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Thoughts on China’s future

I have been wandering through the fascinating nation of China of late, so I have not had much time to peruse the blogosphere – I guess this means that for a month I had a life. I was fortunate enough to spend a few days in the beautiful city of Lijiang in Yun’nan province. This mid-sized Chinese town is famed for its wonderfully restored ‘old city’, a cobbled and confusing maze of shops, traditional inns with gorgeous courtyards and a grid of small canals filled with luminous fish and gushing clean water. A beautiful place to while away a few days, but Lijiang is not really known for its nightlife. So on the evening of the 25th of December, I got trawling through some of the past articles on Samizdata. Reading through the comments section on this post, I noticed that an article I wrote early in 2005 got a mention. It was a pity I was not around a computer regularly, because a debate raged in the comments section that I would have very much liked to have been a part of. For all my appreciation of China, I am one of the few Sino sceptics.

I should explain. I am not a sceptic of the aspirations of the billions of Chinese people who sense greatness in the Chinese identity. After all, I’m mentioning a deeply rich culture backed up by a vast talent pool on the mainland and in the diaspora that has the capacity to change the world radically in the future. I am, however, deeply pessimistic about China in its current nominally Communist incarnation, for reasons I have outlined in a previous post. I will not go into specifics; if you’re curious, please read my rationale here.

Some interesting developments have taken place between now and then, however. These merit further analysis. One or two of the commenters in the mentioned Samizdata piece stated that they were keeping abreast of banking developments in the Middle Kingdom. In 2002, Chinese officials admitted that 25% of the loans written by the state owned banks were non-performing. Standard and Poors and a number of others said it was closer to 50%, and possibly more. Within the space of four years, the Chinese administration has revised its estimation of the rate of non-performing loans down to an average of about 12%. How can this be done so fast? I’m not really sure. We are, of course, talking about the writing down or otherwise accounting for of many hundreds of billions of dollars of bad loans. I assume that it’s due to the fact that most or all of the bad loans have been transferred to special “asset management” companies set up by the government. I suspect that the banks have been able to revise their non-performing loans (NPL) ratio down so quickly by performing a debt-to-equity swap with these holding companies. The article linked to immediately above believes the asset management companies have taken a chunk of the banks’ loans and issued them with 10 year bonds in return. This solution is clearly economic sophistry. At the end of the day, someone has to pay the tab – at some stage depositors are going to want their money. The equity in these holding companies is effectively (if not nominally for the time being) worthless – after all, their assets consist of a bunch of loans that will never be repaid. What is being done about the essentially state-owned industrial sector, which was – and most likely still is – the major recipient of these loans? There’s a saying in China that goes something like “The mountains are high and the Emperor is far away”. I have no doubt that this thinking pervades China’s provincial administration and its state-owned industrial sector, and it explains the pervasive corruption that is, contrary to official publications, as rampant as ever. For every high-profile trial and execution of an apparently “senior” official on corruption charges, there are hundreds of thousands more who not only escape undetected, but are also politically untouchable into the bargain. Quite simply, the central government cannot be everywhere at once, and its reach is frequently limited by local powerbrokers. Consider this case in Guangdong, one of China’s more prosperous provinces, where the central government could not exercise its will due to local political considerations, even though humiliating international media attention was beaming down. And who is to say that the central government is not as corrupt as its provincial counterparts? It is hardly unreasonable to say that corruption probes have a definite glass ceiling when it comes to the powers that be in Beijing.

I believe that the Chinese banking sector’s dire straits constitute the gravest threat to global stability in the coming years. The Chinese government is always harping on about its “deepening” banking and state-owned industrial enterprise reforms, and this is a mantra is being repeated across the world. Unfortunately, the Chinese state is so opaque that it’s impossible to verify the veracity of such claims, and the unrealistic numbers being thrown at us by the Communist party (like the drop of NPLs from 25% to 12% in less than five years) and the shonky juggling of bad debt from one insolvent bank to another woefully undercapitalised holding company do not inspire much confidence in the nature of the reforms. Frankly, I believe the banking sector is too far gone to reform without collapse. In international terms, the crisis in the Chinese banks and SOEs is an elephant that stands in the middle of the room, but everyone is either perceiving it as a mouse or trying to pass it off as a mouse. I believe the Australian government is in the latter category, as are a great many others around the world.

I speculate that governments like Australia’s are acting as they are because they realise the Chinese state is very brittle and unlikely to withstand economic collapse. The massively stimulating US$50 billion or thereabouts annual injection of foreign direct investment is holding the Chinese state together for the time being. Thus, a number of states such as Australia have an interest in talking up Chinese economic reforms – and concealing the parlous nature of the Chinese economy – in the hope that investor confidence will not flag and the Chinese will trade and consume their way out of their problems. Our current economic health is due to huge demand in booming and resource-hungry China. Thus we see documents like this (pdf) that echo the “deepening reforms” mantra consistently spouted by the Chinese administration. Puff pieces like this create and sustain the irrational exuberance that swirls around the legend of the Chinese economic miracle, and inevitably amplifies economic pain when the collapse eventuates. The strategy of our governments may work, but it is an extremely high-risk gamble. The more investment in and commercial intertwinement with China increases, the more outsiders will suffer if the system unravels.

And perhaps the cracks are already becoming evident even to the man on the street. When I was in China in late 2005, ATMs were frequently out of order. I work in the banking sector in Australia, and when an ATM is out of order this nearly always means the machine has dispensed all its money. This was not a problem in late 2004 during my previous Chinese visit – ATM operations at that time were indiscernible to those in Australia. I am speculating here, because I’m not really an expert on this kind of money velocity issue, but perhaps the sudden patchiness of the ATM network is a sentinel of a solvency crisis.

And the collapse could come sooner than we think. In 2007, as per the agreement China entered into upon joining the WTO, it must open up its retail banking sector to foreign banks. This is a potential tripwire. Even if only a small number of Chinese are concerned about the health of their local banks (and thus their savings), when Citibank opens up next door the run on Chinese banks could easily spin out of control. I am assuming that the government is trying to spread the notion of confidence and stability in the retail banking sector. If the Chinese do not panic come 2007 or any time in the subsequent 20 years or so, the banks should be able to reduce their NPL rate to a “more manageable 5%”. It wouldn’t be the first time that people have left their money in a bank that is essentially insolvent because they believe the government will cover any losses incurred. This is a questionable assumption, however, and if I was Chinese I probably would not run the risk.

I am concerned by the consequences of a Chinese economic collapse, and these concerns reach far beyond any short to medium term economic pain. I fear a worldwide economic slump prompted by the collapse of China and its supposedly free market will provoke a popular backlash against globalisation and the liberal market reforms carried out in the 80s in the most successful economies of the West. Capitalism and liberalism will be blamed if people create a nexus between China’s collapse, its market reforms and its intertwining with the greater world economy. There is no shortage of people who will quickly jump to the fallacious conclusion that the free market sunk China – those who protested in Hong Kong and other places would grab plenty of (misguided) ammunition from such a catastrophic event. Ask any one of those economic curmudgeons about post communist Russia’s economy, and I will bet you penny to a pound that their standard response would be “capitalism failed Russia”. This is about as sensible as saying that modesty failed Paris Hilton, for anyone who knows anything about post-Soviet “free market reforms” will know that they were in fact nothing of the sort. This type of thinking could very well gain traction because it makes sense prima facie. Policy reversals may follow and suddenly we’re staring down the barrel of a neo-Keynesian revolution. Consider what the average person knows about China’s economy. We’re all told about China’s free market reforms and its burgeoning capitalist class in the mainstream media – we’re not told about the Chinese government’s meddling in the economy and its mandating of compulsory totalitarian-style imposts on big private companies like internal “political cells”, its retention of control over huge swathes of industry, its equity market (there is currently a ban on IPOs on Mainland bourses) which is stuffed with companies who are controlled by local governments and even the military, rather than shareholder, the board and a CEO. Most importantly, we’re not told about the largely intractable problems with China’s banking sector. Most people truly think China operates under a free market economic system. If the dog’s breakfast that is China Inc fails with all the accompanying pain and fallout, there’s a real danger that free market liberalism will be made the scapegoat internationally.

As I speculated above and in my previous article, Chinese economic collapse will probably preface political revolution. This is in itself an interesting, though disturbing proposition. What would post-communist China look like? Firstly, I should mention that a democratic revolution seems fanciful at best. There is no ANC-type shadow opposition waiting in the wings. The Party is the State, and the Party brooks no opposition. Here are what I consider to be the two most likely outcomes:

1) The military will overthrow the Party. If the banking sector collapses, so too will large chunks of the state-owned industrial sector that are afloat solely due to loans from the state-owned banks. Millions upon millions will be out of work – millions more will lose their pensions and benefits. Many tens – perhaps hundreds – of millions of people will pour onto the street to vigorously and violently protest their loss of savings and/or employment. In its death throes, the Communist Party will order a brutal military crackdown. Trouble is, a military is made up by people with aspirations, families, hopes etc. People who would have lost their savings, too. People whose parents, family and friends are suddenly out of work and without benefits. Most of the officers and soldiers will have no end of sympathy for their countrymen under such circumstances, and it’s difficult to imagine the chain of command will survive under such conditions. The Communist top brass will lose control of the military, which will regroup under a new command. The old political order will be drawn and quartered, Mao will be evicted from his mausoleum and his portrait ripped down from the gate of the Forbidden City. There is no democratic tradition in China, however the country is steeped in a history of rule-by-decree. Expect this for many years to come. Perhaps the best outcome would be highly imperfect democratic elections in several years time.

2) The country breaks up along the lines of regional powerbrokers. Along with rule-by-decree, China also has a long history of warlordism and disunity. Due to the lack of any credible and widespread opposition movement in China, the possibility of a complete breakdown of central control is high if the Communists depart the scene and the military doesn’t fill the vacuum. Hong Kong would almost certainly go its own way. Those provinces with large populations of non-Han citizens like Tibet and Xinjiang may declare their independence – perhaps bloodily ejecting the old order. Inner Mongolia may reunite with Mongolia. There is scope for large-scale dismemberment of the modern Chinese state. That left over will be fractured and ruled perhaps by the old regional party bosses reincarnated as warlords or whoever is able to wrest power from them and maintain it.

Some mention Taiwan as a wildcard that could be used as a distraction by the Central government. I think this unlikely. If the economy collapses, a war with Taiwan is not likely to distract anyone from their sudden poverty. Militarily, it seems unrealistic, too. The military will be stretched to breaking point in an attempt to reign in the chaos on the Mainland, so a massive invasion or attack on Taiwan looks unfeasible.

