Friday, June 15, 2012


There's been a bit of interest in this post from Australia where a blogger lays out in starkly simple terms anyone can understand how the modern post-communism Chinese economy works. It is, in his terms, a kleptocracy. "Get used to it," he warns. It even attracted the interest of New York Times columnist and Princeton economist Paul Krugman, who summarized the post as follows:
Hempton basically argues that China has turned financial repression — controlled interest rates on deposits, which ensure a negative real rate of return — into a giant engine of kleptocracy. The banks extract rent from depositors, transfer those rents on to state-owned enterprises in the form of cheap loans, and then the Party elite essentially embezzles the money. Underlying the whole system is a high savings rate that Hempton attributes to the one-child policy.

Actually, if he’s right about the demographic underpinnings, there’s a time bomb lurking in the system quite aside from his concerns about inflation running too hot or too cold: eventually, and as I understand it fairly soon, those older Chinese who have been frantically saving because they don’t expect enough grandchildren to support them will become net dissavers, pulling money out of the banks to live on. And then, if his basic story is right, the whole system implodes.
Here's the summary from the post itself:

The Chinese kleptocracy – and indeed several major trends in the global economy – depend on copious quantities of savings at negative expected rates of return by middle and lower income Chinese.

He begins with a point that cannot be overemphasized:

Every economy that has moved peasants to an export-orientated manufacturing economy has had rapid economic growth. Great Britain industrialized at about 1 percent per annum. It was slow because all the technology needed to be invented for the first time. During the 19th Century US economic growth – once started – ran about twice the rate of the UK. They copied the technology which was faster than inventing it. Later economies (eg Japan, Malaysia, Thailand, Korea) went later and faster. As a general rule the later you industrialized the faster you went – as the ease of copying went up. In the globalized internet age copying foreign manufacturing techniques and seeking global markets is easier than ever – so China is growing faster than any prior economy. (what happens when new industrializing economies run out or resources run dry? -CH)

He then talks about China's famously high savings rate:

The other key fuel for kleptocracy is a copious supply of domestic savings to loot. The reason Chinese savings levels are so high is the one-child policy. (No safety net or grandchildren to take care of you -CH) ...This is the critical point – the negative return to copious and increasing Chinese bank deposits drives a surprising amount of the global economy and makes sense of many things inside and outside China.

Chinese can't invest in foreign assets by law, and the stock market is a corrupt so:

What Chinese are left with is bank deposits, life insurance accounts and (maybe) apartments.

But the interest rate is actually lower than inflation, meaning those savings are worth less and less every year. Where does the value go? To state-owned industries, of course:

Most Chinese savings however are not invested in see-through apartment buildings. Bank deposits still dominate. The Chinese banks are the finest deposit franchises in human history. They can borrow huge amounts at ex-ante negative real returns. And those deposits are mostly lent to State Owned enterprises.

The SOEs are the center of the Chinese kleptocracy. If you manage your way up the Communist Party of China and you play your politics really well may wind up senior in some State Owned Enterprise. This is your opportunity to loot on a scale unprecedented in human history.

And what is the end result?:

The Chinese Government (and the banks are part of the government even though they are listed) has access to seemingly unlimited bank deposits at negative real costs.

When you have copious funds at a negative cost a lot of investments that look stupid under some circumstances suddenly look sensible. US Treasuries look just fine. Don't think the Chinese are going to stop holding Treasuries. The Treasuries yield far more than they pay the peasants. The Chinese make a positive arbitrage on holding low rate US bonds.

A few posts ago, we noted an article from the BBC which pointed out that disenfranchised peasants and farmers, once the main force behind communism, are now once again on the bottom in a society with some of the greatest income disparity in the world:
China's Communist Party came to power promising to end the country's traditional class structure. As it turned out, it turned the class structure on its head. Scholars, landowners and merchants, the former privileged classes, were stripped of their rights, and sometimes of their lives. Villagers and workers were, for a time, elevated, in status and opportunity. More than 60 years on, farmers and workers are again at the bottom of the heap, and while there's a growing middle class, China has one of the world's biggest and fastest-growing rates of income disparity.
And it linked to this article from Bloomberg: China’s Billionaire People’s Congress Makes Capitol Hill Look Like Paupers:
The richest 70 members of China’s legislature added more to their wealth last year than the combined net worth of all 535 members of the U.S. Congress, the president and his Cabinet, and the nine Supreme Court justices.

The net worth of the 70 richest delegates in China’s National People’s Congress, which opens its annual session on March 5, rose to 565.8 billion yuan ($89.8 billion) in 2011, a gain of $11.5 billion from 2010, according to figures from the Hurun Report, which tracks the country’s wealthy. That compares to the $7.5 billion net worth of all 660 top officials in the three branches of the U.S. government.

The income gain by NPC members reflects the imbalances in economic growth in China, where per capita annual income in 2010 was $2,425, less than in Belarus and a fraction of the $37,527 in the U.S. The disparity points to the challenges that China’s new generation of leaders, to be named this year, faces in countering a rise in social unrest fueled by illegal land grabs and corruption.

“It is extraordinary to see this degree of a marriage of wealth and politics,” said Kenneth Lieberthal, director of the John L. Thornton China Center at Washington’s Brookings Institution. “It certainly lends vivid texture to the widespread complaints in China about an extreme inequality of wealth in the country now.”
We've covered many of the outrageous architectural boondoggles here many times before. So the one bright spot in the global economy, the one they always fall back on when you point out that most people are experiencing declining living standards under the current economic arrangement, might be nothing but a mirage.

Thus it seems that global capitalism everywhere is simply a way for well-connected elites to loot the masses. Privatized profits, socialized losses, corporate welfare, bailouts, etc. I think a commenter to this article nailed it:

"The system exists specifically to divert and channel wealth to the capitalists in the same way feudalism diverted and channeled to the rentier aristocracy."

1 comment:

  1. What makes the China economy a bubble as well is the massive damage they've done to their environment. That's the externalization of costs intrinsic to capitalism. So one answer is for China to export it's excess population to Africa


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