The emergence of China as a $2 trillion economy from such inauspicious beginnings only 25 years ago is such a giddy accomplishment that the temptation to see its success as proof positive of your own prejudices is overwhelming. And the west's broad prejudice is that China is growing so rapidly because it has abandoned communism and embraced capitalism.
And yet it goes on to state, one paragraph later:
in China, its so-called capitalism looks nothing like any form of capitalism the west has known and the transition from communism remains fundamentally problematic. The alpha and omega of China's political economy is that the Communist party remains firmly in the driving seat not just of government, but of the economy - a control that goes into the very marrow of how ownership rights are conceived and business strategies devised.
The author seems to be missing the point. While the West seems to see (or perhaps, desperately wants to see) China as proof that communism must fail, giving way to western capitalism, the author indicates for us that China is actually just pretending to be capitalist. What's really under the covers is
... one of the most corrupt organisations the world has ever witnessed. The combination of absolute power and an ideology that palpably no longer describes reality is a virus that is morally and psychologically undermining the regime.
Corruption has become part of the system's DNA, now threatening the integrity of the state.
Mr. Hutton goes to great lengths to describe the corruption in China, and the harm it can do to its people (not least of which, apparently, is the suicide of corrupt officials). In fact, he concludes that
Successful businesses have to be successful in business terms - with managers freely exploiting opportunities, developing products and brands and promoting on ability. No such autonomy is possible within Leninist corporatism; party needs come before those of business, enforced by a national system of party committees in every enterprise, finance from state-owned banks and a complex system of accounting and ownership rights that leaves majority ownership of most enterprises with the state. Private shareholders have very limited ownership rights; companies' fixed assets are separated out in company accounts and can still only be legally owned by state and public bodies.
This is to say, capitalism and progress cannot exist in a system which is, by definition, anathema to Western Capitalism. It seems to me that Hutton has forgotten one of the most important tenets of capitalism: Capital.
Capitalism generally refers to an economic system in which the means of production are mostly privately or corporately owned and operated for profit and in which distribution, production and pricing of goods and services are determined in a largely free market.
(via) If we look at the above definition, offered by those most astute of economists, we can see the primary focus of capitalism is not the corporate or private ownership of "distribution, production, and pricing," but rather is the fact that they are operated for profit in a free market. Let us also remember (because there are a few of you screeching at me, I can hear you) that Mr. Hutton and wikipedia are subject to the systemic bias that many of us are subject to:
- Technically inclined
- Formally educated
- Aged 15-49
- From a predominantly Christian country
- From an industrialized nation
- From the Northern Hemisphere
- More likely to be employed in intellectual pursuits than in practical skills or physical labor
A free market is a market where the price of each item or service is arranged by the mutual consent of sellers and buyers (see supply and demand); the opposite is a controlled market, where supply and price are set by a government. However, while a free market necessitates that government does not dictate prices, it also requires the traders themselves do not coerce or defraud each other, so that all trades are morally voluntary.
need not have prices set by consumers, or by citizens (with a nod to Solzhenitsyn). Rather the prices need to be set by the market itself, by the consumers of goods. In the case of the Chinese state-owned capitalist economy, the prices are still set by the consumers, as the government is not — cannot — force people to buy goods. Rather, the Chinese are simply setting prices much the same way they fix the value of their currency. This isn't as sinister as it sounds (although, as somebody who lives in the west, I can say that it does indeed sound sinister; please however remember your and my bias here). All those corrupt officials have one thing in mind: profit. Even if it means they're corrupt to the core, and they're ordering mafiaesque killings and scams, if they are so corrupt as to prove the market untenable, the whole thing collapses on their heads.
We don't need to look any further than Singapore or Viet Nam to see that these sorts of markets actually do work, can and do succeed, and will continue to for quite some time. It may be helpful to think of this system as "capitalism by the few" rather than the western "capitalism of the many" (note distinction of by/of). Even in the west, it isn't clear that the entire society dictates the prices of goods, or the valuation of currency, or labor standards. One can simply examine the economy of Europe (and things like socialized medicine, state-provided narcotics — the value of methadone being substantially higher in a truly consumer-controlled market — and so on), as well as in the United States, where we have a great many (although fewer than many places in the world) socialized programs and products. Corn, for example.
