China is a mess

Copyright 2015 John T. Reed

The fact that China, with the size of the U.S., the population of Europe plus the entire Western Hemisphere combined, and the second highest GDP in the world, just had a Great-Depression-size market crash—and is reacting in about the worst possible way to it—is a potentially far bigger story. It could lead to a depression and/or a revolution in China and a depression in China would adversely affect all of China’s trading partners. We are their second biggest trading partner after the European Union.

Here is some perspective on the matter.

Take over the world

China is going to take over the world—or so we have been told.

When I was in grad school in the mid 1970s, we were told Japan was going to take over the world.

They did not. Indeed, they are a financial disaster. They made a bunch of bad loans decades ago and apparently are utterly lacking in a character trait known as admitting you were wrong and cutting your losses.

They also misbehaved during World War II. The Germans did, too. I just spent four days in Berlin. The Germans fessed up to their World War II misbehavior, or almost all of it, forthrightly, apologized, paid reparations, and became a responsible, respected leading country.

Because of an inability to lose face that borders on psychiatric disorder, the Japanese cannot admit and take responsibility either for their World War II misbehavior or for their more recent massive amount of bad loans. So they endlessly limp along in extreme financial distress and without the normal relations with their neighbors and prior enemies that they could achieve if they followed the German model. Japan now has the world’s worst debt-to-GDP ratio—238% according to the IMF—and is in the third decade of its so-called “Lost Decade.”

Population bomb

Add the facts that they allow little immigration and have one of the world’s worst population pyramids and you have disaster squared coming up in the future. Their too-many old people will have to start withdrawing their government-ordered investments in Japan government bonds to pay the rent and that will tip Japan over into inflation because their too-few young people cannot afford to pay the taxes necessary to carry all those retired seniors.

Murderous Communist dictators

So now let’s look at their fellow save-face neighbors: China. Start with the fact that unlike Japan, which got a democracy courtesy of the U.S. military occupation of Japan in 1945, China is run by murderous dictators, e.g., Tiananmen Square, and has been since the late 1940s.

No Communist dictatorship has ever taken over the world and none ever will.

Add the handicap that China has a very poorly-designed language. I know that no single central designer ever designed a language other than Esperanto; the people design languages. But the people of China did an extraordinarily lousy job of it. As a consequence, relatively few foreigners study Mandarin when you consider that it has more native speakers than any other language in the world. It is so difficult to learn that native Chinese children trail behind their counterparts in other countries in literacy during elementary school and maybe high school. Most world languages adopted an alphabet with around 26 letters. China still uses characters that are the equivalent of western hieroglyphics. See my web article Don’t learn Mandarin.

They also were forced to adopt a second written language with an alphabet that was required to send coded messages and to program computers. How many countries make you learn two different written languages? Spoken Mandarin also has tones which make the language extremely hard to speak or understand by anyone other than those who learned it as toddlers and children by growing up in a home that spoke the language.

Their biggest handicap is Communism and being under a dictatorship of the Communist Party for 66 years. Socialism doesn’t work. Communism doesn’t work. See Cuba and North Korea not to mention the Soviet Union and Warsaw Pact countries.

True, they have allowed some free market activities in recent decades. But these are still the guys who murdered over 2,000 peacefully demonstrating citizens in Tiananmen Square in 1998. These people are criminal monsters comparable to Hitler, Stalin, Tojo, Pol Pot, Castro, Kim Jong-un, Idi Amin.The particular leaders in 1989 are not actually the same as the current leaders. Those guys retired or died. But there is no doubt that the current Communist Party leaders would also promptly murder over 2,000 peaceful demonstrators if they thought their power was threatened by them.

China is not rich. Their per-capita GDP ranks 88th in the world according to the CIA—just below Macedonia and just above the Dominican Republic. Not G-20 or G-8 material except by gross numbers.

