The China Vortex

One of the greatest challenges for the American system of government, and which has been laid bare by the current financial crisis is: “What do politicians do when their constituents ask for something which will win them votes in the short-term, but will prove disastrous in the long-term?” This is a very important question which has not been discussed or debated enough. Instead, most westerners naturally assume that it is better, especially when compared with China’s form of government.

Jack Perkowski, author of Managing the Dragon, has several posts on his blog which talk about the reasons and decisions for the current global credit crisis. They are the best explanations I have seen so far for what is happening and I highly recommend reading them.

For Chinese, home ownership is very important, just as it is for Americans. But Chinese would never think of asking the government to pre-approve their purchases regardless of their credit ranking. In fact, so far, there is no national credit-ranking system in China and many families save hard to make a down-payment for their home (which most Americans would call an apartment). Along with saving for their child’s education, this is the single largest expenditure they will make in their lives. Most RE transactions are cash transactions. And what is most interesting is that the private home ownership ratio (by percentage) is higher in China (70-80%) than the US’s 69% (source: Hoover Institution), even though the US had a system which, until very recently, offered free housing to all comers, without any qualifications. Very ironic that a country which is nominally Communist has a higher rate of home ownership than a country which has a free elected government and until recently, actively subsidized home ownership up to 100%, isn’t it?

This then raises a very good question: “If China has a higher home ownership rate than the US without offering junk loans which have led to the global credit crisis, then what was the whole point of the US incentive schemes, of which Fannie Mae and Freddie Mac, as well as the leading investment banks were such an important part of?” Jack Perkowski’s articles answer this very well. You see, the US built an ecosystem which turned banks into sales outlets for loans, then bundled these loans up and fed them to the global markets, where they are now causing so much grief.

Politically, and on the legislative level, this was part of a complex scheme which, at the end of the day, amounted to buying off different voting constituencies to win their votes. Which is a fancy way of saying “vote buying”.

With all the overbuilding which has happened in China’s cities, I would shudder at the thought that many of these residences were pre-approved without down payments the American way. This is why although there is overbuilding, the Chinese economy can still ride out the dips better than the US and global economy can.

Looking at the US now, it shows the danger of letting legislators who do not understand the economic consequences of their actions have too much power over complex economic issues.

Technorati Tags: asia, buying, China, credit, crisis, Fannie Mae, fanniemae, Freddie Mac, freddiemac, Jack Perkowski, Managing the Dragon: How I'm Building a Billion-Dollar Business in China, subprime, United States, vote

Seeking Alpha has an interesting article The Power of the Market: 600 Million People Lifted Out of Poverty Since 1981. The article comes with two graphs, one of which is above.

This shows that there has been a gradual fall in numbers of poor since 1981, but there was a bump in the years from about 1988 to 1994, when the numbers of poor stubbornly resisted to fall. This was a time of high inflation in China.

Do I need to tell you what happened in China in 1989?

This graph gives a rough indication that as long as the Chinese government is able to show a descending line that poverty numbers are going down in absolute terms, then the government’s position is safe. If inflation should pick up and the number of poor goes up, then they have something to worry about.

So far, developments on the economic front have been going well in China, with the noted exception of high inflation in China, much of which is due to higher commodity costs (food and energy costs) and capital inflows. Much of the capital inflow into China is due to investors who want to get out of the US dollar, and see China as the most attractive growth market for their money.

Rising inflation is usually an early indicator of other economic and social problems to come.

A few years ago, investment money coming into China was welcomed with open arms, but now times have changed, and the government doesn’t see them nearly as favorably as they did just one year ago. Capital inflows which are liquid can come into China, and also leave it very quickly, leaving the country’s economy and society in a lurch, just as it did during the Asian financial crisis of 1997 for the countries of Southeast Asia.

With the US economy heading for the dumpster, and Europe showing signs of weakness due to rising energy prices, that is not something the Chinese government wants. It is more than likely that the Chinese government will do anything to keep those poverty numbers going down in China, regardless of what it means for the rest of the global economy.

The need for social stability in China trumps everything else. Including commitments to globalization and the WTO.

Fasten your seat belts.

Technorati Tags: 1997, asia, China, crisis, economy, financial, indicator, inflation, poverty, US

In my previous article I talked about how skill demand in startups in China was changing, and that the skills needed from both local and non-Chinese had changed considerably.

This article from the Asia Times talks about how immigration and hiring trends are beginning to change in China and India. Regardless of whether you agree or disagree with it, it makes for interesting reading.

Technorati Tags: asia, China, education, employment, immigration, india, skills, startups, trends