The Chinese bubble is about to pop

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See the Sol Sanders Archive By Sol Sanders SPECIAL TO WORLD TRIBUNE.COM

All signs point to an approaching Chinese economic crisis.

Given the lack of transparency, the impact of the coming ÒlandingÓ is even less predictable than such economic developments elsewhere.

There are daily announcements by Communist leadership aimed at cooling an overheated economy. But most are fictitious, a cover for bottlenecks in some sectors, unrestrained speculation in others. So any divination is just that.

There is no denying the remarkable last decadeÕs progress. GDP growth figures are probably exaggerated. The truth is nobody really knows. [One cannot forget an angry ex-Prime Minister Zhu Rongzi publicly dressing down regional officials for giving him manufactured figures.] Given the fact that 80 percent of ChinaÕs more than one billion do not share in success of the effort to introduce a liberal economy in a totalitarian state, we have little history to judge the whole experiment.

But here is intelligent Shanghai gossip:

Despite all restrictions, held in place by occasional draconian prosecution [executions], for corruption, illegal Òhot moneyÓ has poured in. Theoretically Beijing has control of its currency. In fact, in 1997, Zhu, with controls and by juggling export subsidies, spared China the effects of the East Asia Financial Crisis. But that was eons ago in Chinese economic development. Once again, the Chinese have proved their phenomenal entrepreneurial talent. The central bankÕs hard currency reserves are now reaching an incredible trillion dollars. That, in turn, introduces inflation with the exchange of imported dollars for renminbao.

Speculators believe, despite all government statements [and the hard line Chinese leaders took with Vice President Cheney this week on American demands for reevaluation], upward movement will come. They want a slice ø when they trade back into dollars.

China is suddenly facing an overall trade deficit ø nearly $9 billion in the first quarter and likely to grow exponentially. That is despite its enormous U.S. trade surplus. ø probably as much as $142 billion last year, and probably growing even more rapidly as U.S. consumer confidence sucks in more consumer goods. The overall trade deficit, likely to snowball so long as ChinaÕs export boom continues, results from a growing import bill for raw materials [and components for assemblies China exports]. Ironically, China itself pushes world prices. China has become the worldÕs second largest oil importer [after the U.S.] with prices rising. [ChinaÕs oil imports increased 38 percent last year; predictions were for a fuel imports doubling this year.] ChinaÕs pull has inflated world prices ø for example, benchmark hot-rolled-sheet price jumped 80 percent to $500 a net ton, a 15-year high.

All this has pressured ChinaÕs claptrap financial system. Despite repeated statements by the authorities to brake lending, ChinaÕs four main banks probably have increased it by 10 percent just this year. ThatÕs despite signs some sectors are piling up inventories ø Shanghai and Beijing real estate, household appliances, automobiles. Again nobody knows, but nonperforming loans may be 50 percent or higher. And, again despite repeated statements, banking practices have not changed. One important reason: ChinaÕs huge, Soviet days white elephants, so-called state-owned enterprises [SOEs], are bleeding the banks with their enormous political influence and the fear of additional unemployment were their bankruptcy finally faced. [Recently, Prime Minister Wen Jiatao trotted out the argument their maintenance in the Northeast rustbelt was a matter of national security.] One danger, of course, is of a run on savings institutions by ChinaÕs incredibly frugal savers when a switch back to dollars after a postponed reevaluation.

ChinaÕs economic fragility is not just a problem for Beijing. As the Chinese maw has grown, it has become a growing market for its neighbors. Thailand, Singapore, Malaysia, Philippines and Australia have seen their exports to China ø including manufactures ø grow by as much as 50 percent. Japan is coming out of its decade of stagnation, in part because of the fillip Chinese exports have given its still only partially reformed export-led economy. South Korea, caught in political and economic crosscurrents, counts on its ÒChina boomÓ for its high tech exports to buoy it until domestic demand returns. Even the U.S., however much it might complain over the loss of jobs to China, continues to have a lower inflation rate in part because Beijing [as well as Tokyo, Seoul, Taipei and Hong Kong] gobble up its treasury notes, halting any Òcrowding outÓ of private sector borrowing in capital markets.

BeijingÕs new leadership, noted for its non-risk-taking past, is caught in the headlights. It dare not fiddle with the currency tied to the dollar, its only stable economic tool. On the other hand, even if no one else does, Chinese Communists remember their rise to power owed as much if not more to runaway inflation in the last years of the Chiang Kaishek regime as to battlefield victories. [The Chinese ÒinflationphobiaÓ is as great as the Germans who remember the 20s inflation that brought Hitler.]

An hour of decision is approaching rapidly.