China is too big to fail

I was retweeted by Brad Delong today for linking to Stephen Koukoulas' latest missive on the results of the current Liberal federal government's campaign of talking down the domestic economy: it looks like it has worked as retail sales have tanked and we're about to enjoy the same sort of quarterly handbrake effect that the US has just endured. This lead to a short (of course) Twitter conversation with Patrick Chovanec about China, which lead to this observation which interested me.

@m0nty for much of the rest of the world, end of China's investment boom is net positive story (relieves deflation, opens up net demand)
— Patrick Chovanec (@prchovanec) July 3, 2014

Chovanec is a Chinese expert of some renown, a former employee under Bill Kristol and a former colleague of Paul Ryan. His blog is interesting reading, in that it is an ongoing attempt by a conservative theorist to understand why this is the Asian Century, and how this is going to lead to China belting the bejeesus out of America in both economic and political power games (if not actual war). He is a bear (despite his protestations), as a conservative academic looking at China must almost inevitably be to jive his beliefs with the ongoing economic and social experiment happening before his eyes based on what he must see as an unworkable melding of private and public control from above. China is still a command economy for the most part, only using those elements of capitalism which are useful for its centrally-determined agendas. As Chovanec notes on his blog, control is actually getting more concentrated among power elites not less. Despite all this, China continues to grow like topsy and it's winning a lot of the contests it enters - like currency wars and its increasingly dominant position in Africa.

Chovanec has issued dire predictions of calamitous domestic Chinese bubbles, as have many watchers over the years, but if the Chinese miracle is merely a mirage then it hasn't dissipated yet. For instance, after he spent a lot of energy talking about how the local real estate "bubble" was ready to pop, it surged again early in 2012, leading to a series of posts floating up reasons as to why stentorian bears like him were so wrong. From the Australian perspective, where it seems apparent that China's restrictions on multiple home purchases are probably why Chinese investors have invaded the Australian real estate market in such numbers to treat empty dwellings like gold deposits, there doesn't appear to be much of an end in sight to the Sino-Australian real estate boom.

Chovanec has also been quoted on recent movements in the heavily subsidised Chinese solar cell industry, as in this NPR interview, and here I think is where his own insights illustrate what is going on.

INSKEEP: So what do the Chinese do now?
(LAUGHTER)
CHOVANEC: Well, what they probably do is they dig deep dig into their pockets – the pockets of the central government – and bail out these companies. Because what they’re really afraid of is, you know, we've seen this over the past couple of months, that even relatively small companies, when they fail in China they're so intertwined in terms of their credit relationships and the local economy that essentially everything's too big to fail.

Just as the TARP bank bailout and the auto bailouts worked perfectly in America, so it appears that China has avoided a series of pitfalls from inefficiencies in its system by temporarily socialising the losses and keeping long-term-viable businesses out of bankruptcy. This is the positive side of too-big-to-fail. Keynesianism is all about smoothing out the peaks and troughs of economic happenstance to prevent long-term damage to the livelihoods of the relatively powerless workers who would otherwise have their careers thrown on the scrapheap of history, for the benefit of the economy as a whole.

No doubt there is an argument that China's socialisation of losses from Suntech et al is a different situation to TARP and the auto bailouts, since the latter actually made a profit in the end and there might not be such an easy denouement to the Chinese solar cell industry's woes. Similarly to the National Broadband Network in Australia - I'm talking about the original Labor vision, not the emaciated joke it has become under the Liberals - governments are in an unique position to invest in such projects and secure a solid rate of return, because they can accumulate many more benefits from positive externalities than do private corporations. Even if the NBN or Suntech were to represent paper losses on their own balance sheets, the indirect public goods from universal broadband in Australia or the popularisation of solar cells on roofs across China could very well translate into higher taxes from increased general production, or a decrease in spending on policing or environmental cleanups.

Under certain circumstances, where it is done for solid Keynesian reasons, TBTF works. Chovanec and those of his ilk like to say that Chinese leaders don't really know what they're doing and lack a coherent direction for the future, but so far in the 21st century they have been kicking ass and taking names in both economic and political realms. Australia may be inside a rapidly shrinking bubble as the bears say... or the lucky country may have just been lucky one more time.