Chinese burns and horse blinkers

By golly, we are a banal lot, aren’t we? How soon we forget the turmoil of yesteryear. Truly, if we aren’t just a bunch of hypocrites, then we are surely a bunch of sanguine ignoramuses.

‘No, that can’t be right,’ people reading this will probably say. They’ll also say that I’ve gone completely mad. They’ll say that in fact the global economic recovery that we seem to be ushering in now is the real deal, the real McCoy, the real Cinderella story of 21st century capitalism.

Economic crises of any variant, they’ll say, just don’t seem to last as long any more. And there’s proof in the pudding. Take a look at stock markets: they’re up everywhere. They’ve been staging some of the handsomest rebounds in recent memory.

Even the Asian crisis of the late 90s didn’t have the kind of spring in the bones of the proverbial camel as this variant does. So rejoice, oh, rejoice, people. Hasn’t it been a while?

How many pants did we soil, collectively, just thinking the multitude of doomsday scenarios that were far, far worse than the Great Depression delivered between 1929 and 1933?

Not as many as there had been 80 years ago. True. People then even committed suicide. And some did this time too not so much for having lost their own money investments but other people’s money through their shenanigans.

Read any newspaper or news magazine worth its salt today and you’ll note His Master’s indelible voice: happy days are here again. We’re coming out of the Great Recession. The champagne bottles are popping. The bubbly is flowing again, like blood swims in our veins. Or arteries.

Our jobs are safe. New jobs will be created. Businesses will return to profitability, big time. More jobs will be created. Governments will rake up untold zillions in taxation revenue. Budgets will be in the black again. Trade surpluses will soar so high that they’ll make the Great Wall of China look like a pathetically minuscule Lego set.

Don’t be fooled by the contrarians: the green shoots of free market capitalism are sprouting everywhere like wild mushrooms. Make no mistake: we’re on the cusp of another heady bull run.

Bull run, my foot. More like another mania. And in less than ten years, what’s to say we won’t be wallowing in yet another economic crisis, one on a scale unprecedented by anything in recent memory?

If any government, any central bank, and for that matter any economist or analyst who dares call himself or herself one, does the Piped Piper caper and leads the city’s rats to the edge of the cliff, then the rats deserve to drown. But if the rats are smart, they’ll take the Piped Piper down with them.

Don’t be a bunny. We’re quite a way from getting out of strife. Call in the witch doctors but the truth is, nobody knows when or how full recovery will happen. Whilst strife may not remain as deep as the deepest ocean now we certainly didn’t reach Armageddon this time round strife remains, lingering like a witch’s curse.

Unregulated capitalism

Here are some key indicators. Gold price is still over US$900 an ounce. World oil price can’t seem to push past US$70 a barrel. Bonds yields, even 10-year notes, are pathetic. While global investors now seem to have a yen for risk, the US dollar is wallowing (and not because the yuan has taken charge).

Stock markets may be belting out happy tunes this past month, driving investors loco and into another bout of frenzied speculation. Call it gambling. Because that’s what it is. It’s not ruled by ‘bounded rationality’.

The problem isn’t American capitalism, or British or European or Russian or Japanese or for that matter ‘Asian’ capitalism, for crying out loud. It’s Chinese capitalism that’s the more worrying the ‘anything goes capitalism’ that’s practised in lawless China.

It’s not a capitalism that’s punctuated by anything. It is unregulated for the most part. And it is unregulated because that is how the leaders and rank and file of the malevolent and immoral Chinese Communist Party these spiteful, Stalinist tyrants fatten their own wallets.

Just because Wall Street has edged above 9,000 points for the first time in a long time, and the Chinese regime says its gross domestic product has inched toward 8 percent in the last quarter, does not mean that all is hunky-dory again. It isn’t.

One can sketch all kinds of technical jargon around the recent good news stories emanating from everywhere. One can even produce technical diagrams to support technical arguments in support of the hunky-dory stories. But you can’t beat the ‘animal spirits’ story. “Naïve optimism”, John Maynard Keynes called it. You can’t beat the story of the herd in recent stock market movements.

These movements are never ever smooth, much less predictable. Anyone who says they are is a liar. Alan Greenspan, the former US central bank chief, may have had a hand in creating flushes of global hot money flows in the 1990s. But when the dotcom bubble burst, and real economies everywhere snafu-ed, he contributed to “irrational exuberance”.

