The end of Chinese false economic prosperity

William Hongsong Wang

Chinese stock crash

This January, my best friends in high school invited me to invest money in the Chinese stock market. Then I hesitated for a long time till this July, seeing the stock market crash and finally deciding to stay away from this place where one is apt to get into trouble. Earlier this year, they told me that I made a stupid decision, but now they praised my wisdom of not entering Chinese stock market to avoid loss and asked me how to analyze this stock crash from the perspective of the economic science.

Yes, the reason why I didn’t invest my little money into Chinese stock market is not that I don’t want to be a rich man, but that if I do this, I may become poorer than before. Why? Let us analyze Chinese economic situation generally at first.

According to media data, in the end of 2014, Chinese local government debt levels reached almost ¥ 25 trillion (US$ 4 trillion) [1]. And in many provinces across China, empty ghost cities are located there quietly. I calculated the investment sizes (due to lack of government transparency, I can only collect partial data) of the top-12 ghost cities from the news report, which reached US$ 8.38 billion [2]. Besides, many enterprises have been bankrupted because of over-investment induced by the ¥ 4 trillion (US$ 586 billion) stimulus plan in 2008. Those are just a tip of the iceberg. As seeing so many bad news which are worse than my imagination, now I have an illusion that maybe I’m in grace, not the strong and powerful China…

Another bad news is that, after the crazy Keynesian economic stimulus plan in 2008, in this March, Chinese central bank broke the silence and decided to lower benchmark five-year lending rate from 6.15% to 5.90% and started issuing more paper money in loan which meant that a new economic cycle will begin.

As an economic student with the knowledge of Austrian Business Cycle Theory, I don’t see this news being good for the future of the Chinese economy. I don’t see that there would be no economic bubble again in the Chinese stock market. That’s why I didn’t invest in my country’s stock market.

I’m lucky, because I don’t have any loss. But I heard not only one Chinese lost his millions and millions of asset in this turn of stock crash, then there’s no good news because the economic bubble has happened. This morning, the stocks in Shanghai Stock Exchange have dropped as much as 6% and this disaster is continuing. Sources have clearly pointed out that this is because of capital chain rupture and self-distrust from investors.

Economic common sense tells us that if this capital chain rupture extends to other economic sectors, China may face a very serious economic crisis, like the one in 1929 in United States. And the worse issue is, Chinese government has decided to devote more currency into stock market to save it. What will happen? Inflation and another turn of economic bubble. The more issuance of paper money by government and the fast expansion of fictitious economy caused by it will cause price signals’ disorder. Investors will say, if they don’t have the knowledge of business cycle, “wow, awesome! What a huge amount of loan, which I can apply for! Let me invest it and earn more!” Because of their optimism, more financial derivatives will be made to meet the need of blind investors, eventually causing mal-investment. Then if the capital chain cracks, we will see what we are seeing now in the Chinese Stock Market.

I don’t see that Chinese central government has the courage to stop making more economic bubble and it seems that Chinese deregulation reform has stagnated due to the obstruction from different interest groups. If I were to make a conclusion of this issue, I would say that we are facing the end of Chinese false economic prosperity.



[1] Zhang, Lianqi (2014) Chinese local government debt danger and opportunity. London:Financial Times Chinese. Available: [Accessed: 8 July 2015] Also see Wang, Yuguan (2013) The Warn on New Cities Plans from Chinese Central Government. Beijing: EnnWeekly. Available: 8 July 2015]

[2]Those ghost cities are: Kangbashi New Area in Inner Mongolia Autonomous Region, Qingshuihe County in Inner Mongolia Autonomous Region, Bayannur City in Inner Mongolia Autonomous Region, Erenhot city in Inner Mongolia Autonomous Region, Zhengdong New Area in Henan Province; Hebi City in Henan Province, Xinyang City in Henan Province, Yinkou City in Liaonin Province, ChangZhou City in Jiangsu Province, Dantu District of Zhenjiang city in Jiangsu Province, Shiyan City in Hubei Province and Chenggong District of Yunnan Province.


