The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- If propaganda were music, the Chinese Communist Party (CCP) would be a symphony. But it's not. If CCP hype and censorship were peeled back, behind flattering copy would be disturbing trends rooted in CCP policies that are demotivating or motivating the wrong behaviors needed for healthy economic growth.
Growth comes easy when it's fueled by cheap labor and investments, especially when they are measured in billions and trillions, as they have been in China. Unfortunately for the CCP, those salad days are numbered. The next leg of growth requires increasing productivity and innovation to support increasing wages that will drive domestic demand and create attractive products for export. This new formula won't be easy to execute, particularly in a Socialist system with unique Chinese characteristics.
The Chinese media won't be spoiling this anniversary party with any cautionary notes on possible kinks in executing the new formula. The media is under a directive to sing praise for the CCP, socialism, and the Great Mother Country.
The media will discuss President Hu's Harmonious Socialist Society, which has at its core a middle class society. The possible kink from rising income inequality won't pass the censors.
recently estimated that when unreported income is included, the rich in China are 65 times wealthier than the poor. This is world class inequality.
High-income inequality, particularly, in a nation where citizens are expected to place the common good before individual interests, can motivate social unrest from marginalized workers and peasants, many who have been uprooted and/or lost their land for the common good, and now feel deceived. The CCP is on top of this. The 2011 to 2015 plan calls for "increasing the low, stabilizing the middle, and curbing the high."
Policies to address this will inevitably lead to inefficient income redistributions, using welfare, subsidies, taxes and income caps. These measures not only do not motivate productivity or innovation, they could be widely demotivating, encourage unrest among the not-low income earners, and encourage cheating the system.
Also censored is an account of the woeful CCP record on defending the constitutionally-guaranteed freedoms of speech, religion, unlawful detention and assembly. The CCP's longevity depends on instilling fear in the people. Freedoms interfere with this.
Fear may be good for the CCP's existence, and it is said to be a great motivator, but what does it motivate? It motivates not getting caught. Depending on the person, this will drive risk-averse behaviors or system gamesmanship. Fear is a negative motivator, and so is repression.
Hidden within China's amazing growth story is the predominance of inefficient and non-innovative state owned enterprises (SOEs). SOE executives, who are CCP members, are known to engage in corrupt practices; corruption is a natural agent of inefficiency. Instead of making decisions to maximize shareholder value, executives make suboptimal decisions to maximize the wealth of a select few.
There are times when close cooperation between business and government can yield powerful outcomes, but the power fades and can become toxic, like it has in China. It's not just because it's easy to cook the books when the chefs and inspectors are on the same team, it's also because SOE's lack competitive motivators, and their motivation to survive is zapped by a virtual life insurance policy, compliments of cozy government ties. The CCP can look east to South Korea and Japan to learn about the moral hazards of cozy business and government ties.
Rolling blackouts once triggered by capacity shortages, were triggered this year by SOE executives who needed to limit losses because fuel prices have soared and end-user prices are fixed. Shortages hobble the productivity of all companies affected and an inability to raise prices minimizes the funds available to innovate. Allowing this may seem crazy, but permitting market forces to pull rank over central planning would require the CCP to forego some element of control. This can't happen because control is central to keeping order in a repressed country and the CCP in power. Have you ever seen anyone positively motivated by dominant controlling figures?
SOE bank executives were in a quandary when directives came down to curb lending to cool an overheating economy. To keep loans flowing, rent-seeking bankers, with little fear of the law, were motivated to figure out how to meet the demand from anxious loan clients. The answer: massive off-balance-sheet loan entries, frequently for high-risk clients. Oh what a tangled web we weave when first we practice to deceive.
These banker behaviors may illustrate the biggest kink in executing the new growth formula: the justice department, and consequently the rule of law, is subordinate to the CCP. This may be helpful for corrupt CCP members, but the unequal application of laws is a real productivity buster for everyone else.
In the case of the government's innovation strategy which encourages reverse engineering, and patenting technology already patented somewhere else -- of course with unique Chinese characteristics, it seems like everyone has a get out of jail free card. But what will come of me too and usurped "innovations." It may suffice for import substitution, but this isn't a strategy for economic growth.
Maybe that's irrelevant because laws are generally acknowledged to be for reference purposes. Or is that just an application for the Chinese? Foreign companies have been finding that some previously dormant laws are being enforced. The common denominator for prosecution: being a superior competitor in industries with CCP patrons. Another win for the CCP, and another loss for innovation and productivity.
Future demographics aren't favorable to productivity either. To predict the effects of China's aging and declining population, look at Japan's anemic growth forecasts. In China, where children are constitutionally obligated to ultimately care for their parent's retirement, this will drive more saving, when the new formula needs people to spend more on Chinese goods.
Japan offers other lessons. Its nation-unique economic policies fueled its rise to become the second largest world economy. In 1985 it was forecast to overtake the US economy in 2007. Soon after, the Japanese economy encountered problems that were related to its unique characteristics. Today, it's the third largest economy.
Russia was once the world's second largest economy. Its title as an economic superpower endured longer than it should have, but the opportunity to reconcile Russian propaganda was long in coming. Today Russia is the 11th largest economy.
The CCP admits that Socialism with unique Chinese characteristics is a trial and error process. That's Petri dish economics. Why though are they testing so many practices that are doomed to motivate the wrong outcomes? Maybe their suppression of the opposition is working too well.
Who knows? Really, who does know? The combination of cover-ups and official propaganda makes it difficult to validate if China's projected economic ascent is foundationally firm or there are serious setbacks in store before any centennial celebration of the CCP.
I don't mean to spoil The Party, but even tweaks to this unique socialist system will not motivate productivity or the types of innovation needed to continue fueling China's economic stardom. There is too much rotten in this single-party system to make that happen.