We first wrote about this two years ago.
Most of the time people said we were crazy.
Some even suggested we were racist.
But we knew what we saw. We didn’t like it, and we thought it was only right that you should know about it too.
Today, it turns out we weren’t crazy or racist. Our worst fears were justified. And now, two years later, the mainstream press has finally figured it out.
What was it we got right that the mainstream got completely wrong? Read on for details below…
Last week, Bloomberg News reported:
‘Three decades after China implemented rules requiring foreign automakers to form joint ventures with domestic manufacturers to build cars in the country, the strategy appears to be failing in one of its key goals. While the policy has attracted investment and created millions of jobs, it has done little to help the Chinese build strong brands.’
That news doesn’t surprise us one bit.
For all the talk of China’s entrepreneurial flair, the reality is that China is still a centrally planned economy. It’s full of what Thomas DiLorenzo calls political entrepreneurs rather than market entrepreneurs.
In other words, rather than businessmen and women creating ideas, products, and services that they think will appeal to consumers, they create things they think will appeal to the central planners.
And in most cases, what the stiff-collared central planners want isn’t what the consumer wants.
That means you don’t get real innovative entrepreneurs. To be an entrepreneur, you need to take risks. You need to believe that what you’re doing will make you rich while at the same time satisfying a consumer need.
But you also need something else. You need to understand that failure is an occupational hazard of an entrepreneur.
Because the odds are against entrepreneurs, they have to know that if they get it wrong the first time they can bounce back and have a second go.
China is Punishing the Entrepreneurs
That’s pretty hard to do in China when the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) says:
‘SASAC appoints and removes the top executives of the supervised enterprises, and evaluates their performances through legal procedures and either grants rewards or inflicts punishments based on their performances…’
Now think back to the news story from Bloomberg. If you want to open a car yard in China, would you take a risk by selling Chinese cars no one has heard of (even the Chinese) or would you open a dealership selling BMWs, Chevrolets, and Toyotas?
If the prospects include punishment for failure, then even someone with a pea for a brain would sell cars of known brands.
The fact is, if punishment is the result of failure then it’s clear entrepreneurs won’t take risks. They’ll always take the safe option…they’ll become political entrepreneurs, toadying and grafting to the central planners…doing what pleases them rather than the consumers.
And that’s why the Chinese economy is starting to collapse. Rather than taking over the reins from the United States as a global economic powerhouse, China has become the US’s offshore manufacturing plant.
It has become – if you like – East Detroit or East Pittsburgh…but without the productivity. And like the old Detroit and Pittsburgh, it’s dying too.
China’s only comparative advantage is cheap labour. It has done nothing to improve production processes or create new ones. That explains why China’s productivity is so poor. As Ro Khanna, a former aide in the Obama Administration wrote recently:
‘What’s extraordinary is that our aggregate output remains competitive with China’s, even though the sector constitutes only 10 percent of our economy compared to nearly 40 percent of theirs. We are a global leader, in part, because our labor productivity (the value that a worker produces annually) is more than six times as large as China’s or India’s and significantly larger than Japan’s or Germany’s.’
Now, if the Chinese had taken Western know-how and manufacturing techniques and improved on them, then we could say China is entrepreneurial. But it hasn’t. It has just copied the West.
Entrepreneurial Economies Adapt and Improve
One of the reasons the US became an economic powerhouse was because it took ideas from the Old World and then adapted and improved them.
The growth of the US steel industry is a perfect example. The US didn’t overtake Germany and the UK as leading steel producers just because of cheaper labour, it overtook them because US industrialists and entrepreneurs developed new and better steel-making processes.
They could do that because they operated in a competitive market. They didn’t fear failure. They knew that if their steel-making process was better than their competitors’, they would become rich. If it wasn’t better, then they would just have to try again.
Chinese firms and entrepreneurs don’t have the same luxury of getting something wrong. If they fail, they could end up paying for it with a long stint in jail on trumped up charges…or even death. As China Entrepreneur reported in January:
‘Wu Ying, once one of the most successful business women in China, has spent five birthdays behind bars. Local officials are selling off her business holdings. She is only 30 years old, but has been sentenced to death for borrowing money outside official channels to fund her business, a common but illegal practice that even government officials take part in.’
The good news is an appeal court overturned Wu Ying’s death sentence.
The prosecutors claimed Ms Wu had engaged in fraud by raising money from investors and not paying them back. Ms Wu claimed that the money was a loan to fund her business.
We don’t know if it was fraud or just a bad investment. But either way, it’s a clear message: do things through the official government channels…or you may die!
Remember, the SASAC openly admits it ‘inflicts punishments’ for failure.
Maybe that message will deter fraudsters, but it doesn’t do much to encourage entrepreneurs to borrow or raise capital to fund a business. If the business fails and they can’t pay back the investment, will they face the death penalty too?
China’s Crumbling Economy
The Western mainstream press and mainstream analysts love sucking up to China’s rulers. They love praising it…probably because it’s Australia’s biggest trading partner and they don’t want to offend them.
But it’s also because it conforms to their dreams of a centrally planned economy. They’re praying it works so they can push for the same system in the West.
But the bottom line is this: China remains what it has been for the past 60 years: a brutal dictatorship where you can make a fortune if you shake the right hands. But get on the wrong side of the authorities, and the punishment can be severe.
Because of this the Chinese economic miracle is crumbling. Greg Canavan has written about this recently, including detail on how investors can profit from China’s collapse. And the fallout out for Australia, which has its colours pegged to the Chinese mast, will be just as bad.
Already, Aussie miners have put billions of dollars-worth of projects on hold as Chinese demand slows. We’ll see how the Australian econom
But don’t worry, Reserve Bank of Australia governor, Glenn Stevens sees a silver lining around the dark cloud. Here’s what he told the House of Representatives economics committee last week:
‘After that the rate of resource investment is likely to decline, while the export shipments of the resources themselves will pick up. By then we might expect that some other sectors that have been weak of late, like residential and non-residential construction, might be starting to pick up.’
Oh brother, not that old chestnut. Clearly economic illiteracy reaches to the very top in Australia. More on that tomorrow.
Cheers,
Kris.
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