8/3/2019 On China's Recent Economic Slowdown

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OnChina'sRecentEconomicSlowdown

byJustinJinorioonMonday,December12,2011at2:38am

ThisisanaturaleconomiccycleresultinginamostlikelyshorttermrecessionforChina.DuringthelastfewyearsChina'sboomingeconomywasproducingandexportinggoodsatanincreasingrate,butaswithallphasesofeconomicexpans

iontherecomesatimewhensurplusescreatearecession.Whatisgoingonhere,inconductionwiththeEuropeancrisis,isthatChinahastoomuchsupplyinresultofreachingthepointwhereglobaldemandcannotkeepupwithit,whichmeansthatglobaleconomiescannotaffordtobuyalloftheChineseproducts,nordotheyevenwantthem.Thissurplus,orexcessinventory,willleadChinatocutbackonproduction,whichalsomeansensuinglayoffsinconjunctionwithlowerpricescomingoutofChinainordertogetridoftheirexcesssupply.Thisiswhathappensinrecessions,andtheynormallyruntheircourseuntilanumberofthingshappentosetuparecovery.First,theexcessgoodshavetobeallocated,andiftheycan'tbe,becausethereisnolongerdemandforthem,companiesmustbeallowedtogobankruptsocapitalcanbeacquiredandallocatedtothosesectorswheretheyaremostuseful,orinotherwords,wherethereisdemand.The

problemisChinahasagovernmentcontrolledeconomywhoisinvolvedinthedecisionmakingprocessconsiderablyinhowtheirproductsaremade,allocated,andhowmuchistobeproduced.Thiswill,withoutdoubt,slowdowntheirrecovery,becauseonlytheincentivescreatedinafreemarketcanmovecapitalaroundtowhereitismostneeded,andonlythecompetitioncreatedinafreemarketcancreatetheincentivesneededtocreatetheseproductsatthecheapestpossiblepricefortheconsumerandallocatethemeffectivelyandefficiently.China'seconomyhasbeensaidtohavebeenopenedupinrecentyearscreatingmoreeconomicfreedom,butletsfaceit,noonereallyknowsforsurehowfreeitis,whattheiroutlookonwhatfreeis,andwhetherornotthechangestheyhavemadewillbeenoughtobeabletostormoutofthisrecessionwiththerapidgrowthseenimmediatelyfollowingtheminfreemarkets.ThiswillbeaninterestingtestforChina,butinmyopiniontheywillstruggletoovercomethishurdlesimplybecau

seoftheirlackoffreedomandincentivetoreadjusttheirproductiontomeatpopulardemandinanefficientway.InRussia,forexample,shortagesandsurpluseswherequitecommonandveryproblematic,notbecausetheyhadtoomuchortoolittleofthegoodsinquestion,butbecausegovernmentcontroloftheeconomy,andmorespecificallytheirpricecontrolsandproductionquotas,werenotonlyinefficient,theyalsocreatedasituationwheretherewerenoincentivesforanybodytoactcompetentlyintermsofproductionandtheallocationofthosegoodsproducedtowheretheywereindireneed.Ifyouwereabusinessmangettingpaidthesameamountforyourgoods,nomatterwhereyousoldthem,youhavenoincentivetotransportthemtoplacesthatmayinconvenienceyoualthoughthoseconsumersmaybewillingtopaythehigherpriceforthesegoodsinresultofshortagesandtheirdireneedofthem,butsincethegovernmenthasplacedaceilin

gpriceonthegoodsinquestion,theyhavenochoicebuttosuffertheconsequencesofpoorgovernmentalpolicy.AperfectexampleofthiswasthegasolineshortagesintheU.S.duringthe1970s,whenapriceceilingwasputongasfortwoyearscreatingmassiveshortagesandridiculouslylonglinesatgasstations.Theseshortagesweren'tcreatedbyashortageofsupply,infact,theU.S.actuallyboughtmoregasinthosetwoyearsthentheyhaseverpurchasedbeforeinallitspreviousyears.Itwasthepriceceilingwhichcreatedtheshortagebytakingawaytheincentivesforthesebusinessestotransportgaswhereitwasmostneeded,andontopofthat,thelackofcompetitionitcreatedledthesebusinessestostayopenalmosthalfaslongastheynormallywouldbefore.Myreasoningforcitingthisexampleofahomemadeshortagecreatedbygovernmen

tpricesetting,inwhichIcancitenumerousothers,istoshinelightuponthefactthatChina,ahighlygovernmentcontrolledeconomywithwhichIâmsurehasnumerousprice-controls,mayhaveatoughandlongstruggleaheadofthemasthey

8/3/2019 On China's Recent Economic Slowdown

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trytoriseoutofthisrecession.Willthescarceresourcesoftheireconomy,bothgoodsandpeople,havethenecessaryincentivesrequiredinorderforthemtobeallocatedtotheplaceswheretheycanbemostuseful,orwilltheChinesegovernmentgetinthewayandslowdownthisprocess?Historytellsusthatallsocialist/communisteconomieshavefailedtodothisinthepast,unlessofcoursethroughexpansion,whichishowHitlerâsGermanydealtwiththisissue,includingrobbingalltheJews.WhatwillChinadowhentheireconomyreachesitsprec

ipice?Onlythefuturewilltell.