For years I have been arguing that the Achilles heel of the Chinese growth model is the unsustainable rise in debt that comes as a necessary consequence of capital misallocation fueled by bank lending.
Capital misallocation, I argued, was the nearly inevitable consequence of high investment growth over many years in a system in which price signals are severely distorted and there is political incentive to maximize economic activity in the near term. If capital misallocation is funded by debt, the increase in debt is necessarily unsustainable. _EM
One could say the same things about government misallocation of capital in the west, of course. Rapid unsustainable buildup in debt in western nations has already caused one collapse (2008), and threatens another -- even as the world flounders in a quagmire of ongoing recession.
But China has been "the golden child." China has represented "the way out," the hope for the rest of the world. What Michael Pettis is saying, is that the Chinese government has no secret formula for building perpetual sustained economic growth. The mandarins of Beijing are "playing at economics" just like everyone else.
China was the beneficiary of a massive transfer of capital and technology from the advanced world, and built a sizable nest egg based upon cheap labour exports. But when the export markets collapsed, did China's government overstep its bounds in the Sisyphean effort to maintain internal order for the empire?
Analysts too easily argue that investment in social housing is China’s trump card that will guarantee sustainable annual growth of 8-9% or more for the next several years. It isn’t. First, there is almost no way social housing investment will be large enough to replace investment in manufacturing capacity, other real estate development, and infrastructure, and if there is a problem with the latter, it will continue. Second, investment in social housing may itself be economically wasteful. Certainly there is no reason simply to assume that, given the conditions that have encouraged capital misallocation for over a decade, calling the investment “social housing” will change anything. _Much more at EMPettis looks at China's investment in electric vehicles, various state owned enterprises, and social housing, as examples of what he sees as an unsustainable misallocation of resources by China's governments.
China -- like Europe and the US -- may have misallocated itself into a corner, with no easy escape.
No, that isn't true. There is a simple escape, but it would be painful for many, in the transition. And for China, it would be particularly painful, given the long history of authoritarianism that has been stamped into the Chinese character.
What is the escape I am referring to? The escape which the European settlers to the 13 North American colonies of England chose -- freedom from arbitrary and tyrannical government. This freedom -- if well designed and codified -- opens the door to human innovation and enterprise. Self-interested productivity often serves where nothing else will do. But only if the people know how to profit from their own efforts, and are able to build upon those profits.
Russia, like a dog, keeps going back to the vomit (authoritarianism eg Putin), and it is likely that a liberated China would do the same -- or break up into competing fiefdoms. There is not always a perfect solution to every conundrum.