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Managing Expectations
The NY Times has published a long piece making the case that China's President Xi has promised too much to his people. While we all wish that there was an all knowing benevolent leader to protect us from risk, such a leader doesn't exist. The belief that such a person exists only creates moral hazard and excessive risk taking without investors doing their homework.
A quote:
“Before that, the authorities did nothing to disabuse the investing public of the notion that a rising stock market was a state-backed goal and integral to Mr. Xi’s promise to build “the China dream.””
The NY Times appears to want to tell a story that China's economy is built on a “House of Cards” and that its fundamentals are weak. One version of this story is that local leaders borrow money from the government and invest in projects that create jobs but not valuable output. When the projects fail, the local government simply borrows more money from the national government and this cycle just continues. There is certainly some truth to this narrative but it misses the bigger picture.
China as an urbanizing, orderly nation, with a highly educated public has a very bright future. The key for it to take the next step in its development is to foster developing its own San Franciscos.
High human capital cities with “individuals” pursuing their dreams and interacting. The next industrial “golden goose” will form around the brain. While I am not smart enough to tell you what will be the next Uber or Twitter these companies will start to form there. China has an enormous home market to sell to and the powerful government can build the infrastructure to facilitate these agglomerations.
The Chinese government needs to step back and subsidize basic research, early child investment and basic transport infrastructure.
President Xi causes a problem for himself if he succeeds in convincing the Chinese people that he is all knowing and all powerful (the big daddy). China doesn't need a “daddy”, instead it needs clear investment rules of the game that incentivize investment in human capital and entrepreneurship.
It also needs blue skies!
Here are 3 of my recent papers on these topics;
3. blue skies
Source: http://greeneconomics.blogspot.com/2015/08/managing-expectations.html