I truly hope that I am wrong about my bleak assessment, mainly due to the turmoil and potentially massive loss of life that would undoubtedly accompany such an event. I am also deeply concerned about the potential illiberal and protectionist measures that may be enacted in the West and elsewhere in the wake of a Chinese meltdown. The world has made a grave error of judgement in heavily backing an economy designed, constructed and administered by a group of ostensibly reformed Communists. This fact alone should have cooled the foreigners’ ardour. As it stands, the potential for unprecedented economic losses from Chinese investments is enormous. I think we could be facing a very painful depression, which may very well be “cured” with a protectionist, welfarist New Deal-like solution. Scary times ahead.

75 comments to Thoughts on China’s future

  • Old Jack Tar

    Excellent article! I have been dubious about China for some time.

  • michael farris

    Conrad of the old Gweilo Diaries used to claim (don’t know here he got his info) that local economic figures (especially ones showing spectacular growth) were made up out of whole cloth by local officials.
    That certainly sounds possible.

  • Doesn’t India stand to benefit? Someone has to fill up our Wal-Marts. How about North Korea? Chaos in China may mean no more aid to keep Kim Jong-il supplied with $600 brandy. I sense opportunity.

  • John East

    Excellent overview which I don’t disagree with. However, when you write,

    ”The massively stimulating US$50 billion or thereabouts annual injection of foreign direct investment is holding the Chinese state together for the time being. Thus, a number of states such as Australia have an interest in talking up Chinese economic reforms – and concealing the parlous nature of the Chinese economy – in the hope that investor confidence will not flag and the Chinese will trade and consume their way out of their problems.”

    Could just as easily have been written,

    The massively stimulating US$248 billion or thereabouts injection of Chinese investment in US Treasury bonds is holding the US$ up for the time being. Thus, a number of states such as China have an interest in talking up the American dollar – and concealing the parlous nature of the US economy – in the hope that investor confidence will not flag and the US will trade and consume their way out of their problems.

    The US will be reluctant to let China collapse because, as much as China needs Western investment, the US needs Chinese support to bring about a controlled devaluation of the dollar to inflate away US debt. A Chinese collapse would precipitate a US$, and Wall St. crash.

    Thus, whilst I expect a crisis of some sort in the coming years, mutual interest might delay the inevitable more than might be expected. We have two great nations who hate each other, but need each others co-operation for future stability.

    I wonder who will blink first?

  • John East – you won’t be getting any arguments from me regarding your rewriting of my piece. I absolutely agree. Thing is, at the end of the day this kind of currency intervention is worse for China than it is for the USA – although in the short-medium term it’s bad for the States and creates imbalances like the widening trade deficit. For now it creates a cheap yuan and an expensive dollar, making Chinese goods look especially cheap to American householders. This helps drive China’s growth, creating markets for its goods and piquing the interest of foreign investors keen to take advantage of its artifically cheap labour.

    However, China is creating an enormous future loss by acting the way it does. The most valuable part of its foreign reserves – its enormous stash of USD – is artificially high due to its own actions. As soon as China is unable to continue to maintain the value of the USD through its strategic purchases on the currency and bond markets, the value of its largest asset plummets.

    I think you are making an error by assuming that the USA will somehow be in a position to intervene to stop a complete collapse in China. Of course the USA would not like China to collapse – nor would the rest of the world. The trouble is that China has been digging a mighty great hole for itself on both micro and macro economic fronts, and if (or when) the chickens come home to roost and an economic catastrophe develops into a social and then political catastrophe in China, there’s not a darn thing the USA can do about it, short of occupying the country. The fact that the USA doesn’t want this to happen is irrelevant once the tanks are on the streets.

    Of course, if the wheels fall off the PRC, it will be terribly bad for the developed nations of the world. Where I hail from – resource-rich, booming Western Australia – will be particularly devastated. However, if we retain our (relatively) liberal economic systems, we will adjust and recover. China, on the other hand, will be on the mat for years and years. I have said for some time now that India is a far better long term bet than China.

  • Larry Blue

    John,
    You make a good point. China’s inclusion into the global trading system was just an addition of China’s economic house of cards with the US-Euro-Japanese economic house of cards. The US, Euros, and Japanese have greater resources (propaganda, institutional, financial depth) to mitigate some collapses. China has little to none of those resources to turn to in the case of a significant crisis.

    The perpetual motion machine of the Global economy has proven time and again in the last 60 years its ability to adapt and steady itself. I’m skeptical that a China collapse would be as catastrophic as you predict (though it won’t be minor) and a lot of the impact will be felt by the resource producing countries (Brazil, Autstralia, etc.) that have been profiting so much from the China boom.

  • Larry – I don’t quite understand how you can say that, considering the unflappable American consumer’s confidence over the past few years or so has been more or less due to a combination of the strong USD and the cheap Chinese goods WalMart has been able to sell said consumer. This is all a product of Chinese central bank intervention. Why else would China acquire such an enormous stock of USD?

    The whole point of globalisation is interconnectivity. I struggle to understand why you think the USA is insulated. It’s actually one of the most exposed.

  • Verity

    James Waterton, who is no longer Suffering for His Art, thank you very much for a very informed and interesting piece. That was fascinating. Like you, I am convinced that India is going to take off like a rocket and will be a safe investment. I’ve always been iffy about China – perhaps because all that secrecy doesn’t inspire confidence in the outside world. But also because Indians are more imaginative. Chinese are very paint-by-numbers. I am not saying this may not serve them well, but I believe the Indians are more nimble thinkers.

  • John East

    James,
    I think we differ only on when, not if, things go pear shaped.
    I believe that Greenspan/Bernanke have a cunning plan. Well, they must at least have some sort of a plan. What this plan is I haven’t a clue, but I can guess. With constant intervention to juggle asset bubbles, plus the possibility of secret political deals between USA and China, they will allow sufficient time for China to diversify some of it’s US treasury holdings, and shift monies to commodities, and alternative foreign investments. In return the US will expect China not to dump US treasuries in anything other than an orderly fashion so that the dollar is slowly devalued.

    I would anticipate this might be a 5-10 year plan, although whether they can balance on the tightrope that long is unlikely.

  • Breaking China up into sub-units could be very good for it in the long run. Some historians believe that the industrial revolution occurred in Europe instead of China precisely because Europe lacked an overarching political power of the kind that ruled China most of the time.

    Sub-China’s would be forced to compete with one another economically. Historically, such competition has created greater political freedom and economic efficiency because it prevents the local powers that be from being to capricious. They have to quickly find the optimum solutions or lose out in the rat race.

    I do wonder if the amount of US debt that the Chinese hold is anything to worry about. It does seem that each decade comes with its own supposed debt crises. In the late 80′s the amount of debt held by the Japanese was supposed to be our downfall but when Japan entered a nearly 10 year long recession we sailed on.

  • John East

    Shannon, I hope for all our sakes that your sentiments are true, but just because the dollar has survived previous debasement doesn’t mean it will last for ever. You say,

    “It does seem that each decade comes with its own supposed debt crises. In the late 80′s……”

    The situation this time is worse. There are many different ways of looking at it, but none look very encouraging at the moment.
    For example, in the late 80′s the proportion of US Federal debt owed to foreigners was 10%, it is now 45%. Furthermore, the absolute size of this debt is now far more ($27,000 per man, woman and child) than it was then, ($6,000 per man, woman and child).

    And there is no sign of fiscal responsibility on the horizon.

  • veryretired

    I have heard repeated claims that the collapse of the US economy is right around the corner all my life. The only times it has (somewhat) occurred was due to intrusive government mismanagement as in the 20′s-30′s depression and the 70′s stagflation.

    Shannon is right, this China boogeyman meme is a replay of the Japanese baloney of the 80′s. Even more, the current situation is reminiscent of the Japanese bubble economy, also largely based on banking malpractice, which popped just as the experts were predicting they were going to take over the world.

    As I have said before, the Chinese have an ancient and venerable culture which is burdened with an enormous amount of counterproductive baggage, both economically and politically, which will hamper their development for decades.

    The basic rules for economic success are not some arcane mystery, but have been explored and discussed many times. The list is opposed to many statist and collectivist doctrines, so it is routinely ignored by the powerful elites and chattering classes.

    China, among many other states, violates several of these basic elements, beginning with a stable rule of law, and ending with economic transparency.

    The cultural bias against the individual and for the collective is also a powerful handicap in an entrepenuerial world. The whole point of political control of the economy is to prevent the disruptions caused by competetive ideas. The ensuing corruption and mismanagement are merely symptoms, like the blisters that erupt when someone is infected with the pox.

    The real disease is systemic and pervasive.

    The engine of economic progress, or progress in any area of human endeavor, is the effort of free and independent minds to bring their dreams to reality. As long as it is a cultural maxim that “the nail which sticks up will be pounded down”, the brakes will be on.

  • John East

    Veryretired,

    Referring to the US economy and recession you say,

    “The only times it has (somewhat) occurred was due to intrusive government mismanagement…”

    I would suggest that intrusive government mismanagement is alive and well today. A recession was called for in 2000 to clean up the system. Rather than permit a correction after the tech bubble burst, interest rates were slashed and the money supply was cranked up to ridiculous levels. Hence successive asset bubbles ever since accompanied by an exponential increase in debt.

    Sorry for the doom and gloom. Maybe quotes I’ve heard from Wall St. shills will prove to be true. “It will be different this time”, “Maybe we are in a new paradigm”, “Welcome to the everlasting goldilocks economy”, and my favourite, “The Fed have finally learned how to break out of the boom-bust cycle to an era of permanent growth”.

    Of course there is no way we can know if your more upbeat interpretation is correct, or if my pessimistic scenario will prevail, so lets not fall out over it. Lets just wait and see how things work out.

  • veryretired

    I never underestimate the ability of politicians to find ways to screw things up. My point was twofold:

    1) This “China is coming” drumbeat that many have been echoing lately is overblown and remindful of similar economic predictions of the past.

    If you remember, Galbraith predicted the USSR would surpass the US about a year before it imploded, and Rifkin recently predicted that the EU was the up and coming economic gorilla that would eat our lunch.

    Anyone who believes this stuff should start selling stocks short now and see what happens. My money’s on continued growth.

    2) The reason I am not so discouraged as some is sitting right in front of you. No one back in 1975 predicted the enormous economic expansion that was going full blast a decade later, and going even better another decade on.

