Ten Reasons China Failed: From Basic Gangsterism to Parasitic Engagements

What happens when liquidity is allocated by political muscle, massive bribery and kickbacks, rather than economics

FUYANG, CHINA - JUNE 26:(CHINA OUT) An investor observes stock market at a stock exchange hall on June 26, 2015 in Fuyang, Anhui province of China. Chinese stocks dropped sharply on Friday. The benchmark Shanghai Composite Index lost 334.91 points, or 7.40 percent, to close at 4192.87 points. The Shenzhen Component Index shed 1293.66 points, or 8.24 percent, to 14398.78 points. (Photo by ChinaFotoPress)***_***

An investor observes stock market at a stock exchange hall on June 26, 2015 in Fuyang, Anhui province of China. (Photo: ChinaFotoPress)

Not withstanding China’s epochal accomplishment in lifting over 300 million people out of poverty while building a world-leading economy, their future appears murky. What went wrong with China’s economy? Inquiring minds want to know. Here is a top ten guide for the perplexed.

  1. Central Planning: Central planning, central planning. The history of the abject failure the Soviet Union’s five-year plans should tell you everything. Command and control economies that report to one man (in a nation of 1.3 billion people) are doomed from the start. Top down economic decisions often look bold and start out highly stimulative, but then degenerate into inefficiency, waste, politics and fraud.
  1. Political Corruption: As the command and control economy generates liquidity, the demand and direction of the distributed capital becomes a political tussle. Decisions on how much steel, cement, coal, glass solar panels, high speed trains and shopping malls—in short everything—are not done in China as a cost benefit analysis by risk capital, a job difficult enough in itself. (Witness the capitalist economies’ booms and busts.) In China, this liquidity was allocated by political muscle, massive bribery and kickbacks, rather than economic justifications.
  1. Basic Gangsterism: Counterfeiting, knockoffs, copyright infringement, theft of intellectual property – these were a part of the booster rockets of China’s economic rise. It was all supposed to go away after China joined the WTO in 2001. It didn’t. It just became more institutionalized. Foreign companies needed Chinese “partners” in auto production, healthcare and technology. These “partners” crippled the potential productivity of the investments and led to frequent disputes and even more corruption… as in the GlaxoSmithKline scandals.
  1. Parasitic Global Engagements: When China enters a market, the intention is to destroy indigenous competition. From American to Nigerian to Turkish textile jobs—all down 90 percent—local earning power is destroyed. Everywhere and in every area—again it’s steel, aluminum, solar panels, toys and electronics—China hollows out local production. This unbalanced mercantilism, and its resultant loss of customer purchasing power, is what lies behind disappearing Chinese exports. Witness Walmart closing 269 stores. The parasite has weakened its host. All the cash spent on Waldorf Astorias and Manchester soccer teams will not make up for the massive purchasing power drain… inflicted on a global scale.
  1. FOREX Constipation: Parasitic global trade imbalances and capital controls created a mountain of cash that was held by the Chinese Central Bank. Like the European mountain of butter or the lake of wine, China accumulated trillions of excess foreign cash. This capital was removed from the more productive capitalist countries, who became debtors to China. In return, China recycled this excess cash into unproductive financial instruments like US Treasury Bills and Euro Bonds.
  1. Binge Investing: Having embraced items 1-5 above, China became a binge investor in absurd countries and silly projects. As if to poke the U.S (its largest single-country trading partner) in the eye, China sidled up to Venezuela of all places. Instead of buying oil on the open market, they went deep into infrastructure projects, loans and even endorsed the psychotic foreign policy rantings of Hugo Chavez. No rational government, unless intoxicated by its economic prowess, would do that. The China Syndrome was also applied to Sudan, Zambia, Angola and Nigeria. Look at the bankrupt failed resort in the Bahamas, Baha Mar, if you want to see what “binge capital” looks like.
  1. Reading Marx backwards: When Deng Xiaoping, China’s “paramount leader” opened the economy to the world in the late 1970’s he could not have imagined it was to create a Chinese class of one percenters. Opening up China was meant to counterbalance Russia and Japan, to give China a chance to have a voice on the world stage. The nation was just recovering from the political and economic quagmire of the Cultural Revolution… Now, these one percenters control over sixty percent of Chinese assets. They buy Bordeaux Chateaus, Hermes handbags and Impressionist paintings. In the process, they’ve created instability. An attempt to redress this is motivating the anti-corruption campaign of Xi. However, it is more like a power realignment, Al Capone style, than real political reform. Even the disappearances are 1920’s Chicago in nature.
  1. “To get rich is glorious” is also attributed to Deng Xiaoping. What he did not say was how. Thus China has been engaged in a forty-year orgy of land theft, labor theft, asset theft and every imaginable kind of shady business practice. From contaminated milk, pet food, and cooking oil, to criminally inadequate cement, adulterated drugs and corrupt zoning decisions, the Chinese have elevated greed to a new level. No one believes any of the listed ingredients in Chinese foodstuffs or medicine. Everyone has to pay off someone to receive the basics of medical treatment, education, or influence regulation.
  1. Reckless Gamblers: How did China’s debt-to-GDP ratio go to 240% from 160% in nine years? How are nonperforming bank loans (if honestly tallied) hovering around 20 percent? There is a recklessness in early stage wealth. It happened in England in the 18th century as exemplified by the South Sea’s fraud and a hundred frauds like it. The recent Sino-Soviet forest stock fraud is an exact mirror. Rapid wealth produces intoxicated investors prone to scams. Remember how the Earl of Grantham in Downton Abby invested a fortune in a fraudulent American railroad. I wonder if there is a Chinese translation of Trollope’s The Way We Live Now?
  1. Lack of Freedom: This is what lies at the heart of points 1-9. There are no institutions like free press, academia, or opposing political parties that can stop the train of failure once it has left the station. Even six-second videos are blocked and censored. This means that all bad decisions are made in a vacuum. Paradoxically, without the rule of law, paralysis has recently set in because one mistake, as judged by someone above you, can result in jail, torture and death. The search for corruption in an economy based on corruption has to be political… otherwise everyone would be in guilty. Nothing can ever be fixed in China until there is freedom. The freedom to publish dissenting opinions, differing analysis and to expose fraud and corruption.

The world has embraced China. Let us hope it is not strangled in the process.