January 13, 2016

WALTER RUSSELL MEAD: The China Bubble: It’s probably bursting, one way or another. And the world hasn’t figured out what to do about it.

China’s slowdown is having knock-on effects around the world. Here at TAI, we have been following the commodity crash story for some time—and not just as a piece of economic news mostly interesting to financial market speculators. This is a political and a geopolitical story as well. Falling commodity prices matter to everything from the security of Putin’s power base to the ability of the oil-dependent Nigerian state to wage an effective war against Boko Haram; the fate of democracy in countries like Brazil and South Africa is complicated by the prospective fallout from the commodity crash; Venezuela may implode into chaos as a result of the oil crash, and fears for Venezuela’s future were a major consideration in Cuba’s decision to respond to the Obama Administration’s normalization overtures. In other words, significant shifts in world commodity prices can tilt the balance of power, undermine the stability of some governments, and boost the prospects of others.
But the story may be getting still bigger. We may be looking at something more serious than the unwinding of a commodity boom; we may be looking at the bursting of a bubble that could dwarf what happened in 2008. The China Bubble is bigger than the real estate bubble, and its liquidation could pose bigger risks for world politics than the subprime implosion.

There’s a difference between China and the China Bubble. China is a middle-income developing country bumping up against the limits of a growth model built on massive exports of manufactured goods. There are lots of bubbles inside China, largely because both national and local governments have pursued a mix of stimulative policies even as the health of the underlying growth model deteriorated. Massive over-investment in real estate, infrastructure and manufacturing capacity, overvalued stock prices and poorly priced financial assets have created an increasingly toxic and dangerous economic situation inside China, and a rattled government is doing its best to keep the system from imploding. The government is hoping to achieve a ‘soft landing’ as China switches away from growth led by manufacturing for export to growth led by services and internal consumption. We shall see; China’s regulators and managers are skilled and have a lot of ammunition. But this is a difficult maneuver to execute and as Chinese society and the Chinese economy both become more complex, the task of running the country keeps getting harder.

The China Bubble on the other hand is an international phenomenon. All over the world, the producers of commodities and manufactured goods have bought into the idea that Chinese demand is a perpetual growth machine.

Something that can’t go on forever, won’t.

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