Scurrying Over the Edge of a Cliff

Since December, China's Shenzhen Composite Index has soared more than 57% amid frenzied buying by investors blithely ignoring government attempts to rein in liquidity and clamp down on wild speculation.

Yet if you compare the graph of the Chinese market over the past year to that of the Nasdaq Composite Index prior to its March 2000 peak, it paints a decidedly less sanguine picture: that of lemmings poised to scurry madly over the edge of a cliff.

 

Put that together with some eye-opening commentary from blogger Charles Hugh Smith, in a post he wrote today entitled "China's House of Cards,"  and my guess is you'll soon be hearing just one thing about the near-term fortunes of nearly everybody's top choice for future economic superpower: "Watch out below."

Take a look at the systemic problems facing China's leadership and tell me the "house of cards" metaphor isn't apt.

There are so many ironies in the current frenzy to "outgrow our problems" that it's difficult to know where to begin. First off, let me say I am not a China basher. We have many, many Chinese friends and would like to see China prosper in a sustainable fashion which benefited all of her 1.2 billion people. But that's not what's happening, nor shaping up to happen.

Instead, the list of extremely-difficult-to-solve problems just keeps growing. Just touching on the fundamentals:

Marxist theory is built on the central contradictions of Capitalism: that monopoly capital creates business cycle extremes which will threaten the entire system, and that even as capital eliminates competitors, it keeps labor costs low by forcing labor to compete against itself.

Despite labor and financial regulations which have taken the edge off the worst of capitalism's excesses (at least until recently), much of what Marx identified remains largely correct: Capital will seek to eliminate competition to gain pricing power via monopolies or trusts, and labor remains in competition  with lower-cost providers of labor unless protected by a government-sanctioned labor version of monopoly, i.e. unions.

But the Chinese Communist Party has its own key contradictions. In a one-party state, oversight is inherently weak, for those in power can always squelch any oversight which threatens to limit their benefits or prerogatives. Without oversight and other balancing centers of power, then corruption, mismanagement and mis-allocation of capital are permanent features of any one-party society and economy.

Thus we have the four central banks of China hiding hundreds of billions in bad debt, loans which were issued to government-owned businesses to keep them afloat despite the corruption and bad management which bankrupted them.

Why did the government do this? To offload the workers' pensions and medical care onto something other than the Party or central government. As the government has slowly closed the worst, most underperforming state-owned industries, the workers are being left with no safety net--no pensions or healthcare benefits.

For Chinese workers, they now have the worst of both worlds. They have the limited education and opportunities of a systemically corrupt Communist society,  and high "free-market" costs for medical care. Thus you read stories of young women offering to sell themselves on the Internet as a way to pay for their mother's operation. Scams? Maybe. But the problem is real: medical care in China is now unaffordable. The days of the barefoot doctors are long past.

Click here to read the rest.

Comments

[Yaser Anwar]

Damn, the resemblance in the chart is uncanny.

Y

[kuku]

I did not read through all of this because most of it is nonsense. Author did not know about China at all. He lives in his own imagination and that is why he is full of mouth of theories!

He said the medical care is unaffordable in China. That is the joke of the year.

[Ryan Parr]

Before 1990, when reference was made to China, it was
always called 'red' China, or 'communist' China, but this reference is never heard any longer. Why is that true?

China's government pegs the value of their currency to the dollar by decree at a rate that's to their advantage. So, it amounts to the transfer of jobs and wealth to communist China, and they build up their military-industrial complex, and continue to add to their trade surplus and foreign currency reserves. All at our expense...

Multi-national corporations chase low wage production capacity in the name of free trade and higher profits. Almost all corporate interests in China are owned by the government, more or less, so workers in China are paid pennies per hour in wages while the government's foreign reserves are at or above 1,000,000,000 U.S. dollars. China's government buys up oil reserves and mining interests around the globe to assure their future supplies.

At the same time we talk about controlling pollution and addressing 'global warming', while China's air quality gets worse all the time. It's a waste of time to do anything when China has no intention of doing anything to slow down their economic growth, and the largest migration in history goes on, as so far more than 100 million chinese have moved from the farms to the cities to find work and get their piece of the pie.

This U.S. government had much of this in mind as part of their plan for free trade and 'globalization'. It was also tied to corporate interests and corporate profits, and it was a way to keep everything afloat here for a few more years. Producing our own goods at the prevailing wages was out of the question. This has worked much better than Nixon's wage-and-price controls, but it all falls apart sooner or later.

One way or another the U.S. dollar eventually becomes devalued by another 50 percent, or more, against most foreign currencies, while wages here will remain depressed, since the unions have been broken up. American's standard of living will fall even further, and millions more jobs are likely to be lost to low wage production in China, India, and Mexico.

Soon China will stop buying very much U.S. government debt and the dollar's value will crash. China is like a vampire that has sucked its U.S. host dry, and we went along with it with most people thinking they were doing us a favor.

Thanks a lot China. Thanks for making it possible for us to buy cheap chinese-made-goods at Wal-Mart, and thanks for financing our long war in Iraq and our massive federal budget deficits.

[Jay Luciani]

I am of the opinion that China will be the catalyst that drives the global economy into a depression. A very good read on this topic can be accessed from the following website:

URL Link: http://www.financialsense.com/editorials/petrov/2004/0902.html

Krassimir Petrov makes some very compelling points, and parallels between what is happening now with what happened just prior to the Great Depression in the U.S.