There is a coming reckoning in China, and at this point we should all be able to see it coming. The current Chinese asset bubble, inflated through monetary stimulus much as the global loose money policies in the last decade inflated the U.S. housing bubble and other asset bubbles, is going to crash. The question for most at this point is when that will be. The question after the Chinese economy slows down will be: what happened to the free market miracle in China?
To pre-empt that idea, Scott Sumner lets loose some frustration at the misrepresentation of claiming China is some how a free market miracle story:
It would really help if people stopped calling one of the poorest economies in East Asia a “miracle.” The problem seems to be that people insist on thinking in binary terms; free market or communist, successful or unsuccessful. Here’s what really going on.
1. In 1979 China had an incredibly inefficient communist system and was poorer than India, poorer than sub-Saharan Africa. It was an almost completely statist economy with incomes below 10% of US levels.
2. China has moved to a mixed economy. These reforms might allow China to eventually reach something like 60% of America’s per capita GDP (which isn’t very impressive.) During the transition from Maoism to this mixed economy, China can expect to grow really fast. There is no miracle here; all the other capitalist East Asian economies also grew fast during earlier decades. Chinese incomes will plateau well below US levels without further market reforms. If they take further market reforms (and it seems almost certain they will) then they may plateau at 80% of US incomes, like some other developed economies. If they go toward a low tax, relatively free market model (such as Hong Kong), they might even surpass the US some day.
This is a sharp and important point. But even further, it is a bit of a misnomer to claim that the loose monetary inflated asset bubble is the result of capitalist free market ideology. Using monetary policy to distort your nations economy isn’t a sustainable free market practice at all. And when the coming adjustment in the Chinese economy comes, it won’t be the fault of capitalism. Is it such a surprise that distoring your economy to unnaturally boost economic growth will eventually result in problems?
This is not to say China is a holistically statist economy. To the contrary, they are truly a mixed economy and that has been the source of their rapid turn from epically poor to leading emerging market country. And this rapid growth has become so entwined with the rest of the world that the coming asset bubble collapse is likely to reverberate around the world, possibly in some very serious ways. And that is not good news for the fledgling eurozone.
P.S.: In a related point, Sumner points to a great Tyler Cowen post on the decay of Chinese state owned enterprises overtime, and draws a comparison to NASA.