Monday, March 14, 2011

Betting Against China - Update

But not much available to buy.

Because I think creating bogeymen undermines conservative credibility, especially when there are so many real threats, I have taken exception to Glenn Beck and others characterization of China as a huge competitive threat. In my last post, KT commented on the incredible pollution in China.
Polluting your environment is like taking on debt. You're getting a big rush of income now, but you'll have to pay it back later. In this case, you'll have to pay it back in clean up costs.
The them of taking on debt in China is discussed in today's Bookshelf column by Edward Chancellor where Red Capitalism by Carl E. Walter and Fraser J.T. Howie (what a great name) is reviewed.
In Red Capitalism, Carl Walter and Fraser Howie detail how the Chinese government reformed and modeled its financial system in the 30 years since it began its policy of engagement with the west. Instead of a stable series of policies producing steady growth, China's financial sector has boomed and gone bust with regularity in each decade. The latest decade is little different.
China's financial sleight of hand, in which savers are paid low interest rates and capital controls prevent the outflow of savings, and then this money is recycled into trophy projects is unsustainable. China's banks and Ministry of Finance have been hiding dud loans for a decade. This will not continue indefinitely. Meanwhile, consumers can't buy products because of the capital controls. A few are getting wealthy of course, but the paper wages of the masses can't buy the luxury goods they see pouring in for the chosen few. How long will this last? People are ingenious at evading controls, even in former communist dictatorships. (Take note, Thomas Friedman, you miserable hack.) Think of the capital controls as a dam that can only withstand so much pressure. The more wages rise without corresponding goods for purchase nor a chance for that money to grow to buy goods in the future, the more pressure will build. This isn't really capitalism, it is confiscatory, crony capitalism and it never works in the long run.

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