Another Economic Bubble Burst Ahead – China? (Part 2)

In the first of this particle the author provided the lurid details of the need to be chary of the economic pace of development of China. The admonition was based on an exclusive analysis of economic growth characteristics of economic super powers from a phase of economic miracle to the phase of economic malaise. The author prognosticated the importance of the need for policies that would mollify the negative impact on the world economy should there be any failure of the Chinese economy. In the second part of this article, the author would like to start with a prefatory discussion of what an economic bubble burst is and the controversies surrounding it. Next, the article would discuss some future precautionary changes China is expected to initiate in order to sustain its economy avoiding any economic quake should there be any thereby reducing the impact on the world. In fact, this ensuing discussion is not a panacea for any future expectant economic frailties but rather a perspective analysis of reality and what needs to be done. Again, it is not an extemporaneous libelous or vitriolic censure of China's economic achievements but rather a meticulous moot assessment of the current situation serving as a harbinger to any future eventuality of economic fiasco.

Now, an economic bubble burst in simple terms occur when an economy experiences huge accumulation of bad debts (bankruptcies) and deterioration of asset values. Deterioration of assets occurs because both good and bad assets appreciate excessively beyond their intrinsic value. This is prevalent when interest rates are low and investors borrow from banks to invest in financial assets resulting in more money in the system as against few assets. Consequently, the increase in demand of assets culminates in over-valuation of their market value as against their intrinsic value. More so, inappropriate monetary policies that enables unscrupulous lending practices by banks leads to the formation of asset price “bubbles”. To explicate this point, it is possible that indiscriminate lending practices will result in unredeemable loans and the accumulation of bad debts. Obviously, the aftermath here is two fold: the creation of bad debts and huge losses in asset values. Such a situation actuates an economic chain reaction called economic bubble burst which spreads to other parts of the economy. A recent example is what occurred in the U.S housing sector in 2007 when bad debts were maximal and home sale lost value dramatically. The negative situation spread to other parts of the U.S economy because the housing sector is an integral part of the greater economy. Now, there are a lot of controversies surrounding the formation of economic bubbles and its subsequent burst. There are those who argue that the phenomenon can occur in times when prices are correctly price and market seems efficient. That the time of occurrence is very uncertain and so it is very difficult to decipher accurately it causes. Despite the hullabaloo, the net effect of the bubble burst is loss of great wealth and possible failure of the economic system. To reduce the impact of the burst, governments would have to increase interest rate to reduce the availability of loanable funds besides increasing bank reserves requirements to reduce the amount of money in the system. As at now, it is known that the Chinese government is putting in place monetary and fiscal policies that can prevent the creation of bad debts and subsequently an economic bubble burst. This is very commendable. However, there are other factors that gravitate indirectly towards an economic bubble burst which needs to be addressed. Now, to ensure the sustainability of China's economy and prevent any economic reverberation to the world economy should any economic quake occur, it is imperative that much consideration is given to the ensuing propositions which addresses these factors.