    The US economy was the environment that allowed the computer revolution to occur, millions of jobs to be created, and several severe shocks to be overcome, even with all its regrettable statist obstacles.

    The reason, partly, that this happened is that the ideas, and the companies putting them into practice. were out in front of the political types and their regulations and roadblocks.

    I recall numerous articles over the years about how challenging the computer/information/technology economy was to government types because they didn’t understand it, couldn’t figure out how to regulate and tax it, and were generally at a loss about how to deal with it legislatively.

    What that meant to me was that there was a window of time within which business could function for economic reasons, not political ones.

    That period ended, of course, when so many government agencies went after Microsoft here and in other countries because it was a threat to the idea that nothing so successful economically can be good.

    Right now, the boogeyman is Walmart. It’s big, so it must be evil and causing terrible things to happen. I even heard some statist on TV the other day claiming that all those low-cost products were bad because people didn’t need higher wages to improve their purchasing power.

    I am not a pollyanna. I expect stupidity and venality to arise in every possible way at every opportunity. I support individual freedom because then the stupidity cannot be legislated into a societal malady, and the venality cannot be given the gloss of legelity.

    For all our faults, and they are legion, as long as free people can create an entire industry that leaves the statists and their hangers-on scratching their heads trying to figure out what to do next, there is still hope the present over-arching state can be dismantled.

    But that project, which will require decades and generations here in the US, will require an even longer and more painful process in a society that is based on the collective, and thoroughly infused with the most pernicious of fallacious collectivist ideology.

    I have children, and hope for grandkids some day. I am, therefore, a long term optimist about the ability of ordinary free people to realize that liberty is preferrable to bondage. We shall see.

  • veryretired

    I never underestimate the ability of politicians to find ways to screw things up. My point was twofold:

    1) This “China is coming” drumbeat that many have been echoing lately is overblown and remindful of similar economic predictions of the past.

    If you remember, Galbraith predicted the USSR would surpass the US about a year before it imploded, and Rifkin recently predicted that the EU was the up and coming economic gorilla that would eat our lunch.

    Anyone who believes this stuff should start selling stocks short now and see what happens. My money’s on continued growth.

    2) The reason I am not so discouraged as some is sitting right in front of you. No one back in 1975 predicted the enormous economic expansion that was going full blast a decade later, and going even better another decade on.

    The US economy was the environment that allowed the computer revolution to occur, millions of jobs to be created, and several severe shocks to be overcome, even with all its regrettable statist obstacles.

    The reason, partly, that this happened is that the ideas, and the companies putting them into practice. were out in front of the political types and their regulations and roadblocks.

    I recall numerous articles over the years about how challenging the computer/information/technology economy was to government types because they didn’t understand it, couldn’t figure out how to regulate and tax it, and were generally at a loss about how to deal with it legislatively.

    What that meant to me was that there was a window of time within which business could function for economic reasons, not political ones.

    That period ended, of course, when so many government agencies went after Microsoft here and in other countries because it was a threat to the idea that nothing so successful economically can be good.

    Right now, the boogeyman is Walmart. It’s big, so it must be evil and causing terrible things to happen. I even heard some statist on TV the other day claiming that all those low-cost products were bad because people didn’t need higher wages to improve their purchasing power.

    I am not a pollyanna. I expect stupidity and venality to arise in every possible way at every opportunity. I support individual freedom because then the stupidity cannot be legislated into a societal malady, and the venality cannot be given the gloss of legelity.

    For all our faults, and they are legion, as long as free people can create an entire industry that leaves the statists and their hangers-on scratching their heads trying to figure out what to do next, there is still hope the present over-arching state can be dismantled.

    But that project, which will require decades and generations here in the US, will require an even longer and more painful process in a society that is based on the collective, and thoroughly infused with the most pernicious of fallacious collectivist ideology.

    I have children, and hope for grandkids some day. I am, therefore, a long term optimist about the ability of ordinary free people to realize that liberty is preferrable to bondage. We shall see.

  • John East

    Veryretired,
    That was a very good response to my doom and gloom scenario. I admire your sentiments, and hope that your optimism actually prevails.
    I’m currently “very retired” and living on my investments. Most of my income relies on the more optimistic sentiments that you expressed, i.e. stock market pension investment returns, real estate etc.
    However, I tend to harp on a lot on the subject of the downside because I would find it impossible to sleep at night if all my eggs were in the bull basket. I find it reassuring to have a fall back position with investments that will rise should the proverbial shit hit the fan. Hence my concern about what might happen, and my recommendation to everybody that you should protect yourself and your family by investing some of your money on the dark side.

    Just in case.

  • Chris Harper

    veryretired,

    Your point about the computer/data comms industry not being regulated, decisions being made for commercial reasons and not regulatory ones, and therefore being able to grow like topsy is a very good one.

    In the West the next BIG THINGs, biotechnology and nanotech, are already being emeshed in bonds of red tape before they have even gotten to the starting blocks. Despite the scandals in S. Korea it is the East which will most likely make the running in these industries. Regardless of current strengths, because of this regulation we will at best be equals in these technologies, not race winning leaders.

  • veryretired

    Sorry for the double post—the Overmind told me to do it for some arcane reason.

    The potential for grotesque abuse and immoral activity in the bio-tech revolution that is certainly developing momentum every day is on a scale that would make Himmler blush. Our children, and their children, will face excruciating moral dilemnas as they grapple with the terrible urge to use other human lives as medical spare parts and aging inhibitors, etc.

    No doubt, a society like N.Korea or even China, is at an advantage from one perspective, i.e., they may not be constrained by moral and social qualms from developing new uses for human lives and their component parts.

    However, from my perspective, this seeming advantage is, in fact, much like the story of the Krell in the old sci-fi flick “Forbidden Planet”. An ancient race, the Krell developed a technology which allowed their mental images to be instantly transformed into reality.

    As one of the human characters describes it, they were then destroyed in a night of horror, as the primitive urges of their unconscious minds gave form to every imaginable type of violence and mayhem.

    If there is a choice between exploring these complex and dangerous moral situations in a society constrained by a deep reverence for the dignity of the individual, or one where there are no concerns about using some as means to others’ ends, I would like to live in the former.

    As an example of what that distinction means, just recall that the Nazis and Japanese fascists may have developed some knowledge worth knowing in their various experiments on human beings, but such efforts, and the moral code which permitted them, were part of a larger cancerous sickness which led to the destruction of their societies, and the repudiation of all involved by any ordinary person familiar with the situation.

    It may cause some disadvantage in speed, or the use of experimental procedures which involve borderline moral questions in our society, but that is a small price to pay if the alternative is to sell one’s soul for a chance to develop some new procedure or treatment.

    Operating in an amoral context, in which a human life is no different than the virus in a petrie dish, is a form of moral suicide. The society which has no qualms about the lives it uses as spare parts will have no qualms about the lives it uses for other “important” reasons as well.

    My vote is for the dignity of the individual, for myself and my children. I demand that I be allowed to live as a human being in a context that reveres that status above all else. Nothing less would be human anyway.

  • Johnathan Pearce

    James, truly thoughtful and provocative post. It deserves a wide reading.

    The key issue here seems to be the banking system and the ability – thus far anyway – of the authorities to blarney about how they are restructuring the system and reducing NPLs. I think the problems of the Japanese banking system in the 90s are a pretty useful header for the sort of problems that might be caused.

    My original article you linked to may have been a bit gushing. I am perhaps a sucker for positive news. Goodness knows there are plenty of jeramiads out there. I am keeping my fingers crossed.

    Verity: not sure whether I would put too big a bet on India, but its Anglosphere pedigree, better respect for law and property does give it a key advantage. BTW, I like what you are doing at Jim Bennett’s blog.

  • Ben

    The reduction in NPLs is indeed an accounting issue. PBoC dedicated a chunk of (its ample) dollar reserves to recap some of the largest state-owned banks and allow them to provision their NPLs. However, to the extent that the reserves so used no longer show up in China’s total reserves figures, the NPL *stock* improvement should not be considered fictitious.

    The real question is of flows. Is the Chinese banking system still creating NPLs at the same dreadful rate as before. I fear the answer to this is “yes”. The day of reckoning remains, in my view, very far off. A country with an enormous glut of savings (some of it enforced, it’s true) will not face a banking crisis, even if its banks are insolvent. To the extent that at any given time, at the margin deposits are growing, insolvency does not result in bank failure. IT is only when people demand back their deposits, only to find the bank has nothing to back them, that insolvency turns into crisis. For cultural and political reasons, that day in China may be a long time in coming.

  • barleymouse

    Whilst I agree China has massive problems and potential problems, this is all rather a lot to build from a bunch of O3* ATMs, is it not? An alternative explanation for the point of departure ( O3 ATMs ~ solvency problems ) is that they’re going off-line due to balky network.

    Of much greater concern to me is the massive over-capacity in large segments of basic Chinese industry; eg over 3000 ball-bearing factories in an economy that needs maybe a dozen. The capital mal-investments of the last decade or two have been nothing short of mind-boggling, and the shakeout will not be pretty.

    It is this future source of widespread unemployment and explosion of NPLs** that is of much greater concern. China almost certainly cannot move another 200 million people from farms to eastern cities in the next ten year and hope to provide them with employment … let alone potable water.

    Neither China’s nor America’s economic situation is particularly good, but America had the entrepreneurial, intellectual, and political capital to compensate, adapt and adjust reasonably well. China does not.

    By and large China has the same sort of government it had 800 years ago.

    * O3 = out of order ** NPL = non-performing loan

  • ming666

    absolutely correct. i have friends who have successful businesses in the US and are making big bets on China. I was living in Kuala Lumpur at the time of the 97 currency crisis. the same structural elements that did in the SE tiger economies then seem to be evident in China. In fact you can argue that since thailand, indonesia, & malaysia are putative democracies – the problem will only be worse. if china does what for instance malaysia did and freezes all outbound capital then we are in for a cataclysmic situation. you cannont have financial system run on cronyism and over-inflated collateral valuations. the fed has been able to deal with liquidity crisises in russia and se asia. this would truly swamp the boat.

  • I have no doubt that a Chinese shakeout will occur. Shakeouts always occur when corrupt governments ride rapid economic expansions. Their self-serving and economically irrational decisions build up inefficiencies in the economy that eventually trigger a downturn. China is definitely going to have problems within the next decade at the most.

    I don’t think, however, that China’s adjustments, harsh though they will be internally, will have a catastrophic effect on US or global economy. For one thing, the chinese economy simply isn’t that big. China accounts for only 4.1% of world GNP, (putting it between Italy and France) so even when it does tank the effects will be minimal.

