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Ten Reasons China Failed: From Basic Gangsterism to Parasitic Engagements
What happens when liquidity is allocated by political muscle, massive bribery and kickbacks, rather than economics
By Jonathan Russo • 02/11/16 2:30pm


Not withstanding China’s epochal accomplishment in lifting over 300 million people out of poverty while building a world-leading economy, their future appears murky. What went wrong with China’s economy? Inquiring minds want to know. Here is a top ten guide for the perplexed.

Central Planning: Central planning, central planning. The history of the abject failure the Soviet Union’s five-year plans should tell you everything. Command and control economies that report to one man (in a nation of 1.3 billion people) are doomed from the start. Top down economic decisions often look bold and start out highly stimulative, but then degenerate into inefficiency, waste, politics and fraud.

Political Corruption: As the command and control economy generates liquidity, the demand and direction of the distributed capital becomes a political tussle. Decisions on how much steel, cement, coal, glass solar panels, high speed trains and shopping malls—in short everything—are not done in China as a cost benefit analysis by risk capital, a job difficult enough in itself. (Witness the capitalist economies’ booms and busts.) In China, this liquidity was allocated by political muscle, massive bribery and kickbacks, rather than economic justifications.

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FOREX Constipation: Parasitic global trade imbalances and capital controls created a mountain of cash that was held by the Chinese Central Bank. Like the European mountain of butter or the lake of wine, China accumulated trillions of excess foreign cash. This capital was removed from the more productive capitalist countries, who became debtors to China. In return, China recycled this excess cash into unproductive financial instruments like US Treasury Bills and Euro Bonds.

Binge Investing: Having embraced items 1-5 above, China became a binge investor in absurd countries and silly projects. As if to poke the U.S (its largest single-country trading partner) in the eye, China sidled up to Venezuela of all places. Instead of buying oil on the open market, they went deep into infrastructure projects, loans and even endorsed the psychotic foreign policy rantings of Hugo Chavez. No rational government, unless intoxicated by its economic prowess, would do that. The China Syndrome was also applied to Sudan, Zambia, Angola and Nigeria. Look at the bankrupt failed resort in the Bahamas, Baha Mar, if you want to see what “binge capital” looks like.

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Reckless Gamblers: How did China’s debt-to-GDP ratio go to 240% from 160% in nine years? How are nonperforming bank loans (if honestly tallied) hovering around 20 percent? There is a recklessness in early stage wealth. It happened in England in the 18th century as exemplified by the South Sea’s fraud and a hundred frauds like it. The recent Sino-Soviet forest stock fraud is an exact mirror. Rapid wealth produces intoxicated investors prone to scams. Remember how the Earl of Grantham in Downton Abby invested a fortune in a fraudulent American railroad. I wonder if there is a Chinese translation of Trollope’s The Way We Live Now?

Lack of Freedom: This is what lies at the heart of points 1-9. There are no institutions like free press, academia, or opposing political parties that can stop the train of failure once it has left the station. Even six-second videos are blocked and censored. This means that all bad decisions are made in a vacuum. Paradoxically, without the rule of law, paralysis has recently set in because one mistake, as judged by someone above you, can result in jail, torture and death. The search for corruption in an economy based on corruption has to be political… otherwise everyone would be in guilty. Nothing can ever be fixed in China until there is freedom. The freedom to publish dissenting opinions, differing analysis and to expose fraud and corruption.

The world has embraced China. Let us hope it is not strangled in the process.

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