“You don’t get it.” “You are trying to apply Western ideas to China, and it doesn’t work.” That is what supporters of all things Chinese say when western economists talk about a bubble in the making in any one area of China.
That may be right, but does that observation not smack you as being a touch racist. Don’t you think that people are much the same everywhere?
Now a Chinese economist (note that Chinese economist) has warned that local government debt across China is “out of control.” Zhang Ke vice-chairman of China’s accounting association, was quoted in the ‘FT’ as saying: “We audited some local government bond issues and found them very dangerous, so we pulled out…A crisis is possible. But since the debt is being rolled over and is long-term, the timing of its explosion is uncertain.”
The ‘FT’ paraphrased Mr Ke as saying the potential crisis in the making could be as serious as US subprime.
In the West we tend to assume central government in China is all powerful; that what it says goes. In fact, it finds it very hard to exert much control at all over the regions. As the ‘FT’ piece pointed out, there are 2,800 counties in China.
It is not hard to envisage a debt crisis in the making; indeed Fitch may have anticipated this when it downgraded Chinese debt recently. It is very hard indeed for an economy to grow at the kind of rates seen in China over the last two decades without bubbles growing. Its government may be very clever, but it is not omnipotent, and its ability to stop a bubble is limited.
One more point on the question of Chinese cultural attitudes being different. If anything, China may be more susceptible to the groupthink and group compliance which may lie behind bubbles. Back in the 1950s, psychologist Solomon Ashe showed how it is human nature to comply with the group, even if that means saying something that is obviously not true. Psychologists have re-run the tests worldwide, and have found that the tendency to comply with the group, even when the group is clearly wrong, is even stronger in countries known for their cooperative culture, such as China.
It would be a mistake to over-egg this because the differences shown by the psychological tests were not great. But to say that western-style bubbles are not likely in China is manifestly untrue.
©2013 Investment and Business News.
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