    Nor do I think US debt held by the Chinese is much of problem. The US has a public debt of 8.1 trillion of which the Chinese hold an estimated $224 billion which percentage wise is 2.8%. I don’t see how a Chinese sell off could possibly be large enough to trigger a widespread devaluation of US debt instruments.

    Things are going to get rough in China and fairly soon. I wouldn’t put a lot of my money there but on the other hand I don’t see China as the pebble that starts a world wide economic avalanche.

  • Larry Blue

    James,
    I didn’t mean to overstate the US invulnability. As others have mentioned, the politicians can turn a crisis into a total clusterfuck of a depression. But you also raised the factor of substitution with India (SE Asia is another option).

    Would the Indians be open to the same deal as the US has given the Chinese? Buy a few hundred billion of US Treasury bonds and you get a 20th to 21st cent industrial infrastructure and move a couple of 100 million of your citizens into the global middle class. It’s a gamble becuase you have develop the necessary institutions and business/legal culture that will allow you to transition into a mature economy when the boom is over.

  • Barleymouse : the ATM thing was an aside; I cannot for the life of me understand how you possibly construed that as the main justification to my overarching hypothesis. It seems like you read that one paragraph about the ATMs and ignored the rest – where I covered the issue of NPLs at length, and pondered what was being done about the SOEs that are no doubt still being propped up with loans.

  • For more info on China’s economy from the underside, I defer to someone like Gordon at the Horse’s mouth (http://thehorsesmouth.blog-city.com/). But my take on it is simple- they have many potential strengths, but with this big ‘correction’ (or shakedown, or recession- whatever), how will the autocratic Chinese Communist Party react? Some have addressed the possibility of military dictatorship and/or war with Taiwan, regionalized breakup, etc… we could even get a vibrant democratic transition, but the truth is we won’t know. But I imagine it won’t be pretty.

    There is this technocratic insistence on trends- but I hope people don’t rely on it too much. Especially from a country like China- the original post calls it ‘economic sophistry’ and from my experience that is very apt.

    The US has been through a few recessions and come out better. The PRC has been booming since Mao died in the 70′s, how will they react when the bottom falls out? They could be just fine… or they could fall apart. PBoC is like Enron on a massive scale, the harder they hold on the worse it’ll be.

    Hold on gents, it could be rough when the storm hits. This Iraq thing is ripples in the bucket.

  • Kurt

    Jim Rogers (Investment Biker and Adventure Capitalist) believes that China will go through a period of turmoil and economic slump, due to the banking problem. However, he remains bullish on China’s long term prospects and believes that following the economic slump, is the best time to invest in China.

    His theory is that the coming crunch will force reform of the banking and political system and that this, in turn, will set the stage for further growth, on a more sustainable basis.

    Also, if China goes into another warlord period, the various provinces will be competing with each other on the basis of trade and economic growth. This may also be a good thing. I do not believe that the different provinces will go to war against each other, because it is always more profitable to make money rather than war.

    The instability will certainly lead to independence movenments in Tibet and Xinjiang, with the muslims taking advantage of the situation to create trouble.

    If all of this does happen to China, more investment and opportunities will return to South East Asia, particularly Malaysia and Thailand.

  • treyb

    IT is only when people demand back their deposits, only to find the bank has nothing to back them, that insolvency turns into crisis. For cultural and political reasons, that day in China may be a long time in coming.”

    I highly doubt that cultural reasons will prevent a bank run. (and can only speculate on the political reasons.) Does anyone remember this from a couple years ago: “Fears of financial problems sent hundreds of people rushing to the bank Thursday demanding their money.

    “The bank run was sparked by reports that a manager at a related bank in New York City’s Chinatown was being investigated. WNBC in New York reported that the employee was under investigation for taking $1 million from the bank. “

    This was relatively big news in NY for a couple days. (I didn’t even know that it had spread to PA till I searched for it just now.) And this bank run was caused by a rumor of an investigation of a bank official. If there’s anything to this ATM cash flow problem, a collapse could be quick.

  • Verity

    Jonathan – Very elegant of you. Thank you.

    I am more positive about India than are my co-bloggers over at the Anglsophere (and you, too, apparently) because I have followed it so closely for years, and they are rid of those toxic Gandhis at last.

  • thad

    Barleymouse,

    Don’t dismiss the Empty-ATM-as-Harbinger-of-Doom scenario out of hand. During the Summer of ’98 in Moscow, a rather sudden acute shortage of US$-dispensing ATMs was my first signal that something was seriously amiss. (I unfortunately wasn’t watching the GKO market very closely, which, with 20-20 hindsight, was a much better indicator.)

    While the collapse of China would indeed shake the foundations of the global economy and would require skillful management by central banks and international monetary authorities, I don’t think it necessarily follows that the U.S. dollar would be one of the casualities. In fact, the opposite could be the case, as global crisis precipitates a flight to safety.

    The Chinese holders of U.S. Treasuries aren’t propping up anything, John East; they are parking their assets somewhere safe. Those assets aren’t going to be dumped in a crisis; they’re going to be gripped ever more tightly.

    The only question would be: in the event of such a China crisis, would the additional global demand for U.S. Treasuries by others heavily invested in China and seeking a safe haven make up for the sudden absence of Chinese buyers at future Treasury auctions?

  • John East

    I just saw this on the FT site:

    “China signals reserves switch away from dollar
    By Geoff Dyer in Shanghai and Andrew Balls in Washington

    China indicated on Thursday it could begin to diversify its rapidly growing foreign exchange reserves away from the US dollar and government bonds – a potential shift with significant implications for global financial and commodity markets.”

    It looks as if some of the questions raised on this thread might be answered sooner rather than later.

  • Verity

    Very bad news, people. Microsoft has just shut down a Chinese blog at the request of the government. (Link)

  • Sam

    While there are lots of reasons for concern about the US economy, it seems that almost everywhere else, things look to be in worse shape, hence the US still remains a relatively attractive place to invest. However, just because it looks good comparatively speaking, doesn’t mean that if a widespread international economic crisis won’t hurt–suffering the least when everyone is suffering is better than being hurt the worst, but still isn’t pleasant.

  • Federalist

    A fine analysis. One way out for China in the projected banking crisis is for the government to recapitalize the banks using foreign currency holdings and peel off the NPLs. Such a fix would still require a lot of luck — and reform of new lending, swift sale of bad loans, and liquidation of nonperforming companies. The economy would then reorganize itself around well-run companies with stable markets.

    Some form of unemployment payments would have to be made to displaced workers for the sake of limiting the potential for mass disorder. Most of all, the Chinese would have to learn the American trick of putting companies into bankruptcy while still keeping them running and not having workers go on wildcat strikes.

    Unfortunately for China, corruption is pervasive and integral to the Chinese system, essential legal and political institutions are lacking, core business competencies are thinly spread, and the Chinese elite is composed mostly of military, party hacks, and engineers, with few having talent outside their immediate areas of expertise. In a crisis, they will be hard put to make the correct moves on a timely basis.

    Unless the Chinese economy collapses so as to produce wide unemployment and massive unrest, a military coup or civil war seems unlikely. If there is a crisis, I suspect that in addition to getting the economic moves mostly right, the Chinese government will have to pledge and deliver on democratization — and that will be the hardest step of all.

  • Those (USD) assets aren’t going to be dumped in a crisis

    Not true – it depends on how the US fares in the event of a Chinese meltdown. The two economies are reliant on the actions of the other to maintain the status quo, that neither could withstand the economic contraction of the other without very serious consequences.

    Also, gold is a safe haven but the USD isn’t necessarily so. That’s the trouble with fiat money – it has no intrinsic value. When confidence is shaken, its reputation crumbles. The price of oil will plummet, too.

  • Robert C. Sellers

    As I recall a 1993 briefing at the Beijing embassy, one possiblity put before us was that China would spin off into regions dominated respectively by Japan, Taiwan, Hong Kong, and South Korea.

  • Jim Rockford

    I can speak to two issues.

    NPLs are very bad, when in China during 1996 I attended many briefings where the NPL issue was openly discussed. It was identified as the main reason China’s banking system remained closed and unable to grow to it’s potential.

    The other issue is SOE which is also interlinked. Most foreign investors at the time complained their investments were very risky long-term bets because all the short term possible gains were eaten away by mandatory partnerships with SOEs to keep employment up. China does NOT have anything like Social Security, all social welfare including schooling comes from your employer which is for almost ALL Chinese a SOE. I toured a SOE steel factory that was in partnership with a foreign manufacturer (IIRC, Nucor). New technology allowed them to set up a new plant alongside the old one, which remained, idle, with people on the books doing nothing, and which the foreign partner was responsible for about 50% of their pay.

    I’d say MOST of the private investment in China has failed to generate profits; the people making money are the connected SOE/Gov/Military/Party folks who set up private factories outside these partnership requirements and make lots of cheap stuff for export.

    One last thing. In 1996 the power picture was very ugly. No national or inter-regional grid, most factories using their own diesel generators due to lack of reliable power, bad roads/rail; and ports VERY congested and with corrupt customs officials. At some point the structural disadvantages of China will have to outweigh the advantage of cheap labor, which does not last forever.

    If I were looking at a place, undervalued, with skilled workers, lots of infrastructure advantages, and a lot of experience in manufacturing high quality and low cost consumer goods I’d look to Japan. Which I would say would be the main beneficiary to any problems in China.

    I don’t think China will collapse; the leadership is not IMHO stupid, is aware generally of the problems, and is trying to keep things together as much as possible. I do see however at some point foreign investment dramatically slowing as returns that have been deferred for more than then years just don’t show up.

  • ed

    Hmmm.

    1. I had read in an article that China had planned to offer stock to Chinese citizens in these debt holding companies. I.e. they’re way of paying back the Chinese depositor is by inducing him to buy worthless stocks, shift the money to the back to cover his withdrawls, and then let the debt holding company go broke. So the bank doesn’t fail, a “private” company fails instead.

    2. They were also trying to set things up to offer these stocks to foreign investors.

    3. The scenario you describe seems to be a traditional Chinese peasant revolt. I.e. famine or a bad economy causes the common folk to believe the ruling elite have lost the Mandate of Heaven and thus the authority to rule. In such a circumstance the current facade of communism over the traditional feudal arrangement will be ripped off and we’ll be left with a feudal China and a possible return of a Chinese Emperor.

    Or, like you pointed out, the existing China will fracture and result in a return to the days of the regional warlords.

