Sunday, May 1, 2011

Thoughts about China & Review of The Party: The Secret World of China's Communist Rulers

I am still mystified that the Russian market has a much cheaper valuation than the BRIC countries' markets. Brazil is a basketcase, and a blanket policy of avoiding Chinese investments and fake bullion coins seems like the way to go. A Credit Bubble Stocks correspondent has written with thoughts about China:

China has been over-organized for a couple thousand years. A privileged elite consumes all of the potentially productive capital that innovators might otherwise use to create additional capital. So China's list of inventions is paltry. Today, to some extent it compensates by industrial espionage.

The Chinese communist party reduces Chinese wealth by 90-percent or so, compared with what it might be. Then it uses its monopoly of power to steal half or more of these diminished resources from the public.

The Chinese communists impoverish the larger society by preventing other people from thinking and acting on the basis of sound information. That is, they prevent Reed's law economic gains. In other words, for the purpose of maintaining monopoly control, they prevent the formation of wealth-producing subgroups that are independent of them. They only allow a spoke-and-hub organization, with themselves in control of the hub.

The asymptote is to have everyone connected directly to everyone else. Countries that fail to approach this asymptote will find themselves unable to compete with countries that do.
The point about wealth coming from thinking and acting on sound information is true. We know this from Mises treatise on economics: Human Action. The free-market economy surpasses any centralized system. It allows entrepreneurs to rise to top positions in industry and direct production, by earning high profits and  serving customers.

Right now, the Chinese government lies to itself and to outsiders about economic metrics. This is part of a very long history of economic insanity in authoritarian countries. See Bryan Caplan's review of Mao's Great Famine: The History of China's Most Devastating Catastrophe, 1958-1962:  
"Alas, the Communists saw absolute power as a mere stepping stone to their true goal: Mimicking a few random characteristics of advanced economies, no matter how many lives it cost."  
In other words, a cargo cult. The story of Mao's Great Famine is totally appalling, and I'm not sure that most investors know anything about it. Mao killed fifty million people, and the Chinese were reduced to eating each other. As our correspondent writes,
Communist party members were a broad mass of illiterate or semi-literate dregs who had no concept of economics, industry or science. The people who were able to scramble to the top of this heap of rubbish had special personalities.

They always ranked themselves at the top of any dimension of goodness and they felt murderous rage when anyone questioned their rankings. They were unable to judge technical talent or rank themselves accurately on any scale of goodness, compared with others.

They were unable to compare their own crude grasp of technical matters with the subtle knowledge of experts. Stalin was especially prone to murder experts. He and Mao had only the crudest, cargo cult caricatures of knowledge of high technical civilization. Their talents were murder and stealth.

Lenin said, "Communism is Soviet power plus electrification of the whole country." In other words, Communism is murder plus electricity.
Recently, I've been reading a book about the current Chinese political system, The Party: The Secret World of China's Communist Rulers. Most people do not know that the country is controlled, top to bottom, by the communist party. There were two key takeaways. First, the country is incredibly corrupt. As the book says,
"Corruption thrives in sectors with heavy state involvement and considerable room for administrative discretion: customs, taxation, the sale of land, infrastructure development, procurement, and any other sector dependent on government regulation. The jobs in government which attracted the most applicants in 2008 were not elite positions in the mandarinate... Of the top ten government bodies which received the most expressions of interest for positions, eight were provincial tax bureaux, topped by Guangdong, all of them along the prosperous coast, and two were the customs bureaux of Shanghai and Shenzhen. The bottom ten, which attracted the least interest, were all provincial statistic bureaux." (p141)
Second, the representations made to foreign investors about Chinese companies do not tell the whole story,
"The bulging prospectuses used to sell Chinese state companies ahead of their offshore public listings are crammed with information... but the Party's myriad functions, especially control over top personnel, have been airbrushed out altogether. [...] There is a tacit understanding among western intermediaries to play down the Party's role because people understand that it is not going to sell well in the west." (p22)

"Morgan Stanley bankers underwriting the CCB listing were caught by surprise... A number quietly suggested that if the Party wielded such influence in CCB, perhaps its role ought to be declared in the prospectus as well. They were quickly set straight. 'Ultimately, no one was under any illusions that the state controlled the companies,' said an adviser to the deal. 'To get into details about the party committees in a way that was provocative and tendentious was neither productive nor necessary.'"(p52)
I am bearish, longer term, on China's prospects, especially if they maintain the current, defective political system. There's evidence of China's lack of invention in The Man Who Loved China. There are individual American inventors, like Edison or Kettering, with a more impressive record of invention than China.

1 comment:

Anonymous said...

Mr. Yuan is a high school history professor in Beijing. He got famous when recordings of his classes went viral online. First because he’s hilarious and awesome at the same time. He explains Chinese and World history with superb detail while translating it to colloquial and humorous Beijing vernacular. And he is also opinionated and outspoken. His popularity went out of the roof when his lectures on the Mao Zedong era went public, where he openly calls Mao a murderous butcher, who has killed more Chinese than all foreign devils combined.