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AseanAffairs Magazine
March - April 2010

The United States is facing daunting prospects in the Asia-Pacific region, a huge market for US goods, while China’s influence is growing as it makes rapid trade inroads in the region. The implications for the US and its need to redefine its ties with Asean are explored in our exclusive interviews with Ernest Z. Bower, Senior Adviser & Director - Southeast Asia Program, Center for Strategic and International Studies, Founding Partner, Brooks Bower Asia LLC and former President of the US-Asean Business Council, and Demetrios Marantis, Deputy United States Trade Representative for Asia.

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The Big Q: What is the Secret of China’s rising Economy?

The Big A: The government owns the Banks; the bankers do not own the government.

China’s stimulus plan is working better than that of the USA and the UK because the government is using the banks for public ends, rather than allowing the banks to use the government for private ends. In the USA, the banks are the most powerful lobby on Capitol Hill, they “own” the government.

The USA is spending trillions of “Greenbacks” to bail out its banking system, helping to revive the languishing economy, such as China, now called a “miracle economy”, decoupled from the rest of the world and is maintaining an amazing 8 percent + annual growth rate.

This has been questioned by lots of polls, commentators, economists and other talking heads, as they ask how that growth is possible, when other countries relying heavily on exports have suffered major downturns and remain in economic doldrums.

Economist Richard Wolff sceptically puts it this way: “We now have a situation in the world where we have a global capitalist crisis. Everywhere, consumption is down. Everywhere, people are buying fewer goods, including goods from China. How is it possible that in that society, so dependent on the world economy, they could now have an explosive growth? Their stock market is now 100 percent higher than at its low -- nothing remotely like that hardly anywhere in the world, certainly not in the United States or Europe. How is that possible? In order to believe what the Chinese are saying, you would have to agree that in a matter of months, at most a year, no more, they have been able to transform their economy from an export-based powerhouse to a domestically focused industrial engine. Nowhere in the world has that ever taken less than decades.”

How can China’s stimulus plan be working so well?

The answer may be very simple in that China has not let its banking system run roughshod over its productive economy. Chinese banks work for the people rather
than the reverse.

The key reason China is booming now is due to the way its government handled its banks. China has not allowed its banking sector to become so powerful, influential and big that it can call the shots or side track the bailout.

In simple terms, the government prefered to answer to its people and put their interests first, before that of any vested interest or group and that is why Chinese
banks are lending to the people and their businesses in record numbers.

In fact, I have learned recently that one major Chinese bank is exploring going to the USA to loan money to Americans who cannot get loans from their own

In China, unlike in the USA, credit is flowing freely, not just to the financial sector but to industry and local governments. The State owned banks have increased
lending in a major way, with local governments and state enterprises borrowing on a huge scale.

The People’s Bank of China estimates that total loans for the first half of Y 2009 were US$1.08 T, 50 percent more than the amount of loans Chinese banks issued in all of Y 2008. This at the height of the world’s financial crisis when the US banks virtually shut down lending to all but the most credit worthy corporate customers.

The US Federal Reserve has also engaged in record levels of lending, but its loans have gone to bail out the financial sector itself, leaving Main Street and local governments begging.

The financial sectors in the USA and the UK are booming and have been leading sectors on this new Bull Market, while the needs of regular people appears to be going from bad to worse, unemployment is high, businesses are failing and house foreclosures are rampant across the country. Wall Street and Main Street in the USA might just as well be in different solar systems.

Why? Well, in large part, because USA and UK banks are not lending money to the people, as the US and UK banks have captured all the money from the taxpayers and the cheap money, for what is called quantitative easing from central banks. They are using the cheap money to shore up, and clean up their balance sheets rather than lend it to the people. Thus, high-jacking the money, and the government is doing nothing about it. In fact, they are complicit in this action.

OK, so the Chinese economy is not perfect. The drive to make profits from foreign investment capital has indeed encouraged speculative ventures, with a great deal of money going into high-rise apartments and other real estate developments that most people cannot afford. When I lived in Beijing between 2002 and 2006, I lived in the 27th floor penthouse of a new high rise, with my own swimming pool. It was not expensive for me but for a regular Chinese it was out of reach.

Chinese workers are complaining of too much capitalism, since now they have to pay for housing, health care and higher education which were all formerly paid up by the State, and while efforts are being made to make more loans available to medium sized and small businesses, Stateowned businesses and large corporations do get most of the loans because the banks have been told to tighten lending standards; hence larger entities are safer credit risks.

There are many who are preaching that the Chinese economic miracle is a “bubble” about to burst, with dire consequences. Historically, however, when “bubbles” have collapsed suddenly it has been because they were punctured by speculators on purpose.

You may recall the Japanese stock market bubble burst in Y 1990, and when other Asian countries followed in Y 1998, it was because foreign (USA) speculators were able to attack their currencies with exotic derivatives, thus causing the victim countries to defend themselves by buying up their own national currencies with their foreign currency (US$) reserves, which were soon exhausted as the dollars returned to the USA.

Today, it is different because China has accumulated so much in the way of USD reserves that it would be difficult in the extreme for US speculators to do the same thing to the Chinese stock market as they did to Japan. A gradual stock market decline, due to natural market forces, is something an economy can take in its stride.

Now, for the time being, China’s stimulus plan is working better than that of the US and the UK, and a Key reason it is working better is that the government rules its banking sector.

The government can operate the banks’ credit mechanisms in a way that serves public enterprise and trade, because it owns most of the banks, a feature of China’s economy that has allowed it to get closer to the original American capitalist ideal than the USA is now. I am keenly aware, having lived there for 4 yrs, that although China is continually referred to as a Communist country, it has never been truly textbook Communist at all. Communist Party leader Deng Xiaoping, who opened China to foreign investment after 1978, said that it does not matter what colour the cat is, so long as it catches mice. So, whatever the Chinese economy is called and/or you wish to call it, today it provides a framework that effectively encourages entrepreneurs.

We all know Jim Rogers, an outspoken expatriate American investor and financial commentator, based in Singapore. In a 2004 article entitled, “The Rise of Red Capitalism”, he wrote: “Some of the best capitalists in the world live and work in Communist China. . . . No matter how long China’s leaders persist in calling themselves Communists, they seem quite intent on creating the world’s dominant capitalist economy.” In the meantime, the US has sunk into what Rogers calls “socialism for the rich.”

When ordinary US businesses go bankrupt, they are left to deal with the asphalt jungle on their own; but when banks considered “too big to fail” go bankrupt, the American taxpayers pay the losses while the banks’ owners keep the profits and are allowed to continue speculating with them; and the rescue of Wall Street with taxpayer money is a huge departure from capitalist principles, one that has changed the face of the US economy.

The capitalism we were taught in school involved small family-owned businesses, family farms, and small entrepreneurs competing on a level playing field. The government’s role was to make sure everyone played fair, but that is not the sort of capitalism that the US has today.

The small stores and family farms have been squeezed out by giant chain stores and large industries. The small farms have been bought up by multinational agribusinesses, and Wall Street banks have gotten so powerful that some US Congressmen complain publicly that the banks now own Congress. The big banks and corporations have rewritten the rules for their own needs. Healthy competition has been replaced by “predator” capitalism in which the small are systematically swallowed up by the Big Sharks. The result: an everwidening gap between rich and poor that represents the greatest transfer of wealth in world history, and the people are helpless to do anything about it.


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