China's state-planned economy is doomed

The biggest obstacle to China becoming the world's No. 1 economy is China.

The communist nation's determination to keep as tight a rein on its economy as it has on its citizens will lead to failure — just as it has for other countries that embraced central planning schemes.

China is reversing its flirtation with a type of quasi-capitalism that allowed entrepreneurs to thrive and propelled the economy forward at an annual rate of about 10 per cent.

The Chinese now follow the so-called Beijing consensus, a belief that concentrating more control of industry in government hands will avoid the financial debacles caused by free markets.

The nation's state-owned companies are buying up independent businesses in the auto, steel and energy industries. A government-run company even plans its own internet search business to compete with Baidu Inc., whose shares trade on stock exchanges.

Monopolies in China might appeal to investors who think merged companies can cut costs and maximise profits. Though huge Chinese companies may be well run today, they will die from the inefficiencies, cronyism and corruption that often plague state-controlled enterprises.

Inflationary pressures springing from China's rapid growth has the government threatening to interfere even more in the economy — by imposing price controls on items including food and fuel. Capping prices doesn't stop inflation, it's merely a delaying tactic. China's decision to raise interest rates and this month's order to force banks to increase reserves are better tools to combat the current inflation rate of 4.4 per cent.

As it moves away from free markets, China ignores two recent central-planning failures.

Lessons from history

Remember Japan Inc.? Thirty years ago, pundits said Japan's economy would rule the world as its bureaucrats allocated capital to key industries, protecting them from foreign competition. The US railed against Japan's manipulation of the yen to keep its exports moving — just as today it moans about China keeping the yuan low.

Although Japan did become the second-largest economy after the US — until being dethroned by China earlier this year — it's been in a prolonged stall. Its peak growth rate in recent years was 3.4 per cent in 1997.

The collapse of the Soviet Union starting in 1989 is a more pertinent cautionary tale. Sadly, Czar Vladimir Putin is reversing Russia's chaotic moves towards democracy and capitalism.

China won't collapse tomorrow. Its exports continue to flood the globe, earning it money to make major investments — and amass political clout — abroad. But don't let so-called experts fool you into thinking China has discovered a new and better way to organise an economy. State-run capitalism is an oxymoron.