Give Trains a Chance

Chinese exports and imports slipped in March.  According to trade data from Beijing released Wednesday, exports declined 6.6 percent from this time last year.  Moreover, imports dropped 11.3 percent.

If you can believe it, China’s first quarter GDP rose just 7.3 percent.  That’s its slowest growth rate since 2009.  While this may be red hot growth in many countries, in China this is cause for alarm.

In China, 8 percent GDP is considered necessary to create enough jobs for the tens of millions of migrants flooding from the country to the city.  Likewise, this growth and creation of jobs are thought to be necessary to prevent massive social unrest.  Some, however, believe a slowdown for China will ultimately help the economy.

Last month, Mei Jianping, professor of finance at the Cheung Kong Graduate School of business, explained why a slowdown is inevitable.  “China’s GDP target of 7.5 percent for 2014 ‘may be possible’ but the rate ‘is not sustainable’, said Jianping.

“For sustainable long-term growth, the rate is probably 5 percent – and 5 percent is not bad,” added Jianping.  He also elaborated on why this would be beneficial…

In Bad Need of A Maalox Moment

“Historically, the Chinese government has bailed out failing companies and companies with bad debt,” said Jianping.  “It was this excess that China has to avoid going forward.

“Let’s say I’m going to give you a reward: You can go to any Michelin-starred restaurant in New York, and I’ll pay for it.  You can do it for five days.  There is only one catch: you’re not allowed to go to the restroom.  Can you do it?”

This analogy, says Jianping, can be used for China’s economic growth…

“For the last 30 years, China has been eating up a lot of capital, but it never seriously goes to the restroom.  So, one of the most amazing characteristics of the US system was the financial crisis.  It’s bad, but it’s like somebody going to the restroom.  You take a break and get rid of the excesses, then you become healthy.  China hasn’t had a chance to do that.”

Unfortunately, in the U.S., the latest recession was greeted with Chinese style bailouts.  The government rushed in to bailout General Motors, AIG, and others.  Hence, the rot was never purged from the economy.  But that is a story for another day.  Today we’ll keep our sights squarely set on China…

Give Trains a Chance

One of the many conceits of central planners is that they know how to best organize and arrange people in ways that are most beneficial.  Of course, they are the ones that define the criteria.  Freedom of choice, individual autonomy…these are things central planners have little patience or care for.

There are few passions – with the exception of long lunches with interns or short standards of accountability – that stroke a central planner’s vanity than state sponsored train building projects.  The execution of public train projects engages all the sanctimonious forces of big government.  Directing where people travel, how they get there – and when…these are the sorts of things big bureaucrats relish.  What’s more, hijacking of public funds for the so called public good can be further vindicated when it will save the economy too.

“China has outlined a package of measures, including railway spending and tax relief, to support the economy and create jobs after a slowdown endangered Premier Li Keqiang’s target of 7.5 percent growth this year,” reported Bloomberg Beijing last week.

“The government would sell 150 billion yuan of bonds this year to help build railways mainly in the less-developed central and western regions, the State Council said in a statement on Wednesday night after a meeting led by Li.

“Authorities will also create a development fund of between 200 billion yuan and 300 billion yuan a year to increase sources of rail financing.”

Naturally, when risk of not hitting the 7.5 percent GDP target’s on the line…give trains a chance.


MN Gordon
for Economic Prism

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