Why china doomed to fail growth model transition.
Many people argue China is a long term growth story, there might be
rough path ahead as economic slow down, but china still can grow much faster
than most emerging market and developed market since its vast hinter land and
much lower GDP per capita.
But the harsh reality for china is average house hold income still trail miles behind many emerging economic after decades of double digit GDPgrowth. Furthermore, wealth disparity is accelerating at alarming speed.
In order to maintain certain level of GDP growth and employment rate, government turns to fix capital investment model as the best way for
economic great leap forward. But China is sunk into an economic growth black
hole, more GDP growth, more waste of resource (natural resource, human capital, financial capital) and more wealth disparity, thus less middle class, less social stability
Other sustainable growth model option simply can not be pursued under
current system.
We all know the central planned or so called command economic has the
efficiency of massive resource allocation. So the infrastructure can be
built at breath taking pace. But they are inferior at achieving market rate
of return, in other words, they are good at inputs side of the economic,
but poor at the output per input, the capital return side of the economic equation.
For now, almost everyone knew china has a real estate bubble, and many people are aware of the massive scale of the bubble. And we know this pervasive real estate bubble is a direct result of command economic. The government has been trying to promote another economic development model, so called “Scientific Development Model” for 5 years, but so far they failed to
deliver the transition success. On the contrary, in the past five years,
this reliance on fix capital investment is accelerating. We saw more and
more ghost shopping center, more and more vacant skyscrapers, and high
speed train with lower passenger occupancy, wind power and nuclear power
facility are mushroomed with dropping electricity demand. Many people will claim
that
China did use technology to transfer its economic development model. For
instance, the wind power, and high speed rail, so many western firms are
supporting these technology endeavors. But, what is the rate of the return
for these capital investments? Do we really need all those green energy projects if current electricity generation is more than sufficient to meet
the demand? We already lived in a over consumption society which are the
root cause of global imbalance and conflict.
I listed following disease of the command economic, and these deficiencies
can be contributed to lack of accountability and interest representation
in a non democracy society.

In a democracy representative system, various interest groups can voice
their various interest concerns, and the final action will be balanced and
the decision maker will be held accountable. During this transparent
process, the cost and price of each action variable can be determined.
But current China, the cost finding process are distorted, for instance, in coal
mine operation in China, the environment cost and labor cost can be
discarded , the interest of the shareholder (local government official
and owner) are the only concern. Same can apply to almost every industry
sector and financial sector in China’s “market economic” without democracy.

1 The waste of the natural resource, the land, the mine, the wild animal and
plant species, the forest, the river, all those natural resource have been
depleted without the consideration of sustainability. Couple of week ago, I
read an article, there are organized crime in sea bed sand excavation in
north part of china, the underground group dug out the sand from the sea bed, ship hundred miles away as port building material (by the way, China
already has oversupply of port facility), the local government sea
supervisory agency turned a blind eye since the leader are shareholder of this operation. So after all these destruction at ground level and underground level, they are devastating the sea bed. So what is the next victim? Since the cost consideration for environment and welfare of local
community will never be a legitimate issue that can be represented by a
legitimate interest group in China. So even there is environment protection
regulation, but in reality, the implementation of law is almost zero by western standard.
2 The abuse of the human resource. Why the labor is so cheap? Same reason,
there are no legitimate interest group with tooth to represent them.
3 The waste of the financial capital, the banks are in a deep hole, 50% of their lending are directly linked to real estate project( loan to real estate developer, mortgage loan to home buyer, the unique preference practice of issue loan to borrower with pledged real estate). Regular business loan such as for R&D are shrinking. Facing the ever diminished
marginal rate of return, the cash flow from those fix capital investment are not sufficient enough to cover the interest expense, nevertheless to pay back the principal.
Most banks have to keep issuing new loan to those borrowers to keep them
float, the debt have been rolling over for years. In economic crisis, the
prudent banking risk management practice is to entrench, to withdraw and
preserve the capital, but in China, just opposite, the bank have to loose
up to prevent the dismantle of entire system. And the root of the problem is
the same: issue loan can benefit the borrower, the banking executive, and
the local government officials. Their interests are aligned. The capital return, the potential lose of the principal is always a secondary consideration, especially, when the loan are issued to the state owned enterprise or well connected “too big to fail” private business. Who care?
The bank are state owned bank, the capital are state capital.
>> >
>> >
>> > With the waste of financial capital, the abuse of human capital and the
>> > natural resource, china is over drafting its future. But many will argue
>> > that China has been doing this for decades, why this time is different?
>> > What are the sighs of final time of reckoning?
>> >
1.As I observed in current China, bank are in a dilemma now, the banking system is hooked up in the huge hole, they can not step on the brake,
otherwise, whole system will collapse very soon, the pervasive of loan shark
and skyrocketing interest rate are the cracking sighs of financial system failure.

Soft landing can be wished, but the hard landing is more of a reality.

2. The human capital are fighting with their own life, the migrant workers
commit suicide in order to get a raise, but 20 percent minimum wage increase
will not solve the wealth disparity problem, and besides the lucrative
Joint venture, how many china private business can afford a decent raise?
Without independent labor union, this problem can not be solved, but just imagine what will happen if china has independent labor union?

And there is a reverse migration going on in coastal areas in China.
The natural resource, well, they began to steal the sands from the sea bed?
What can you say? There are many other sighs such as: worst stock market performance in
The world,。 The peak of the real estate bubble. Maintain stability became top government priority etc.

So what is the future for the sustainable development of China? I only can
hope it is not too later for china to change.
New sustainable model mandate the elimination of the old system to allow
various representative interest groups to raise their voice. China is in a
deadly dilemma. That is the true meaning of the words of Prime Minister
Wen.
>> >
>> >
>> >