The China Bubble: part one

Macleans(Canada) ^ | Aug. 15, 2005 | Andrea Mandel-Campbell

[headsonpikes]

Many are hopeful the threat of an economic slowdown will force the party to speed up much-needed reforms, but others remain skeptical. The government is relatively untested when it comes to stick-handling delicate fiscal matters, and its ability to make quick, informed decisions is bogged down by a glacial adherence to consensus-building and a generation of leaders born of the immensely destructive Cultural Revolution.

That raises many frightening possibilities, not just for China but for all those investors who've pumped billions into its rickety institutions. "If the Chinese banks collapse, the whole world economy collapses," Wilson warns. "The world economy is very dependent on China in ways we still don't completely fathom, and we won't for another five or 10 years." We do, however, know this: when Japan arrived at its day of reckoning, the rest of the world escaped relatively unscathed, and the lessons learned faded quickly. Should the same fate befall China, the pain will be spread far and wide. It's not something we're likely to forget.

[headsonpikes]

In the West, we take for granted the infrastructure of a mature capitalist society. We expect the banks, the utility companies, and other actors to hold up their end, so to speak.

Stepping down from the economic heights, in China there is no equivalent of say, a Dun & Bradstreet to inform businesses of the credit-worthiness of customers and suppliers. A well-connected little Canadian/Chinese company is filling the breach.

http://www.yangtzetelecom.com/s/CorporateNews.asp?ReportID=109815&_Type=&_Title=Yangtze-Telecom-provides-update-on-Credit-Management-System

[Leo Carpathian]

If many manufacturers went to China to make a buck and support the communist system, they might be for a harsh awakening, just like Lenin's NEP back in Soviet "paradise". Time to pull back and move to more stable and promising pastures like Eastern Eu.

[snowrip]

Potentially bad for us, definitely bad for China.

One can only hope.

[sine_nomine]

This sounds like good news to me. A shaky China cannot spend so much on the military. Russia found out that a world power needs cash.

[redgolum]

Housing bubble, China bubble, I am going to loose track!

[CasearianDaoist]

What no one in the media seems to want to mention is that most of the "Rising Sun" agitprop -for that is what it truly was - occurred during the Administrations of Reagan and Bush Senior.

Notice that soon after Clinton came to power the reporting here changed.

Curious thing about that.

[Drammach]

China's troubles may be the reason so many US investors are turning to India..

[Amalie]

Great post; the whole read was well worth the time. if indeed this is the case, we could be looking at a WORLD economic collapse with all then intertwined financial investments in the Chinese economy.

One other thing, though - I see the spending issues here in the States to be as detrimental as the spending issues in China. Only the level of graft is different...

[untenured]

I have written about this, as a short-term problem here and as a long-term problem here. China appears to be dramatically overbuilt now, primarily because of so much politically motivated economic activity and so much corruption, which masks a lot of mistakes until the bill comes due. I think in the long-term the economic ascendance of China is a fact, with social stability the primary potential obstacle. Save for the corruption (which is not a trivial problem), China to me looks economically similar to Japan, Taiwan, Korea and other Asian miracle countries in years past. If you believe that modernization depends on cultural compatibility with it, China is in good shape in ways they weren't in centuries past.

[headsonpikes]

The many businessmen I know who commute from Canada to China are very optimistic about prospects there.

The Chinese will survive the upcoming collapse of socialist institutions quite well, imo, provided that the new civil society entities they are creating mature sufficiently prior to the approaching, and unavoidable state banking crisis.

[Rockingham]

I think that a "world economic collapse" because of China is extremely unlikely. The underlying real economy in the US and Europe is strong and mature. Most likely, the financial turmoil would settle quickly, with Chinese dollar reserves being expended to buy their way out of trouble, bringing the dollar down and boosting US exports. If the US economy got into trouble at the same time, it would not be due to China but to the housing bubble collapsing.

[Montfort]

Well, if the Chinese economy crashed, and the global ecomy took a dive with it, at least demand for oil might decrease.

Which reminds of the cartoon where the guy who was headed out the door to go to work, comes back in and says to his wife "Good news, honey, I won't have to commute to work today. The world is ending."

[<1/1,000,000th%]

The next collapse of the Chinese economy won't have nearly the impact of 9-11. The US economy lost between $6-8 trillion, depending on who's estimate you use.

The entire Chinese economy isn't worth this much.

[America's Resolve]

Not sure I agree with a lot of what I see on this thread. Just IMHO like everyone elses I guess ;)

Yeah, I can see China falling apart. The LAST people in the world who know how to run a capitalist, free-market economy are a bunch of elderly communists.

But business people tend to be gun-shy. They may have their eyes blinded by $$$ signs right now, but it won't take a whole lot to wipe those out and cause all those dollars to be withdrawn from China and put in the safest place in the known universe. The US economy.

Europe, as we know, has MANY problems and practically nothing for growth prospects. Japan has its own problems and history that will make investors stay away for a long time yet. Russia's a basket case. Greater Arabia ditto. India maybe I suppose, but not if its a world-wide phenom.

Where else is there to put money into? Only the US.

If China falls apart, every one of these investors is going to get burned and start repeating to themselves at LEAST once a minute, "Fool me once, shame on you, fool me twice, shame on me." They'll come back to the US, ESPECIALLY if as some on this thread note, this becomes a world-wide problem.

[quantfive]

"I think that a "world economic collapse" because of China is extremely unlikely. The underlying real economy in the US and Europe is strong and mature. Most likely, the financial turmoil would settle quickly, with Chinese dollar reserves being expended to buy their way out of trouble, bringing the dollar down and boosting US exports. If the US economy got into trouble at the same time, it would not be due to China but to the housing bubble collapsing."

Well put and agreed. The housing bubble coupled with outrageous energy could be the biggest recession of the last 50 years or even a depression. The ripple effects from our potential deep recession in the US would cause global recession. But China causing world financial collapse? I dont buy it either.

[<1/1,000,000th%]

We've been through this a couple of times. We tried to expand into China back in the '70's, the Chinese ended up appropriating everything; buildings, equipment, etc.

Same deal again in the '90's.

It'll happen again. As people accumulate capital, the government will have no choice but to appropriate their assets and probably disappear them. US corporate assets will be appropriated to clean up the mess. It'll end up being another tax write-off and waste of time.

[Pagey]

bttt

[nopardons]

bttt

[Rockingham]

Thanks. I have come to recognize a standard editorial formula for such stories: lay out a financial doomsday scenario and then get experts to comment on whether it "could" happen. There are always experts available who will play along, flattered by press attention or thinking publicity useful to their careers.

String together several apocalyptic comments and our prosperity can be made to seem fragile and endangered by adverse changes in most anything: Shanghai port loadings; reserve Saudi oil capacity; LIBOR schedules; Japanese patent filings; drought in the Sahara; and so on.

Uhhh, what about the American economy? What about domestic business conditions, the money supply, and the burdens of taxes, regulation, and politically driven misinvestment and financial bubbles? Dull, dull, dull. A foreign scare makes for better reading does it not?

[atlanta67]

on the plus side oil would be $20 again