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The Faux Threat of the Chinese Economy

China has been in the American political discourse quite a bit. Most recently, President Trump spent last year’s campaign saying “(China’s) killing us” economically. As has been the argument among many for awhile, China is outperforming the US with a faster growing economy and a high trade deficit with the US. Indeed, the prediction of the day when China beats the US as THE world superpower has been a belief for quite some time now. Of course, like with many things, the common wisdom that China is on the rise is wrong as mismanagement and corruption have actually started slowing down the Chinese economy which will eventually snuff its predicted superpower status before it ever happens.

One thing that does not bode well for China is the fact that they are actively working to hide its economic problems. Last year, it started issuing threats to economists to fix their analyses so that the government could get preferable results to the public. This is unsurprising as China has had a horrendous history of cracking down on dissent. However, the fact that they’re actively working to to rig the results of economic analysis to convince the public that things are looking good is highly suspect. It makes one wonder if they are worried about something.

Of course, we do not have to worry so much as know without a doubt that something is going wrong. In 2016, China saw its imports drop by roughly 25% while its exports dropped approximately 14%. At the moment, they are greatly assuming far more debt than their country is growing to the point that their debt is outpacing their economic growth, which led to the deputy director of the IMF's Asia-Pacific department said that it is “unsustainable.” Unsurprisingly, wealthy Chinese citizens are trying to get their money out of China as fast as possible.

The primary reason the Chinese economy is starting to slow down is largely because of central planning which leads to mismanagement. Over the past several years, China dumped large sums of cash into infrastructure projects and urbanizing cities (they actually put RMB 200 billion or roughly $30 billion into a replica of Manhattan)...where no one is living.

Few to no Chinese citizens are moving into these cities ranging from the incredibly high cost to move into them or hesitancy to leave the rural districts. This shows that demand for these cities is nonexistent and yet the Chinese government is building them anyway. This has overall led to a massive housing bubble due to overinvestment created by the debt the Chinese government has been incurring.

Of course, that is not even directly getting into other central planning problems brought about by the Chinese government (like how their attempts to reduce smog have ironically increased it) but rapid credit expansion and regulatory leverage for infrastructure projects have horribly put the Chinese economy on shaky footing. Unfortunately, it seems unlikely that China has learned anything from this as its government is supposedly and secretly intervening to prop up its stock market.

So the big question is this: if the Chinese government’s spending is so catastrophic to the Chinese economy and so inefficient to improve its overall growth, why is it pursuing such policies? Unfortunately, the answer is very simple: it benefits the ruling elites. There is a very strong tie between the Chinese government and Chinese business. As a result, various Chinese officials benefit from the expanded loans and special interest projects that the country is pursuing. So the result is that the government is actually being incentivized to pursue these policies.

The links between the Chinese government and its business sector are no secret. The banks in China are under the ruling Communist Party’s control, the biggest firms outside of banking are also under the party’s control, and investments by foreign business are heavily regulated to keep foreign competition out of the equation. As was noted by Minxin Pei in his book “China's Crony Capitalism: The Dynamics of Regime Decay,” “By forming dense networks of connections (guanxi) with private businessmen, officials can generate lucrative profits by, as Xi Jinping, the general secretary of the Chinese Communist Party, points out, turning the public authority entrusted to them into instruments to seek private gains.

In essence, Chinese politicians are allocating funds towards preferred businesses which has led to high amounts of bribery and collusion to make sure preferred regulations and projects go to well-connected businesses. The result is the increased debt for infrastructure spending and a regulatory nightmare that is benefiting those with power.

In the end, central planning never works. Be it Venezuela, Cuba, the Soviet Union, or now China, the amount of mismanagement always leads to an economic catastrophe. In large parts, it both fuels and is fueled by corruption that only expands the problem and makes mismanagement worse.

Bribery, economic hardship, and increased wealth inequality are the inevitable payoff of that as a country starts to become rigged for the well connected. Unfortunately, even the United States is not immune to that as it was an element of the 2008 financial crisis.

What this means is that the constant warnings of China beating the United States economically in the next few decades seem unfounded. The amount of improper central planning and the profiting off of it will lead a country to collapse. What this should serve as is a reminder to the individual that a free market is traditionally the best and most efficient market. It prevents improper central planning by governments lacking information on economic areas that it chooses to intervene and prevents well connected special interests from using that to their advantage and instead empowers the individual to create their own businesses and address the needs of the consumer. For this reason, freedom and capitalism will always be the best alternative to state-run central planning.

(A special thank you is given to the blog “Against Crony Capitalism.” Their vast research in economic affairs was both the inspiration for and helped source this post.)