That ear-splitting thud you heard was the stock market crashing on Wall Street. Since the market's historic high back in April, stocks have lost over two thousand points. Numerous factors have contributed to the downfall, but the one factor most frequently sited is the economic downturn in China, the world's second largest economy after the US. The Chinese stock market has lost billions in value, and the government has devalued their currency as that country falls into a deep recession. These developments have struck fear into the hearts of investors around the world, particularly the US. A multitude of companies, both large and small, depend on China for a signifigant amount of their business, and if the Chinese economy goes into a protracted tailspin, so will the profits of these companies.
Just a few years ago financial experts around the world were predicting that China would overtake the US as the world's largest economy. So what happened? To find out, let us back up a few decades. Under Chairman Mao and the communist revolution, China was nothing more than a large country with a third world economy. There was massive poverty and hunger, the result of a brutal dictatorship and failed economic policies.
With the death of Mao, new leadership took power and immediately overhauled their policies by liberalizing their economy and granting their citizens greater personal freedom. The beginnings of a capitalist economy took root. People were now free to own their own businesses and enjoy the profits. No longer did the communist leaders declare capitalism to be the enemy. Instead, the government encouraged entrepreneurship, causing the economy to soar and poverty and hunger to diminish.
So why is the powerful Chinese economic engine suddenly sputtering and stalling? A couple of years ago I told a friend the Chinese miracle would not continue unabated--could not continue under its current system of government, much less surpass the United States, because it has one fundimental flaw. That flaw is its economic system.
Am I saying there is a flaw in the market system? Not at all. The flaw with China is that its free market isn't free enough. Because it is still a one party system run by communists, the government maintains stringent controls and regulations over the market. In order for a free market system to grow and prosper, freedom must be maximized. Allow me to explain.
Picture a large unfenced backyard. In this yard we have a dog. To keep the dog from running away, it is attached to a long leash. The leash is long enough to permit the dog to roam a large area. But if it goes beyond a certain point, the leash stops the dog in its tracks and prevents it from advancing.
Such is the case wirh the Chinese economy. It is like the dog in the yard. The communist bureaucrats are the leash. Once the economy grows to certain levels, the onerous regulations halt economic expansion in its tracks. It was just a matter of time for those regulations to halt progress, and that time has arrived.
While our own country does not have a totally free market, the level of regulations and restrictions are nowhere near the magnitude of the Chinese.Should our leaders at some point in the future seek to increase the regulatory burden on the marketplace, then we will experience a similiar crash.
What is now required going forward is for our business and political leaders to realize that as long as China remains under Marxist leadership, their ability to be a dynamic economic power will be limited, like that dog on a leash. Further advancement will always be thwarted. That means our own business plans must begin to reflect that reality when dealing with the Chinese.
The lesson to be learned is thas the freer the market, the more prosperous the market.
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