China is Doomed, Unless.....

Suddenly the media is loaded with commentary regarding an end to China’s miracle if she does not discard the evils of central planning.

These authors are correct.

We stated that there would be no so-called “hard landing” in China (with growth at 9%, we suppose a hard landing there would be a welcome event anywhere else). In fact, we have highlighted the Chinese consumer as one locomotive to a world recovery.

The reason for that optimism is that we know that central planning can appear to work, up front. For example, it is well known that authorities deliberately deflated the property bubble by forcing lenders to cut back loans to developers. And we saw that the central bank acted reasonably with only modest lifts to combat inflation.

Yet however reassuring these things may be, the time frame is limited, short to intermediate term, within our normal window; that to which most desk trading decisions are confined.

Centrally planned economies sometimes thrive early on because central planners pump resources into sectors where market demand is nonexistent (in China, this may mean targeting the interior provinces next).  As a result, these economies avoid recessions for a bit; yet it is a phony fix. Eventually, as the Soviets learned, the mis-allocation of capital results in an ultimate tanking of the economy. And there will always and everywhere be mis-allocation of capital in a planned economy. Real prosperity is spawned only by economic and civil liberty; that is, the rule of law.

Thus, if we are to venture past our normal strategic time frame we would say that China is doomed if she continues to favor bureaucratic planning decisions over the unseen hand.  It won’t work. China’s absurd home purchase restrictions - controlling the number of homes each family can buy, whether they can afford it or not - is a perfect case at point.

In conclusion, we will look for near-to-intermediate term resilience from this credit but her life span is limited and her economy will implode unless adoption of free-market principles become not partial and cloaked by party jargon, but wholesale and transparent. If it is political change which precedes economic change, we may be hopeful. But it may take a new generation for this to happen, and it may be too late.


Robert Craven