The country would have to review the factors that compositely control its economic freedom and political freedom locally and internationally. The factors to consider are investment freedom, financial freedom, property rights freedom, freedom from corruption and invariably civil rights freedom. China needs to remove restrictions on investment freedom especially the caps and delineation of certain sectors for foreign investors. Furthermore, the state inordinate control of its financial systems predominantly the banks needs to be revised. The revision should be focused on the regulatory framework which limits foreign investors in capital markets and also curtails the expansion of financial services to the locals and foreigners alike. In fact, revisions of this sort in the financial sector would increase the contribution of the financial system to GDP growth in addition to providing jobs in the sector. The country would need to enforce intellectual property rights protection to curb copyright activities and associated fraudulent deals on patents, trademarks and the likes. Strangely, corruption is very pervasive and is enhanced by the absence of regulatory transparency. Unfortunately, it extends into the financial sector as well as government activities and projects at the state and local level. The aftermath is a set back to direct foreign investment and if not controlled can adulterate the decency of economic growth gradually bringing it to a halt. Factually, corruption at this level can lead to creation of bad debts as it has the tendency to promote indiscriminate and vague transactions (including lending practices) consequently initiating an economic bubble burst. Indiscriminate transactions also include unscrupulous spending practices and the scramble for assets which could result in assets over-valuation. Also, the ramification of corruption from this perspective is a potential “land mine” for initiation and causation of an economic bubble burst. Generally, the influence of the ruling communist party on the market economy is inhibiting investment, financial and property rights freedom besides implicitly enhancing corruption. Also, China is presumed to have a very low tolerance for political freedom with particular reference to human rights. Truly, a proper reformation of these components of its economic freedom and political freedom would help create a good image on the international scene fomenting the prosperity of its strategic investments in places like Africa, South America and the developed world. Again, the reformation should encompass geopolitical, anti-corruption, pro-civil rights strategies with special focus on a systematic democratic regulatory framework with transparency and respect for human rights. Rumors have it that China's investment in places like Africa is a form of neo-colonialism and this is expected to impede the pace of strategic investments (mergers and acquisitions) in these foreign countries. Only time would tell if China's activities are pro neo-colonialist. For there is a proverbial saying that fire is a good servant but a bad master and it remains to be known if the activities of China would conform to this saying. China must prove its critics wrong! Africa has become a fertile ground for China for doing business primarily because China is more interested in doing business than in conforming to moral and ethical standards of detesting corruption, human rights abuses and probably environmental pollution impacts. With a record trade surplus of $35.2 billion as at September 2008, the country has the capability to invest any where even though the trade surplus is expected to dwindle in the face of sluggish exports and domestic demand. The growing raw material needs for its industrial and manufacturing sector also adds to the urgency to invest. Presently, the country is aggressively doing business in places like Sudan, Zimbabwe, Democratic Republic of Congo where human rights abuse, genocide and corruption are at their zenith and also in countries like Ghana and Zambia where environmental pollution is on the ascendency but a secondary issue. China has turned a blind eye to these atrocities because it is more interested in expanding its economic empire than meddling in the affairs of the host countries. The western world sees the violation here and is agitating for adherence to ethical standards by China and unfortunately African governments infested with corruption seem not to welcome the western world utterances. Sorry to say, corruption has its root in greed and it is this mindset that is causing China and these nations to do business against the background of some international violations. Again, sad to say human rights abuses and disregard for the environment and corruption are inseparable. And that if a country is corrupt there is the tendency for it to violate human rights and disrespect environmental laws. In spite of the recent economic achievements by Sudan due to trade with China, doing business with Sudan against the international outcry is like saying yes to the genocide and indirectly this is putting blood on their hands. Currently, China has managed to secure several oil projects and investments in Africa because China is the second largest consumer of oil after United States and so it needs these oil sources to sustain its economy. For your information, the continent of Africa holds about 8% of the world's oil reserves besides several potential undiscovered reserves. Additionally, China is supplying technical assistance and loans to some African countries that it deems as viable business partners. It has also inundated the continent with its low cost goods some of which poses environmental risk even though China is currently preaching to the world the need for countries to comply with targets set at the just ended climate change conference.

Finally, African leaders may be celebrating their new found supposed “win-win” relationship with China just because they believe the strategic investments would provide the much needed long awaited jobs. However, these governments should be chary of whether Chinese foreign policies and investments has the capability to do just that without a future price to pay from the perspective of the environment, health and bad debts. Furthermore, whether these investments are sustainable from the view point of geopolitical risk (that is policy changes in investments and labor) encompassing China and host countries. Let's not forget what happened to white farmers in Zimbabwe under Mugabe regime.

Watch out for Part 3 of this article!!
Source: Charles Horace Ampong [MSc(Eng), MBA(Finance)]

GLG Councils Consultant
Blog: http://charliepee.blogspot.com

Development / Accra / Ghana / Africa / Modernghana.com