Chinese Economic Growth: Between a Rock and a Hard Place

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By Jacob Maslow

Hong Kong city at daylightThe interesting thing about China’s economy is that it is a mixed economy. On one hand, you have a tremendous amount of government regulations and dictatorial power. There is really no way around it. I mean, you only need to look at the recent financial crash of 2008 and how the Chinese government responded.

The Chinese government told banks to make loans. It is not a question of whether banks could choose to comply or not, but to actually make loans. It was a top-down directive. Compare that with the United States which uses interest rate mechanisms to gently push market players to make decisions that are in line with economic planners’ expectations and prerogatives. In a large sense, that level of control is actually what kept China from plunging into a downward spiral during the great crash of 2008. It can be argued that, due to the huge strength of governmental controls, China was able to survive the financial crash relatively unscathed.

The other side of the equation, however, is that china is also home to a very vibrant private sector. We are talking about the free market, at least as far as Chinese regulations would allow it. There is a lot of wheeling and dealing and, sadly, a lot of secret off-the-book deals that tend to aggravate the weaknesses of China’s economic model. You have to understand that the Chinese real estate market doesn’t allow for an official depreciation of real estate assets. I know this sounds ridiculous because, in any market, prices go up and down. However, in China apparently, prices can only have one direction, and that is up.

There is definitely a lot of unreality and sense of denial at play in the Chinese economy. This is why it is really important to note that any talk of sustainable increases in Chinese GDP growth has to take into account these two competing realities. On one hand, we have rosy government figures that seem to instill a lot of confidence on global financial markets. On the other hand, we have millions of unsold real estate inventory and a lot of off-the-book accounting that may eventually poison the broader economy. Currently, the Chinese regulators have the upper hand. However, you can only keep your finger in the dike for so long until the dam breaks.

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