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Beijing’s age-old problem has been trying to keep China in one piece. Beijing has to underwrite massive (and expensive) development programs to stitch the country together with a common infrastructure, the most visible of which is the Grand Canal that links the Yellow and Yangtze rivers. The cost of such linkages instantly guarantees that while China may have a shot at being unified, it will always be capital-poor.
Beijing also has to provide its autonomy-minded regions with an economic incentive to remain part of Greater China, and “simple” infrastructure will not cut it. Modern China has turned to a state-centered finance model for this. Under the model, all of the scarce capital that is available is funneled to the state, which divvies it out via a handful of large state banks. These state banks then grant loans to various firms and local governments at below the cost of raising the capital. This provides a powerful economic stimulus that achieves maximum employment and growth — think of what you could do with a near-endless supply of loans at below 0 percent interest — but comes at the cost of encouraging projects that are loss-making, as no one is ever called to account for failures. (They can just get a new loan.)
The resultant growth is rapid, but it is also unsustainable. It is no wonder, then, that the central government has chosen to keep its $2 trillion of currency reserves in dollar-based assets; the rate of return is greater, the value holds over a long period, and Beijing doesn’t have to worry about the United States seceding.
Because the domestic market is considerably limited by the poor-capital nature of the country, most producers choose to tap export markets to generate income. In times of plenty this works fairly well, but when Chinese goods are not needed, the entire Chinese system can seize up. Lack of exports reduces capital availability, which constrains loan availability. This in turn not only damages the ability of firms to employ China’s legions of citizens, but it also removes the primary reason the disparate Chinese regions pay homage to Beijing.
China’s geography hardwires in a series of economic challenges that weaken the coherence of the state and make China dependent upon uninterrupted access to foreign markets to maintain state unity. As a result, China has not been a unified entity for the vast majority of its history, but instead a cauldron of competing regions that cleave along many different fault lines: coastal versus interior, Han versus minority, north versus south.
China’s survival technique for the current recession is simple. Because exports, which account for roughly half of China’s economic activity, have sunk by half, Beijing is throwing the equivalent of the financial kitchen sink at the problem. China has force-fed more loans through the banks in the first four months of 2009 than it did in the entirety of 2008.
The long-term result could well bury China beneath a mountain of bad loans — a similar strategy resulted in Japan’s 1991 crash, from which Tokyo has yet to recover. But for now it is holding the country together. The bottom line remains, however: China’s recovery is completely dependent upon external demand for its production, and the most it can do on its own is tread water.
The commie bigwigs are sweating big time with the falling dollar and their citizens getting smarter by the day, realizing wealth had been unfairly distributed and social spending close to nil. It is only a matter of time the peasants will rise against their rich, who like the rich everywhere else, had hoarded their wealth instead of spending it.
China’s survival technique for the current recession is simple. Because exports, which account for roughly half of China’s economic activity, have sunk by half, Beijing is throwing the equivalent of the financial kitchen sink at the problem. China has force-fed more loans through the banks in the first four months of 2009 than it did in the entirety of 2008. The long-term result could well bury China beneath a mountain of bad loans — a similar strategy resulted in Japan’s 1991 crash, from which Tokyo has yet to recover. But for now it is holding the country together. The bottom line remains, however: China’s recovery is completely dependent upon external demand for its production, and the most it can do on its own is tread water.
Originally posted by plumranch
Friedman said "China is Japan on steroids". China is not Japan but considering all of China's problems there is a downturn in the future here somewhere. For Japan it was the mid 90's. When will it be for China?
China’s current problem is that, with the exception of having more infrastructure than it did a year ago, Beijing enters 2010 in almost the same situation as it entered 2009. Exports have rebounded by about one-third but have not returned to pre-crisis levels. Chinese corporations remain burdened with the same export-dependency and capital-inefficiency problems that made 2009 so nerve-wracking, and structural shifts in the Chinese economy to reduce this dependency cannot be made in a decade, much less a year. The Chinese, then, have little choice but to continue the debt-driven loan and infrastructure programs that allowed them to evade a crash in 2009 until such time that external demand revives sufficiently.
Originally posted by plumranch
China is in a unique position of overstimulation, lagging world markets and world market competition! My guess that China's salvation is that it has a lot of accumulated capital that can be used against its current unprofitable situation. China is using that capital to bolster it industry and lend to the US rather than strengthen it very extensive rural infrastructure.
China's property prices rose at the fastest pace in 18 months in December, ending the year with rising fears of bubbles in the property market. Housing prices in China's 70 large and medium-sized cities rose 7.8 percent in December 2009 from a year earlier, and were up 1.5 percent compared to the previous month, said the National Bureau of Statistics (NBS) on Thursday.