On February 26, China’s cabinet, the State Council, approved a joint task force to tackle Chinese stock market corruption. This is believed to be the prime cause of the 9% Chinese Market crash that sparked last week’s worldwide market collapse. This should give a clear indicator of how business is conducted in China; the government finally decides to investigate its markets, and the smart money bails!
The fact that the government task force seeks to unite seven disparate state run agencies should give some insight into the efficiency of communist administration. Nevertheless, this change is welcome. The recent market upsurge was attracting swarms of new and uninformed individual Chinese investors; and Chinese brokerages were getting rich selling them stocks in companies that didn’t exist.
I have spent a fair amount of time in China, and it is amazing how much the economy runs on government corruption. Bribing a government official is an accepted part of conducting any business. It is the only way to make communist bureaocracy run efficiently. In Chinese law, “money laundering” is specifically worded to only include funds connected to drugs or terrorism. All other money transfers can not be investigated, and there is no fund transfer flagging system as in the U.S.
Occassionally, with a high publicity project such as the environmental disaster at the Yangzse River’s Three Gorges Dam, the west catches a glimpse of Chinese corruption. Chinese government officials embezzled 473 million yuan on the project in 1998 alone. An estimated 12% of the 4 billion yuan budget was illegally diverted to government officials by January 2000, for a project that has displaced 1.9 million villagers and destroyed invaluable archaeological and cultural resources.
Cause for Hope
China’s move towards policing their markets is a very good sign. The current Chinese economic might is only a tiny fraction of China’s potential. Consider that China essentially has no real estate market (the government owns all the land in China, and grants leases to home owners for up to
75 years 70 years). Also consider that China’s credit and debt market is in its infancy. Once the average Chinese consumer has the ability to borrow or shop on credit, the retail economy will double, and business development will skyrocket.
Capitalism Topples Autocracies
It worked with the Soviet Union, and it will work with China. Through the internet and world trade, Chinese citizens are becoming increasingly aware of the rights and priviliges of western countries. Currently, only ten American movies are allowed into Chinese movie theaters every year. They are carefully selected by the government so that the Chinese working class will not see America’s wealth. It’s very odd to be homesick in China, pop into a movie theater, and have your only selection be “Anaconda II!”
Currently, even ValueWiki.com is blocked by the Chinese government. But as the internet and world trade seeps into China, the government will ultimately be faced with two choices. Either cut off all connects with the west entirely, or give in to capitalization and westernization. Now that China has a taste of economic success, I believe they are hooked.
Longterm, I’m bullish on China.