In October 2011 Mises Institute President Doug French wrote an article, The China Model is Unsustainable. He asked whether China was the capitalist powerhouse “everyone thinks they are.” Characterizing the Chinese financial system as shaky, and citing Fraser J.T. Howie’s Red Capitalism: The Fragile Financial Foundation of China’s Extraordinary Rise, French explained that Chinese capitalism relies on a Soviet-style financial system. It is a topsy-turvy non-market system where supply and demand are trumped by the Communist Party, where “zombie banks and crony-led corporations are left in place to squander capital.” And squander they do.
The financial losses incurred in building cities nobody needs, or fostering investments that will bring no return, must be catastrophic in the end. The one-party communist state is problematic because the mentality of those in charge is fundamentally anti-market. Therefore, the notion that China is capitalist in the sense of being a free market economy must be erroneous. And the notion that China’s economic miracle is real, must also be erroneous.
The U.S. Energy Information Administration says that China will soon become the world’s largest importer of crude oil in October. We are supposed to be impressed by this testimony to China’s rapid growth. Or is it testimony to Chinese malinvestment? It may also be a measure of America’s rising energy position. (Last year Bank of America Merrill Lynch projected that new finds of domestic oil and natural gas were fast approaching $1 billion a day in the United States.) Whatever argument one cares to make, China’s economy is not free to follow the market. It follows political directives. So we ought to ask: How real is China’s growth rate? Economists have taken issue with Chinese trade statistics, domestic growth figures, and purchasing surveys. The Hindu Business Line quotes economist Stephen Green as saying, “If there was an index for suspicion about China’s official statistics, it would be off the charts….”
Listen to: Joseph Dancy: Global Demand For Oil Is Growing Relentlessly
There is nothing new in a Communist regime falsifying statistics, government reports, or the historical record of entire eras. It is entirely consistent with communist doings to fake an entire economy. In supposing this we should not deny that hundreds of high-rises have been built, or that mountains of cheap product have been exported. But we may ask ourselves what return may be expected from these and other state-directed investments? As the Austrian economist Ludwig von Mises pointed out, “State interference in economic life … has done nothing but destroy economic life.”
On the East Asia Forum, Yao Yang of Peking University has written a piece titled “Authoritarianism not key to China’s economic success.” According to Yao it is a mistake to link China’s economic success with the country’s authoritarian political system. China’s success, says Yao, “is primarily the result of decades of market reform,” for if “government intervention were the key to economic growth, China would have succeeded 30 years ago, when the state governed all aspects of society.” But China’s economic success may be a Keynesian illusion. For when the free market is combined with authoritarian rule the tendency, says Yao, is that a small elite monopolizes the economy and hinders development. But this criticism is as far as Yao is able to go without taking a personal risk. As the minion of a state ruled by an all-powerful and corrupt Communist Party, he must assert that there are elements of democracy in China that promote government accountability, so that the country is not governed in the interest of a small elite. According to Yao, “the country’s officials are increasingly being held accountable for their actions – either through the formal channels built into the establishment or through popular views in the media and over the internet.”
None of this is likely. China is far from a free country, and its market economy is tied to Communist Party committees that secretly hold sway over the top executives of China’s largest companies. This is best shown in Richard McGregor’s The Party: The Secret World of China’s Communist Rulers. While there are efforts to stem the tide of government corruption connected to China’s economy, those efforts are dwarfed by the scale of the corruption. The Central Commission for Discipline, notes McGregor, has a staff of only 800 to oversee an enormous number of government workers who, in turn, oversee the world’s largest economy.
According to the Heritage Foundation’s 2013 Index of Economic Freedom, China’s freedom score is 5.19, ranking it at 136 in the world. This is not impressive. According to the Heritage Foundation, “China’s economy remains ‘mostly unfree.’ The legal and regulatory system is vulnerable to political influence and Communist Party directives. The party’s ultimate authority throughout the economic system undermines the rule of law and respect for contracts. Corruption is widespread, and cronyism is institutionalized and pervasive.”
The real question is not whether China will continue to grow. Economic science suggests that China’s economy will stop growing if it hasn’t stopped already. The world’s largest country, with over 1.4 billion human beings, must necessarily suffer the greatest and most devastating financial crash imaginable. On July 29 Michael Pettis wrote a piece for CNN titled Will China’s economy crash? Pettis is a professor of finance at Peking University. He says that “the China story has taken a serious turn for the worse. China, it now seems, is about to collapse, and along the way it may well bring the world economy down with it.”
For those who understand the problems of state interference in the economy, there is no mystery. There is only the tragedy of a world that will not learn. As Gustave Le Bon once wrote, “Although socialism is in contradiction to all the data of modern science it possesses an enormous force by the very fact it is tending to assume a religious form.”
And so it has, even when the state denies or attempts to hide the extent of its involvement in the economy, whether that economy is Chinese or American.
