It's the government, you stupid...

Image via WikipediaWatching the international analysis on the economic situation in China, makes me wonder whether even the most fundamental lessons we have learned in the past are thrown overboard. What was one of those lessons? Look at the government, what is the government's role? Even now the market has become a force of importance, much of the economic action is still government action.
When you look at the different elements in what is perceived as China's own economic crisis, the picture might be quite different from what is happening in other parts of the world.
Take the real estate crisis, for example. The current glut has been triggered off by efforts of the central government to tone down economic growth and slow down the pace of the crazy pace of its construction industry.
China's export industry has been hurt by the strengthening of the Renminbi. After a decade of being pegged to the US dollar, the Chinese current has been allowed to strengthen, making the export a bit more expensive and causing a crisis in those companies where margins were scary thin anyway.
Costs have gone up because labor has become more expensive, both by increases of the minimum wages and the new labor laws, ending - at least in legal theory - decades of exploitation of China's labor force.
The central government has started, or planned, reducing the domestic subsidies on fuel. Those changes have been influencing the sales of cars, not any global scare among consumers.
Of course, for the export the global downturn is going to be a negative factor on top of a trend that was already pointing in the direction of a decline, but in all important points the decline has been triggered off by government policies.
The nice thing of government policies is that, at least to a certain degree, you can reverse them. We cannot expect that the legal protection of employees is going to change again backward, but the increase of the minimum wages has already been halted. Fuel is still going to be subsidized, the real estate is going to be encouraged and the Renminbi will weaken again. The question is how fast this is going to happen, and how fast the effect can be noted. Currency policies should not be treated as a Jojo and changing real estate policies is actually much easier than executing them.
But the idea that China's economic problems are closely connected to the global problems seems very wrong. China has its own problems, and needs its own action to change it. By doing its best domestically, it might actually offer the best service to the rest of the world too.

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Johnny Chan
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