Repost Stratfor in Barrons:
Barron's
MONDAY, FEBRUARY 21, 2005
World of Worry
Problems abound around the globe, but Stratfor thinks we fret over the wrong ones By JONATHAN R. LAING
Friedman sees more peril in 2005 from developments in quarters of the globe that have received less media attention. China, for example, this year could see significant deceleration in its torrid economic growth rate and may well be on the cusp of a meltdown, he says. Moreover, Friedman contends that China is likely to become more bellicose and nationalistic as its economic malaise swells, because foreign aggression has been a tried and true method for deflecting people's attention from problems on the home front.
To be sure, Friedman's pessimism about China's prospects places him at odds with the conventional wisdom pushed by virtually every U.S. corporate chieftain and by scores of news commentators.
"Today's China boom can only be compared to the dot-com frenzy of the late '90s in the hype and conviction that China will somehow defy all the rules of normal economic cycles," he avers. Yet many observers are still agog over China's low labor costs, the gleaming office buildings of Shanghai, the state-of-the art plants rimming its eastern cities, huge currency reserves and surging trade surpluses.
Friedman sees growing imbalances, seething social discontent and a rotting financial structure. In fact, to Friedman, the current China exhibits unsettling similarities to Japan in the late '80s, just before the sun set on the latter economy.
China, like Japan of yore, is experiencing an insensate real-estate boom and looming overcapacity in its industrial base.
The financial structures of both countries suffer from the rot of loan misallocation, a shaky banking system and a huge overhang of bad debts, Friedman notes. Likewise, much of today's economic growth in China is profitless, due to both the weight of moribund state-owned enterprises in the economy and a mania for market-share growth at the expense of economic returns.
Finally, Friedman claims that many China enthusiasts are ignoring the demographic time bomb of an aging population as a result of China's one-child-per-family crackdown. The more rapidly advanced graying of Japan has already put a damper on Japan's consumer spending.
Signs of trouble in China are beginning to accumulate just below the surface of glossy economic growth, Friedman asserts. The economy continues highballing along, despite all government attempts to rein in growth by a small interest-rate hike and restraints on lending to some key industrial sectors. China can't afford too much monetary restraint; any large increase in interest rates could trigger a cascade of loan defaults and pop the credit bubble.
Stratfor has also noted a dramatic jump in riots, strikes, bombings and the like throughout China that have largely gone unnoted or unreported by the bedazzled world news media. Social tensions only figure to grow as a result of increasing layoffs at the state-owned enterprises and yawning disparities in wealth between China's populous agrarian hinterlands and the thriving coastal cities.
He claims that paranoia on the part of party authorities seems to be growing apace, as evidenced by their increasing resort to security sweeps against dissidents. The government's fear of riots following the recent death of Zhao Ziyang, the disgraced former general secretary of the Communist party and a hero of the democratic movement, was just one example of this new attitude, says Friedman.
Friedman also expects Chinese authorities to increasingly fan nationalistic fervor in an attempt to defuse growing tensions at home. The recent spate of saber-rattling with Taiwan is just one example. China's dispute with Japan over exclusive economic control of a large swath of ocean waters south of Japan must be seen in the same light. "The Japanese are widely disliked in China, so the Chinese authorities can always use Japan as a potent symbol of why the Chinese people must remain unified," Friedman claims.
At present, capital inflows into China remain enormous from the nation's positive trade balance, foreign direct investment chasing the Chinese dream and currency speculators betting on a revaluation of the yuan. But Friedman points out that capital flows can turn on a dime -- as witness the capital flight suffered by other East Asian nations in 1997 and 1998.
In recent months, Chinese companies and other entities have begun to make substantial investments in overseas natural resources, land and tech companies. Most observers see this as an indication of China's growing economic might. Still, Friedman wonders if this foreign direct investment might be an incipient sign of capital flight by Chinese businessmen looking for a safer and more profitable home for their money.
"Just like the controversial Japanese acquisitions of Pebble Beach and Rockefeller Center in the late '80s, might the recent deal Chinese computer maker Lenovo reached to buy IBM's personal-computer business be a sign of trouble at home rather than self-assertion of a growing economic powerhouse?" he asks. |
