Thursday, April 23, 2009

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.

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