    Frankly I think the latter is far more likely. Some provinces are much stronger both economically and militarily, particularly the coastal provinces. These provinces have the best chances of forming new political entities. And the best chance of starting an internal war with each other as they jockey for resources, industrial areas, key power generation sites and military assets.

    4. I think that China doesn’t have 20 years to deal with it’s shaky economic situation because demographics are against that timeline. Right now in Guangdong the number of schoolboys vs schoolgirls is 142 vs 100 as an average. There is a long history of killing infant girls but this situation has become much worse due to the “One Child” law. Even now the Chinese government has made it illegal to have a sonogram for the purpose of determining the gender of a child. With practically no effect at all.

    The coming financial instability will become more and more evident to the average Chinese as time passes. In such a circumstance it is very logical for Chinese parents to place even greater preference on boys rather than girls. This current gender imbalance has resulted in 70+ million men currently unable to find a girlfriend or wife, essentially unmarriageable in every context. In response these permanent bachelors have had to compensate with drinking, gambling and prostitution with commensurate violence, spread of STDs and HIV and social instabillity.

    Furthermore with the inception of the “One Child” law and the added effects of a cultural promotion of sons vs daughters, many of whom are even now being shipped overseas to adoptive parents, means that the gender based population imbalance isn’t the only one. Another severe problem is the age imbalance.

    5. The current median age is 33 but that’s mostly due to a long term lack of sufficient medical care that has been vastly improved over the past 30 years. However what this means is that China has, in effect, a “Baby Boomer” generation of it’s own. A population wave that is progressing through the various age brackets that increasingly threatens to destabilise everything as time passes. As of 1985 the percentage of Chinese age 50+ was 14.7%. As of 2012 the number of Chinese 50+ will be 29% and rising rapidly. By 2050 the number of Chinese 50+ may top 40%.

    In effect much of the industry being built now in China won’t have any workers by 2050. But the effects of this demographic wave will be felt long before then. By 2012 some 14% of China’s population will be 65+. If we use the current population figures, for ease of calculations, then that will amount to 182 million elderly needed advancing healthcare, treatment and nursing.

    Even if we assume that there must be 1 nurse for every 20 elderly then that would require almost 1 million nurses, with all of the attendent costs associated with them. Who will pay for it? The individuals themselves from their savings deposited over the years in Chinese banks that are largely insolvent. Then there’s the issue of workers needed for industrial work having to be trained and diverted to the care of the elderly. A percentage of the workforce that will increase as time passes until industry will have to compete with healthcare for any available workers.

    Frankly the list is endless. Bad mojo.

  • ed

    Hmmm.

    If China, in the midst of a solvency crisis, tries to maintain solvency by dumping trillions of dollars worth of US debt at cut-rate prices, then this will have minimal effect on the US economy. Except that the debt will be shifted from one creditor to another and it may be possible for the US federal government to step in and buy back that debt at a huge discount.

    Particularly if advantageous, to China, trade negotiations take place simultaneously to shore up investor confidence and promote fiscal stability in an unstable China.

    That would be the opportunity of a lifetime frankly.

  • JBG

    In my law practice, I have represented, since 1995, abouit $10 million USD in defaulted debt to Chinese banks and trading companies. Their credit clearance policies are sheer jokes.

  • Expat in India

    As someone who actually lives in India and deals with the overburdening and corrupt bureaucracy, those who forecast a bright future for India in the event of China’s economic collapse are falling into the same self-deceiving trap as they did with China.

    At least in China, the repressive one-party government can take strident self-serving action. In India, where there are hundreds of political parties — everyone with virtual veto power over any proposed governmental policy; and an over reaching judicial system (it amazes me the power of the Indian supreme court) — you have unimaginable bureaucratic gridlock. If you think not, come to Bangalore – the “high tech capital of India” -land at the horrific airport, sit in traffic for a few hours and experience the constant electric and water shortages (all due to bureaucratic ineptitude) and reality will set in quickly!

    India is a country that has a great superficial image (ask any tourist who has visited the country), but to residents, it is full of serious problems that have, and will continue to severely impede it’s economic progress.

  • ed

    Hmmm.

    India is a country that has a great superficial image (ask any tourist who has visited the country), but to residents, it is full of serious problems that have, and will continue to severely impede it’s economic progress.

    Agreed though my knowledge is superficial only and entirely derived from reading. The examples cited above are some of the ones leading companies to relocate their outsourcing efforts to the Phillipines. Though I think that might be only a marginal improvement.

  • The Wobbly Guy

    Guys, let’s try to be supportive and optimistic here. It does nobody any good to sit around and gloat over somebody else’s impending doom, especially, when that somebody is a nation of 1 billion people, if only because they’re running oppressive policies that you disagree with.

    If China collapses, the deaths that might result from the ensuing unrest may number in the millions. Is that a good thing?

    The same goes for India. Both India and China are crucial to the world’s future, especially in light of the long ideological war against religious extremism. India because of its Hindu culture, the other traditional foe of Islam, and China because of the fact that the Chinese have no use for it either. Their combined population is about a third of the world’s total.

    India’s problems have been highlighted before. Fortunately, there are solutions. China’s problems are also quite extensive, and again, there are solutions.

    Let’s hope both China and India do well, instead of one at the other’s expense.

  • John East

    Federalist,
    China has another option to you suggestion,

    “Some form of unemployment payments would have to be made to displaced workers for the sake of limiting the potential for mass disorder.”

    It might find it cheaper just to shoot them.

    James Waterton,

    “Also, gold is a safe haven but the USD isn’t necessarily so. That’s the trouble with fiat money – it has no intrinsic value. When confidence is shaken, its reputation crumbles. The price of oil will plummet, too.”

    So true, with the possible exception of your last point. A recession induced US slump/Cinese collapse will reduce demand and tend to push the oil price down, but as long as oil is traded in $’s Opec will do all in their power, which is considerable, to raise the $ price to match the fall in the $. Here in Europe the net effect could well be cheaper oil, but in the US the price would soar.

  • CDR Salamander

    I’m going to have a beer now.

  • ed

    Hmmm.

    It might find it cheaper just to shoot them.

    Actually what I figure the Chinese authorities would do is reprise an old theme amongst the Marxist Left; blame somebody else for *stealing* China’s success.

    Combine economic instability, banking failures, investor flight and a huge excess male population, Middle Kingdom egotistical paranoia. Mix well and serve: War. I frankly think the last step prior to internal meltdown and provincial fratricide is a series of external wars. Wars for territory, resources, women or just to use up as many potential troublemakers as possible.

    I think these are the only possible steps. I don’t think shooting them would work as well simply because communications are becoming ubiquitous and the long experience of the Chinese to such tactics. Indeed right now the Chinese government, at all levels, is teaching the Chinese people how to bypass and deal with communications blockages during small crisises. The numerous protests over highhanded uncompensated land takings have resulted in many people becoming proficient in modern subversive communications techniques. In order to effect an order to “shoot them” the Chinese government would have to effectively shut down the landline, cellular and Internet communications systems.

    And that would be a warning in of itself to many Chinese.

    Another issue would be the locality of the Chinese troops. To be certain that regional loyalty doesn’t interfere the government would have to ship soldiers around to areas that they don’t have any ties to. Frankly I think there are a lot of very smart people who will start to put things together if they start seeing a massive troop shuffle. It’ll remind them of Tiananmen Square where the government had to bring in forces from another province to crush the students.

    There’s a lot of ways things could work out well for China. But the impending financial implosion, the rapidly expanding gender imbalance and the massive aging population wave that is trending it’s way towards elderly instability all seem to suggest 2020 may be the beginning of the end.

  • ” Ask any one of those economic curmudgeons about post communist Russia’s economy, and I will bet you penny to a pound that their standard response would be “capitalism failed Russia”.”

    Too true. My graduate international political economy professor blamed the Washington Consensus and “shock therapy” for Russia’s troubles.

  • Lee

    When the word “China” comes to mean something akin to “Europe” or the “EU” then “China” will have finally found its way. Today’s “China” is an unnatural monstrosity built on the brutal application of a brutal ideology. The important steps to this region’s brighter future will be painful, but not nearly as painful as suffering the present, unnatural regime. I look forward to traveling through Asia’s Europe in the future and will bet an egg roll I’ll be doing this sooner rather than later.

  • thad

    True, James, the U.S. dollar is a fiat currency, as are all the world’s major convertible currencies.

    The question isn’t, however, whether the dollar has intrinisic value or not, but rather, when the crisis comes, what assets will be sold in the ensuing panic, and what assets will be held.

    John East and others make the (false, IMHO) assumption that the Chinese are doing Uncle Sam a favor by “propping up” the dollar. In fact, they are simply following the first rule of theatrical con men, eloquently stated by Max Bialystock in Mel Brooks’ “The Producers”: “NEVER INVEST YOUR OWN MONEY IN THE SHOW!!!”

    Any developing economy that works hard to attract foreign direct investment by holding out the promise of high returns while simultaneously being a net exporter of capital is suspect in my book. When that nation is one as opaque to outsiders as China, my suspicion rises exponentially.

    If China’s banking and financial system were to implode (and I think your analysis here is spot on), the panic would make the Thai crisis seem pretty pale by comparison. No industrialised economy would escape the ensuing carnage – the U.S. included – but it would be other emerging markets that feel the pain the most quickly and severely. Money would haemorrhage from bourses throughout Asia. New York, London, Frankurt and other major exchanges would also take a substantial wallop.

    All that liquidity would be circling the globe looking for a place to land. Commodities like gold would be one option, but one could make the argument (which I won’t attempt here) that global commodity markets are already severely overheated. The demand for high-quality fixed-income securities would clearly skyrocket, however.

    The question for the US dollar would be: would all that excess liquidity compensate for the sudden absence of Chinese buyers at U.S. Treasury auctions? If the panic is big enough (and I think it would clearly be huge), I feel confident that the answer would be “yes.” In fact, the U.S, with its mammoth budget deficits, might be the only sponge large enough to mop up the mess.

  • brooksfoe

    This is all rather amusing to read.

    The Chinese economy has structural weaknesses, as does the American economy. But anyone who has been to a Chinese city of late, and reflects on the fact that 25 years ago, Chinese cities generally looked like Khartoum, while now they look like Manhattan, has to acknowledge the badlfaced obvious fact that China has exploded into (or returned to) great economic power status. Think about what it’s like to deal with the executives of a Chinese consumer electronics firm today, and what that would have been like 25 years ago; or what it’s like to talk to Chinese academics today, and what that would have been like 25 years ago.

