middle class has the patience for a more difficult path of recovery path. That difficult path involves getting rid of the shackles on people so that they can develop their productivity to the fullest as well as giving government wealth back to the people, which I will discuss in the next post.

What Real Estate Bubble?

While real estate price has been falling all over the world, China's real state price has been stable. Though the amount of transaction faltered in the fourth quarter of 2008, in the first quarter of 2009 you again see long lines in front of real-estate sales offices, and transaction quantity rose again, some apartments' price rose too. All marks of a real-estate bubble are salient in the Chinese market, from the price/earning ratio of (12:1 in shanghai) to the price/rent ratio (100:1 in Shanghai). But there is no sign that the bubble is going to burst.

How can the apartments become unaffordable for most people but still enjoy a stable demand? I was very confused until several friends of mine told me the same thing: one have to get a house to get married. Yes, that's answer, homeownership is the foundation of love in China. Since love is priceless, homes are of course priceless. The economic rules of supply and demand, or cost and benefit, only apply to material things. Spritual things, like love, are beyond those rules. Throughout history, people are willing to give up everything for love, so it's no surprise that now they are willing to pay everything for homeowership. Real state market in China is a bubble only if you think love is a bubble, which might burst at some point of human history.