King Tubby has drawn my attention to a Reuters article on a financial constellation within China which could spell a Chinese financial crisis, some three years after the West’s – and most of the world’s – financial crisis began.
If China had been asleep for centuries (as Napoleon Bonaparte allegedly once put it), most of the English-language press seems to have been asleep for some three years, when it comes to this issue. Rather than being in awe for China’s simulus, they might have taken note of its financial sources back then. Victor Shih of Northwestern University actually pointed them out – to the international press in Beijing – in March 2010, and while the numbers may not have been easily available before, the press should have been full of questions anyway.
Even earlier, in February 2009, Huang Yasheng of the MIT told Nanfang Daily that while India’s investment only amounted to 50% of China’s, it still created economic growth that amounted to 80% of China’s. The issue is misallocation of capital – the state manipulating investment into channels where it either performs less well as it could elsewhere in the country, or even dumping money into white-elephant projects. Small and medium-sized enterprises (SMEs) might make better use of such investment, or loans, but are lacking the attention the state pays to state-owned juggernauts (or, more generally-speaking, .industrialists who are, for cousinhood or other forms or association, particularly close to the CCP.
But neither did Chinese growth in past years spell as golden an age for the average Chinese people as the hype in our press seemed to suggest, nor will the future necessarily be as messy as is now predicted by a growing number of China experts.
From my comment, in reply to King Tubby’s:
While some of the aftermath of impending financial defaults within China (after all, the creditor-debtor relations are mostly a domestic affair) will be ugly and even dramatic (and it’s easy to excite the Chinese public, both willingly and unwillingly, isn’t it?), it still won’t spell comprehensive economic collapse. The real structural problem in my view is the one which Huang Yasheng and the very recent Reuters article describe: the misallocation of capital. That however is a malfunction China has lived with for decades, and will continue to live with. These have been seemingly golden decades – but never as golden for the average Chinese as our media kept suggesting. The future isn’t as bleak as they like to suggest now, either. The crux will be if the center, i. e. Beijing, will manage to turn the coastal provinces into investors, and consumers, in their domestic relationship with the hinterland which still has quite a potential to grow economically, as export keeps dwindling. I have my doubts about Beijing’s and their provincial fiefs’ ability to tap this potential for growth from within China – but it is an option, and could be a way out of the looming economic straits.
If they managed to do that, it could be a turn to a more sustainable pattern of growth than what we’ve seen so far.
Import substitution could be on the cards, too. There has been some public discussion in China about leaving the WTO more recently (leaving may be a prerequisite for the protectionism import substitution would require). The pressure that would stem from having to do your own R&D, rather than simply importing it, could help innovation. So, there is an underlying rationale underneath the “we-are-victims” talk here, too. Foreign bad, Chinese good is essential artwork for anything you wish to sell in a Chinese debate. But that doesn’t mean that a protectionist position in itself couldn’t make any sense.
» From another Discussion with King Tubby, January 28, 2011