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It was the Beijing Olympics in 2008 that amazed and deluded so many investors. If only Western governments had the courage and vision of the state capitalists in the Chinese Communist Party, was the not-so-silent thought. What followed was the global financial collapse, and for the next five years, the autocrats in Beijing continued to intervene clumsily, alternately whipping on and choking back the Chinese pony until it stumbled into the slow lane, dragging its huge debt burden behind.
Since the Lehman collapse, it has been an article of faith that the world needs more state intervention. The market is erratic and often too late in imposing its harsh discipline. Better to assert prudential authority from above. For China, the hand at the tiller has turned into a deadly grip steering the ship of state first into the eye of the storm and then on to the rocks. According to the IMF, the investment boom of easy credit unleashed after the crash has left Chinese companies with debt-to-equity ratios well in excess of 1 to 1. The money flow is now being choked back and government, itself excessively burdened with debt, is now being asked to bail out the "private sector," often companies partly owned by provincial or local governments.
What we seem to be seeing in China is enforced solidarity, where the debts will be shuffled upwards into the lap of the state to avoid embarrassing defaults and the disaster of bankruptcy and mass worker layoffs.
My guess is this clumsy attempt by the Chinese state to manage the unwinding of an artificial boom will fail. It somewhat resembles the efforts by corporate Japan in the 1990s to escape their debt crisis through the keiretsu system of interlocking shareholdings and corporate support networks.
There are those who persist in believing that the emerging markets, led by China, will continue to drive global growth, simply by virtue of the latent demand of billions of consumers. There is no question that there is aspiration for a better life, often expressed loudly rather than latent, but it is not the case that this can always translate into economic demand.
For the aspirers to become participating consumers requires an open economy and an open society. It requires more than just the rudiments of market forces. It requires a system where capital and opportunity are allocated to the most efficient, rather than traded as political favours. In other words, it requires the rule of law and open government.
If you can buy shares in major companies in the U.S. and Europe at valuations that are similar to those at which trade Chinese or Indian enterprises, why would you choose the latter, rather than the former, given the political risk? For a long time, the question was ignored. Now it is becoming moot.
Carl Mortished is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights.