Yet here is the flaw in the Beijing Consensus. The healthy thing for China to do would be to allow the bubble to burst, allow a serious recession to occur, and allow the yuan to rise in value according to market forces. This would fully transition China into a modern, service-based consumer economy. But China will never make a move that restores market discipline, because the necessary short-term pain and mass unemployment needed to purge the economy of its excesses would threaten the Chinese Communist Party’s grip on power.
Our slow and indecisive government limits U.S. politicans, and if America goes into recession the worst thing that can happen is that politicians get booted out of office. In China, the Communist Party official’s wealth and safety depends on preserving party power, which depends on absolutely minimal amounts of social unrest, which in turn depends on constant and steady GDP growth. All the incentives—and power—are there for Chinese officials to do everything possible to maintain the status quo, even if it means damning future growth potential.
This is why, according to The Wall Street Journal, China hasn’t had a major bankruptcy in recent years and has an irregularly low level of firms that are allowed to go bust. Local governments usually bail them out, and central government currently allows no defaults in the public bond market. One of the more entertaining examples of this attitude toward the necessary “creative destruction” of capitalism came with the government-orchestrated bailout of an investment product titled “Credit Equals Gold No. 1.”
China also seems intent on blowing up the credit bubble further, as the central bank—against its own wishes and under prodding from top party officials—cut interest rates last month and more recently cut its reserve requirement ratio for banks in an attempt to maintain liquidity (keep lending going) as investors pull cash from the Chinese economy.
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