State capitalism's real weakness: an inability to control the economy

Interesting piece in the WSJ on China's inability to control inflation, which is really taking off.  Food, for example, is 10% higher than this time last year (which is nothing compared to gas in the US).

Basics of the piece notes that China's Central Bank must kowtow to the Party's wishes, and the Party tends to be captive to the interests of the exporters and "free-spending local governments," both of whom feel they've got their marching orders too regarding growth.

So you basically have China's Bernanke going around begging for help and not really participating in the top decision-making meetings, most of which occur in the ten-person State Council headed by Premier Wen or the nine-person Politburo Standing Committee headed by GenSec Hu.  While the PBOC (People's Bank of China) would prefer to push harder on inflation, the party and government fear triggering a downturn.  Two different views, of course, point being that the political overwhelms the economic logic - the main point of Ian Bremmer's book, "End of the Free Market."

Watching a political system refuse to deal with economic reality doesn't exactly mark China's state capitalism as superior - just differently incentivized.  We don't have the same fears of social unrest over economics here that they do.

This is fundamentally why China is a lot farther away from creating an international reserve currency than imagined.  To have one is to send more capital abroad than you take in (giving others to hold in reserve) and China will simply have a devil of a time reorienting from their Japan-plus growth model of publicly-enabled investment and export-driven growth, in large part for the same dynamics cited here:  the Party and Government are too influenced by industrial concerns.

The beautiful irony here persists:  China is more the Marxist ideal of capitalism run amok than America is today - by a ways.  It's also far more indicative of industrialists/financiers having taken over the government, in that Marxian fear, than America is today as well.  Again, you have to go back to the late 19th-century US history to find similarities that hold true.

Larger point:  state capitalism remains - at best - an evolutionary precursor to our mix of big firms/small firms (see Baumol Et. al, "Good Capitalism, Bad Capitalism").