Is the Chinese growth miracle built upon the same sand base that characterized Western Democracies’ growth for the past 30 years? The answer, according to Red Capitalism by Carl E. Walter and Fraser J.T. Howie appears to be YES.
In a review of the book, Edward Chancellor states:
According to Fraser Howie and Carl Walter in “Red Capitalism,” an unsettling portrait of a fragile economic behemoth, the Communist Party “treats its banks as basic utilities that provide unlimited capital to the cherished state-owned enterprises.” The result is a banking system that is allowed to carry huge amounts of nonperforming loans and to delay the day of reckoning.
In other words, China’s banking system may be worse than our own (which is insolvent and held up for the moment by lax regulators and Federal Reserve bailouts).
What is surprising is that China could ruin its banking system so quickly. It was never a model of transparency or soundness and probably carried over many problems from Communist days. The Chinese government runs their banking system as it still runs much of the economy via command and control in lieu of markets. This central planning ensure the mis-allocation of resources and investment, probably on a scale not even achieved in the former Soviet Union.
Numerous articles and videos have appeared showing the most tangible of the distortions — “ghost cities.” A ghost city is virtually unoccupied. It is a planned city built by the government for millions of inhabitants, with virtually no one moving in. Apparently, the magic of “Build it and they will come” exhibited in the movie “Field of Dreams” does not translate well to centrally planned economies.
Distortions in capitalist economies are prevalent, especially as a result of government interventions. Yet in what is primarily a capitalist economy, individual firms and economic actors provide a check on government’s ability to wreck an economy. That is not the case in a centrally planned economy where everyone must follow the dictates of the plan. In China, the banks follow are an integral part of the direction of the economy:
Since 2008 China’s growth has been driven by rising fixed-asset investment, sponsored by the state and funded by banks. A slew of trophy projects, including the world’s largest high-speed rail network and dozens of new airports, threaten yet another mountain of nonperforming loans.
Thus far, weaknesses in the banking system have been hidden by according to Chancellor:
In China, the practice of hiding bad loans has become endemic, a practice that has only been possible because capital controls prevent depositors from moving their money off-shore.
The old Chinese wish of “may you live in interesting times” appears to apply today to China as well as many other countries around the world.
