China Tries to Slow Economic Growth

The booming Chinese economy is the envy of most other countries. The annual growth rate of 10.3% for the first three months, if sustained, would double the size of the economy in fewer than 7 years. Such growth, however, isn’t healthy, and the Communist regime is trying to rein it in. That’s the trouble with relying on market forces; a dictatorship tends to lose control.

The Chinese prime minister, Wen Jiabao, told a meeting of the State Council, “We must change the way we just pursue economic growth and blind expansion of investment. We must improve our economic structure, improve the quality and efficiency of our economic growth.” His worry is the 30+% increase in urban investment seen in the first 5 months of the year over last year.

That’s what happens when there’s too much cash in an economy. The value of the cash drops (in a market economy, inflation results; in a command economy, the black market soars), and people shift to other assets, like land, factories, diamonds, gold, etc. The money supply is up 19% from last year. The obvious move is to mop this up with fiscal policy, such as increasing taxes,

That, of course, is a bit alien to those who put Marx above Adam Smith. Instead, the government has decided to penalize lending institutions that make loans for things like houses, cars and building supplies by making them buy short-term securities with low yields. “We will remove fuel from the fire, so that they do not have the money to lend,” said deputy central bank governor Wu Xiaoling. Probably not with that policy. A shrewd borrow will simply change the data on the loan application, and the bankers will collude to get the higher return.

The trouble is that too much cash can’t be wiped out over night. Eventually, there will be so much excess capacity that the economy will stagger if capital investment continues at this pace. It is the mirror of the US, which invests far too little of its own money in anything anymore. And both face troubling futures because of their imbalances and their poor policies.

© Copyright 2006 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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