Will China’s Economic Model Prevail?

Here are a couple of things that tie together and that you’re liable to hear a lot more about in the coming months and years.

From the Telegraph.co.uk”

In April, China’s purchasing managers’ index hit 53.5, its second month above the crucial 50-level and fifth successive monthly rise. Loan growth is running at 25pc annually – with banks extending $280bn (£188bn) of new credit in March. What a contrast with the Eurozone, where credit is still shrinking.

Chinese car sales spiked 30pc last month and house prices were up 9pc. More homes were sold in Shanghai than in any month since 2007.

From mid-2009, China’s economy will regain its rapid momentum, says the World Bank. Annual growth will “slow” to 6.8pc, but China is the “bright spot in the global economy”. Shanghai is the world’s top-performing stock market – up 30pc since the start of the year, with the main Western share indices down 5pc to 10pc.

Pretty impressive isn’t it. Particularly for a country that’s controlled by the Communist Party and subject to a great deal of central planning.

Now consider this from the Economist:

I recently heard a well-known capitalist make a shocking claim. He speculated that the Chinese economic model has been proven more effective than the American laissez-faire model. Do recent events and the extraordinary growth of China prove quasi-capitalism with lots of government manipulation work best?

The Economist goes on to dispute the idea that China’s performance is the result of a superior model and instead credits the country’s economic performance to American consumer demand and currency manipulation. They go on to say:

A major source of the extraordinary growth in China can be attributed to an influx of capital and the mobilisation of labour. For any economy, if you add more capital and labour, you’ll experience growth. But capital and labour each face diminishing returns, so at a certain point adding more does not result in more growth.

The only source of sustainable growth is technology, and so far China has been importing much of their technology from the West. Unless that changes, at a certain point Chinese growth rates will look more like Western rates. It remains to be seen if the Chinese market, as it currently operates, can provide the incentives and support for useful innovation.

Fair enough and I would agree with their analysis. But, don’t expect that to be the final word. If the Chinese recovery sustains itself there will be more arguments advanced in favor of mixed economies. As the U.S. government is going to find itself at least for the next few years with a significant say in the financial system and the auto industry arguments in favor of a mixed system are going to proliferate particularly if that involvement results in improvement in the relative performance of those sectors. That is likely to be the initial result given the troubles both are currently experiencing.

Whether or not the U.S. is drawn into further direct involvement in the economy is going to depend largely on the political class. Assuming that Chrysler gets back on its feet and the financial sector recovers to some degree then more intervention is likely to be an easy sell. The early results can be quickly grasped by the electorate while the arguments against the model long term are much harder to communicate.

Here’s hoping the politicians decide to keep hands off.

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