November 24, 2023
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China’s command economy hits great wall of the free market


Henry Dubroff

Henry Dubroff

“They’ve gone about as fur as they c’n go.”

Sixty years ago, Richard Rodgers and Oscar Hammerstein used those words to describe the state of affairs in Kansas City in the musical “Oklahoma.”

But I can’t think of a better way to describe what’s going on in China. The Middle Kingdom appears to have hit the great wall of economic reality. In the first 10 days of the year, more than $1 trillion in wealth has been wiped out.

You can tell the problems are really serious when Nobel Prize-winning economist Joseph Stiglitz stepped forward to offer the consensus view that China can manage its way to a transition to a more consumer-led economy.

But what if the conventional wisdom is wrong? Writing in the Washington Post, my colleague columnist Allan Sloan wrote that “contrary to what many people believed, China had not devised a magical method to grow smoothly at double-digit rates year after year and leave the United States in the dust.”

In an extended conversation via phone and email, Todd Lowenstein, director of research at the $15 billion asset High Mark Capital Management, said the transition is going to be bumpy. “It will likely reduce their sustainable growth rate by 50 percent, similar to what occurred in Japan and South Korea,” said Lowenstein, a UC Santa Barbara graduate who teaches at his alma mater.

Yet another speed bump for China is the fact that it has had chronic problems with bad debts.

“China has had to recapitalize its banking system many times, it likely will have to do it again this cycle,” said Lowenstein, who said Wall Street has been skeptical about a debt restructuring plan floated last year.

Even China’s strongest card, its more than $3 trillion in foreign currency reserves, are not as strong a firewall as it appears. More than 10 percent of its reserves have been spent defending its currency and recapitalizing the banks yet again could “shake market confidence because it is such a much bigger problem when you are the world’s second-largest economy,” said Lowenstein.

Part of the problem is that much of the debt is owed by China’s state-owned enterprises, which may have a claim on some of the People’s Bank of China’s coveted reserves. “But who knows how much is involved or how firm such guarantees might be?” Cohen wrote me in an email. “The Chinese themselves may not know.”

Lowenstein described China’s problem as a “middle income trap,” which happens after hyper-growth ends as rising wages pull a country out of poverty but make its manufacturing operations less competitive. “Transitioning to the next stage of growth, driven by consumers and services, requires a rebalancing of the economy toward a market economy and a social safety net to allow this to occur. Managing this transition can be difficult and growth can stall out if not handled right.”

In 1955, Rodgers and Hammerstein had their first big Broadway hit with a story about cowboys adapting to town life. China, too, has learned the limits of the cowboy economy. Now the rest of the world is picking up the tab.

• Reach Editor Henry Dubroff at