    This has all gone far past the point where one might speculate about the new Chinese economy “collapsing”. It’s the sixth-largest economy in the world, and it’s based on manufacturing, not oil. China is here to stay. Speculations about its secret weaknesses and looming demise may be psychically gratifying to Western democrats made understandably anxious by the rise of a non-democratic, jingoistically nationalist new capitalist power; but they are driven by resentment, not reason.

  • Dennis

    First stop here. Terrific stuff. I guess the following is pertinent to some of the observations made here:
    A Yahoo News story, dateline today:
    A farmer angry over a court ruling set off a bomb in a Chinese courthouse, killing himself and four other people, a news report said Saturday.

    The explosion Friday in Minle County in the northwestern province of Gansu killed the president of the county court and a local Communist Party official, the official Xinhua News Agency said.

    The bomber was identified as Qian Wenzhao, 62, a farmer who Xinhua said was angry over a ruling in a property dispute involving the house of his late son and daughter-in-law.

    Qian forced his way into a meeting room on the courthouse’s fourth floor and ignited explosives, Xinhua said.

    “Police believe it was Qian’s resentment against the court verdict that had led to the blast,” the report said.

    The slain court president, Chen Xingrong, and the party official, Wang Qiang, were attending the meeting, Xinhua said. It didn’t say whether they were the targets of the attack or identify the other victims.

    Bomb attacks motivated by grudges or business disputes are common in China, where most gun ownership is banned but explosives are widely available for mining and construction

  • SB

    “Chinese cities generally looked like Khartoum, while now they look like Manhattan, has to acknowledge the badlfaced obvious fact that China has exploded into (or returned to) great economic power status.”

    “Speculations about its secret weaknesses and looming demise may be psychically gratifying to Western democrats made understandably anxious by the rise of a non-democratic, jingoistically nationalist new capitalist power; but they are driven by resentment, not reason.”

    As an American, I will admit a little bit of Schadenfreude as I’ve been hearing for a few years now (a lot of times from people who have an axe to grind against America) of how we’re going to get our comeuppance and that the U.S. is an arrogant world power that will soon be bypassed.

    The thing is – the hope that America will fall from dominance hasn’t been restricted to China. Speculations about its weakness are coming from more that. They’re coming from past experience.

    In the 50s the Soviet Union was supposed to be on its way to world domination not just militarily, but economically. It turned out years later that the numbers it had been releasing were bull. Germany in 70s was supposed to blow everyone away. (not even just W. Ger. – as late as ’89, even the CIA (true to their record at prediciting things) believed that East Germany had the 9th largest economy in the world.) Obviously, everybody’s familiar with Japan in 80s and what happened later.

    I just feel like I’ve been here before.

    Now, Japan’s version of “collapse” was incredibly different from the USSR – but China in 2006 isn’t Japan in the 1980s. It still has an average income of $5,000 a year. 52% of the pop lives on other $2 a day.

    Sure, even those number’s have improved a lot. But they need to improve a lot more before it becomes the world dominating powerhouse that a lot of people have been predicting the past few years. The cities look great. But the vast majority of Chinese don’t live in those cities.

  • SB

    haven’t had my coffee yet,

    that should be “under $2 a day” not “on other $2 a day.”

  • A nice piece overall, James. I agree that there is plenty of cause for skepticism and concern over the state of the Chinese economy, despite its numerous and real achievements over the past two decades. I offer the following

    1. The non-performing loan issue has been at the forefront of worries for the better part of a decade. As you mentioned, the write-offs are simply shifting the bad loans to asset management companies, which have been desperately trying to sell them to investors, including foreign ones, but the are barely getting 25 cents on the dollar for them. And although the loans are off the books of the banks, the real question, as one commentor pointed out, is whether they have managed to control the rate of creation of new bad loans. Keep in mind that when you see the latest NPL figures from Bank of China or whomever, that is applies only to loans given before 2001 or so. Their excuse is that loans need time to go bad so they don’t have more recent data.

    On foreign direct investment, the $50 billion or so China brings in a year is just a drop in the bucket to what domestic investment is. I think it accounts for maybe 3-4 percent. In that sense, the economy really isn’t all that reliant on FDI to drive growth. Where FDI is important is in the technical and management expertise foreign projects tend to bring, as well as the prestige of China able to tout that it is the No. 1 destination for foreign capital in the world.

    I am skeptical that your ATM experience holds much significance beyond the fact that the banking system in China generally sucks. I lived in Beijing from 2002 until late last year, and ATM problems were common throughout that whole time. Often I would have to hit three ATMs near my home and work to find one that had money. It’s also more reflective of the fact that China is a cash economy. Checks are unheard of and only a tiny fraction of one percent of people have actual credit cards.

    I also think the idea that China’s ethnic minorities could forcibly eject their Han overlords from their territories is dubious. I don’t discount some surge in violence — mass protests, lynchings, riots, that sort of thing. But I think it’s highly unlikely that any ethnic group could organize an effective force able to deal with the local PLA garrison. In Tibet and Xinjiang those garrisons are formidable and the general populace is unarmed. In Inner Mongolia, the Han outnumber the ethnic Mongols by quite a large margin, and many Mongols have effectively been integrated into Han society, to the point where many of them use Chinese names rather than Mongolian ones. While you hear the occassional lip service to throwing out the Chinese, I doubt the will to attempt that is very strong.

    Finally, you say the world has made a grave error by investing in China. I think that view is exactly wrong. Consider the alternative if the West shunned China: an isolated and impoverished country ruled by an even more authoritarian and paranoid regime than the one that exists now. Whatever faults of China’s rulers, and they are many to be sure, there is no denying that the average Chinese is freer, wealthier and, yes, happier than they were even 10 years ago. Of course the “peaceful evolution” idea that a democratic transformation of China is inevitable as a wealthier populace demands greater political freedom is unproven. But our active engagement with China has made that outcome far more likely than under alternative, more antagonistic policies.

  • ed

    Hmmm.

    Speculations about its secret weaknesses and looming demise may be psychically gratifying to Western democrats made understandably anxious by the rise of a non-democratic, jingoistically nationalist new capitalist power; but they are driven by resentment, not reason.

    Insulting attacks are often the refuge of people who couldn’t otherwise debate a subject.

    There is nothing “secret” about any of this. All of this is amply documented by a multitude of organizations including the United Nations. As an example the problems that America is going to face with a tidal wave of 77 million baby boomers set to retire soon and, as they age, vastly increase the demands on the healthcare industry and Medicare, are also mirrored on the Chinese side. Except there the numbers are far more staggering. How worried are people about the looming crisis of the baby boomer retirement? How much more worried should the Chinese be? How is this a “secret”?

    The tremendous problems the Chinese banking system has with endemic corruption and the use of NPLs to prop up uneconomic companies have been an ongoing situation. They were, they are and they will continue to be a problem because such state-owned and semi state-owned companies are prime opportunities for bureaucrats, political elite and the military elite to profit from their positions. This again is not a “secret”.

    Nor is it a “secret” that there is a looming crisis in the gender imbalance in China. Even the figures we have are largely from official sources, all of whom have an incentive to make things look better than they are a la USSR. But the numbers available are horrifying, how much worse could the numbers be is left to the imagination. However the numbers available also only cover the most industrialised coastal areas and don’t cover at all the poor rural interior provinces where such practices may be even more extreme. Again this is not a “secret”.

    And that doesn’t even begin to touch upon the fact that China is currently busy converting it’s most productive farm land into industrial parks. The net effect of which is to force China to become, more and more, a net importer of food. While that seems acceptable in a global economy it also means that China must have liquidity or else face starvation. If anything, such as a banking or financial crisis, interferes with that liquidity then the resulting chaos will be made much worse because not only oil and energy purchases will be affected but also food supplies and imports.

    And famines or instability in food stocks has always been a traditional precursor to insurrection and political instability in China.

    There is no question that China has all of the appearances of wealth, power and prosperity but China also has a long history of depending upon a facade rather than the reality. The fact is that all of that facade is extremely vulnerable to the massive power of these financial and demographic trends.

  • Joel

    Welcome to the boat sir. Finally you Westerners have got a rough idea of how dire things really could be. Chinese have been thinking this for years (incl the highest levels inside the CCP, PLA, and provincial and central government officials) but they don’t dare speak this out in public. It has been observed that Westerners’ commentaries about the PRC are far more glowing than those from the Chinese themselves (who do know the reality of the situation).

    If you read Chinese, this series of articles by Caoan Jushi predicts something wrong will happen by oe before 2008. Stay tuned:

    http://www.epochtimes.com/b5/nssc858.htm

  • brooksfoe

    There is nothing “secret” about any of this. – Ed

    No, you’re right; I should rather have said something like “underappreciated”, or at most “hidden”, in the same sense in which you use the “facade” metaphor later on.

    There is no question that China has all of the appearances of wealth, power and prosperity but China also has a long history of depending upon a facade rather than the reality.

    There’s a question here as to what we consider “facade” and what we consider “reality”.

    One of the things which the rapid recovery of South Korea, Malaysia and to some extent Thailand in the aftermath of the Asian economic crisis has demonstrated is that the collapse of a country’s currency and banking system, while it may have extremely painful consequences in the short term, does not necessarily mean very much for a country’s economic prospects in the longer term. What counts far more are factors like a skilled workforce, an efficient manufacturing sector, well developed infrastructure, and political stability and competent governance. The countries which fared worst in the recovery from the SE Asian crisis were those, like Indonesia and the Philippines, with very poor education and workforce skill levels, bad transportation and telecomm systems, and weak or dysfunctional political systems.

    The collapse of the Chinese banking system due to massive nonperforming loans, undervaluation of the yuan and excessive purchases of US debt, etc. would be a tremendous setback for the global economy. But ultimately, China would come back pretty quickly, because a billion and a half people with a 99% literacy rate, a staggeringly large and efficient manufacturing infrastructure that essentially can’t be beat on price, and an increasingly huge number of international-quality science Ph.D.’s and MBAs doesn’t disappear when the currency collapses. The only really important unanswerable question is the stability of the political system, and on this point, speculation is basically fruitless. The level of political violence in China today is utterly eclipsed by the communitarian rioting, banditry and scattered guerrilla warfare which has hummed along in India for the past 57 years, mostly unnoticed by the outside world, without ever upending the political system.

