More on China…and the “Flaw” of Capitalism

If you create a graph of the MSCI China Index the past 10 years relative to Japan’s Nikkei over two decades ago, it’s not surprising to see a close relationship. The difference this time is the Chinese government stepped in to prop up prices soon after markets collapsed, thereby prolonging the life of the domestic property bubble. If equities are a reflection of the health of corporate China, then China will need to face reality soon enough. After rebounding over 120% in early 2009 from the trough in October 2008, China share prices have gone nowhere. It is true most Chinese consumers are enjoying higher wages, but the cost of living has certainly risen. I doubt the government’s CPI comes even close to reflecting the change in household costs. What matters even more is whether Chinese companies can continue to pay the higher wages. Equity investors seem to be skeptical. It’s becoming more and more difficult for Chinese authorities to keep promoting the dream of a strong and vibrant economy. Sooner, rather than later, they will need deal with the associated economic costs of a prolonged period of strong growth such as overstretched balance sheets, inflated property prices and widespread corruption.

It makes you wonder if one reason capitalism seems to be flawed of late is because governments around the world keep on intervening with stimulus packages to prop up their economies whenever there’s a recession. They want to be seen as doing whatever they can do to revive their economies. The problem is a period of private sector “irrational exuberance” will always result in a painful recession. Whether the recovery is “V,” “L,” “U,” or “W” shaped doesn’t matter. The pain is the same. Maybe the best medicine government leaders can provide is only a combination of safety nets, “proactive” monetary easing and corporate bailout packages that uphold market principles. Instead of rushing out to unveil “exuberant” fiscal spending packages, governments should only be allowed to use policy options to support their economy in times of economic duress.

It’s human nature to get swept up in the pool of “greed and arrogance” that appears when economic times are good. The problem is that in “bad times,” it continues. Behind excessive and misguided government pump-priming are layers and layers of cronyism and political lobbying. That’s the real reason capitalism is flawed in the current day and age. We can not turn the clock back to fix past mistakes. The problem now is whether the mistakes are too big to fix going forward. With all the economic problems the world faces (China’s bubble bound economy and US-Japan-Europe fiscal quicksand), will policymakers have the patience and wisdom to set things straight. I would honestly hope so, but in the race to grow and succeed, the only real choice, a “global hard landing,” will be avoided at all costs until…

Reading List

• 5 CHARTS OF CHINA’S GROWTH CONUNDRUM - Pragmatic Capitalism

• THE CHINESE BLACK BOX & A WARNING SIGNAL? – Pragmatic Capitalism

• China Housing Boom Spreads to Smaller Cities, Posing Dilemma - Bloomberg

• China’s riot town: ‘No one else is listening’ – CNN

• China’s bubbly property markets have not burst. Yet – Economist

• China Property Developers’ Outlook Cut to ‘Negative’ by S&P – Bloomberg

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