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An article published today by the Chinese newspaper Global Times announced the approval of the new Shanghai Free Test Trading Area or Shanghai FTA. This new area is supposed to revolutionize the Chinese economic revolution by demolishing existing barriers.

Shanghai’s party secretary Han Zheng declared that the FTA “is the core of institutional innovation, rather than incentives”

Planned Innovations:

  • Foreign Investors will be able to participate in Chinese Capital Markets (Bonds, Stock and Futures) to a large degree
  • Investors will also be able to withdraw money quite freely from those markets
  • No import tax
  • Expedited custom procedures
  • Freer regional trade
  • Higher personal freedom of access
  • Freedom of circulation of money
  • And many others…

Of course, the Chinese government is still researching how best “to manage the market and serve the market”

Actually, Chinese leaders are far more ambitious than that. They declare that this market management methodology needs to be resolved not only for Shanghai, but for the transformation and upgrade of China’s economic development!

OK. Now let’s take a second or two to process all this information. It is obvious that China trashed its entire communist thinking 30 or so years ago, when it decided to go capitalist… the Chinese way.

In practice this means capitalist wealth with communist control.

It is obviously a really, really idiotic idea. But we grant that every civilization has one or two historic opportunities to make gigantic mistakes.

It is also obvious that Chinese leaders figure that if Western leaders can control the people and the markets, they can too.  There is no reason for these controls to be Western-flavoured. They can be Chinese-flavoured.

However, there is a tiny flaw in the plan: first, it will backfire and secondly, it will collapse.

The most basic necessity for capitalism to work is a free market. A free market needs free thinking and free thinkers are, as the Germans put it “streng verboten” (or strictly forbidden) in China.

Chinese leaders are forging ahead with their forced industrialization and their building of empires based on the Renminbi. A deeply inflated currency. The real Chinese inflation is about 20% to 30% annual, which is about the same as any other Banana republic such as Argentina.

To make matters worse, they are pinning their hopes to a deeply flawed economic idea which is Mercantilism. This doctrine states that wealth can be accumulated by simply export, export and then export some more. The tiny problem with this doctrine is that as wealth accumulates, so does cost hence preventing exports! It is a self-defeating strategy that eventually collapses.

It is also clear that in the beginning such economic experiments seem to work. There is no secret here. The problem is how they end. Can you spell PIIGS (Portugal, Italy, Irland, Greece and Spain)? How about Argentina? Paraguay? Zimbabwe? Estonia? And so, so many others that are in the monetary intensive care ward (France, Germany, Brazil, India, etc.).

So we know that Chinese leaders are driving their people from a crippling communism to a disastrous pseudo-capitalism. We also know that China cannot avoid all the problems that other would be market managers throughout the world could not resolve. If there is a solution, a way to manage a market and make it more stable and more efficient than a free market, don’t you think that they would have found it by now? Isn’t about 200 years of economic experimentation and failure enough? Is there something that they haven’t tried yet? At least one thing that worked? No. Not one.

In short, the Chinese experiment is doomed. It will work, for a while, until the inevitable booms and busts begin. When they start, there will be plenty of “blood in the water” to make a killing in the market. The smart money will be betting to the resurgence of the Chinese economy after each collapse. New billionaires will be made. Of that, we have no doubt.

However, as the old Chinese proverb says “be careful what you wish for”. By switching to capitalism, by means of switching to freer and freer markets they are also freeing minds. These freer minds will, eventually, get rid of all communist bosses. This weird concept that they can somehow maintain communist control over a capitalist China will blow-up in their faces.

And, of course, as Absolute Austro-Libertarian enthusiasts we will be there. Making money over many years and laughing our pants off. The Chinese leaders will indeed get what they wish for, the question is, will they like it? We think not.

Note: please see the Glossary if you are unfamiliar with certain words.

 

 

 

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