China’s Economic Failures Threaten the World: Is China’s Economy Real?

The Chinese government is learning the hard lesson that comes from attempting to cheat the laws of supply and demand thanks to the near collapse of the Shanghai stock market.  Where Americans learned from the Subprime Mortgage Meltdown that artificial demand created by cheap and easy credit will push the price of goods beyond affordability, the Chinese are learning government policy dictating artificial demand through overproduction, i.e. oversupply, creates an economic bubble that is destined to burst.  

Although the world has been focused on the drama of the Greece Debit Crisis, the Chinese economy has seen trillions of dollars evaporate over a few short months.  Unlike tiny Greece, China is the world’s second largest economy and that raises concerns of a global recession on the horizon.  Unfortunately, Beijing’s attempts to keep Chinese workers on the job has already resulted in the oversupply of Chinese goods that will ultimately lead to the freeze of production in China and drive down the prices of these goods.

Unfortunately, the Chinese glut will be harmful to the United States, because it will flood the US with even cheaper Chinese goods and that could force American manufactures to cut their prices below their costs or shutter their production.  For Europeans, quotas will likely help buffer them from dumping; whereas, the US government is not preparing at this time to adopt emergency tariffs to compensate for the artificial dip in prices.  It is even less likely that emerging markets can soak up excess Chinese production while Chinese manufacturers would certainly have to sell its goods for less in these markets.

On the other hand, a dramatic loss in Chinese production will also push down the price of raw goods and other commodities.  For non-Chinese manufacturers, this could help them cut costs dramatically and set them up to secure even larger shares of their markets.  In other words, a recession originating from China may well help shift global production away from the increasingly aggressive nation.  For nations, such as Russia, that supplies China with the raw goods it needs, their economies will be particularly hard hit. 

With that in mind, it is important to recognize the Chinese leadership may think like capitalists, but China is a communist country in transition.  The Communist Party’s crackdown on dissent, which it delegitimizes its legal system by making civil liberties illegal, is the most obvious example.  Beijing’s direct interference in the equity market collapse, which is boldly observed by its decision to ban investors who own more than 5% of a company from trading, also demonstrates their instinctual reaction when feeling insecure.  As such, it is clear the Communist government prioritizes jobs (politics) above economics, because a lack of jobs creates dissent. 

Decreased imports from Russia, South Africa, New Zealand, Australia, Brazil, Indonesia, Japan, Germany, Hong Kong, Netherlands, France, the EU, Italy, Korea, Taiwan, and the UK versus increased imports from India, Malaysia, ASEAN, US, Canada, Singapore, Philippines, Vietnam, and Thailand curiously reflect geopolitical interests.  Where China is attempting to shift away from imports to favor a domestic economy, these shifts suggest China is moving away from regional and global competitors while growing closer to nations it wishes to placate.

Frankly, the financial world may see China as an economy, but it is a corporation seeking to fulfill the objectives of its political class.  In truth, the largely agrarian domestic economy of China will survive in the event of a serious global recession, but the government needs a modern formal global economy to interact with the world and buy what it needs to keeps that modern economy going.  It also needs financial capital to gain influence over foreign markets and secure its national security interests.


Unfortunately, the stock market collapse, production bubbles, and a lack of domestic are a result of the government’s failure to build a real economy.