In today’s Wall Street Journal, Irwin Stelzer wrote about how China might have over-reached itself. His views (like ours) are that a sustainable economy can not possibly be efficient with so much government intervention… here is why:
In order to pop a property bubble and damp inflation, the chinese government has tightened credit, driving property prices down by something like 20%-30%. Families that bought condo units before the credit crunch have rioted as discounts offered to new buyers push down prices, wiping out earlier buyers’ equity. And owners of small businesses are finding it necessary to turn to what is essentially a black market in finance as loans available from banks decline and the growth of the money supply slows.
Such credit as is available is gobbled up by state-run enterprises. Ian Bremmer and Nouriel Roubini, respectively president of the Eurasia Group and a professor at New York University, pointed out in The Wall Street Journal last week that 39 of the 42 Chinese companies listed among the Fortune 500 are state-owned, and three-quarters of China’s 100 largest publicly traded companies are state-controlled. This distorts the flow of capital and bank credit, and allows inefficient enterprises to load banks with their dicey IOUs. Meanwhile, local governments, overburdened with infrastructure projects, are raising taxes at three times the rate of increase in gross domestic product, just as exports to Europe are hit by the euro-zone crisis.
None of this is to say that China is on the verge of precipitous decline. But it does seem that its days of what President Obama called “gaming the system” may be coming to an end.
We could not agree more.