Centripetal China in Chaos

ChinaHardLanding CSMonitor
Fewer people may be eyeing China recently, in light of the unrest in Arab countries and the devastating natural disasters and aftermath in Japan. Yet China holds a big piece of the puzzle, as to how the future will turn out. Best not to forget it.

For example, a fascinating method of financing a commodities and real estate boom:

...companies importing copper are indeed buying it on deferred payment terms. For example, 1,000 tonnes of copper bought using a 180-day LC means the companies don’t have to pay the bank issuing the LC for 180 days after the shipment arrives in China.

During that time, though, the copper can be pledged as collateral for cash — and the funds raised are free to be invested any which way the company wishes.

As our source points out, with real estate and commodities having gained 20 to 30 per cent, or more, in some six-month periods, this could have been an extremely profitable activity in the last couple of years. _FT

Western investors may well be lured in by outward signs of economic growth which are actually based upon shifty loan schemes resembling something Bernie Madoff might have dreamed up. When all the loose ends of this "infrastructure to nowhere" are pulled in, what will be left?

....China's export-led economy is due for a hard landing. Instead of 9.8 percent, its growth in the fourth quarter of 2010, China's GDP could decline toward a recessionary 6 percent. That will slow domestic job growth, choke off the expansion in the rest of Asia, and rattle investors around the world.

It also will no doubt burst the global commodity bubble, which would be bad news for commodity exporters, ranging from Brazil and Canada to Australia and New Zealand.

A hard landing in China is very likely for two reasons. For one, Beijing's policy tools are crude. In the wake of a real estate bubble, a jump in consumer inflation from negative territory in 2009 to 4.9 percent in January 2011, and a rise in food prices to a politically untenable 10.3 percent, China has slammed on the brakes. Eight times since January 2010, the central bank has raised reserve requirements – a sledgehammer tool the Federal Reserve here hasn't used in decades.

Another reason for a hard landing: In a part command/part market-driven economy like China's, any economic policy is hard to enact. _CSMonitor

Even the best of markets will behave chaotically from time to time, and require painful corrections. But China's economy is even less of a market economy than that of the US. Too much relies upon top-heavy dictates based upon little more than educated guesses, tainted by nationalistic and ideologic bias. The "Knowledge Problem" always has the last laugh.

It is always good to look at how power is distributed in a society, before one attempts to predict the society's future:

Key in the survival of political systems is not democracy in the western sense but a diffusion of power over generations, a leadership that reacts to popular concerns, and room for upward socio-economic mobility. China has all of those.

Unlike in the Middle East, where strongmen and family dynasties who have ruled for decades on end have become the focal points of anger, there has been remarkable diffusion of power in China. None of the powerful families, like those of past leaders Deng Xiaoping, Ye Jianying, or Chen Yun, have had offsprings promoted above a certain rank in the Standing Committee of the Politburo.

That ranking is far more important than titles like Vice Premier or Minister. For instance, Prime Minister Zhou Enlai during the Mao era was ranked at number seven in the Party hierarchy in the 1970s. The offspring of political figures mostly enter business, as there is more money and personal freedom there. _ShaunRein

Rein's insight is key. In a "one-child society" such as mainland China's, wealth and power do not diffuse and propagate through the generations in the same way as they do in societies with extended families -- aunts, uncles, cousins, siblings, etc. The urge to wealth and power tend to take on a sense of immediacy and urgency which may be partially sublimated and diluted in societies which provide a greater sense of immortality through one's extended progeny.

Nationalism becomes more prominent as well, which in the face of a growing "male dominant society," could easily lead to international frictions and more frequent brushfire wars and conflicts -- in an attempt to diffuse the growing bottom-up pressure from a male "youth bulge."

The speculative fever which has driven China's economy since the collapse of its export markets in 2008, is built upon multiple inter-locking layers of corruption at most levels of government -- but particularly at regional and local levels. National leadership tends to look the other way as long as economic numbers look good, and as long as China's military and technological strengths appear to grow. Everything else is built upon the economic numbers, at this point.

Never forget that China -- like the late USSR -- is an empire, comprising multiple ethnic regions and relying upon the stripping the resources of multiple client states in the region. Also never forget that China's recent economic, technological, and military resurgence was largely fueled by massive outside investment, which continues throughout the last few years of global financial and economic turmoil. Never forget that China's wealth is incredibly lopsided demographically and geographically. China's historical tendency to break apart into warring centres of power should never leave one's mind when contemplating possible fates of the middle kingdom.