It's not my job to offer aid and comfort to Mr. Osborne but it would very uncharitable not to offer the Chancellor a small crumb of comfort. He thinks he is facing insurmountable problems - of course, he doesn't say that out loud but he knows it and so do we - so he should relax for five minutes and read Ambrose E-P in today's Telegraph. The Chinese government is up to its armpits in chop-suey, at least, it looks like chop-suey but smells a lot worse! Basically, the government is divided between the reformers and the statists. The reformers have known for some time that the first phase of China's development from a quasi-Soviet state to Sate-controlled capitalism has passed and now the country must remove the grip of the State and open it up to full-blooded capitalism. Unfortunately, as I have reported here before, the State-owned banks who financed the first phase far above and beyond what was required are now in deep trouble and any reform will shake them to their foundations. Another difficulty is the overwhelming predominance of State Owned Enterprises (SOEs). They and the banks have been in bed together for too long and their overweening strength has stifled free enterprise. However, the intertwining power of the cronies and the bankers whose financial influence extends deep into the government will make it incredibly hard for the reformers to make any headway. An interesting article in Caixin Online compares the China of today with the Britain of 1979 that Mrs. Thatcher had to sort out:
In Britain in the late 1970s, the government controlled most of the key
industries, and the Chinese government today controls PetroChina, China Mobile,
Air China and BaoSteel, in addition to all the financial giants such, as
Industrial and Commercial Bank of China. The 10 largest companies by market
capitalization in China are all state-owned and account for the majority of the
total earnings on the stock market last year. Earnings by private companies
remain insignificant after 30 years of privatization. In developed markets,
state-owned firms generally account for a negligible portion of the overall
The international market analysts have seen the problems approaching for a considerable time and their warnings are there to be seen and read by everyone - except those determined not to look! Here is Ambrose E-P again:
HSBC's gauge of Chinese services fell three points to 51.1 in April, the lowest
in almost two years.
The broader composite index also dropped sharply to a six-month low of 51.1
and is now barely above the contraction line, with new orders trailing badly.
The economy grew 7.7pc in the first quarter, slower than expected.
The Shanghai index of stocks rolled over in early March and has given up the
half the gains since the rally started late last year. It has dropped almost
60pc since its peak in 2008 and is now trading at levels comparable to 2003.
China's downturn is rippling through commodity markets, led by a major
sell-off of base metals this year. Credit Suisse said the short-covering rally
over the last few days is likely to prove a "dead cat bounce" as China's
structural slow-down and a weakening global economy overwhelm all else. It
expects copper to "bite the dust", falling to 2009 levels near $6,000 a tonne.
An opinion piece in Caixin Online re-iterates the warnings as expressed by what it calls "the China bears":
The China bears based their analysis on this: China's economy is slowing, and
the massive debts of local governments could well become a burden on the
national balance sheet, impeding the economy's balanced and stable growth. They see risks to the financial system.
None of this is to suggest that China's problems are insoluble, after all, 'that woman' taught us that nothing is impossible if you have the will - and the luck! Even so, the tensions between the reformers and the statists will be intense and dangerous. I have remarked before on my belief that China has inherent centrifugal forces at work and the chances of them overcoming central power is always a possibility.
There, feeling better now, are you, George? I hope not because you need to sort out our untenable borrowing requirements amongst several dozen other major problems!