by Mitch Kokai
Senior Political Analyst, John Locke Foundation
China is on the road to its own Great Depression. The causes of our Great Depression are still hotly debated, but the best explanation comes from Friedrich Hayek, aided by the work of Milton Friedman: the depression was brought and prolonged by loose monetary policy in the 1920s, followed by a too-tight money policy after the initial bust. The misguided supply-side policies of Hoover and Roosevelt served to postpone the recovery further. China’s depression will stem from similar causes.
China’s massive over-indebtedness, which underlies its current slowdown, is the inevitable outcome of its easy money policy of the recent past. But China’s monetary policy is increasingly becoming far too tight, even as China’s central bank attempts to accomplish the opposite. Misguided supply-side policies will compound these problems in a lurch away from economic liberalization, toward increased state control of industry. Put all these factors together, and China heads into a depression. …
… How should China move forward? Ideally, China would allow the debt surrounding property to liquidate. This would restore robust growth, as future capital would be directed to projects better reflecting the preferences of Chinese consumers. Yet the weakness of the China model of governance will not allow this. Beijing will do everything to keep the bubble going, for fear that the sharp economic downturn required to liquidate the debt will foment civil unrest, or an inter-party war.