Because it seems that, as we regain quite rapidly our appetite for risk, and shovel exuberance into a mound that we then call the return of confidence, all this misses one crucial point. Paul Krugman calls this the “return of depression economics”. It’s a theory of horse blinkers that has proven right more times than not, like the Asian crisis.

Yet that’s where we look to be headed as asset bubbles bubble and froth. Where will the corkscrew be the next time to prick yet another bubble economy and it’ll be a massive one too?

Dodgy financial system

Here’s one among a thousand and one more reasons why it’ll be China. The speculation fever not fervor is being driven by the political centre in a desperate bid to halt the Chinese economy from sinking into a mud-sloshing dyke.

This, in turn, will unleash all manner of social and political problems that the regime will find too hot to handle. And we all know how it deals with problems like this, right? By taking the hammer and sickle and loaded guns to those who dare to protest. It’s barbaric.

New barbarians have arrived at China’s Gate of Heavenly Peace: speculators, armed with cheap money thanks mostly to Beijing’s policies that force its banks, including insolvent ones, and other dodgy credit companies, to lend, lend and lend to even the riskiest borrowers. You’d think they would have learnt lessons from American capitalism.

And Chinese consumers bless their cockeyed neo-nationalist hearts, have spent, spent and spent. So exuberant they were that they borrowed even more money to spend some more still. So no reason why aggregate domestic demand should not have risen so sharply. Right?

The most worrying sign of asset bubbles emerging in China is the first Initial Public Offering (IPO) since last year. The game? Sichuan Express Company (SEC). On the first day of trading on the Shanghai bourse, SEC’s share price closed at 10.90 yuan (US$S1.60). The IPO price, wait for it, was set at 3.60 yuan. This alone raised eyebrows. And at one stage during trading, SEC’s share price was quoted at 15.25 yuan.

That didn’t stop the Chinese toll-road operator boost its market capitalisation to a whopping $3.4 billion. It’s enough render concomitant humiliation and envy to the likes of, say, Malaysia’s Plus, that road-toll grim reaper, and other Malaysian state-backed, crony-infested so-called private enterprises.

The big question regarding China’s renewed but extraordinary buoyancy is the source of the money that was splurged on this IPO, and on others now in the pipeline but are being rushed for much earlier appearances. It’s hot money, and it’s not Greenspan’s fault this time round.

Sure, one can expect greater speculation in a bullish market. But this one, in China, looks to have been manufactured by the regime. If it is not carefully managed, if the Communist Party tells the China Banking Regulatory Commission to make the usual noise but also typically turn a blind eye, and China’s banks continue to lend as recklessly as they have been doing in the last six months, only carnage awaits. No bull.

When China reported that its foreign currency reserves had topped US$2 trillion, two-thirds of which are parked US dollar assets, it sparked frenzied speculation of its impact on the yuan, whose value is managed by the Bank of China. That announcement also precipitated inflows of more hot money from elsewhere.

In the first six months of this year, China’s banks ‘lent’ 7.4 trillion yuan. That’s equivalent to almost half the money value of China’s GDP in the same period. How much of this has been spent on lifting aggregate domestic demand is anyone’s guess. More interestingly, though: just how much of China’s fiscal policy was splurged on shoring up its main bourse and its newly listed state-backed enterprises?

To get in on the game, and quickly, homebuilder China State Construction Engineering Corporation says it has secured $7.35 billion in capital by issuing shares. It is not alone. Everbright Securities Company, an arm of the state-controlled China Everbright Group, in which Chinese Communist leaders have their sticky fingers, says it too has Beijing’s blessing to issue shares to raise new capital.

And why blooming not? After all, the Chinese Red Army has long had its own companies listed on the Hong Kong stock market before the Shanghai bourse opened. We know from history that sticky fingers are perennially susceptible to crude shocks.

China, worried about growing US debt, does not have the same problem. But it does have rickety banks, and a rickety governance or prudential architecture, with routine interference by China’s mendacious political elite and their capitalist cronies. All of which lend to a dodgy Chinese financial system, framed by a decrepit legal system.

This should greatly worry the world, going forward unless, of course, we all return to wearing horse blinkers again. And guess what? This is only part of a far bigger story.

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MANJIT BHATIA, an academician and writer, is also research director of AsiaRisk, a political, economic and risk analysis consultancy in Australia. He specialises in international economics and politics, with a focus on the Asia-Pacific.