Asia’s Multilateralism

Date: 20 Apr 2015 Comments: 0

AIIB - The Asian Infrastructure Investment BankWhy would anyone favor increased Chinese Communist Party control over financial institutions of any kind, much less a global development bank, other than an academic economist whose judgment is clouded by an ideology that favors centralized government control in general at the expense of the billions of freedom loving people who rely on free markets to maintain their individual liberties?

China’s own banking system is largely undeveloped and is largely controlled by the Chinese Communist Party. By incurring massive amounts of debt to fund highly visible infrastructure projects, they have showcased China’s engineering talent, but what many fail to see is that there is not enough revenue to cover even the interest on the debt, and this has resulted in questionable loans on a massive scale.

Financial contagion emanating from a financial crisis in China may be deterred if China does what it has done in the past to conceal the weaknesses in its banking system, namely to sell the bad loans and uncollectable accounts receivable to “Asset Management Companies” in exchange for notes receivable from these AMC’s that can then be held on the books of the banks and privileged Communist controlled corporations at face value provided that interest payments are met. The AMC’s have been able to do this by liquidating the underlying assets at pennies on the dollar, which means that little if any of the Note principal will ever be repaid. But, by repeating this process, as they are about to do again, these bad loans can be concealed for a very long time. Still, this is hardly an endorsement for the CCP as a candidate to control a global, or even regional, infrastructure development bank.

True, the new leadership of the CCP recognizes the unsustainability of China’s rapid accumulation of bad debt to finance white elephant projects and additional excess capacity in certain industries where existing capacity within China alone is already far in excess of 100% of global demand, and it has taken measures to curtail this out of control spending. But, this has still resulted in trade contagion from China that has negatively impacted other countries, possibly leading to financial crises in those countries.

This is of especial concern to heavily indebted countries with aging populations that are now starved for growth in order to prevent their debt to GDP ratios from spiraling even further. Many of these countries have sought to achieve their much needed economic growth by turning to China, which helps to explain why China has become the world’s largest trading partner and the world’s largest creditor. But, ironically, one of the reasons these countries are starved for growth is because their corporations operating in the strategically important industries over which the CCP China has been aggressively seeking global dominance have been unable to compete with China’s communist controlled corporations that benefit from massive subsidies and technology transfers through government backed cyber theft and/or local content requirements applied to MNC’s seeking to do business in China–possibly to ensure access to critical rare earth based components that China has already restricted for geopolitical purposes.

To put this into perspective, consider that many Chinese companies intentionally operate unprofitably because this is what ensures that they will remain cash flow positive: they will qualify for government subsidies only if they reach the targeted levels of employment that the Communist party relies upon to ensure its stranglehold on power. And, China’s lower stated debt to GDP ratios may allow it to maintain these massive subsidies far longer than heavily indebted governments in developed countries could if they were to seek to challenge China by implementing similar measures, so it is no wonder that foreign competitors have struggled to match the China price that these Chinese Communist Party controlled corporations can offer. And, foreign governments have become so reliant upon China for desperately needed trade and financing they lack the political will to challenge China’s predatory practices, provided that they have not become so entranced by the apparent success of these government-backed measures that a sense of shared ideology might even lead them to condone such measures instead.

Condoning what could arguably be called economic warfare is obviously foolhardy, and would merely accelerate the weakening of the economies of these countries, potentially leading to lost wealth through financial crises and lower standards of living through lower wages and higher unemployment. Yet, this is not a concern to the leaders of the CCP. They are intent only on increasing their power, and relying upon rhetoric regarding China’s century of humiliation to support this ambition even though it was China’s own leaders who contributed to China’s failure to keep pace with advances taking place in the rest of the world by, for example, the large scale social experiments that characterized Mao’s “Great Leap Forward” that resulted in the deaths by starvation of tens of millions of peasants who were forced to abandon their farming activities in order to produce pig iron using primitive methods. Although ever increasing levels of debt may have helped to disguise the folly of such central planning efforts as it does today, the perpetuation of activities that make no economic sense absent such artificialities are not sustainable so will likely lead to the same disastrous results only on a larger scale.

So, yes, there are reasons to be concerned about the CCP’s attempts to expand its power and its unsustainable lending practices by creating new regional financial institutions modeled after its own inherently flawed banking system. What the world needs is sustainable growth fueled by fundamentally sound economic activity backed by fundamentally sound banking practices, i.e., a global economy that is closer to a true market equilibrium governed by the natural market forces of supply and demand, rather than a stable disequilibrium governed by powerful elites who rely upon their control over the banking system and ever increasing levels of debt to ensure their hold on power.

What the world does not need is higher and higher levels of debt to support higher and higher levels of CCP controlled productive capacity intended to both drive out foreign competitors from the strategically important industries that the CCP has targeted, and to make its neighbors and commodity-rich countries more heavily indebted to the CCP so it can advance the agenda of its privileged elite who seek to expand their reach outside of China by acquiring control over global financial institutions rather than just their own. If the Chinese people would prefer to direct their savings outside of China, and correspondingly outside of the reach of the CCP, they should have the opportunity to do so through existing financial institutions that insist upon sound policies designed to prevent global financial crises rather than through new CCP controlled financial institutions likely to result in the same politically motivated lending practices and disguised non-performing loans that have led to the fragile banking system that exists in China today.

Leave Comments Here