News reports are replete with analyses of China’s economic struggles. Accumulated debt, currency mismanagement, errant economic projections, and miscalculations of societal needs are only part of their systemic problems. Evergrande Group, the largest real estate developer in China, recently filed for Chapter 15 bankruptcy protection in New York. Why not in China?
Because China cannot restructure companies efficiently in a totalitarian state.
In the United States when a company goes bankrupt, restructuring is handled from the federal government to local communities in a free-flowing process where different jurisdictions automatically coordinate to determine the most effective value of remaining assets, ongoing business, and cash flow. Bankruptcies in the U.S., depending upon size and complexity, can be problematic. However, the bankruptcy process is like dropping a large boulder in a lake. The water is disturbed temporarily, but the free enterprise system quickly reestablishes equilibrium and the water returns to an adjusted level. This is accomplished through banks, investment banks, specialty companies, liquidation firms, accountants, lawyers, and entrepreneurs acting freely, without the need for government permission, to restructure the troubled business model.
In China, such a system does not exist. Banks and investment banks respond only to central government direction. Very few investments, and literally no restructuring, are administered without government oversight. The time alone that it takes for the bottleneck of federal bureaucrats to make decisions limits options and opportunity and it also eliminates flexibility in restructuring a deal.
Evergrande’s bankruptcy is just the beginning of financial peril for China’s real estate, supply, and management industries. Reestablishing the supply chain and service industries necessary to complete a major real estate project will take time. Collateral components of required businesses to restart construction will themselves come under financial stress. Individual Chinese citizens who were directed by the government to make investments in the real estate projects are now without recourse for retirement income. There is no Social Security in China like in the United States. It’s not just the domino effect. It’s that the entire landscape of the industry has been disrupted.
China’s problems today stem from the very foundational element of society’s relationship with government. In the United States, federal, state, and local jurisdictions simultaneously work independently of each other, but in full coordination with each one’s area of authority. In China, all critical decisions are made by the central government. Provencial (state) and city jurisdictions are expected to obey orders in a sense like a military structure. Not only are local government jurisdictions unqualified to make restructuring decisions, there is no coordination with the private sector to redistribute assets or restructure debt. In Evergrande’s case, approximately $328 billion is in a state of frozen indecision.
From 1991 to 1993, I was involved in a group project advising China on a protocol to reopen the Shanghai Stock Exchange. I reported to then President Jiang Zemen and senior elder Deng Xiaoping. The Chinese government’s strategy for opening up China to world markets and trade involved establishing a federal reserve wherein the government dictated prices and monetary supply of the currency necessary to meet the five-year economic plan. I counseled Chairman Deng that, in my opinion, the proper way to establish a federal reserve was to react to the demand and desires of the people for what they wanted in goods and services, letting supply and demand dictate activity through prices to determine what products were to be produced by the economy. He argued that he could manipulate the system through what he called “Chinese capitalism” to perform the way a central committee designed the economic objectives.
He believed that (then) 1.2 billion Chinese people would do what they were told. They would buy what they were told to buy. They would save when they were told to save. And, they would invest in what they were told to invest. The monetary policy would simply be composed of elements to support the directives of a command economy.
I predicted that if China structured their federal reserve to facilitate a communist-planned economy rather than serve a free enterprise system where citizens made the decisions about economic activity through local jurisdictions, the Chinese yuan would never be tradeable with other sovereign currencies in a free-floating exchange rate. Neither one of us yielded to the other. He proffered that it would take 30 years to determine which one of us was right. This is the 30th year since that discussion. One thing is for sure. The question remains: if China is the second largest economy in the world, why doesn’t anyone want their currency, including themselves? If Chairman Deng were alive today, I would ask him if he is still confident in “Chinese capitalism.”
Signs are emerging that totalitarian economies are on the brink of failure. Under such circumstances, dictators are likely to become aggressive militarily rather than admit the errors of their ways and seek peaceful resolution. How extraordinarily odd is it for Vladimir Putin of Russia, a military power, to be asking Kim Song Un of North Korea for military assistance? This would be like the Soviet Union asking Cuba in 1968 for support and military aid upon their invasion of Czechoslovakia.
Congressman Tom Cole at a recent briefing pointed out how eerily similar the world is today to the 1930s. A European dictator is attempting to violate the integrity of borders by military force while an Asian power stands by calculating its next move – then Germany and Japan, today Russia and China.
And, how odd is it that China, an economic power, is asking BRICS (Brazil, Russia, India, China and South Africa) for support rather than incorporating them into their own sphere of influence? Even though BRICS recently expanded its membership, it still does not constitute a natural coalition of economies that can establish a common currency. India actually is the most diverse economy in the bloc. Its currency, the rupee, is the most stable. They have nothing to gain by diluting their currency with the weaker Brazilian Real.
What all this strange geopolitical, illogical activity means is that a reset is coming. Using the bankruptcy analysis of free-flowing authority, America is a country best positioned to implement a national reset. Why? Because the U.S. is the primary country in the world wherein local jurisdictions can make decisions and move quickly to meet the needs of the local community.
Before the final reset manifests itself, there will be one more attempt by governments to manage a world economic outcome. Inflation may reemerge as government leaders attempt to convince citizens that managed economies, more deficit spending, and more accumulated debt is better than allowing free enterprise to course-correct through sound economic principles for prudent currency management.
Citizens of the United States need not worry so much about how much gold to buy rather than participating in their community for contingency plans required to address any economic downturn. Oswold Chambers, through his edited writings of My Utmost for His Highest, refers to Christ’s blessings flowing through us as “springs of benignity”. What he means by this is that individuals cooperating with each other freely, at different levels of jurisdiction, render benefits for the collective good when done of out love for one another. No government can orchestrate such coordination of selfless cooperation. They can only facilitate it through unfettered freedom. This cooperation of citizens, for many an act of faith, is what sets America apart from every other country. By allowing for constitutional rivers to carry the free flow of freedom throughout all jurisdictions of government authority, the needs and stability of society are met.
In the times in which we live, local jurisdiction of government authority will become more and more critical. Now is the time to intensify preparation for reasonable threats to community security. Believe in the benefit of citizen cooperation. Participate and exercise in God’s given order of local authority…
And in so doing, bless the free flow of freedom.
My name is Marc Nuttle and this is what I believe.
What do you believe?
