Politics & Policy

What’s Happening in China Is Happening Here

Construction in Chongquing, China. (China Photos/Getty)

Student loans are Chinese apartment blocks are Jiang Jianqing’s private jet.

Jiang Jianqing is the boss at the Industrial and Commercial Bank of China (ICBC), which bought a few private jets a while back — with your money. As the invaluable Timothy Carney explains, this was another in the Export-Import Bank’s long line of shenanigans. ICBC, the largest bank in the world, set up a leasing company to buy the jets from Hawker Beechcraft, which was at the time owned by Goldman Sachs. The Export-Import Bank offered sweetheart financing to make the deal happen. As Carney summarized: “The U.S. taxpayer was lending money to the largest bank in the world (owned by the Chinese government) to buy corporate jets from Goldman Sachs.”

That is a sentence that makes me feel like I need a shower.

But the Chinese bankers may want to make sure that those jets last: It could be a while before they’re in a position to buy new ones.

China, as you may have heard, is experiencing some economic difficulties, in no small part because most of the Chinese economy operates approximately like the U.S. Export-Import Bank or the federal student-loan program: Money is lent on concessionary terms to make transactions happen for politically favored businesses and investors on the theory that the resulting economic activity will be worth the costs. And it’s fairly easy to get away with that arrangement, because the costs are disguised as profits: A loan made at a below-market rate is a wealth transfer, but in the government ledger it looks like income. Simple example: If the U.S. government were to lend me $1 billion for 20 years at 1 percent interest, I’d be a very, very happy man, and even if I earned only modest returns on that $1 billion, I’d have around $1 billion in my pocket after paying back the original loan. In effect, the government would have given me $1 billion, but on the books it would look like it had instead earned more than $100 million in 20 years. That’s because government is accounting only for the interest I paid, not the interest it could have earned if it had lent the money at the market rate.

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I know myself well enough to predict that I’d do some jackass things with that $1 billion. And China has financed some jackass adventures, too. The ghost cities are the most famous, but Beijing has also underwritten the construction of a great many factories that don’t produce economically viable goods and has used cheap credit to prop up enterprises and industrial sectors that are not genuinely productive or competitive. The thinking here will be familiar to those of you who have followed the various stimulus-package debates in Washington over the years: Sure, that cheap money may be contributing to overbuilding, but it creates a lot of jobs in construction, and it jacks up demand throughout the economy by increasing the domestic appetite for steel, cement, construction supplies, machinery, etc. The guy at the cement factory gets a raise, his family gets more noodles or a new motorscooter, the multiplier effect kicks in and presto-change-o, you’ve made yourself wealthier by throwing money away. Which in fact works pretty well, until it doesn’t. Eventually the Chinese government, despite all its tanks and brutality and nuclear weapons and gulags, must bow before Stein’s Law: “If something cannot go on forever, it will stop.”

China’s current economic reversal is being driven in part by a slowdown in construction. As it turns out, if you build enough ghost cities full of empty apartment blocks, then the oversupply in the market eventually makes it unprofitable to build more empty apartment blocks. (Counterintuitive, right?) Students of Austrian economics will recognize this as the old problem of “malinvestment,” capital’s being misallocated because of subsidies and other distortions. Who’d they build those apartment towers for? Who cares? If there’s free money on the table, somebody is going to pick it up.

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The ripple effect that provided Beijing’s rationale for all these subsidies is reversing itself: Construction supplies had been an important contributor to the Chinese domestic economy, but now cement production is falling, glass production is falling, and steel production is falling faster than it ever has. If you happen to need a few million tons of steel, China is having a fire sale on the stuff, which of course enrages American politicians, because what good could possibly come of lower prices for enterprising Americans who want to build things?

