China syndrome

Financial Adviser

For the past two weeks we have had a global panic over China, with many so-called experts, including many of the same economists who missed the 2007/8 financial crisis, predicting the end of the China miracle.

Without as much as an apology for their appalling earlier miscalculation, or indeed for the additional hocus pocus that has arisen since – from so-called behavioural economists to astro-economists – they have pounced on China like hungry cats.

However, we believe that the China spasm was simply a slight disturbance on the long journey.

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This conclusion is based on a basic analysis: for most of the last millennium, until the rise of mercantilism and the industrial revolution, the Chinese economy was the most dominant in the world.

Since then, and particularly now, it has been embedded in the Chinese political DNA to return to the pinnacle of global economic power, by hook or by crook.

Equally, it is simply folly to analyse the Chinese economy using the metrics of liberal democracy.

The most important thing about China is that it is a state capital economy ruled by the central committee; it is not a liberal democracy, far from it.

So, as we have witnessed, the state has reserved for itself the right to intervene: in bank lending, in when corporates and individuals can invest, in how and when foreign investors can invest in the country, the industries and the degree of management involvement.

Second, the stock market is not the economy, and the last thing this Chinese government will do is to allow a bit of volatility on the exchange to undermine its determination to see the yuan become a global reserve currency, a symbol of its new supremacy.

Sometimes we like myths, such as that India is the world’s biggest democracy – on the basis of a vote every four or five years – and can replace China when in reality we read every day about the backwardness and kleptocracy that is part of everyday life in the sub-continent. No matter how we try, China is in no way equally as corrupt.