Platt Perspective on Business and Technology

China and its transition imperatives 4: considering challenges faced 3

Posted in macroeconomics by Timothy Platt on March 5, 2014

This is my fourth installment to a new series on China and its recent Party and government leadership transition, looking back over the past year since that formally and officially took place and to now and China’s current situation, and forward (see Macroeconomics and Business, postings 154 and loosely following for Parts 1-3.)

I have up to here in this series been discussing China from a very business-process and business-modeling approach, centering entirely around its economy and its cash flow and liquidity. I began in Part 1 by raising what I see as the single most important macroeconomic challenge that the People’s Republic of China faces, according to which its massive reported reserves are roughly matched by corresponding if differently reported and accounted for debt. Quite simply, it at least appears that China’s massive liquidity reserves are more mirage than reality if a fuller and more balanced bookkeeping approach is taken, of a type that would be required of any business.

I then turned in Part 2 and Part 3 to pose and consider the question of what trillions of China’s Renminbi have been spent on in building their massive local and provincial governmental debt, carving into their country’s overall governmental financials. I argued, by way of some briefly sketched if high profile examples, that their infrastructure and other governmentally funded expenditures have not been effectively spent, leaving many of their most significant ongoing problems that would be worthy of such effort, unattended.

I began addressing the question of how this might arise in Part 3. But simply suggesting widespread local and provincial governmental inefficiency, and overly active corruption on the part of a significant number of local and provincial level government office holders, is not enough to do more than scratch the surface for addressing the question of what China’s new overall leadership needs to address. An obvious partial answer as to what China’s new leadership has to do, is to root out corruption. And that is already begun happening, at least at a show trial level, with display model examples of how Xi Jinping and his new government are cleaning house. It can be said, I add, that this process began in the months leading up to the 18th National Congress of the Communist Party of China with the arrest and denunciations of Bo Xilai and his key supporters (see my discussion of this in China in Transition at Macroeconomics and Business, starting with postings 63, and particularly that series’ Part 4 and following.)

I stated at the end of Part 3 that I would write here about:

• China’s open economy, its black market economy and its in-between gray economy.
• And I added that I would also write about this in the context of Mao Zedong’s legacy and the continuing burden that it imposes on China and its leadership.

I began discussing China’s open and public or white economy, its black market economy and its middle ground gray market economy in some of my earliest postings on the People’s Republic. See, for example, my series The China Conundrum and its Implications for International Cyber-Security (at Ubiquitous Computing and Communications – everywhere all the time as postings 69 and loosely following) and see in particular starting with its Part 3.)

I wrote in that series and I add in subsequent series on China as well (as posted in my Macroeconomics and Business directory) of their open economy and how it is dominated by their People’s Liberation Army (PLA) as its single largest participant. Quite simply, the PLA has as part of its mandate, a requirement that it manage its essential resource base and their supply of essential material, and it has pursued this to a level in which it dominates multiple industries and at least strongly participates directly in essentially every industry in China. And overarching all and dominating all in China is its Communist Party. The Party in China shapes and controls everything, its open economy and marketplace definitely included.

I also wrote in my China Conundrum series in particular, of China’s black market economy, there citing and discussing its black market and technically illegal bootleg operation rare earth metals mining enterprises, starting that in its Part 3. And in-between black and white here is that vast and amorphous gray economy. And in a fundamental sense this entire discussion, and for all shades of openness and formal legality in their economy and marketplace, is about the Party.

Businesses succeed or fail, continue or shut down at the will of and even the locally expressed whim of the Party and its leadership in place, where such decisions would be made and whether locally, provincially or nationally. This holds for the open or white market with its PLA dominance and overtly open Party control. This applies for the black market, and certainly where it is developed as a major industrial force as has taken place in rare earth metals mining and sales, and with the adverse environmental impact of that largely flow of business officially discounted and overlooked. And this Party control most definitely applies for China’s semi-legal, semi-illegal gray economy and its corner cutting businesses. And this brings me directly to the shoddy construction practices that led to all of those government-built building failures as noted in this series in its Part 3. Many thousands of people, including many thousands of children died when their schools collapsed down on top of them in the May 12, 2008 earthquake in Sichuan. It is safe to assume that essentially all of the infrastructure development and all of the infrastructure expenditures that I have been writing of in this series have been understood and approved by the Party, and more specifically by local and provincial Party officials in place. So if this construction has been rife with corruption and inefficiency, this has all been Party approved, and if not from the top, then from all of those points of contact and oversight where Party officials actually live and make day to day decisions. And this brings me directly to Mao’s legacy and the system that he created.

I am going to continue this discussion in a next series installment, looking into Party membership and leadership, Crown Prince Party membership and leadership, and the legacy of the Great Helmsman’s dead hand still controlling China’s tiller. Meanwhile, you can find this and related postings at Macroeconomics and Business.

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