William Hongsong Wang is a researcher from the Shalom Institute and has graduated with a masters degree of Austrian Economics from the Universidad Rey Juan Carlos in Spain (King Juan Carlos University).

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State-owned enterprises, a failure of Chinese Keynesian experiment

William Hongsong Wang


The chance of studying overseas is helping me become more and more international. That’s why I receive the same question all around the world, “William, do you think China will become a superpower in the 21st century?” Or I hear the compliment many times, “China has a strong market economy and it is becoming richer and richer!”

Unfortunately, due to the economic science and libertarian perspective, I ought to say “No. China will not become a superpower and there’s no ‘strong’ market economy in that country.” to my friends. I would like to ask them and myself a question, “In a society, if the government is killing people’s innovate ability by killing the liberty of free speech and NGOs, if authorities like your parents, bosses, teachers are strangling your entrepreneurship by their belief of patriarchy, would you still think that this society can achieve a long-term prosperity without respecting individualism?”

Maybe the whole countries with Confucian culture more or less have the similar problems. But the lucky issue for Japan, Korea, Taiwan and Singapore is, in a way, people in these countries have more liberty of free speech and more fair opportunities for managing small business than the ones in China. And what many Chinese people may envy them is the higher living standard in these countries, for which they are called “developed countries”.

To return to the analysis of the question and compliment I mentioned in the first paragraph, let us see a key problem in Chinese economy: the state-owned enterprises. Even there has a snack bar, the government would like to nationalized it! In my homeland Shanghai, there’s a snack bar named Qiaojiashan which was established in 1909 and was quite popular among local people. But after the communist regime took over Shanghai, it became a state-owned enterprise. It is still popular because of many delicious foods provided by it, though as a national-owned monopoly the service there is inefficient and poor. Even Chinese government restarted doing economic deregulation and hoped Shanghai could allow private sectors to do more, nothing changes in my homeland. These time-honored brands in Shanghai still belong to government.

If you are a Westerner and then count all other industries in China, things may become crazy for you. Chinese government almost monopolized the whole educational, medical, petroleum, telecom industries. And if you want to make contact with banks, only in a few circumstances can you avoid the four major state-owned commercial banks.

In the economic common sense, the more a government monopolizes industries in a country, the more inefficient an economy is, and more corruption the government has. The myth why the real living standard of Chinese people has improved is just because of market reform and deregulation, not the governmental monopolies in considerable industries.

If these big-government policies only bring us the consequences above, it seems not too bad. But remember, as what Lord Acton said in the 19th century, “Power corrupts, and absolute power corrupts absolutely.” Chinese government controlled almost all the important finance resources, i.e. the four major state-owned commercial banks, you will arrive at a conclusion by logical deduction: the government might issue many paper money for its own sake because it’s so power and wayward.

This is exactly correct. Chinese government issued paper money for infrastructure construction before 2008. As a natural outcome, malinvestment, brought by easy-money policy, the slowdown of Chinese year-on-year GDP growth was 5.7% in the first quarter of 2009, which was the lowest growth rate in the last 10 years. But it didn’t learn from the lesson of economic bubble created by the state-controlled credit management system, Chinese central government issued ¥4 trillion ($586 billion) to stimulus economy, then another term of false prosperity and economic depression happened again. The year-on-year GDP growth dropped to 7.3% in the fourth quarter of 2014.

This current Chinese central government indeed has done many deregulation measures to let the market spontaneous order work better, but I’m afraid that if it still owns many national enterprises and national banks, there will be no hope for the health of Chinese economy in the future. And there’s no evidence which can tell us that the government has the willing to destroy its own enterprises and banks. Surly if China still has a Keynesian big-government, rent-seeking, corruption, governmental malinvestment, inflation, economic crisis (as what Austrian Business Cycle Theory told us) will happen again and again. Then, China may face the famous “middle income trap”.