    It may be your view that overvalued currencies and debt portfolios are “real”, while world-class capitalist consumer electronics firms and automotive factories (and we’re not talking about command-economy fictions here; these are the factories that are feeding the West’s capitalist economies), vast well-educated workforces, and thriving cities growing at a spectacular rate are a mere “facade”. To me, this suggests an oddly inverted view of the world.

  • brooksfoe

    And sorry to bombard the thread, but one more thing: many posters here inappropriately cite the fictive strengths of the old Soviet-bloc economies as precedents for a Chinese collapse. This is a complete misunderstanding. The problem with the old Soviet-style Communist command economies was that all those huge factories were producing shoddy goods which no one actually wanted. Hence the GNP statistics based on their value were fictions. The fact that Chinese-made goods are not shoddy, and that everyone in the world wants them, should be evident to anyone who walks into a department store anywhere on the planet. The value of the Chinese economy is real.

  • The Wobbly Guy

    Good points by brooksfoe. However, if conflict breaks out and the government is unable to impose order in the event of an economic collapse, China’s economic foundations of skilled labor, vast manufacturing capacity etc could well be lost.

    It all comes down to this:

    1. It is likely that China will suffer an economic crisis due to financial weaknesses in the next twenty-forty years.

    2. Unrest will result.

    3. The unrest will either escalate or taper off. This is the key point.

    4a. Escalating violence may lead to a collapse of the present political system. A splintered China, or one governed by die-hard rectionaries are the most likely outcomes. All previous economic progress will be nullified, and China goes back into darkness.

    4b. The government maintains control, and stability returns. China, on the strength of its economic fundamentals, recovers and reforms its financial sector, along with instituting measures to improve transparency.

    Joel-Good series of articles that accurately depict the lack of transparency in Chinese institutions(hehe, I’m partly chinese-educated). Even if the chinese survive a financial collapse and start booming again, if they can’t be more honest in their dealings, another fall won’t be far ahead.

  • SB

    “It may be your view that overvalued currencies and debt portfolios are “real”, while world-class capitalist consumer electronics firms and automotive factories (and we’re not talking about command-economy fictions here; these are the factories that are feeding the West’s capitalist economies), vast well-educated workforces, and thriving cities growing at a spectacular rate are a mere “facade”. To me, this suggests an oddly inverted view of the world.”

    All of these are real. All of these are also just a part of China economy, however.

    That’s where the facade part of this comes from. Travel beyond the cities and there are enormous amounts of the population living in houses with dirt floors and little indoor plumbing.

    The cities are great, but judging China through them is comparable to Westerners circa 1900 judging Russia through Moscow and St. Petersburg. Where I’d say people in the West are foolish right now is the fact that they look at this and fail to realize that rural population that tourists don’t visit is the norm not neighborhoods that look like Time Square. 19 percent of people in China live on $1 or less a day. 52% of people live on $2 or less -

    http://www.nationmaster.com/country/ch/Economy&all=1

    Sure, it’s an improvement, but people the last few years have been getting a little ahead of themselves in their predictions on all this.

    “The problem with the old Soviet-style Communist command economies was that all those huge factories were producing shoddy goods which no one actually wanted. Hence the GNP statistics based on their value were fictions.”

    The comparison I’d make has nothing to do with quality of goods-it’s a lack of ability to double-check the numbers. The Soviet Union’s numbers weren’t just fudged on shoody goods values, they were being flat out fabricated. I don’t like the predictions here and I hope none of it ever happens – best of luck to them that it doesn’t see the light of day and we all have utopia in the next hundred years. Their current econ stats aren’t transparent, though. They’re signed off by officials that don’t have an incentive to be modest about them.

  • I agree with number 2 mostly.
    Because it would help lower the barriers for total trade with China that would be fractured. I m pretty sure that the big players like Citibank and HSBC would help pull the rug out from under china’s feet at the apex of the boom and then buy back with supreme privalages at the apex of the collapse.

    P.S.But I also have to point out that in Russia capitalism wasn’t blamed for the collapse it was mostly the vestages of socialism and everyone anticipating the coming collapse of the system amplified corruption by a thousan fold. Another thing is that during the collapse in Russia the military command structure was maintained and people were more or less orderly. (i am talking about 1998 but even in 1991 the military structure was in order and the breakup was largely peaceful)

  • Federalist

    In confirmation of the central thesis, the LA Times has a detailed article today (January 8) about the collapse of Shanghai’s housing boom (URL below). The government so far is letting prices fall and mostly looking to the market to absorb the speculative surplus, but, if other residential property markets also go bust, Shanghai will be the first taste of a deep and bitter cup for residential housing builders and speculators.

    For China’s governing class, the danger sign would be incidents of protest and civil disorder generated by desperate ruined speculators. So far, there are no reports of that from Shanghai or elsewhere, but, with many people having lost their savings, a sharp uptick in local unemployment will tend to generate discontent in an unexpectedly swift fashion. The weaknesses of China’s economic statistics and financial system will make timely preventative action difficult.

    http://www.latimes.com/business/la-fi-chinabubble8jan08,0,7585034.story?coll=la-home-headlines&track=morenews

  • ProudNeoCon

    The most dangerous threat to come from a Chinese collapse would not be economic.

    China has always gone through a cycle of stability and collapse. When one government loses the “Mandate of Heaven”, the Chinese people rebel, overthrow their government, and replace it with another. This has repeated itself many times during China’s long history.

    However, this has never happened during the nuclear age. A warlordistic China with nuclear weapons would be very dangerous, both to the Chinese and to the rest of the world.

  • brooksfoe: But ultimately, China would come back pretty quickly, because a billion and a half people with a 99% literacy rate, a staggeringly large and efficient manufacturing infrastructure that essentially can’t be beat on price, and an increasingly huge number of international-quality science Ph.D.’s and MBAs doesn’t disappear when the currency collapses.

    First, let me say that I doubt the possibility of a Chinese economic collapse, for the reasons enumerated by brooksfoe. However, even if there were such a collapse, and the Chinese stopped buying US government debt, triggering a rise in Treasury yields and a fall in the dollar, the greenback would recover in short order for the reasons in the above quoted passage. The American workforce is very productive, its manufacturing infrastructure is first rate, American marketing prowess is legendary and the inventiveness of its research staff is why American companies sell so many things around the world. Names like Caterpillar, McDonald’s, Goodyear, HP, Apple, Microsoft, Intel, Boeing, Dell, Pfizer, Eli Lilly, Johnson and Johnson, Merrill Lynch, Goldman Sachs, Bank of America, Citigroup, et al are why the greenback will recover, even if it whipsaws some currency traders in the interval.

    Another thing that does not appear to be well-understood is that American government debt only *seems* large. In reality, it is a smaller portion of economic output than the debt of most other developed nations.

  • Liang1ahost

    China can achieve the sole ultra-superpower status within 30 years when with its awesome economic power and high technologies it could deploy the most formidable military power. And with such an invincible military power it could globalize the world in China’s image of universal justice, peace, and prosperity.

  • SB

    “China can achieve the sole ultra-superpower status within 30 years when with its awesome economic power and high technologies it could deploy the most formidable military power. And with such an invincible military power it could globalize the world in China’s image of universal justice, peace, and prosperity.”

    Japan once had a remarkably similar idea

  • I think something else that is not generally understood here is that the Chinese government owns all the land in China. What is currently traded, on a very limited basis, are leases for the use of government land. A limited number of leases aside, the vast majority of land in China is owned directly by the Chinese government. China is a huge country. It rests on 9m sq km of land. In acres, this is approximately 2.2b acres. Let’s say, very conservatively, the government owns 1.1b acres. If the government were able to sell each acre for $500 (a pittance, even in Chinese terms), it would be able to raise $550b to fully recapitalize the banks to cover the bad debts.

    Note that there are many ways for the Chinese government to deal with the bad debt problem, which isn’t really a bad debt problem, but an entitlements problem. Think of these “bad debts” as an entitlements deficit that the Chinese government chose to funnel through its banks rather than fund via taxes – state-owned companies were simply the Chinese conduit for transferring benefits to certain lucky people who worked for the state. Even without selling land, the Chinese government can raise taxes to cover the bad debt problem.

    I think another point people haven’t looked into is the fact that the Chinese economy continues to grow rapidly, for some of the same reasons that the so-called Tiger economies (Malaysia, Thailand, Singapore, Hong Kong, South Korea, Taiwan) grew rapidly during their growth phase. China is a cheap production base for the goods that used to be produced by the Tiger economies. Many of the firms in the Tiger economies that used to make things domestically have since shifted their production to China.

    But for China, there is one additional factor – when a centrally-planned economy throws off the reins, the result is wild growth. The United Kingdom had six decades of socialist economic policies after the Great War. And then Thatcher came on the scene, and implemented what some considered relatively laissez faire economic policies, and the result was rapid economic growth for more than two decades. China went through far worse – complete collectivization that brought hundreds of millions to the point of starvation and worse. When you couple the fact that under Mao, China’s economy regressed a couple of centuries with the fact that modern economic theories and technology were available to bring China back to the modern era and the loosening of controls on private enterprise in the late 1970′s, it’s no surprise that China’s economic rise has been so rapid. Basically, China started from an Africa-like base, and built up rapidly from that.

    China remains one of the poorest countries in East Asia. Illegal immigrants from China continue to flood neighboring countries. Until Chinese incomes and land prices catch up to the rest of East Asia, China will remain very competitive in regard to attracting foreign investment. But China’s problem is this – Chinese incomes and land prices are rising rapidly. As these incomes and real asset prices rise, China’s attractiveness as an investment destination will fall. Both foreign and Chinese investors will move their factories overseas if Chinese costs rise above regional costs. They’re not in China because they like the Chinese, but because Chinese costs are currently rock-bottom. When that changes, China’s attractiveness as an investment destination will start to fade.

  • Another fact that’s not widely noted is that the very cause of the significant numbers of demonstrations that China is encountering every year is widespread layoffs at state-owned enterprises. The Chinese government is privatizing these enterprises as fast as it reasonably can, without touching off widespread unrest. The demonstrations are happening precisely because the SOE’s are more than a place of employment – they provide daycare, housing, health insurance, a pension, etc. But the government is shedding these obligations at a rapid clip, thereby reducing the amounts of money that state-owned banks have to “lend” to SOE’s to support what are essentially entitlements spending for their workers. Once an SOE is privatized, its entitlements obligations to its workers end with lump sum payments that don’t remotely approach the present value of what used to be its future obligations. This is why demonstrations tend to occur in conjunction with privatizations – long-time SOE workers feel they’ve been gypped.

