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China's failing economy reflects inherent weakness of state control

China's downfall signifies the chief problems of state-run economies
China's downfall signifies the chief problems of state-run economies

Though economists from AFP and Bloomberg forecast Chinese 1Q2014 GDP at 7.3%, it rose to 7.4%, still lower than the 7.5% growth rate the Chinese government has officially set. And while it is higher than the 7% growth floor that, according to Deutsche Bank Research, is the lowest China would tolerate, tonight's data reflects structural economic failures in the Asian economic behemoth.

For example, China recently held its first failed bond auction since their June 2013 liquidity crunch, selling 20.7 billion yuan instead of their planned 28 billion yuan, Business Insider reports. That followed events this January wherein China narrowly avoided its first trust default in a decade, sparking the keg of government ultimatum -- China's banking regulator prompted financial institutions to either bolster funding for ailing holdings, or sell off their stakes immediately, according to Bloomberg.

China's economy is a textbook case of crony capitalism, particularly since more than half of new debt accumulated within the past five years--equal to the size of the entire US banking industry--has been in the country's lightly regulated shadow banking industry, according to Seeking Alpha. The answer, of course, is not increased regulation, but for the Chinese government to stop bailing out dinosaur-zombie corporations which would have perished long ago in a free market environment. Simply turning one's head away from the problem by throwing money at it does not make it disappear. Rather, prolonging these bad companies' existence merely spreads economic contagion across the entire economy, collectively diminishing the prospects of the Chinese financial sector. In short, as research from the Federal Reserve Bank of New York shows, programs--be they the American 'Too Big to Fail,' or a rose by any other name--encourage risky practices.

Granted, there has been some progress on this front, in the form of collapses. Earlier this year, China suffered its first bond default in about two decades, much to the shock of the financial world, the New York Times reports. Unfortunately, as the Financial Times argues, these so-called defaults are really comparable to Potemkin (phony but realistic looking) defaults meant to foster a mirage of security in an otherwise objectively volatile sector.

Save the aforementioned, there is little solace in China's crumbling economy. Property values in the bloated real estate market are increasing, but that amount, as Forbes contends, is decreasing each month percentage-wise; indeed, it is peaking, and a sure sign of a budding property collapse. The International Business Times echoes this sentiment, highlighting the 1Q2014 49.1% decline in real estate investment trusts.

But this should not be misinterpreted as some Peter Schiff-esque doomsday creed. China's state-fueled crash will not end overnight. Yet the decline of China's momentum cannot be overstated. Without free enterprise, it is fairly certain that China will be stuck in a low-growth environment for years to come, or a lengthier duration, possibly one of permanency.

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