I'd be interested in reading Mr. Kamm's opinion of the book. I suspect it will eventually come across his desk.
There are a couple salient points in the excerpt, the first being
According to one influential estimate, even the tiniest upward movement in interest rates or the slightest decline in sales would mean that 40%-60% of their enormous bank debts would not be serviced, rendering the entire Chinese banking system bankrupt. They are commercial and business disaster areas.
The problem with this argument, however, is that debt is part of any healthy economy. It is helpful to consider the question of American homeowners. One of the typical arguments of armchair financial planners is that the best investment one can make is their home. It's generally the most expensive thing anyone buys. Let us say that tomorrow, I purchase a home, and find myself suddenly in US$1.5M of debt. This is an enormous figure. However, what this ensures is that I will continue to work to pay it off, and my buying it ensures that the people who built the house will be paid for their work. Additionally, there are more nuanced factors, such as my investing elsewhere to hedge bets against a flagging housing market. The point is that debt is not as unhealthy as the author makes it out to be. Consider also, the debt of America as a country, or of its people. I won't pretend I remember the numbers from the last Marketplace, but I do certainly remember American consumer debt is in the many trillions of dollars. Americans will be paying this off in perpetuity, as debts are paid, and new debts are created. Importantly, without debt, there is no payment.
Again, also consider that it is not in the interest of the corrupt state officials to bankrupt their own economy. It is always in the interest of those involved in Capitalism — whatever the strain — to perpetuate the system in order to further increase their profits. In a static system, where prices are fixed not by the consumer, but by Leninist or Marxist ideals (not the case here, certainly), there is no incentive to keep the system working, as there is no way to increase wealth past a certain point. The promise of free-market capitalism is perpetual wealth gain through reinvestment.
The second interesting point in the excerpt is thus:
The cumulative result of all this is economic weakness, despite the eye-catching growth figures. Innovation is poor; half of China's patents come from foreign companies. Its growth depends on huge investment, representing an unsustainable 40% or more of GDP financed by peasant savings. But China now needs $5.4 of extra investment to produce an extra $1 of output, a proportion vastly higher than that in economies such as Britain or the US. But 20 years ago, China needed just $4 to deliver the same result. In other words, an already gravely inefficient economy has become even more inefficient. China's national accounts tell the same story. Hu Angang calculates that China is now back to the Mao years in term of the inefficiency with which it uses capital to generate growth.
which indeed offers actual numbers to demonstrate the health of the Chinese economy. Note that they are numbers relative to the west, which is a meaningless comparison here. All the same, it is worthwhile to note that the trend has changed. It's really too bad that Hutton continues with
Behind all these problems lie Leninist corporatism. Capitalism, I contend, is much more than the profit motive and the freedom to set prices which China's reforms have permitted. It is a system in which many different actors freely take different decisions according to their best judgment; some are right and some are wrong, but the system never has to bet on any one being right for everyone - as in an authoritarian system of centralised economic control.
(emphasis mine). There's a tenet in the "so you're new to investing" school
Investing and religion don’t mix
Amana aside, all of these funds are mediocre performers, at best. That could be reversed at MMA Praxis, because last year’s Morningstar equity-fund managers-of-the-year, Christopher Davis and Kenneth Feinberg, were hired in January to take over the Core Stock fund.
But it’s unlikely that dynamic duo will be able to achieve the kind of greatness they enjoy at their economic-inspired mutual funds, Davis New York Venture A (NYVTX) and Selected American Shares S (SLASX).
You may substitute "religion" here for "morals," "politics," and any other subjective razor you'd like (counterpoint). The point is, if you're going to objectively value something so as to invest (or not) in it, you cannot view it through a lens of what your beliefs are (although here, one could make equivocal arguments that it is either theosophist or capitalist to do so). Mr. Hutton in this case, has done precisely the latter. He has tried and convicted the Chinese economic model in a court of his — not their — views. They may well succeed, continue to grow, in their own particular corrupt fashion, and maybe even step on the little guy in their path to do that. It doesn't mean they won't succeed. They're just going to do it in such a way that causes him to jump up and down, simian-fashion, screeching about how unfair and unjust the world is to conscientious, righteous investors such as himself.
The west is unforgivably ignorant about China's shortcomings and weaknesses, which leads it vastly to exaggerate the extent of the Chinese "threat".
See also: irony.