By Dick Morris on July 27, 2009

Buried amid its astonishing annual growth rate, even in the recession, is the sad story of China’s socialist sector, a huge and perennial drag on its economy. The failure of government control amid the success of private initiative is a story that President Obama would do well to study as he brings government control and management to the automobile and banking industries in the United States.

In China, 80 percent of all investment activity comes from bank loans largely controlled by the government — a harbinger of what Obama will bring to the United States as TARP-funded banks increasingly have to bow to federal regulation and pressure. And, as is to be expected when the state runs the banks, the lending goes disproportionately to state-owned enterprises (read: General Motors). These companies get 70 percent of the nation’s investment capital (and the figure is rising) but only produce between one-quarter and one-third of all output in the country.

An article by John Lee explains that China’s “move towards an unbalanced state-led model did not occur by accident but was the result of deliberate policy” in the wake of the Tiananmen Square demonstrations. Prior to Tiananmen — when 80 percent of the poverty alleviation China has experienced took place — fixed-asset investment by the private sector grew at 20 percent per year. Since then, it has dropped to almost half that level.

At the same time (again, a prophesy of the result of Obama policies), the number of government officials shot up from fewer than 20 million in the early 1990s to the 46 million that now bloat the government payroll.

We are developing our own equivalent of the Chinese state sector through Obama’s takeover of General Motors and his insistence on keeping banks that took TARP money on a tight leash. By controlling bank lending (and refusing to let most banks repay the TARP loans) Obama is replicating the Chinese experience. Indeed, as he forces banks to convert the preferred stock he made them give the government to common (and therefore voting) stock, he hastens the day of federal control of the banks and, through them, of the economy (see our warnings in Catastrophe).

In doing so, he might consider the total failure of the Chinese economy’s state-controlled sector, a drag on its overall privately induced sensational economic growth.

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