Saturday, April 21, 2012

The Latest On China

N.B. I updated the post on the Chinese political crisis with some graphics that might help you keep track of the names and political alliances.

It turns out that Bo Xilai, the purged Communist governor of Chongqing was … a Keynesian.

It seems he spent a lot of government money on big projects:

The moves signal a challenge to an opaque state-guided economic model—reliant on heavy injections of finance, showcase infrastructure projects and huge social-housing developments—that Mr. Bo was championing in the southwestern city.

Sounds like Obama, eh?

The popularity of Mr. Bo's programs had raised the prospect such policies could gain traction nationwide, which could have clouded prospects for what economists say are needed reforms in China.

These reforms were covered in the earlier post on the China 2030 report put out by the World Bank. My post on the crisis explored how the designated incoming leader Xi is politically related to the now-disgraced Bo:

… Perhaps the most pressing task for leader-designate Xi Jinping is rebalancing the country's economy away from debt-fueled state investment, as exemplified in Chongqing, toward private consumption.

That will involve raising households' incomes and helping small and midsize businesses, which would mean directing funds away from the type of state-owned enterprises that Mr. Bo favored. Critics of Mr. Bo say that under his watch, private entrepreneurs—the real drivers of a consumer economy—were forced to pay for some of the excesses of government-directed spending, in some cases through outright expropriation.

Funny how what is probably a new word to most of your, expropriation, can come up twice in one week. Hmmm. Isn’t that also part of the constitutionality problem with Obamacare: whether some of your income can be expropriated by the government to fund national healthcare?

And then this sounds like the way America privately financed many of its mortgages and then shifted the risk to Fannie Mae (and implicitly, taxpayers):

The Chongqing finance bureau is also looking into developments funded upfront by banks or other investors, then sold to the government upon completion …

Please keep in mind that I’m not stating categorically that any of this is a problem. What I am stating is that there are disturbing similarities.

But, the test of whether or not those are important is the behavior of prices out in the market. For Chongqing, the message from the markets sounds like the same one that the PIIGS are getting in Europe:

Think about how bad this really is: Chongqing, which has some ability to expropriate funds to make its interest payments, is not thought as likely to make repayments as private firms that don’t have that ability.

Whatever faults you find with former President Clinton, he was known to complain that bond markets limited his ability to pursue projects that he wanted, but based on his advice from Treasury Secretary Robert Rubin, he deferred to bond markets when rising interest rates showed him that investors were unhappy. And … it isn’t even a contest for who produced the best results between Clinton, W, and Obama.

Read the whole thing entitled “Chinese Investigate Spending in Scandal ” in the April 19 issue of The Wall Street Journal.

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