That’s my answer to the question and compliment referred to in the first paragraph: the failure of Chinese Keynesian experiment. We will not see a real Chinese superpower (For me, a real superpower means the system of the country respects individual liberty and there’s no governmental intervention neither in domestic nor foreign issues.) and a richer China if there’s no fundamental change happening in Chinese economic policy.


William Hongsong Wang is a researcher from the Shalom Institute and has graduated with a masters degree of Austrian Economics from the Universidad Rey Juan Carlos in Spain (King Juan Carlos University).

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What’s wrong with the new Chinese economic stimulus plan, “One Belt, One Road”?

William Hongsong Wang

Chinese Version


In the end of March, Chinese central government officially published a document for the establishment of “One Belt, One Road” (OBOR) project, which meant a new “Silk Road” will being built crossing the entire Central Asia, Western Asia, Southeast Asia and Southern Asia in the next recent years.

In the governmental project of OBOR, we can see all the countries related to the program will strengthen infrastructure construction, eliminate trade barriers, cooperate among financing, tourism, overseas study industry, IT industry, NGO and etc. What a dizzying project! And how can we analyze what policies belonging to the project are reasonable or not in the perspective on economics?

First of all, let’s see the policy of strengthening infrastructure construction mainly guided by the governments. As we know, every coin of tax using by government comes from taxpayers’ funds. The more government spends every coin from taxation, the fewer taxpayers could dominate in his daily life. And now, Chinese government may levy a higher tax for OBOR. As it’s very hard for us to follow how much government will spend on infrastructure construction of that project, how will we know whether Chinese government will waste the taxation or use new technology to cut the cost of infrastructure construction as what the innovation process can be done in free market? (Remember taxation belongs to taxpayers, not government, so we can strongly doubt that whether government has the incentive to save money and do innovation or not.)

Our worry is not unnecessary. Just in 2008, China issued ¥4 trillion ($586 billion) to stimulus economy, and many of them were spent on infrastructure construction which was proved later to be a huge waste: For example, many high ways and railways became useless projects later, and many empty cities appeared by real estate bubble. The economic stimulus package not only resulted in a big lavishness, but also an enormous inflation and redistribution of wealth in Chinese economy. Because of these consequences, this Chinese cabinet had to start the “Streamline Administration and Delegate more Power to Lower-level Governments” process.

According to the past facts, the worries about the abuse of power in “One Belt,  One Road” are reasonable. On one hand, Chinese government is doing market reform and deregulation, on another hand, “One Belt, One Road” project will cause increasing issue in paper money, government’s power and inflation which will lead to a new-term of economic bubble and redistribution of wealth and give negative impact on market reform.

Now we can say that governmental actions mentioned in “One Belt, One Road” project may not only wreck economic prosperity, but also lead to many further serious consequences.

But this does not mean OBOR project is totally wrong. What we can do is to bring the project back to economic laws and market reform.

We’ve seen that OBOR tries to eliminate trade barrier, encourage tourism, open overseas study and free flow of personnel which we believe are all good policies. In fact, if Chinese and other governments included in the project do more deregulation, common people, entrepreneurs and investors in these countries could find more opportunities whether in life goal or business by OBOR project. What governments should do is to give up their power in economic regulation, then communication among the people in these countries would become more frequent. If we ask what could be done in the infrastructure construction, I would say that governments could cancel more administrative examinations and approvals and encourage private investors playing more important rules in OBOR project.

Now we can make a conclusion: the wrong part in OBOR project is to increase the power of government (e.g. collecting more tax and expanding government agencies for the project), the correct part should be the policies of eliminating barriers for commercial and free flow of personnel in these countries, which must be the main perspective on “One Belt, One Road” project.

William Hongsong Wang is a researcher from the Shalom Institute and has graduated with a masters degree of Austrian Economics from the Universidad Rey Juan Carlos in Spain (King Juan Carlos University).

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