A Brief History…

Tom Friedman has a column today about China. Interestingly, his theme is that he knows more about the economics of China than a very successful investor.

Reading The Herald Tribune over breakfast in Hong Kong harbor last week, my eye went to the front-page story about how James Chanos — reportedly one of America’s most successful short-sellers, the man who bet that Enron was a fraud and made a fortune when that proved true and its stock collapsed — is now warning that China is “Dubai times 1,000 — or worse” and looking for ways to short that country’s economy before its bubbles burst.

Friedman dismisses this fellow, who made a fortune shorting Enron, and thinks he knows better.

I am reluctant to sell China short, not because I think it has no problems or corruption or bubbles, but because I think it has all those problems in spades — and some will blow up along the way (the most dangerous being pollution). But it also has a political class focused on addressing its real problems, as well as a mountain of savings with which to do so (unlike us).

And here is the other thing to keep in mind. Think about all the hype, all the words, that have been written about China’s economic development since 1979. It’s a lot, right? What if I told you this: “It may be that we haven’t seen anything yet.”

Why do I say that? All the long-term investments that China has made over the last two decades are just blossoming and could really propel the Chinese economy into the 21st-century knowledge age, starting with its massive investment in infrastructure. Ten years ago, China had a lot bridges and roads to nowhere. Well, many of them are now connected. It is also on a crash program of building subways in major cities and high-speed trains to interconnect them. China also now has 400 million Internet users, and 200 million of them have broadband. Check into a motel in any major city and you’ll have broadband access. America has about 80 million broadband users.

He had previously expressed his enthusiasm for China’s political class.

One-party autocracy certainly has its drawbacks. But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages. That one party can just impose the politically difficult but critically important policies needed to move a society forward in the 21st century. It is not an accident that China is committed to overtaking us in electric cars, solar power, energy efficiency, batteries, nuclear power and wind power.

Of course, that column was written before the CRU scandal so he is overly impressed with global warming, unlike the Chinese he so admires, but I doubt he has changed his mind. The religion of the left these days is global warming. If only Obama could just dispense with that clumsy democracy we have. Well, he is trying. Others have noticed a plethora of empty buildings and other signs of economic stress.

Some Chinese economists who argue for the merits of a Keynesian style market economy have openly defended the Chinese Government’s position. They claim that an over-priced property market is a small price to pay for preventing a sharp rise in unemployment.

I am not an economist. I cannot put forward a technical argument against this kind of fallacy. My friend Dfzh is not an economist either. However, he does represent a middle-class group in China. This group neither owns capital nor controls the State. Instead, they derive their income and status from service and management. Like many Chinese people in his socio-economic group, Dfzh has become increasingly disenchanted over the Chinese Government’s economic policy, as well as the CCP’s strong grip on power. He has regularly expressed to me his concern about a widening gap between the rich and the poor, and how this is creating social instability.

The problem with Friedman’s, and Obama’s, love affair with the corporate state is that it may not work as well as they think it will. Stratfor.com does not seem to agree with Friedman.

Security officials have warned that these out-of-work laborers could be a source of instability or, more ominously, a target for domestic or foreign instigators to exploit to undermine the Chinese government. The All-China Federation of Trade Unions has warned that China must be vigilant and prevent “hostile forces” from taking advantage of the new masses of unemployed migrants, while the Ministry of Public Security is sending work teams to the countryside and cities to assess social stability and stress factors. Chinese President Hu Jintao has led a chorus of Chinese officials calling on the People’s Liberation Army and the People’s Armed Police Force to be first and foremost loyal to the Party, and to be on alert for rising instability in China due to economic stresses and foreign and domestic hostile forces.

They are not that optimistic at all.

And with China’s economic problems (for which Beijing has assiduously sought to blame everyone but itself), cracks have begun to appear in the veneer of nationalism. They appear not only because of individual reactions to economic problems, but also as various provinces slip into local protectionism, seeking their own recovery over that of the nation.

I will take the advice of James Chanos, thank you. Friedman married money but Chanos made his own. Billions of it.

Tags: China, economy

This entry was posted on Wednesday, January 13th, 2010 at 12:42 pm and is filed under financial. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.