So in the past I've oft voiced my opinion on the faults and positive aspects of the economies here in Nepal and back Home in America. Today I'm going to discuss what I think might be one of the worlds biggest economic bubbles, and that is Nepal's neighbor to the north- China's growing economy. Now there is no doubt that there has been some real progress in China, and real wealth has also actually increased, but there is another side of this growth that people aren't paying attention to, and that is the side that central economic planning plays and how it distorts the Chinese market.
Now there is a lot to admire about the Chinese, they are shrewed and in many ways better capitalists than Americans are these days. They have acquired access to near monopolies on rare earth metals, and they have manipulated their currency in a way to send trillions of dollars to their country via exports. They have hired out Western firms to learn how to do high end engineering projects and instead of becoming dependent on them they have trained their own staff in their techniques and then pursued those same projects with only domestic talent going forward. People in the West, and elsewhere, are rightly impressed, but this admiration often goes too far and with little understanding of what is driving the Chinese economy.
Lets look back at the last century for a minute. After world war two the world was essentially divided into three camps; American and Western market system republican governments, Russian and communist run governments and the third world. Many in the west were petrified of the communists, because in short they were too impressed with them. We thought it might, you know, work. We were so afraid that their models might work and spread that we fought wars in places like Vietnam, Cambodia, Cuba, and a big cold war through various hot proxies with Russia. Most of the fretting was for not. In fact by becoming involved in those wars we made matters more often worse instead of better. Communism collapsed all over the world not because Uncle Sam pointed a gun barrel at these people and told them they had better learn to love market economies but because communism as an economic model is unsustainable, is constantly unable to find price information and thus production is never matching what is required. All these years later places like Vietnam and Cambodia have been won over not by the bombs that were dropped but instead by experimenting with the reality of what does and doesn't work.
Another one of those markets that has seemingly come around a bit is China. There is no doubt Mao would be spinning in his grave to see what China has become. That said, China is far from a free market utopia. Like the most of the West the money supply in China is still centrally planned via a central bank. China uses artificial pegs to keep its currency weak against other foreign currencies in order to push exports. The other side of this equation that is not often discussed is that the Chinese government also controls much of the demand side of spending in its own country, i.e. most of the new money that gets spent in China gets bid out to government or quasi government companies in China. So when the Chinese need to inflate growth numbers it's easy to create a large project, as well as create the money to fund it.The problem with this model is that it leads to horrible malinvestment of resources and encourages staggering corruption.
China has a huge population, and there is this idea that to create an economy that can support itself and not be so reliant on exports China needs to create demand in their own country by creating a wealthier middle class. To facilitate this China has built entire cities where there is no population, created huge housing complexes with no occupants...yet. The hope is that in the creation they will create demand, and once people go from simple village living to more urban settings all of a sudden they will need knick-nacks to decorate their walls and big screen TVs for their living rooms. But supply has vastly out done demand, in proportions that make the US housing market bubble look like chewing gum next to a hot air balloon.
While the US and other nations can manipulate our own currency for effect and cause some suffering for its population, the Chinese have the "advantage" of being able to give that money a place to be spent. It usually gets spent by people that are well connected, in places that benefit those people and not necessarily China as a whole. The result is the creation of entire cities without people and when production gets this far ahead of demand, it means that prices, and value will have to take a serious dive. More importantly with gluts so large China's building companies will have no reason to build for years, as it will take a large period of time for what has already been created to be digested into the system, let alone create any new demand for more housing and infrastructure. As time goes by with these houses and buildings having no occupants, basic upkeep doesn't get done either, further eroding the real value of anything that had been produced.
While no doubt China will be a major player in the world's future, its economy is not the unstoppable force that many make it out to be. Further when a crash does finally catch up with China the ethnic and local tensions in the many non Han areas may erupt beyond China's authoritarian hand, threatening to rip the country apart. Much that is currently considered China, is not a homogeneous society and many resent the power exerted by Beijing- not just Tibet but the far western provinces and even regions like Szechwan. The fret coming out of places like the United States reminds me in many ways of how we viewed the Japanese back in the recession of the early 90's. Remember, Japan was going to be the largest market force in the world?
Those in the west that see China as a threat, need to remember that the Chinese system will most likely falter under its own manipulation. There is no shortcut to greatness, and while economic manipulation may have some short term gains, it also creates unsustainable bubbles that cause immense suffering when they begin to deflate. There will come a time in the not so distant future when I believe China will be more in need of our sympathy than our envy or fear.