China's Slowing Economy and Communist Run Society is on the Descent

The world today, both politically and economically, is in serious trouble in more ways than one.

Today, let's look at the situation in China in particular. First, it was Japan that was destined to rule the world economically and then it WAS China. The past tense of what never happened very much applies to China's future now, just as it did to Japan's in the 1990s.

Yes, China "was" the world's latest can't miss "miracle" economy that looks like it "missed." Let's see why that's the case.

China's best days may very well be behind it for lots of reasons, not the least of which is demographic. With their one child policy having been in place for several decades now, China is getting old before its citizens managed to get rich. That's a huge problem going forward.

But there's an even bigger problem facing China, and that's the lack of a competitive multi-party political system and a market based economy which encourages entrepreneurial risk taking by individuals.

China's Reform Moment is subtitled 'The Communist Party can't afford to cling to a broken status quo:'

"All of China's economy is nearing a growth and reform watershed. The question is whether Beijing's new leaders are willing to give up some political control to maintain the growth they need to retain political legitimacy.

The problem is that China's old economic model is running out of steam. Growth slowed to 7.7% last year, a 13-year low, and then to 7.3% for the first three months of this year. . . . Indicators such as slack domestic shipping and electricity consumption point to greater weakness than the official GDP data suggest.

This is happening because Beijing's old methods of supporting the economy are breaking down. The prime issue—and one implicated in that financial crunch—is credit expansion. Beijing juiced the economy for several years after the global financial crisis by opening a gusher of new credit.

Fitch Ratings estimates that total social financing, which measures both on- and off-balance-sheet debts, now stands at 198% of GDP, up from 125% before that credit stimulus. But the returns on that additional credit have fallen precipitously. Comparing the rapid rate of credit creation to the slowing rate of GDP growth, it appears each $1 of new credit now yields only 17 U.S. cents in GDP growth, according to Bloomberg, compared to 83 cents of growth per credit dollar in 2007.

In other respects, too, the current system is no longer capable of delivering previous levels of growth. Local governments are running out of worthwhile public-works projects to build. The large, state-owned firms Beijing fostered for the sake of guaranteeing employment are struggling to deliver the productivity gains China needs now.

As the benefits of the old system dwindle, the costs become more onerous. . . .

Although leaders in Beijing often say they will tolerate a slower growth rate if that growth is "better"—meaning tilted toward domestic consumption instead of investment and exports—this doesn't appear to be happening. Household consumption as a percentage of GDP is declining, one sign that even as growth slows fewer of the benefits of development are being distributed to Chinese citizens.

The way out is for Beijing to undertake a new round of bold, market-oriented reforms. Privatization of state enterprises should be on the agenda, as well as ending the monopolies many of them enjoy. . . . There are plenty of other possibilities, as Beijing's leaders well know.

The obstacle will be politics. A freer economy by definition requires less political control, which means less control over the levers of economic power by the Communist Party. Market-driven interest rates mean less politically directed credit. Fewer state enterprises mean fewer patronage jobs for local commissars to pass out to comrades, friends and family. A freer economy also means tolerating private wealth not controlled by the political class.

Perhaps this explains the reluctance already in evidence in Beijing. The National Development and Reform Commission recently released a blueprint for reforms. It included some useful elements, such as a proposal to reduce the number of investments requiring Beijing's approval. But it ignored privatization and state monopolies. . . .

Yet the political risks of inaction are greater than those of reform. China will need rapid growth for many years to absorb its tens of millions of still unproductive rural workers, to finance the retirement of an aging population, and above all to satisfy the ambitions of its urban middle class.

New President Xi Jinping speaks often of an amorphous "China dream," but the Chinese people already have dreams of their own. An unelected ruling class that can't deliver jobs and rising incomes will eventually find itself dealing with unrest far broader than the chatter on microblogs. As Deng Xiaoping understood at an earlier watershed moment, the only real choice is reform."

Summing Up

The more government control in any society, the less freedom for that society's citizens.

The less freedom for citizens, the less freedom for private sector investment and entrepreneurial risk taking.

The less private sector investment, the slower the rate of economic growth, the higher the rate of unemployment and the more government "investment."

The more government "investment" in a slow growth economy, the more government borrowings that occur.

And that means trouble for the future. 

Heavy government involvement, a slowing economy, a growing government debt burden and a rapidly aging population all add up to difficult times ahead for Chinese leaders and the Communist Party.

Someday it will all blow up.  The only question is when.

That's my take.

Thanks. Bob.