Monday, October 29, 2007

Chinese Bubble, Bubble, Toils, and Trouble

Given how bubbles are created, it is not a surprise that recent Chinese economic expansion represents one. Tom Barnett, as often is the case, has noted, among other things, another positive outcome of our "engagement" strategy, i.e., the investment of private Chinese money. He is, of course, bullish on what he sees as the pending Sino-American alliance following the inevitable bubble burst. I am a little less optimistic (but not a lot) and the false (or at least undemonstrated) premises in this passage don't help:

China will learn from scandals and crashes. The key for us, is how we mentor them in this process, because we’ve been there and done all that before.

But you look at all that uncertainty and looming new rule sets that the Party knows full well it’ll have to adopt as the country matures and moves through all these inevitable crises, and it’s little surprise to me that China has no desire whatsoever to stick its neck out on the Burmas and Darfurs and Irans and North Koreas of the world. Why pick up the quagmire when you got this much going on at home?

But the truth is--and will increasingly become--that China has no choice. The rise of the China Investment Corp is a good example: $200B of its $1.4T pile of U.S. dollars. With its development trajectory and demographic trajectory, China can’t sit on all that money and get low U.S. T-bill rates. It needs to invest like a Boomer who’s suddenly found investing religion at age 52! Aggressively.

And yet to do that, even with seeming blue chips like Blackstone, and then drop 1/6th of your investment in a few months, and THAT’S scary enough to get popular political backlash at home. Imagine what happens when the military intervention goes wrong?
The Chinese government doesn't believe it ever has to do anything, which makes them far less predictable than suggested; if they were fully rational, they wouldn't still be Communists.

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