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It's amateur hour in China

It's amateur hour in China

Postby smix » Wed Sep 02, 2015 3:22 pm

It's amateur hour in China
Yahoo Finance

URL: http://finance.yahoo.com/news/china-is- ... 34633.html
Category: Business
Published: September 2, 2015, 11:21 AM EDT

Description: This is the next superpower? You’ve got to be kidding. Anybody expecting China to dominate the world must be wondering how the Keystone Kops managed to take over the Politburo in Beijing. China has embarked on a long odyssey to prove that capitalism can work within the confines of a communist government. There have been many impressive successes. But the failures—including those we’ve seen on display this summer—reveal that China is nowhere near the global powerhouse it imagines itself to be or some western declinists fear it will become. The follies in China’s financial markets during the past two months have mainly been driven by the communist government’s failed effort to manipulate stock prices as it sees fit. Beginning in 2014, the central government began urging people to buy stocks, as a way to divert money from real estate and deflate a dangerous property bubble. People obeyed, and it seemed to work for a while. By June, the Shanghai stock market (000001.SS) had soared by 150% since last summer. Then something happened that’s normal in capitalism: Investors began to think stocks were close to a peak, so they sold to lock in profits. Not what the government was expecting. The government tried to stem the selloff by enacting stimulus measures, instituting new rules and even preventing some institutional investors from selling. Authoritarianism displaced capitalism. Yet even then, stocks plunged. Since the June peak, the Shanghai market is down by nearly 40%, and it could have further to fall. China’s government has now reverted to the ultimate absurdity: Blaming critics of the markets’ performance for the whole fiasco. Authorities have rounded up and punished nearly 200 people whose acts of sedition include suggesting Chinese stocks might go down. They include several bloggers and stock market officials plus at least one journalist. That’s like indicting a weatherman who accurately predicts a storm that’s coming. As if saying the sun will shine will make the sun shine. Here in the United States, people publish opinions all the time about what’s right or wrong with the stock market. They make predictions of all kinds -- and are often wrong. Instead of getting a prison sentence, they get to deliver their opinions on cable news shows. Western markets also tolerate short sellers and others who bet against stocks because it serves as a check on the system: When there’s money to be made by stocks going down, it forces better diligence among those betting stocks will go up. Abuses? Sure. But unleashing market forces in every direction—not just the one you want prices to go in—generates confidence that prices will gravitate toward an equilibrium based on reality. A month ago, the main problem in China seemed to be an overheated stock market that possibly reflected a weakening economy. Today, the main problem is much bigger: The nation’s leaders seem to have lost control. For a long time, they repeatedly surprised the western world with quarter after quarter of robust growth. Critics said the data was fishy and the boom was a mirage. Now, the critics seem right, while president Xi Jinping and his minions look like they have no idea what they’re doing. “Panicky and incompetent” is how Willem Buiter, global chief economist at Citi, described the Chinese leadership's handling of the stock-market swoon. They ordered stock prices to rise and can't believe that stocks disobeyed. Many complex factors determine the behavior of stock markets, including unpredictable and irrational human behavior. But stock markets do follow certain fundamental rules, especially the rule of supply and demand. When there’s heavy demand for stocks, prices rise. When demand is weak, prices fall. Over time, this law is immutable. The Chinese seem to think they can subvert the most basic law of economics and compel prices to rise when demand dries up. Americans worry a lot about China, with more than half mistakenly believing it is the world's top economic power. Only 32% say the U.S. economy is most powerful. But the Potemkin mentality at the very top of China’s communist government suggests other parts of the Chinese state are a lot hollower than they seem. Economic power is the source of other forms of power, especially military and geopolitical strength. It takes a lot of money to build world-class aircraft carriers and submarines, to bully your neighbors into territorial concessions as China is trying to do in the South China Sea, to operate big multinational companies with the smarts and agility to compete with the best in the west. If the economic foundation is flimsy, other pillars will be too. China undoubtedly has a huge economy that will eventually become the world’s largest, due to its enormous population. But it will be a long time—think decades—before China can truly match U.S. economic power. If ever. GDP per capita is still less than $8,000 in China, according to the World Bank. In the United States, it’s more than $54,000—7 times the level in China. That gap might widen rather than narrow if China keeps trying to force-feed economic growth while American capitalism continues to rely on market forces and innovation. We’ve got plenty of problems here—including our own variety of political ineptitude—but at least we let supply and demand determine most prices. When China’s leaders let that happen, maybe it will be time to worry.
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