The Chinese economy

Everyone must have heard many different variations on how incredible the Chinese economy is: spectacular growth, innovations galore, etc., etc. And there's much truth to it — China has been industrializing at a mind-croggling pace. At least, the visual evidence says so. The economic data coming out of China is, to be kind, not as dependable as similar data from most other countries.

I realize it's considered bad form to quote yourself, but I still think the same way as when I wrote this and this.

[From August, 2004]: While there is no doubt that China is a fast-growing economy, the most common mistake among both investors and pundits is to assume that China is really just like South Carolina or Ireland . . . a formerly depressed area now achieving good results from modernization. The problem is that China is not just the next Atlanta, Georgia, or Slovenia. China is still, more or less, a command economy with a capitalist face. One of the biggest players in the Chinese economy is the army, and not just in the sense of being a big purchaser of capital goods (like the United States Army, for example).

The Chinese army owns or controls huge sectors of the economy, and runs them in the same way it would run a division or an army corps. The very term "command economy" would seem to have been minted to describe this situation. The numbers reported by these "companies" bear about the same resemblance to reality as those posted by Enron or Worldcom. With so much of their economy not subject to profit and loss, every figure from China must be viewed as nothing more than a guess (at best) or active disinformation.

Three years on, I must retract a tiny bit there . . . Enron's and Worldcom's figures, while deliberately misleading, were refutable (and the culprits taken to court).

[From October, 2004]: Much of the problem is that even now, the Chinese economy is not particularly free: the official and unofficial controls on the economy provide far too many opportunities for rent-seeking officialdom to play favourites and cripple antagonists (and for once, "cripple" is not just a bit of hyperbole). Any numbers provided by the Chinese authorities can not be depended upon, and should probably only be viewed as an indication of what the Chinese government wants the outside world to believe.

Even in a relatively free economy like Canada, the underground economy can be huge, with plenty of economic activity happening out of reach of the taxman. In China, where everybody was raised in an environment where providing the "wrong" answer to your leader could get you imprisoned (or executed) as an economic criminal, the numbers upon which the bankers and financial officials depend can only be described as extremely unreliable.

Samizdata links to a brief Tyler Cowen post which includes this quote:

...of the 3,220 Chinese citizens with a personal wealth of 100 million yuan ($13 million) or more, 2,932 are children of high-level cadres. Of the key positions in the five industrial sectors - finance, foreign trade, land development, large-scale engineering and securities - 85% to 90% are held by children of high-level cadres.

That's even higher than I expected. But it's an excellent example of what I originally wrote about back in 2004: the economy isn't free, and the beneficiaries are disproportionally those who are politically well-connected. Caveat investor.