Mick Hartley

Niall Ferguson sees some problems ahead in the supposedly inexorable growth of China’s economy (via Peaktalk):

The 60 billion renminbi question, of course, is how long the heirs of Mao can get away with running the ultimate contradiction in terms – “the Socialist Market Economy”. Can you really present people, as consumers, with the seemingly boundless choice of the free market without offering them, as citizens, some political choice as well? Put differently, won’t the social strains arising from this second (and real) Great Leap Forward inevitably stimulate popular demands for democracy?

My hunch is that China’s economic and political fate will be decided by two key institutions. Both are networks. The first is the country’s financial system – the credit network that links the country’s vast private savings to its equally vast investment boom. The second is the global information network known as the internet.

Let’s take the credit network first. This is the shadow side of the Chinese economic miracle. Sure, the People’s Republic has acquired a forest of high rises, endless miles of new highways and umpteen industrial estates the size of Wales. But its banks, stock market and other financial institutions are a joke. The banks are relics of the old planned economy, owed unquantifiably large bad debts by the defunct state enterprises of Mao’s time. The relatively new stock market, meanwhile, is tiny in relation to the scale of the manufacturing sector. The result is that the allocation of funds for investment and credit is not done on the basis of meaningful competition and relevant information, but through personal connections that maximise returns to a powerful few, rather than general economic efficiency.

Will all the countless new tower blocks in Shanghai’s Pudong district be making money five years from now? I rather doubt it. What about the bizarre office building I saw in Shenyang that is actually the shape of a Chinese coin? Even less likely. Could the real estate bubble that currently dominates conversation in Shanghai and Beijing go pop? You bet. And what would the effects of such a property crash be on the economy as a whole? No one has the foggiest idea.

It may be that the familiar laws of economic development have been abolished by the Chinese Communist Party. It may be that China will be able to sustain this runaway growth without ever suffering a financial crisis of the sort that has periodically interrupted the miracles in other Asian economies. But I am doubtful. […]

I suppose I came to China prepared for the old Communist culture of evasiveness and stonewalling. I encountered the very opposite. People are keen to talk. They are not afraid the way people were in the pre-Gorbachev Soviet Union. If they are not pressing harder for political change, it is simply because they are too busy trying to make money. But if the money were to dry up – if the dodgy financial system were to crash before the worst of it has been flogged to gullible Western banks…

If such an economic setback were to occur, people’s tolerance of the corruption that is inherent in the “Planned Market Economy” might suddenly diminish. And with the internet and the English language spreading so fast, there are ways to express disenchantment beyond the wildest dreams of the Tiananmen Square generation.

Watch this vast and vital space.