They now rank second in the world in total GDP, or so they tell us. They are a pack of liars. For example, they count the money spent to construct high-rise buildings that no one wants to own or rent, and that sit empty all over China, as part of their GDP, among other dodges.

Their currency, the yuan, is not freely traded—banana republic behavior—and not on the IMF list of approved reserve currencies. Austraila has just 23 million people—about the same as Texas—but the Australian dollar is one of the IMF reserve currencies.

China is cracking down on democracy in Hong Kong—in spite of a solmn promise not to do that when they took control of it in 1997. They censor the Internet, have capital controls (more banana-republic behavior), imprison political opponents. They have one of the most polluted—both air and water—countries on earth. Not only do they not have enough clean water; they do not have enough water of any kind.

In spite of having 1.4 billion people, they have a labor shortage, yet they continue their one-child policy. Japanese companies that moved to China for low-cost labor have now moved on to Vietnam and Bangladesh because the Chinese labor got too uncompetitive.

China chronically suffers from mass unrest that is approaching a boiling point. Their Communist leaders live in constant terror of a new revolution—against them.

China ranks 100th in Transparency International’s Corruption Perceptions Index—below such bastions of integrity as Algeria, Greece, Tunisa, Cuba, and five countries above Argentina.

China’s population pyramid is almost as bad as Japan’s, albeit a decade or so behind Japan. Going from a have-lots-of-kids policy to a one-child policy overnight means China will get old before it gets rich.

Now look at recent events there.

Chinese leaders, being Communist ignoramuses about business and free markets, foolishly concluded that a rising stock market was a feather in their caps. So they manipulated their own stock market, a law violation in countries run by competent grown-ups.

They pushed their stock prices to new highs. Then, they fell 30% in three weeks in June. For perspective, here are some comparable falls in the U.S.

• 44.57% from 16 September 1929 to 13 November 1929, a.k.a. the beginning of the Great Depression
• 33.51% from 25 August 1987 to 4 December 1987, a.k.a. Black Monday
• 36.77% from 24 March 2000 to 21 September 2001, a.k.a. the Dot-Com Crash

But wait, it gets worse. The Chinese government has freaked out.They did all sorts of crazy things like ordering banks to buy stocks and letting people use mortgage refinancing to buy stocks. Since China is far from transparent and known to lie to avoid embarrassment of the government, the world figures the government must know something the public does not. So the world heads for the exits.

But the Communist Chinese leaders cannot comprehend anyone not obeying them and they haver ordered the market to make prices to resume rising. They are unaware of the fact that world finacial markets are far more powerful than world governments—even the government of the most populous country in the world: China.

China’s GDP is $10.4 trillion. That’s a big number. But then ours is $17.4 trillion and the European Union’s is $18.5 trillion.

But if you want to see some really big numbers, look at the size of the world stock, bond, and currency markets:

• world stock markets: $54 trillion
• world bond markets: $157 trillion
• world currency markets: around $6 trillion a day! about $1.5 quadrillion a year!

And some country with a dubious GDP of $10 trillion is going to order world financial markets around?

The financial crisis in Greece has been the big story recently.

Greece is about the size of Louisiana. It has the population of Ohio. And the GDP of the Minneapolis-St. Paul metro area.

The fact that China, with the size of the U.S., the population of Europe plus the entire Western Hemisphere combined, and the second highest GDP in the world, just had a Great-Depression-size market crash—and is reacting in about the worst possible way to it, is a potentially far bigger story. It could lead to a depression and/or a revolution in China and a depression in China would adversely affect all of China’s trading partners. China is,for example, Japan’s number one trading partner. Just what Japan needs with all its above-described problems. A depression in China would probably cause at least a recession in its main trading partners: the EU, US, Hong Kong, Japan, its fellow BRIC countries, Taiwan, and South Korea. A depression in China could tip Japan over into hyperinflation. Both going over simultaneously could tip other countries into financial catastrophe.

Greece failing only endangers a spiritual concept known as European integration.