Who matters in the world's second-largest financial system is barely understood Feb 4th 2010. From being a rounding error a decade ago, the financial clout of China now trails only that of America.

By market capitalisation, it has three of the four largest banks, the two largest insurance companies, the second-largest stockmarket and a lengthening list of investment funds. Yet who makes the decisions in China is barely understood.

The government and the Communist Party are intimately entwined with the managers of China's financial institutions. Working out who is really in charge is almost impossible. Even attempting to do so takes you into sensitive territory. Disclosing information about how the Chinese government works risks violating nebulous secrecy laws or sacrificing business opportunities. Many China-watchers will only speak face to face, concerned about using e-mails or phone calls to discuss what, in the West, would be standard chatter about the status of bankers and their supervisors. - Economist

Dominant Social Theme: China must grow up.

Free-Market Analysis: So the Economist editorial staff finally admits what has been increasingly obvious as China "evolves" - that it has nothing resembling a free-market system at the top. We've written just this thing a number of times, but the amount of wrongheaded discussion (from our point of view) about China and its powerful economy is truly amazing. In fact China has privatized in numerous ways, but most of the privatization has taken place in the arena of fruit markets and taxicab stands. When it comes to large financial entities and, generally, large businesses, China is still controlled from the top down. Here's what we wrote not so long ago about China:

The Chinese bubble has not yet burst - it has been inflating for many years - but there aren't a whole lot of articles being written about the Chinese miracle anymore. ... A Chinese growth rate of 10 percent or more PER QUARTER year in and year out [is] not a testament to vibrant management but to unbridled money printing. The Chinese people as a whole are entrepreneurial and hard working, and the "people's part" of the economy has truly been privatized. But when it comes to its larger financial sector, the Chinese government has adopted wholesale the socialist mixed management of Western nations - especially the United States.

Despite the similarities, there are differences between Western and Chinese economic practices that are likely far more specific than are being reported. Fifty years ago China was still treating its educated classes as the enemy and sending them to prison. It is only in the past 25 years or so that China has made significant progress from a "modernization" standpoint. But if you read articles today in most major mainstream publications, you will find that this 25-year overlay is ignored. Instead, Chinese fledgling financial institutions are treated as the equivalent of Western counterparts.

The only part of the above we might change is the statement at the end of the excerpt implying that Western financial institutions are somehow superior to Asian ones. It is true that Western financial institutions nominally have more independence. But when one examines who controls Western money stuff, and the mercantilist interactions generally between Western banking interests and their nominal governments, it becomes fairly obvious that a small group of men are fairly well in charge just as in China.

Yes, we would argue that the Western system at this point in time is not much "freer" than the Chinese system in terms of the end result. Money stuff is still controlled by tightly vested public/private interests - and it is money itself that matters. Control the production of money and you have created a top-down, controlled economy, whether one wishes to admit it or not. Compare the Anglo-American dominated West to China - given the current central banking economy - and you will end up arguing about degrees of control in our opinion rather than whether the two systems are truly dissimilar.

One could argue that the West's financial systems are becoming less free and more concentrated as the century-long central banking era continues. Central banking itself tends ineluctably to more and more centralization of money power and eventually the Western and Asian systems will be more alike in practice as well as opaqueness. Seems to us the whole China story is something of a dominant social theme, the idea of which is to convince the Western investor - and citizens as well - that the world is "global" and capitalism is interlinked around the world.

So why is the Economist going on record to contradict that sort of promotion? Perhaps the China miracle is starting to unravel and, if so, there's no use in continuing to play a melody that is soon to go out of style or at least become discordant.

Conclusion: Those who are thinking of making China bets, or wondering generally if the world can sustain even the limited market-based recovery it has apparently experienced, ought to investigate what's going on fairly carefully. China is an integral part of the world scene right now, yet its economy is in a sense as rigid and backwards as the USSR's once was. Paper money printing is merely covering up this unpleasant fact. Of course, the success that China has is also due to the entrepreneurial spirit of its people, sooner or later, those in charge of the printing presses will discover they've pushed too far. Like a balloon the economy pops. When it does pop, we would anticipate a social upheaval that will make the EU's seem tame by comparison.

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