Wednesday, April 24th, 2019

Inept Bureaucrats Are Killing China’s Economy

 

The Chinese economy has been growing at a phenomenal rate for decades and now is slowing down. Our contention is that it is not just lower global demand for products that is hurting China. It is our opinion that inept bureaucrats are killing China’s economy and the fallout is affecting markets across the world. The New York Times published an insightful article suggesting that China stop its market manipulations.

Chinese bureaucrats believe that they have the right to intervene in their country’s economy whenever they want, not only to promote certain industries but also to prevent sudden downturns and reduce volatility. Officials believe that they don’t have to defend or explain their decisions in real time to market participants. In fact, being opaque preserves their discretion to make changes on the fly.

This approach goes against the operating principles of global financial markets: clarity and timely transparency. Intervention should be the exception, not the norm.

The job of regulators should be to ensure a fair market, but China’s stock market is worse than a casino, as Chinese regulators’ goals and the basic rules of the game can shift without warning.

An example of how this works in China and how inept bureaucrats are killing China’s economy is the connection between the real estate and stock markets in China. The government encouraged real estate investors who were fleeing the real estate bubble to invest in the stock market and managed the market to ensure higher returns. Then, when the market started to fail they stepped in and made things worse.

Chinese Currency Issues in Perspective

CNBC writes about the Chinese currency and why people should care.

China’s market turmoil since the start of the New Year has put the spotlight on a not-much-noticed quirk of trading the mainland’s currency: the offshore yuan doesn’t always want to stay in tune with its onshore peer.

In November, the International Monetary Fund (IMF) agreed to add the renminbi to its Special Drawing Rights (SDR), a type of international reserve asset. It will join the euro, yen, pound and dollar in the reserves basket.

But one of the requirements of the SDR is that the onshore and offshore yuan need to converge toward a free floating rate. As markets sold off this month, the two currencies diverged.

The problem is that as inept bureaucrats are killing the Chinese economy, one of the ways they are doing so is by not letting their currency float with the market to an appropriate level. The result is an overpriced yuan and the loss of hundreds of billions of dollars of foreign currency reserves as China continues to prop up its currency.

Social Unrest as Economy Weakens

The Financial Times reports that Chinese police arrest activists to try to stem labor unrest. The bottom line for the Communist government in China is maintaining power. While inept bureaucrats are killing China’s economy there is the risk of the social system unraveling.

Chinese police have arrested four worker activists based in the country’s Guangdong manufacturing hub, according to lawyers, in what has been described as the harshest crackdown against organized labor by the Chinese authorities in two decades.

The level of the clampdown in the country’s southern industrial powerhouse, amid official jitters over a slowing economy and growing labor unrest, was “unprecedented”, a labor rights activist in Guangdong, said. “In the past, they would give us verbal warnings or put pressure on our landlords. But they had not used legal charges in their intimidations.”

There is a price to pay for ineptitude of China’s governing elite and it is not just financial. People in China tolerate a heavy handed government because the economic results have been good over the years. A sagging economy brings out complaints about the leadership that could results in social unrest and political change.

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