THE NEW DEAL FAILS AGAIN:

The other side of China's success story (Financial Times, January 19 2003)

[A]ttempts to stimulate the economy have succeeded up to a point - national growth has remained above 7 per cent a year for the past several years. But, as Xiang Huaicheng, finance minister, warned last April, the government cannot continue to finance growth through deficit spending indefinitely.

When the tap is turned off, the impact along much of the coast will be offset by continuing foreign investment and export operations. But elsewhere, much of the country will find the going tough. In fact, many places already are. Thanks to the huge state-spending binge of the past five years, many second-tier cities, including many provincial capitals, have heavily over- invested in everything from near-empty highways and surplus bridges to speculative high-rise properties and grandiose multi-storey stations that dispatch a train or two a day.

They are also home to a big part of China's surplus manufacturing capacity - again, much of it caused by over-investment. This has been a prime cause of the deflation that has plagued China since 1998. It has also created tens of thousands of money-losing companies propped up by bank loans - in turn adding to the bad debts of China's banks, now standing at 40-50 per cent of all loans.

These are just the most noticable effects. It's hard to imagine things won't get much worse as an isolated authoritarian bureaucracy continues to make its inevitable bad decisions. Add in the coming demographic crises, the centrifugal forces that any easing of political control will unleash, and potential military confrontations with vastly superior militaries like India's and Taiwan's/ours and you've a society headed for disaster. Posted by Orrin Judd at January 20, 2003 8:48 AM