Opinion The end of the Chinese "miracle"

by **Cals** Tue 28 Jan 2014, 01:51

Opinion The end of the Chinese "miracle"

Business & Markets 2014

Written by Carmelo Ferlito

Monday, 27 January 2014 15:12

KUALA LUMPUR (Jan 27): The next economic crisis will be in China. And it is closer than we may think. While the whole world views the Chinese giant as the dazzling new super power capable of supplanting the dominant role of the United States, my analysis seeks to shed light on the short-term effects that will appear as a result of the way in which China has guided its economic boom.

What saddens me in observing the development of Asian countries is that they do not seem to learn from the mistakes made by the West. On the contrary, in an almost neurotic effort to achieve certain development standards, they admire the most superficial aspects of Western culture (consumerism) and launch economic policies based on the same scientific dogma: fiscal and monetary policies geared to debt and inflation. Such policies in Europe and America have created an unsustainable development model which today, through the recessionary crisis, is revealing its ominous side.

The data almost absent-mindedly reported by international press about the situation in China show that the land of the Dragon has based its growth policy on the same foundations of clay used in the past by the main Western countries: public expenditure (funded by public debt), monetary expansion and the dis-education of people as regards the value of savings.

The latter point is particularly significant. In fact, only a high propensity towards savings is able 1) to support families in the medium and long term and 2) make resources available to entrepreneurs for capitalist investments. Past generations in China were fully aware of this and, in the face of a State oriented towards crazy public spending and damaging Socialist planning, worked hard, saved and thought about the future. Today, this mechanism has become jammed. The Government's spendthrift approach has influenced new generations, who effectively live thanks to consumer credit and all its related instruments.

Yet matters are now coming to a head. The Beijing Government has been forced to authorise local governments to issue bonds in order to finance by now unsustainable spending (exactly as happened in the Western world). On the credit front, however, in the wake of the recent liquidity crunch, there is persistent pressure for higher interest rates in order to curb galloping consumer prices and the over-exposure affecting banks.

The situation is a photocopy of what happened a few years ago in the USA with the housing boom. And the consequences will not be very different. A painful crisis. The Dragon has missed an opportunity to develop an alternative growth model. The opportunity will arise again when the time comes to emerge from the crisis. Will the model of Bernanke's fateful QEs be followed or will strict re-education as regards the value of the future and savings be implemented?

Carmelo Ferlito is Senior Fellow, Institute for Democracy and Economic Affairs, Kuala Lumpur Visiting Professor, INTI International College Subang, Subang Jaya and his views do not necessarily represent the views of The Edge.