Thomas Friedman of the New York Times has famously heaped praise on the autocratic leaders of China as that "reasonably enlightened group of people" who have sagely dispensed with the messiness of democracy so that they "can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century."
The leaders seemed to be just so brilliant even as recently as a few months ago, as China's economy just kept growing at record pace quarter after quarter (at least, if you believed the official numbers). Oh, a few naysayers had started to quibble around the edges, as by impolitely asking how the growing swarm of ghost cities was getting counted in GDP. But that was then. Now suddenly there is no denying that China has hit some major bumps in the road. Its stock markets are down around 40% since June. There are obvious gluts of steel, building materials, and many other products coming from China's factories.
The real test of a government's economic policy comes in how it acts during market downturns and corrections. So now we're getting a chance to look at how the supposedly enlightened Chinese leaders perform under these conditions. Although it's still early, they've already done plenty to make it possible to render a verdict. And the verdict is, they don't have a clue what they are doing and are committing one huge blunder after another. The errors are all of essentially the same sort, exactly the sort you would expect from a group of self-absorbed autocrats like these, namely that everything is geared to preserving and enhancing the power and image of those in power no matter what the cost in damage to the economy and impoverishment of the people. And all, of course, without any of the (however minimal) accountability that might come from a little democracy.
Several weeks ago (July 18), in the first part of this new series, I took note of the first inklings of the gross incompetence, when it came to light that the Chinese government had committed the equivalent of some hundreds of billions of dollars to propping up the stock market in an effort to stem the rout. My comment at the time:
So, to protect their political image and narrative, the great leaders of China are in the process of transferring some 5% of GDP from their taxpayers and citizens into the pockets of stock market speculators, in a completely futile effort to prop up stock prices that with a high likelihood are destined to fall no matter what.
So, how has it gone? The Financial Times (hey, I'm in London!) this morning reports the latest, in its lead article, "China ditches mass share buys after $200bn two-month spree." According to the FT, it seems that after pouring a couple of hundred billion into stock purchases and seeing the markets barely stabilize, the government then eased off on the purchases early last week, only to see the markets immediately resume their rout. Then the government got back into purchases on Thursday and Friday. Why?
Traders and officials said the latest intervention was aimed at providing a "positive market environment" ahead of a military parade on Thursday to celebrate the 70th anniversary of the "victory of the Chinese people's war of resistance against Japanese aggression."
Two hundred billion from the taxpayers straight to the hands of savvy stock speculators and the only positive they were even trying to achieve was some image-burnishment for the leaders. I mean, at least when the U.S. Congress and President decide to essentially waste $1 trillion on a "stimulus," we get a few new sidewalks and repaved roads to show for it.
And as more news comes out about Chinese economic policy in a downturn, the stock market purchases are only the beginning of the incompetence. From the New York Times of August 29, we have "Zombie Factories Stalk the Sputtering Chinese Economy." Excerpt:
Like many industrial cities across China, Changzhi, which expanded aggressively during the country's long investment boom, has too many factories and too little demand. That excess capacity, many economists indicate, will have to be eliminated for the Chinese economy to return to healthy growth. But rather than shut down, Lucheng Zhuoyue and other Changzhi companies are limping along in a kind of march of the undead. . . . [T]he government and its state-owned banks sometimes keep money-losing businesses on life support by rolling over or restructuring loans, providing fresh credit, or offering other aid.
And there's more. The government geniuses have also decided that they know the lines of business that the economy should get into now, and will direct investment to their cronies to get it done. From today's Wall Street Journal Europe, "China's Xi Faces Mounting Crises":
Over the past week, state media have touted a theory attributed to Mr. Xi that calls for an accelerated shift to higher-level manufacturing and away from steel and other industries with excess capacity.
Something tells me that if the very-enlightened Mr. Xi had been running the U.S. economy in the 80s and 90s, he would not have come up with the internet, the smart phone, or the search engine. He's doing exactly what will inevitably condemn his economy to long-term second-class status. I guess we should thank him. Up until now, there had been reason to think that China could be challenging the U.S. for world leadership at some point in the near future.
Back in Manhattan (where I will be returning shortly) it's not hard to see that the keys to today's success have been (1) letting the businesses of the past die, and (2) allowing private individuals to create new businesses that no government bureaucrat could ever have come up with. We had the greatest and most active waterfront for shipping in the world; now it's entirely closed down. We had hundreds of thousands of manufacturing jobs, now almost all gone. We had the premier clothing manufacturing center of the world, now shrunken to near invisibility. We had the corporate headquarters of a big plurality of the Fortune 500; most of them moved away. (Who would possibly have thought that corporate headquarters would prove to be a low-value use?) And most of the jobs worth having today are things nobody had even heard of thirty years ago. Hedge funds? Apps? Search engines? Digital advertising? We would have had no place to put any of these things if we had used government power to preserve the low-value businesses of the past.
Good luck, Mr. Xi, if you think you and your little group of cronies are such geniuses that you can come up with the next thousand or so currently-unknown high-value businesses to put your billion plus people to productive work.