Why U.S. Investors Should Worry About Following the Chinese Example

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Worldly wise investors and sophisticated geopoliticians sometimes forget that Chinese markets reflect the power of the country’s government more than its economy. The price of stocks in state-owned and state-funded corporations has too little to do with their profits and too much to do with their political connections.

Unfortunately for the political and commercial elites thoroughly invested in Chinese success, the government’s economic power seems to be weakening. The elites’ will to rule is not in doubt, but the tools that the ruling class uses may be rusting.

After decades of Chinese economic success, it has become easy to forget that the quasicapitalist China has been unstable all along. Decades after the death of Mao Zedong, political and economic power still grows out of the barrels of guns. Without the guns, China would soon have a new government -- or many of them, or none at all.

The guns aim at the hundreds of millions of people brought out of communal poverty into individual prosperity since 1979.

In his treatise on guerrilla warfare, Mao dismissed political liberty as irrelevant to the revolution: “People who live at subsistence level want first things to be put first. They are not particularly interested in freedom of religion, freedom of the press, free enterprise as we understand it, or the secret ballot. Their needs are more basic: land, tools, fertilizers, something better than rags for their children, houses to replace their shacks, freedom from police oppression, medical attention, primary schools.”

Rising Expectations

Except for freedom from police oppression, hundreds of millions of Chinese have satisfied those primary needs. Now the time has come for a revolution of rising expectations, which always comes when things are getting better -- but not quickly enough.

Mao’s face is still on the money. Its value is whatever Mao’s successors say it is from day to day. Economic power still is concentrated in state-owned enterprises and a central bank that answers to the Communist Party to support its leaders’ permanent rule. Political power is the real source of wealth, and more than a billion Chinese have none.

Deng Xiaoping may have said, “To get rich is glorious,” and the phrase has been taken as a signal for the vast economic change that has taken place since he came to power in 1978. But Deng should have told the rest of the story: People can get rich as long as they keep their mouths shut.

Just as admirers of Maoist communism ignored murder and starvation on a scale that overwhelmed the evils of Hitler and Stalin, admirers of Chinese economic reform have often ignored the chain-mail authoritarian fist inside the velvet economic glove.

In a famous comment in 2009, Thomas Friedman of the New York Times acknowledged the fist and ignored it: “One-party autocracy certainly has its drawbacks,” he said. “But when it is led by a reasonably enlightened group of people, as China is today, it can also have great advantages.”

A breezy Goldman Sachs person said that if China were a football team, you would want to wear its shirt.

Central Weakness

The advantages of one-party autocracy do indeed surround anyone who visits China: architectural wonders in the skyscraper mode; industrial development beyond the Maoist dream; nearly instant creation of subways and high-speed rail lines; construction of tens of millions of housing units; expansion of university education; and adoption of Western brands, styles, and gadgets.

Shanghai resembles New York City more than it resembles Shanghai of 50 years ago, and this is a good thing, but we still should not want to wear China’s football shirt.

Growth and prosperity in China have been handed down from governmental heaven through the diktats of central planners, and financed through manipulation of money and exchange rates.



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