    Bottom line is that the bad debt problem is gradually going away as SOE’s get privatized. But Chinese banks are also SOE’s – like the typical SOE, they are also overstaffed. Consequently, the central government is also placing pressure on them to become more efficient with a view to future privatization. I have heard that layoffs at Chinese banks are getting pretty serious, with as many as 1 out of 2 employees getting the axe at many branches. As a result, service levels may not be what they used to be, considering that Chinese banks are open 7 days a week. This may also account for some of the ATM problems Waterton ran into* recently.

    * One thing I am curious about – are foreigners able to take money from Chinese ATM’s using their foreign bank cards? In addition, don’t Chinese ATM’s only have a Chinese language interface?

  • This is a great discussion. A few thoughts:

    TWG – No one is gleefully anticipating China’s downfall, least of all me. Personally, the prospect scares the hell out of me. It pays to be cognizant of the true economic situation in China, and I don’t think a lot of people are. A dose of reality is required. Your demands that we be “supportive” and “optimistic” sounds like a call to bury one’s head in the sand, given the current conditions there. I agree, there are solutions to China’s economic problems, as there are solutions to everything. The point is, I don’t see a great deal of evidence that China’s leaders are chasing up these solutions. Some of the solutions involve a lot of pain (allowing the shonky SOEs to fail, for example), and it’s questionable whether the Chinese people will bear this pain without turning on the Communists. The central government must know this, and it’s the reason why they are so reluctant to take some of the necessary steps. Trouble is, prevaricating only makes the execution of what needs to be done more difficult.

    Zhang Fei – Agree with most of what you say, although I think tackling the problems with the SOEs is the Communists’ most difficult job. The state-owned sector is still enormous and enormously inefficient – in 2001 they employed something like 41% of the industrial workforce (with over 50% of the plant machinery), whilst producing less than a quarter of China’s industrial output. Even with China’s current breakneck growth, the private economy couldn’t possibly hope to mop up so many jobs even over a period of a decade or more. SOE reform is thus decidedly tricky. It’s hard to know whether the Chinese govt is even doing anything about the SOEs, due to the opaque nature of ownership structures in the Middle Kingdom. I wrote about this in the article I linked to in the first paragraph. Incidentally, foreigners can use the Chinese ATMs managed by the big four banks. You can withdraw from your credit card account at all four. BoC and ICBC (and maybe CCB, can’t remember) subscribe to the Cirrus network so you can draw funds from a debit account if your bank is also on Cirrus. When you first stick your card in the ATM, the major banks’ machines prompt you as to whether you’d like the text in Mandarin or English.

    Whoever was talking about US dollars: I’m not too worried about the value of the USD – it may fall markedly, but this is not necessarily a bad thing. The argument that in a time of uncertainty, people will flock to safe havens is not really applicable if there’s a Chinese meltdown. The USD will not be perceived as a safe haven. Because of China’s massive USD holdings, it will be seen as a timebomb. No, gold will be the main beneficiary. Also, oil will fall dramatically for a period of time. Oil prices and futures are being bidded up so strongly because of expectations of booming China into the future.

    Liang1ahost – hate to burst your bubble, but the vast majority of China’s “high technologies” aren’t indigenous. In fact, China barely innovates at all. In terms of military hardware, China is several generations behind the USA on the technological front, and the gap is widening. However, it sounds as though you’re singing from the People’s Daily hymn book. Enjoy your delusions.

    Brooksfoe : I would say to you that perhaps your perceptions of China’s industrial strength are a little exaggerated. Chinese consumer goods and motor vehicles designed, as well as manufactured in China is far from world class. They are, however, the cheapest. A company like Haier manufactures whitegoods that are nowhere near as advanced as those from American, Japanese or European companies, but its stuff is cheap. Like I’ve said before, China doesn’t innovate much. Foreign firms simply import the technology and the goods are assembled in China. The Chinese currency is currently vastly undervalued – this is why Chinese labour is so cheap for foreign companies, and that’s why they’re in China. If the system that maintains a cheap yuan folds, then suddenly China’s neighbours start to look a lot more attractive to foreigners in terms of cheap labour. This is the problem with a low-innovation manufacturing market – as soon as you’re not the cheapest, your technology-supplying foreign partner starts to look elsewhere.

    And I don’t see how cities resplendent with gleaming skyscrapers is a symbol of economic certainty. Tell that to those New Yorkers losing their shirts in 1929. As was noted before, the Chinese are great savers. Thus, the banks have a lot of leeway to loan. Unfortunately, they have enormous portfolios of bad loans. Where do you think this money has been allocated? Partly to construction, I’ll wager. I don’t share your confidence that, just because China has come so far, it couldn’t possibly regress. The Chinese economic miracle is underpinned by some distinctly wobbly foundations.

    I should add that I believe that there’s a fairly good chance that China will rise to become an economic superpower at some stage. However, I don’t think it will happen in its current incarnation as the PRC.

  • PiedPiper

    I have read the post and all the comments and do not see how China’s fall from within would be anything but an unqualified win for the ‘Anglosphere.’ China, rather than Muslim Extremism, represents the greatest long term threat to peace in the world. Liang’s post and SB’s reply “Japan once had a remarkably similar idea” should be telling as to what sort of threat China poses. The fall of the Chinese Communist government from within is much to be desired.

    Citing the Chinese overclass and the sky-scrapers of coastal China seems facile, at best, as any indication of cultural permanency. Building height is a leading indicator of economic downturn. Andrew Lawrence created the Sky-Scrapper Index and the correlation between the building of tall buildings and depression is pretty dramatic. I t sounds like pseudo-intellectual crap but the availability of easy money leads to a rapid expansion of the economy, a building boom and then economic collapse.

    In the !930’s US purchasing stocks on margin tipped an economy that was teetering over into depression. It is as yet unclear whether underperforming loans will tip the Chinese economy. The United States went through substantial social and political upheaval while recovering from the Great Depression. To the point where the U.S. Constitutional order was dramatically changed (FDR’s attempted Supreme Court is one example) China does not have the underlying stability that the US had at that time and the CCP may not have the flexibility to react to upheaval as the US democracy had.

    My guess is that China will have an economic correction on par with that of the 1930’s in the U.S. Whether China explodes into chaos is doubtful but big changes are afoot.

  • What effect will ethnocentrism play in saving China? I’ve spent many years doing business in Singapore, Malaysia, Indonesia, The Philippines, as well as in Toronto and Vancouver. One thing that seemed a constant to me is that “You can take a chinaman out of China, but you can’t take China out of a chinaman.” Few of the Chinese I have worked with outside of China have nationalistic feelings for the country they were born and raised in. They speak Chinese to each other, they send their children to Chinese schools and they usually marry within their own. I’ve often speculated that, if China were to attack their country, most would either flee or fight with the Chinese. Just speculation, mind you.

    It seems to me that, other than money controlled by the Japanese and Indians, most of the money in Asia is held/controlled by those of Chinese descent. Together they have a huge amount of econimic might, and a strong ethnic, emotional and economic tie with China. I can’t help but think they’d go all-out to ease China’s fall.

  • So what becomes of all this US debt the Chicoms hold? Do we walk away. murmuring “suckers” under our breath? And would this ease the demand for oil if China devolves into a land of feudal warlords?

  • Fred

    China is much too big now anyway it’s a monster. It’s best for China to split up into several independent states then the region and the world is more equally divided which will make the world more stable in the long term. And I think, hope this will happen soon.

  • joejoe

    Well China like the world want really matter. within this year i can see the derivatives system falling apart. with it some $250 trillion in derivatives.(in the search column of Google type derivatives monster $250 trillion)
    compare that figure to the worlds trading wealth of $40 trillion. the chinese want even have any money to use the phone to call in the tanks into the city’s.

  • diablovision

    Having travelled through China on occasion, but not speaking the language and therefore being quite immune to propaganda, I had some observations. There are severe infrastructure problems and, as someone mentioned, serious economic misallocations. For example, I noticed how on trips through the back countries, passing near factories, junk yards, and random fields, the roads, buildings, sidewalks, vehicles, etc, are falling apart in heaps. Litter collects in every corner. There are piles of junk–new junk, old junk, used junk–everywhere. I passed a brick factory with a 400 yard square filled with must have been 100 million bricks or 1 billion bricks–but without much heavy equipment or trucks to move them, they aren’t going any where. There are piles of everything, just waiting around, misallocated. Tires. Scrap metal. Rusty Bicycles. Paving stones. Lumber. And junk of every type, haphazardly classified, rotting. For miles.

    The problem seems to me that the production, distribution, and maintenence of goods and materials is extraordinarily inefficient and wasteful. The semi-central management and un-fluid commodity market causes systemic and widespread inefficiencies. The efficiency lost, the labor wasted, and the capital tied up in overproduced or mismanaged, under maintained infrastructure and industries, coupled with a gluttonous surplus of cheap manual labor leads to what I would call labor for the sake of labor. Sidewalks in the cities are made of bricks; trees painted (by hand) for road markers. Entire overpass buttresses are hand-paved with stones. Concrete is going into the urban centers where high-rise apartments are poured literally from the ground up in a matter of a few weeks. The resulting buildings are subsequently under maintained and seem to last only a few decades before being replaced.

    Cities are dirty. Surprisingly, with the surplus of labor, no value is placed on cleanliness. You won’t find street sweepers or window washers in any but the most ritzy of areas in urban areas. Pollution and weather stain apartment complexes; they become dingy, dirty eyesores in the matter of a few years, eventually to be replaced by one or another “urban renewal” plan.

    Real-estate prices do not drive development, but rather political and “renewal” concerns. It is not uncommon to have large, new, gleaming hotels and buildings be built with poor, dirty, and slummy areas literally mixed together. The broken window problem rears its ugly head and the buildings quickly degenerate. Placement, such as high-rise hotels thrusting up from slums, leads to under-utilization and ultimately, waste.

    This is not an isolated phenomenon, but widespread and chronic. China has a long way to go before it ever becomes a developed country.

    Many of the residents burn stoves and furnaces with unrefined coal and live in toxic pollutants that cause widespread respiratory problems and dirty everything in sight. Miles of forests planted along highways outside of urban areas yawn under a perpetual gray dust that gives the leaves an depressingly washed-out drabness. Litter collects everywhere along roads, train tracks, in fields along the country side. And disturbingly, human graves, just piles of pebbles, often unmarked, can be found along the railway tracks, and even in the fields where vegetables are grown. I dared not think whether those people had died in their daily work, or whether they were just too poor to find a decent grave for their loved ones.