China is poised for a bubble burst and a financial crisis similar to the one in Europe and will go through a fiscal overkill in2013, said Nouriel Roubini, the professor from New York University who gained fame after he predicted the current U.S. downturn. Michel Pettis, a visiting scholar at Guanghua School of Management of Beijing University, predicts 3 to 6 percent annual growth in China over the next five years or so.
3 to 6 percent annual growth means a war in China
A Real estate bubble burst or a sluggish growth rate of only 3 to 6 percent could bring a response worse than a series of protests, as seen so far in the west, but a civil war or even a regime change. A 3 to 6 percent rate of annual growth would result in 1.6 to 2.6 million out of the 6.6 million annual university graduates being unable to find jobs. After five years the jobless population would be four to six times higher than the number of the People's Liberation Army of China. This whopping number of unemployed coming out onto the streets would make 'The American Autumn' and The 1989 Tiananmen Square killings look like childs play.
Chinese citizens would hit the streets out of hunger, which could lead to war. It is Western experts view that financial bubbles are inevitable in China as it adopts a capital system, but such speculation can be misleading, however, as 'the invisible hand' in China is not price, but the government.
Why China would collapse
Media in the West talk about aChinese bubble burst resulting from four factors: ghost cities, ailing local governments, an economic soft landing with thinning exports due to the European financial crisis, and social instability caused by uprisings of ethnic minority groups. Recently, video clips of two of the abandoned new towns in China, known as 'the ghost cities', Ordos in inner Mongolia and Zhengzhou city on the outskirts of Henan province, were widely spread on the internet and in the Korean financial sector, as a warning to the risk of a Chinese real estate bubble. China is divided into the rich West where 4 percent of the Chinese population claims 64 percent of the land, and the poor East with 96 percent of its population on 36 percent of its land. From the viewpoint of the East, China is doomed to collapse while for the West, China is fast growing. Meanwhile, regarding the ailing Chinese local governments, the Chinese government ordered the recapitalization of Chinese banks through a capital increase on a large scale last year. China acknowledged that its local governments owe a total of 10.7 trillion yuan in debt, among which it ordered to write off 20 percent of bad debt as an expense and transfer it to a state-owned bad bank with a capital of 2 to 3 trillion yuan. Chinese local governments earn 30 percent of their revenue from land lease. Accordingly, the governments' debt is mortgaged by land, which makes a huge difference from the characteristic revenue source of western countries, where tax is almost the sole source. Against this backdrop, Chinese state-owned banks are seen to have the ability to write off the bad assets of its local governments.
While the States and the European countries are suffering from a serious economic meltdown, China witnessed a 17 percent increase in exports last month. Despite a 20 percent increase in imports, its trade surplus reached US$ 14.5 billion last month. Cumulatively speaking, Chinese exports have increased by 25 percent while its imports have decreased by 27 percent this September. The main reason behind the surplus is that China exports daily necessities at a medium or low price rather than a high value product. Amid a sluggish global economy, demand for Chinese products which are at the world's lowest price level is anticipated to grow, which allows a double digit growth expectation for export for next year. However, the net export of China has contributed less than 20 percent to its GDP over the last decade and the main driving
force behind China's economic growth is not export, but domestic investment and consumption.
Will China loosen its budget
During the third quarter of 2011, China saw its GDP drop to 9.1 percent, a 9.5 percent reduction compared to the previous
quarter. September's CPI reached 6.1 percent, a slower growth than in August. A growth rate of M2, or money and quasi-money in circulation, dropped to 13 percent from 30 percent last year and new loans are at a record low over the recent 21 months. A series of small and medium companies have gone into bankruptcy. Amid the tightened Chinese economy, will China be able to loosen its purse strings Hinting at its negative real interest rates, the world's most populous country is unlikely to drop its cheap-money policy, despite its slowdown. It is noteworthy to check its liquidity and China has spent more than the US relative to GDP to overcome the 2008 Death Valley. In absolute terms, China doubled its spending in 2010 compared to 2007. In consideration of the fact that it takes one year at the most for liquidity
to reach the real economy, China is seen to be unlikely to drop its tight money policy, at least between the fourth quarter
of 2011 and first quarter of 2012. During the first half of 2011, China raised its reserve rate every month and its interest rate every other month, as a part of an austerity policy with aims to cool down economic over heating. However, the movements were more about preventing the serious undervaluation of the Chinese Renminbi due to the massive influx of hot money. Once the financial crisis of the European countries is stabilized, it is not outside the realm of possibility that hot money
from all over the world flock into the rapidly growing Chinese economy.
Retrenchment in 2011
China awaits a busy and complicated year in 2012, when it will have its fifth generation leader. As China employs a one-party dictatorship system and therefore has no opposition party, it is not a regime change but a change in leadership. The communist country has a leader staying in power for nearly 15 years with 10 years as a leader and 5 years as an advisor. The long term leadership allows China to have a more consistent policy compared to the western countries. It is the 15-year regime cycle that stabilized the Chinese economy during two downturns since the 1998 financial crisis in Asia. In this regard, it is likely that China will continue its tight money policy in 2011, not just because of economic reasons but to offer an opportunity for the new Shi Jin-Ping regime to have tangible results its first year in leadership next year. China is the sole country with a low domestic consumption of only 30 percent among the other 10 superpowers. Raising the level of domestic consumption to 50 percent within the next 5 years is one of the major policy goals of its 12th 5-year development plan. China is achieving the goal to boost domestic demand by expanding fiscal policy while keeping the cheap money policy in tact.
China, a battlefield to accommodate 7 billion players
A search for a stock that benefits from a stronger Renminbi is seen to be continuously heating up in 2012. China is filled with ultra-loose liquidity from inside and outside China. As its financial market is blocked overseas, the blocked funds are struggling to find an exit. These days, five star hotels in Seoul, Korea, full, mainly due to the huge demand from Chinese tourists. It is Chinese woman in their middle age who clean out luxury shops in Seoul. China is the sole country where people still consume these days and the world is targeting the market. The problem is that China is no longer a market which anyone can seize. It is a battlefield where 7 billion players are fighting to claim the 1.3 billion person market.
