The Communist Party in China is as crony capitalist as it is communist these days. It has embraced its role as ruler of a state capitalism state. However, with state capitalism comes a fundamental fragility.
The beauty of a free market is its natural tendency to renew itself. When economic activity is twisted and manipulated for the politically connected sooner or later weaknesses in the system emerge as economic renewal is restricted.
Perhaps Li’s brother really shouldn’t be running that manufacturing plant. But because Li’s brother is Li’s brother and Li is politically connected Li’s brother gets to run it. Li’s brother doesn’t want to disapoint Li who got him the job and so Li’s brother cooks the books. Li knows that the books are being cooked but as long as his crony sponsor is OK with it Li is OK with it. And so it goes until reality breaks through.
Reality hasn’t broken through in China yet, and it may still be a long time before it does on a broad scale.
An arms race with the US may speed any trouble along however.
(From Project Syndicate)
Like the Soviet Union, China is paying through the nose for a few friends, gaining only limited benefits while becoming increasingly entrenched in an unsustainable arms race. The Sino-American Cold War has barely started, yet China is already on track to lose.