That Chinese industrial contraction is a short-term problem and a long-term problem. The short-term problem is obvious. But the long-term problem is more difficult to see: Sure, if you’re sitting on a bunch of warehouses full of plate glass and the price is at rock-bottom, you’re in trouble. But if your country’s glass factories are organized (labor, machines, transportation, logistics, storage, etc.) to produce x amount of glass each month when the market wants a good deal less than x, what do you do? You can’t just wave a magic wand and turn those glass factories into BMW factories. (And no, Mr. President, you can’t just break the windows.) And, don’t forget, you’ve built roads to connect those superfluous factories to customers who no longer exist, and you’ve built water-lines and electricity connections for them. The malinvestment goes all the way through the economy, distorting public and private sector alike.

RELATED: It’s Time to Rethink How We Talk About China

Beijing has responded with its usual clumsiness and brutality, threatening to jail stock traders as the market shudders and devaluing its currency in the hopes that China’s accustomed economic life-raft — exports — can be goosed enough to take up the slack. But in reality China can only do so much of that, because China is an importer, too. Devaluing your currency makes your exports more attractive, but it makes your imports more expensive, which is something to consider when you import tremendous amounts of food. China imports more soybeans than it does aircraft or gasoline (and it imports a great deal of both, with or without the involvement of the Export-Import Bank) and a lot of that soy comes from Illinois and Iowa, where the farmers don’t take American Express, Visa, Mastercard, checks, chickens, or pesos, much less renminbi. You can devalue your way into being hungry pretty easily: When the cost of a plate of pockmarked-old-woman tofu goes up by 50 percent, those newly unemployed Chinese construction workers are going to notice.

Malinvestment: It is a pickle. And we’re in the same jar.

And China has to import to export, because it imports a lot of the stuff it uses to make its exports. China’s top export is computers, but it has to import LCDs, which alone account for nearly 2 percent of China’s imports, as well as integrated circuits (7.6 of China’s imports), and crude oil (14 percent of imports) to move those goods to market.

Malinvestment: It is a pickle.

And we’re in the same jar. Hawker Beechcraft employs 5,400 people, many of them in Wichita, Kan. Bill Buckley famously dismissed the boast in Lillian Hellman’s memoir that she was the greatest female American playwright as “on the order of celebrating the tallest building in Wichita.” You know what the tallest building in Wichita is? For sale. It’s 20 percent empty and on the market at an asking price of half what it cost to build in 1987. Downtown Wichita probably doesn’t need a 22-story office building, but it’s hard to unbuild things. Come the day the U.S. government stops paying Chinese bankers to buy Beechcraft jets, the company may decide it has more employees than it needs, leaving Wichita with more schools and houses than it needs. What made sense while the money was cheap doesn’t make sense when real prices reassert themselves — as they always do.

#related#By the same token, college towns from Berkeley to Austin to Boston have had their economies inflated by the great roaring river of money the federal government has sent their way for years in the form of student loans. We certainly have more women’s-studies departments in this country than we need, and we’d probably have fewer of them if Sunshine had to foot the bill herself rather than being given money on concessionary terms by Uncle Sugar. (Loans that she will then, like Michelle Obama, complain about having to repay.) There’s a $1 trillion student-loan bomb waiting to go off, and politicians Left and Right are looking to reform the system of credit subsidies that leave campus administrators fattened and young graduates burdened. What happens to Lubbock, Texas, home of Texas Tech University, if that revenue stream runs dry? I am a native of the place, and its two major sources of economic activity — college education and cotton farming – are both subsidized to an absurd degree. I have a house there, and I have made certain economic decisions with that asset in mind. I want to see student lending reformed (and by “reformed” I mean eliminated), but I expect I’ll see my property value decline significantly if that happens. No doubt other people in Lubbock have made much more substantial investments on the assumption that the college economy will keep on keeping on.

Which it will, until it doesn’t.

There isn’t any way around this: If you distort markets, you will, eventually, discover that everybody has taken out second mortgages on their Chinese ghost-town vacation condos to invest in tulip bulbs.

You buy the ticket, you take the ride.

Kevin D. Williamson is roving correspondent at National Review.




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