China's economic model starting to come apart

According to several reports from various media, including Reuters, state-owned enterprises account for 40% of the country's industrial output and nearly half of its bank lending. An estimated 37 million people were employed by the state as of 2013. It is being estimated that as many as five to six million people in these state-owned enterprises will be laid off over the next two to three years. Reuters reports that the Chinese government will spend "billions to cover the layoffs and protect against unrest." It will cost the government an estimated $23 billion just to cover the coal and steel industry. "Additional funding will be needed to resolve the debts of so-called ‘zombie firms'—state-owned companies that have ceased operations but continue to pay workers—that could compromise local banks."

That's a lot of people out of work with a whole lot of time on their hands. And you know what they say about "idle hands."

An article by Simon Denyer in the March 1 issue of the Washington Post noted that on Monday (Feb. 29) China announced "that it expects to slash 1.8 million jobs in the coal and steel sectors, about 15% of the total workforce, as it struggles to reduce overcapacity in its bloated mining and industrial enterprises amid a deepening economic slowdown." Workers in "Anyuan and other districts of Pingxiang," where the state owns the mining company, were laid off and others were told to stay home with a dramatically reduced paycheck of just 470 yuan ($70) a month, Denyer wrote.

That led to a march of up to 1,000 workers from three mines protesting against the Communist Party and carrying banners reading, "Workers want to survive, workers need to eat," Denyer wrote, quoting social media posts. Speaking with several people, Denyer noted that some of them were struggling to understand how this could happen in a country where "Mao Zedong led the Great Strike" and formed the Communist Party.

For many workers, though, who knew the mines were in trouble, this did not come as news. When you're being paid by the government to come to work and do nothing, something is wrong. But China has been at this game for a long time. China's "ghost cities" are one example of the many "make work" programs that the communist government has created to keep people busy. These cities are beautiful places with high-rise apartment buildings, shops and stores, all standing vacant after years of construction.

Other news reports tell of workers from government-owned factories having to return home to the villages in the western parts of rural China to try to eke out a living. That after the government relocated people en masse from the rural areas to the large cities in the eastern parts of China more than a decade ago to provide workers not only for state-owned factories but for the factories of many U.S. and European companies.

We can see the "shift" happening, as a glut of workers and scarcity of jobs results in reduced salaries and workers vying for jobs with privately held foreign companies. Will that make China even more attractive to U.S. and European-based companies? Or will the fear of unrest, as communism seemingly runs its course and capitalism becomes the preferred economic model, give these companies pause?

Recently it was noted that Beijing overtook New York City in the number of billionaires (100 vs. 92). It appears that capitalism is sitting pretty well with some Chinese, as their wealth trickles into the United States via purchases of million dollar homes and condos in New York, California and Florida. The capitalist system enables wealth creation through true supply-and-demand economics. The Chinese have had their taste of this, and they won't easily let it go.

We all know that history runs in great cycles as people, cultures and governments change with the tides of time. China looked across the Pacific Ocean and saw that manufacturing made America a great nation with a large and growing middle class, but failed to see the system in place that allowed our manufacturing economy to create true wealth across the entire economic spectrum. It allowed people like Jon Huntsman, Sr., who founded Huntsman Corp., the world's largest private chemical company, to go from barefoot to billionaire, to quote the title of his autobiography, and along the way give thousands of others the same opportunity.

That might be something to think about as this political season gets into full swing.