When Barack Obama took the helm at the nadir of the U.S. financial crisis in 2008, no one was quite sure the policies he would seek to redress the re-capitalization of U.S. banks. Shortly before her death at the age of 93, Dr. Anna Schwartz, recalled her communique with other noted economists at the Federal Reserve that entire media networks had gotten it wrong, it wasn’t a liquidity problem but a recapitalization problem. The banks would need to offload defaulted securitized loans to the Fed in exchange for new assets. This was accomplished quite easily. The next eight years saw the official Obama economic policy in permanent regulatory capture of capitalism, zero interest rate policy, quantitate easing; all to the detriment that became the canard of secular stagnation.
I point this out before I begin criticizing Chinese leadership. Truth be told, the U.S. possesses a unique responsibility in being a reserve asset, for it permits us to run deficits that would easily kill other political economies.
Currently, Chinese leadership is paralyzed. It has not decided whether it will privatize or seek redress toward consumption in financing state-owned enterprises. This captures why the entire Chinese political economy is gloated in debt. Like the American’s, the only way out is market based reform.
2016 shows that neither nation state is ready, for the concept of crony capitalism underwrites both the Communists in Beijing and the neo-liberals of both U.S. political parties.
Throughout the Middle Kingdom, state owned enterprises dominate industry, even to the detriment of the rule of law as state assets are used to provide benefits to connected company bosses and political elites. Even the State owned Assets Supervision & Administration Commission (SASAC), the rotating party-led hierarchy of state owned enterprises; the administrative body responsible for managing China’s state owned industries, rotates industry leaders in mockery of competition. China now has over 15,000 such enterprises, all seek to avoid market based reforms that would threaten their hold of market share.
If privatization comes about, its because Beijing’s taste for subsidies and cheap capital have ended, for it costs a fortune to keep these state owned enterprises afloat, above the fray of market discipline. Over the last twenty years, Beijing has spent over $300 billion in subsidies. Two market indices to watch: the components of debt ratio that underwrite these GSE (government sponsored entities) is proportionally maxed out and returns on assets on entire industries lags far behind privatized firms. Even with China’s central bank pumping liquidity with capital controls isn’t enough to prevent Beijing’s Communists from seeking the creation of new oligarchies in privatization. It happened in Russia under Yeltsin, it can happen in China.
If Chinese authorities seek reform, they should remember their own history, for Chinese economic reform began in 1978 in the countryside. Party officials (guanxi) permitted rural entrepreneurs to begin, absolutely no one sought permission from the center. Land was de-collectivised and contracted out providing the very price signals needed for an extended order to begin. What underwrote the success of early capitalists was boldness, transparency and long-term planning.
How best should China go forward toward privatization?
It could begin with foreign direct investment or the creation of federal competitive auctions of industries. This would help create, strengthen legal and institutional frameworks that help sustain the creation of capital. Putting domestic rivals on an equal footing with foreign investors requires the rule of law.
Why will none of this happen?
Any initiative that removes the role of the state in the allocation of priced capital threatens the political base of Communist leadership.
The U.S. has an identical problem with its own political parties.
Until authorities acknowledge the right of civil society to flourish outside the confines of myopic authority, we suffer.