The Damage Is Just Unfolding

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In the Manhattan Contrarian, Francis Menton shows how China’s system has” enormous disadvantages, mostly self-inflicted by the ruling Communist Party, that show every prospect of greatly hindering and undermining its ongoing economic advance.”

China’s relative new-found wealth has allowed it to keep up the illusion of productiveness for years, issuing debt to support make-work projects even as its economy hollows out.

The United States, a far wealthier country, can keep up the illusion for much longer. But not forever, warns Mr. Menton.

In the last few months, China has been doubling down on the most “counter-productive aspects of its economic system.”

From the Epoch Times;

Be it e-commerce, entertainment, education, or gaming, few areas of Chinese society have been left unscathed amid Beijing’s torrent of regulatory activity in recent months. . . . The cascading crackdowns have been swift and puzzling, with some likening the Party’s attempts at social engineering to that which occurred during the Cultural Revolution, a decade-long period from 1966 when the regime’s first helmsman, Mao Zedong, sought to reassert his control within the Party by launching a mass campaign to destroy traditions, beliefs, and social mores.

A “profound revolution” is underway in China, declares nationalist essayist Li Guangman, a former editor for an obscure state newspaper. In a recent commentary quickly promoted on prominent Chinese state media websites, he hailed the regime’s campaign as a “return to the original intent of the Chinese Communist Party (CCP) … and the essence of socialism. . . .”

Is China Broken?

An article from the WSJ illustrates how China’s economic model took the country from “poverty to great-power status.” Everywhere, there are signs of distress.

With private investment weak and exports flagging, officials say they have little choice but to keep borrowing and building to stimulate their economies…

The outlook has darkened considerably in recent months. Manufacturing activity has contracted, exports have declined, and youth unemployment has reached record highs.

One of the country’s largest surviving property developers, Country Garden Holdings, is on the cusp of a possible default as the overall economy slips into deflation.

EVs, the Heavily Subsidized Rush

Mr. Menton focuses on an even bigger misdirection of capital by state command: the heavily-subsidized rush to produce electric cars:

A plethora of Chinese EV start-ups launched in the past decade, fueled by government support, including consumer incentives and direct financing. Auto makers churned out EVs to suck up subsidies.

About 400 Chinese electric-car makers have failed in the past several years as Beijing reduced industry subsidies while ramping up production mandates. Scrap-yards around China are littered with EVs whose technology has become outdated. . . . Chinese government support inflated EV investment and misallocated capital that could have been put to more productive uses. Now comes the destruction that invariably follows the government creation. . . .

The WSJ raises the issue of China’s EV industrial policy: Will China’s EV woes be a harbinger for the U.S. as the Biden Administration emulates China’s EV industrial policy?

One can only hope the Biden administration will learn from China’s state-directed commands to produce EVs.

In a dynamic economy, assures Mr. Menton, “business failures are inevitable.”

How about the additional trillions getting thrown into “green energy” more generally: solar arrays, wind farms, battery storage, massive new transmission lines, new heating systems for buildings, etc., etc., etc.?

All of this is unproductive, which at some point will be recognized. And all of it will need to get discarded, and the economic resources re-directed back into something useful.

Government will be mainly responsible for the destruction that results from its force-fed EV transition—and the damage may only just be starting.