GOLD is the money of the KINGS, SILVER is the money of the GENTLEMEN, BARTER is the money of the PEASANTS, but DEBT is the money of the SLAVES!!!

Sunday, March 6, 2016

China’s Economy is Slowing Down

On a more fundamental note, no economy can keep growing at a blistering pace forever. Just like when it happens with people trying to lose excess weight, they hit a plateau, that is exactly what has happened with the Chinese economy, it has plateaued. One has to bear in mind China did not grow organically, it was a forced growth through state intervention. To draw an analogy, the growth of China's economy through state intervention was very much akin to a bodybuilder pumping iron by injecting bunch of anabolic steroids. He grew his muscles really big, and fast. But when the effects of the steroids started to vane, he lost all the muscles he had build in much shorter time then that he had gained in. The only option for him was to keep taking those steroids forever which could lead to other sever complications including cardiac arrest, or then learn to live with his new look sans any muscles. First one has to understand how Political hierarchy in China works to understand its economics. Since China is a Communist Country with Politburo at its apex the only way to rise within that structure is to outperform others and manage to catch the eye of the members that constitute the Politburo. These Politburo members are also the people heading China's State owned Industries & Financial Institutions. While in the past (Mao's) times the fastest way to the top for a Provincial Leader was by mobilizing more men for Red Army than the neighboring provinces Governor, after Deng Xioping took over the mantle, instead of mobilizing men for the Red Army, the Provincial Leader who showcased increased economic activity within his province was guaranteed a promotion. This led to Provincial Governors outdoing one another by setting up bigger & bigger infrastructure & building/housing projects. This increased activity of infrastructural development gave State owned Corporations & Banks more business which in return helped Bosses who ran these enterprise (Industries & Bank) yield considerable clout within the Politburo. So in essence the Provincial Governors curried favor of Politburo bosses by giving these enterprises big orders for infrastructure projects. In their desperate bid to out do one another in the race to the top, they initiated infrastructure projects on mammoth scale of which neither there was demand nor requirement. These led to huge swaths of land resembling Ghost towns What Will Become Of China's Ghost Cities? During my Business visits of China in early to mid 2000's I was visibly upset at the stupidity & shortsightedness of Chinese political leaders, and had warned all my investors of staying clear of investing there. But herd mentality prevailed over my sane advise and for lack of better judgement, they went in and sunk their money in its property market, and rest they say is HISTORY. Of course, this mad rush to build ghost cities also helped other developing economies namely, Brazil & Russia grow exponentially, as China's hunger for their resources drove up commodity prices globally. But all this had to end sooner then later, after Xi assumed Premiership he started taking remedial measures to cool down this artificially heated economy, credits are not as easy to get as they were in earlier times, more roadblocks have been erected in infrastructure development spending, more restrictionist measures been taken making western media question if Xi will reverse all of China's gains. Blame Politics for China's Market Meltdown But, I think Xi is doing the right thing, he is putting dietary restrictions on China's over bloated economy and putting it on a trajectory to a more sustainable development. Meanwhile, rest of the World including the US will have to learn to live with a more slowly but surely growing China. A multi-trillion dollar economy growing at over 6% is no mean feat. Let us all learn to live with this new normal.

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