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U.S. vs. China: D.C. Dysfunction Gives People’s Republic an Edge

Aaron Task
Daily Ticker

The big political news in America last week was the House vote to avoid a total government shutdown while President Obama broke bread with several GOP Senators (POTUS paid…with his own money!)

Meanwhile, China continued its once-a-decade leadership transition and efforts to fine-tune its economy proving a glaring contrast to the ongoing and long-running story of D.C. dysfunction.

From Xi Jinping on down, China’s new leadership is trying to cool off the nation’s red-hot real estate sector, stem overall inflation, tackle rising income equality, curb corruption and make the economy more driven by domestic demand -- all while managing China’s ever-important role in a still-sluggish global economy.

“China is holding up pretty well despite what’s happening in the rest of the word,” Cornell professor and Brookings Institution senior fellow Eswar Prasad tells Henry Blodget in the accompanying clip. “Growth has slowed from the red-hot pace before the final crisis but [GDP] is now growing 7.5% to 8% year on an inflation-adjusted which is pretty good.”

Like most observers, Prasad sees “big festering problems” in China, most notably in its financial system. But unlike some, he doesn’t believe China’s economy is in imminent danger of imploding.

At least in the near term, Chinese officials “still have enough room in terms of fiscal and monetary policy to deal with shocks,” he says. “An important thing about China is they do have a good sense of what the problems are in the economy.”

Does 'Command & Control' Trump the Free Market?

Here again, the contradiction with America could hardly be more sharp; U.S. policymakers are pretty constrained in what they can do, even if they could somehow agree on whether the “real” problem is too much spending or not enough revenue. (To be clear, this is a bipartisan critique; neither party has a monopoly on common sense right now.)

Related: “We Need Ted Kennedy”: A Conservative Politician’s Unlikely Solution to the Sequester

The glaring contrast between what’s happening in Washington vs. what’s happening in Beijing raises the question of whether China’s “command and control” economic system is better than our quasi-free market model.

Of course, countries are not stocks. But, if they were, investors would look at things like their balance sheet and the amount of debt vs. assets, plans for future growth, as well as the competency and stability of management. On these particular issues, China Inc. is kicking America Co.’s butt right now.

These are not just idle or academic issues to consider. One of the big fallouts from the 2008 financial crisis and its aftermath was the diminished allure of the ‘Anglo-Saxon’ (i.e. U.S.-U.K.) model. This was the theme of Ian Bremmer’s 2010 book The End of the Free Market, in which he argues:

“The free-market tide has now receded. In its place has come state capitalism, a system in which the state functions as the leading economic actor and uses markets primarily for political gain. This trend has stoked a new global competition, not between rival political ideologies but between competing economic models. And with the injection of politics into economic decision-making, an entirely different set of winners and losers is emerging.”

In a state-sponsored economic model like China’s, homegrown companies are given huge advantages over foreign rivals. Just last week, for example, China’s Ministry of Industry and Information Technology warned that China was becoming “too dependent” on Google’s Android platform. Some analysts believe the report is a harbinger of new regulations against Android and/or more-tacit support for platforms developed by China’s ZTE and Huawei, Reuters reports.

In the near term, moves like these can put downward pressure on international growth opportunities (and earnings) for U.S. multinationals. In the medium term, they can lead to tit-for-tat reprisals and copycat policies by other nations. In the long run, that's a recipe for outright trade wars, which often lead to hot wars.

If China really is America’s main global rival for the next century, U.S. policymakers better wake up and smell what the Chinese are cooking.

Aaron Task is the host of The Daily Ticker and Editor-in-Chief of Yahoo! Finance. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com

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