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Something serious happening to the Chinese economy?

Posted By Jo Nova On July 16, 2016 @ 2:40 pm In Economics,Free markets | Comments Disabled

Something suddenly changed in December last year in the world’s second largest economy (some say it’s the first). For the last few years private investors in China have been running away at a faster and faster pace. Apparently, no one wants to invest in the Chinese economy except the government, and six months ago, the State launched a rocket.

The massive growth of China is partly thanks to rampant money-printing. Say hello to Malinvestment. The Chinese economy is sick. It’s distraction time. Anyone want to stoke a war?

China, private versus government (State) investment, 2016, Graph.

 

I saw the graph on the ABC news last night thanks to Phillip Lasker. The original graph came from Bloomberg under this unlikely headline:

 China Proves Doubters Wrong For Now as Credit Boom Stokes Growth

“Stoking Growth” is not always desirable — to go biological — cancer “stokes growth” and so does Ebola.

“The amount of cash Beijing is shoveling into the economy is stunning,” said Andrew Collier, an independent analyst in Hong Kong and former president of Bank of China International USA. “Given high fixed-asset investment among state-owned enterprises, it’s likely most of it is being consumed by the inefficient state sector. This is more bad news for structural reform. “

It’s not just bad news for “structural reform”. It’s also bad news for holders of Chinese money. Supertanker loads of money have been manufactured in China in the last few years.  In essence money is a promise, but too many promises have been made. Worthless bits of paper only have worth as long as they carry an IOU promise that the owner will one day be able to swap them for something they want. But create too many new promises and sooner or later it destroys the value of those created earlier. There is only so much of people’s labor that you can buy with new “free” money. As the promise-bubble pops, inflation arrives and people start to realize that they’ve done years of work for almost nothing. Not surprisingly, smart Chinese money is pretty keen to escape China while it can still buy nice things like real estate in Sydney.

In the end, broken promises rather suck motivation, so China’s economy is struggling uphill under the weight of the debt. Even a command economy run by a communist party cannot make people perform at their best, as the Soviets found. The alternative of a capitalist economy bloomed in China, but the Chinese economy is becoming more soviet by the day.

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