Is China heading for a financial crisis?
Peter Zhang
The universe is ruled by fundamental laws, one of which is that you cannot consume what has not been produced. It does not matter whether a good is produced by nature or man; until it comes into existence it cannot be a subject of human action. This fact is so obvious that one would think that it did not require a second thought let alone an explanation.
Unfortunately, this lesson needs to be rammed home if China is not to repeat its economic mistakes. Many economic commentators are still pushing the absurd line that rising consumption created purchasing power and fuelled China's economic 'miracle'. From this they conclude that the key to uninterrupted economic growth is increased consumer spending. And that means printing money, only they call it 'pump priming.'
Purchasing power is nothing more than the ability to command other goods. The greater one's purchasing power the great one's power is to command other goods in exchange. And exchange is the key. A person's purchasing power springs from his productive capacity.
The more he can produce the greater his capacity for exchange will be. It should be easy to see from this that as individuals increase their real purchasing power, i.e., expand individual output, total output rises, which is just another way of saying that demand has increased.
This process of exchange will tend to equate the value of the worker's output with that of his wages. We can say at this point that purchasing power is just another term for exchange power, which in turn is labour's ability to create goods for exchange. But this raise the question of what determines labour's output.
What makes America the world's greatest consuming nation is the fact that it is still the world's greatest producing nation. This is because it not only has more per capita investment than most other countries, it uses its capital goods more efficiently because it allows markets to allocate them to their most valuable lines of production. Now we have the answer: It is per capita investment that raises purchasing power.
The more that is invested per worker, i.e., the better tools he has to work with, the greater his output and hence his purchasing power. (The elements of this process were well known to the classical economists — and then came Keynes.) It follows that any action that diverts savings from investment to consumption will have the effect of lowering future purchasing power. And this is what Keynesian 'pump priming' policies do.
Several years ago Nicholas Prescott from the World Bank claimed that falling disposable incomes and rising savings drove down Asian consumption. Prescott ought to know that in free market prices determine costs, meaning that falling Asian wage rates were responding to changes in demand. Any attempt to resist this by holding up wages rates will only cause unemployment to leap.
This change in demand in demand was not so-called demand deficiency. It was the result of years of heavy credit expansion creating massive malinvestments, misdirected production that could not pay for itself. Once the credit expansion was brought to an end the malinvestments emerged as 'excess capacity' and the demand for labor fell.
Unfortunately it looks as if this is what is in store for the Chinese economy. From the beginning of 1997 to the end of 2003 M1 (currency and bank deposits) expanded by an astonishing 160 per cent, an annual average of 23 per cent.
This monetary expansion is causing considerable concern among better informed party officials. They know that this expansion is unsustainable. They also know what will happen when they are finally forced to put a halt to it.
Although I have no evidence that the regime has been saber rattling as a prelude to whipping up nationalist feelings in order to divert attention from the consequences of a severe credit crunch (no officials have suggested this to me), it wouldn't be the first time that dictators have used foreign enemies as a distraction from their own failures.
On a personal note: I never answer abusive emails (why bother?) and I certainly would never correspond with anyone who thinks that Mao's reign of terror that killed scores of millions of my fellow countrymen was just a mistake. I consider such people to be beneath contempt. If that makes me a "dog" then I'm proud to wear the label.
BrookesNews.Com
Monday 26 July 2004