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The fall of the Middle Kingdom

April 14, 2016

cover-the-economist

Did you remember the causes of the 2008’s economic crisis? When banks in the US developed a kind of credit bubble which burst afterwards? Yes you do and also you remember that this bubble provoked the fall of Lehman Brothers and made the worldwide economy sluggish. Today, although we still feel some remnants of this crisis in our everyday life, the USA and Canada have managed to stand back on their feet and make the economy run again. They are followed closely by Europe, Russia and the whole Asian area, but the United States remain first in the race of superpowers. However, figures and economists suggest that China or India will someday and somehow overtake the United States. As things stand, the idea seems really questionable because a crisis is looming in China which may highly threaten the exchanges in the world.

Albeit China is no longer the Workshop of the world but the second world power, the socialist economy is doing very poorly. As China only gets between 6 and 7% of GDP growth, the whole country has to tackle a huge crisis.

In a way, the recession is provoked by the socialist economy. In China, the legacy of Mao Zedong is still palpable. Though the private sector highly participates in the increase of the country, China has kept its bad habits of nationalizing the biggest companies in the country. Because of the nationalization, if the company collapses, it is the role of the state to bail it out. In 2004, almost 80% of the companies were under the yoke of China’s Communist Party. Today, at least 500 companies are owned and ruled by the state such as the oil companies PETROCHINA or SINOPEC and CNOOC, also in the transport sector with CHINA RAILWAY GROUP. Allegedly, the biggest companies owned by the states are comparable to the ones of any capitalist government in the world which contributes to making the country richer and the growth increase. However, in comparison to European or American private companies in the same fields of action, China is in charge and responsible for their failure or their success. For instance EXXON MOBIL in the US or TOTAL in France, which are private societies, are totally autonomous. Those private companies just have to represent their country’s best interests but are not indebted to the state.

SINOPEC

Therefore, when FORTUNE GLOBAL 500 published for the year of 2015 the top 500 companies in the world and put 106 China’s companies in it it was not such a blessing for the country. The more the companies are powerful and internationally recognized, the more the state has to be responsible because it is in charge of it.

Moreover, while there are powerful and worldwide companies in the country, China also hosts some “walking dead” companies as well as ghost cities which are totally empty of life and inhabitants who leave  their houses and their land to anyone who can bail them out.  The Middle Kingdom Empire also teems with ghost companies which are owned by the state and have instalments at the end of the month imposed by the communist government. The companies are suffocating because of the debt they owe the state. Therefore, the state, which is in charge of the companies, has to invest money and inflates the debt again.

On the whole, we can wonder if the Chinese communist’s government is heading the right way. Despite the 7% growth of the GDP each year, the current situation exposes the failure of the system. With all the investment of foreign countries in China, we can also wonder if a second subprime crisis is not looming there. But this time we can not imagine the repercussions of such a crisis in our already indebted world.

Corentin.

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