Communist Crony Capitalists

China has made the leap from N Korean-style basket case communism to banana republic crony-kleptocracy, and we should all applaud the fact that liberation has lifted several hundred million people out of grinding poverty and into middle incomes.

But is the Party over?

If you think we saw bad things out of China this week, brace yourselves. It’s going to get worse.
..
So expect defaults, expect credit events, expect strong companies to survive in this environment and weak companies to get wiped out.
In fact, as you can see in the Morgan Stanley table below, it’s already started.

China optimists like Scott Sumner (I have a bet with Scott on whether Mexican PPP GDP per capita will still exceed China’s by 2038) will point to figures showing state investment is declining, but I suspect a graph of “technically not state-owned, but substantially owned by officials of the armed forces or Party” would paint a less rosy picture.

China is still very poor and has enormous opportunities for economic growth, but this is what happens when capital is expended without enough market guidance — the incentives for the Communist Party are to keep their oligarchic power whatever the cost to growth. China is not developing a free press or inclusive democratic institutions, and without them, at some point they must inevitably run into a zero-growth wall. Is that time now?


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One response to “Communist Crony Capitalists”

  1. Neil Avatar
    Neil

    I don’t know if democratic institutions and a free press are absolute requirements–one could imagine a benevolent tyrant who opens up the economy, respects property, and provides the required educational opportunities to allow an entrepreneurial, property-owning middle class to develop.

    However, one would also suspect that such a tyrant wouldn’t last very long after the middle class gained economic power.

    I think that there is very little chance that the Party will release enough power to really develop a dynamic economy. The most likely outcome is another period of warlordism.