China’s State Capitalism has the Monetary Policy Firepower for a Soft Landing

Posted by PITHOCRATES - January 22nd, 2012

Week in Review

The Big Government Keynesians love to point to China as how state capitalism should be done (see Analysis: China has multiple choices to avoid hard landing risk by Zhou Xin and Nick Edwards posted 1/18/2012 on Reuters).

China faces what could be its worst year of growth in a decade with policy firepower that developed nations can only dream of.

A record-breaking tax take expected to top 10 trillion yuan ($1.6 trillion) in 2011 gives Beijing fiscal scope to support growth and financial system liquidity, while monetary policy is perfectly poised for easing after a near two-year tightening cycle.

Contrast that with deep deficits across Europe and the United States and the orthodox policies forced upon central banks on both continents in a desperate bid to avoid a slide into economic depression…

Twin bubbles in real estate and local government debt are still being battled by Beijing, and are arguably the only — if significant — policy constraint faced as the world’s second-biggest economy faces another economic slowdown.

Of course, we mustn’t forget that China is a manufacturing powerhouse.  And why is that?  They have no unions.  Are the Big Government Keynesians suggesting that the US do away with our unions?  It’s that cheap labor that makes all the difference in China.  It is the only reason why they are the world’s second largest economy.  It’s just not that currency manipulation.  It’s that cheap labor makes their export goods inexpensive.

But can it last?  With not one but two bubbles?  No other nation ever fixed a bubble without a long and painful recession.  Let’s not forget that a real estate bubble started the current US recession.  Which burst.  And became the subprime mortgage crisis.  And the Japanese Lost Decade also started with a real estate bubble.  Bubbles aren’t good.  Because they always burst.  And when they do painful recessions follow.

China will collapse.  As all state-run economies do.  Because any suspension of market forces never ends well.  At least, they haven’t yet.  Other than the latest try.  China.  But they will.  Because they always do.  The countries who allow free market capitalism are the ones that stand the test of time.  Just look at Britain and the US.  They’ve had centuries of success.  While China has only had a decade or two.  The odds are on free market capitalism.  Not state capitalism.  As time will no doubt tell again.

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