China's State-Led Model Showing Signs of Trouble

ICYMI, you might want to skim former SIEU chief Andy Stern's op-ed at the Wall Street Journal from earlier this week, "China's Superior Economic Model." I don't begrudge China's economic success, but I've never been one to fall head over heels for China's model, especially as a replacement for the American free-enterprise ideal. Stern's piece reminded me of the "Japan as Number One" school from the late-1980s and early-1990s. Back then I thought more reliance on industrial policy and governmental intervention might be a good thing. Then Japan collapse and by the end of the Clinton years the American economy was booming. Hardly anyone was championing the Japanese "developmental state" by that time. And thus, I mostly yawned when reading Andy Stern, and that was after a little chuckle, considering the former union boss was throwing his lot in with one the most murderous regimes in modern times.

In any case, the editors at Wall Street Journal throw some cold water on the Chinese economic system. See, "China's Hard Landing":

China is a poster child for the Austrian school of economics' theory of the business cycle. After undertaking the biggest stimulus program the world has ever seen in response to the global financial crisis, the country is drowning in unproductive investments financed with credit.

The government spent 15% of GDP largely on public works projects in inland regions, financed with loans from the state-owned banks. Investment as a share of GDP soared to 48.5% in 2010, and the M2 measure of money supply ballooned to 140% that of the U.S.

Now comes the hangover. The public works projects are winding down, unleashing a wave of unemployment and an uptick in social unrest. The banks' nonperforming loans are rising, and local governments are insolvent. The country is littered with luxurious county government offices, ghost cities of empty apartment blocks, unsafe high-speed rail lines and crumbling highways to nowhere.

One effect of negative real interest rates was a nationwide bubble in private housing, with the average price of an urban apartment reaching eight times the average annual income. Real estate is the most popular investment for the wealthy, according to a central bank survey in September. Millions of luxury apartments are vacant, even as there is a shortage of affordable housing for the poor....

There is no easy way to avoid the bust that is coming. The silver lining is that China's increasingly state-led growth model will be discredited, and a debate will begin on restarting the reforms that stalled in the mid-2000s. A financial sector that allocates credit based on politics rather than price signals led China into this mess. Popular pressure to dismantle crony capitalism is building, and the Communist Party would be wise to get in front of it while it can.