The Great China Bubblebath: Part 3 – Scary Bubbles

Monday, March 5, 2007 5:55

Often times the media portrays economies or economic phenomenon that move at an unsustainable pace a bubble. Profits occur quickly, there is overpricing in the market, and often times (as seen in HK, Silicon Valley, and in other areas) controls are too little too late.The bubble pops, and the effects can be widespread.In China many in the media use the term bubble to describe the dynamics of the last few years in China, when in fact there are a number of bubbles that are internal and external to China, that should one “pop” it would have a significant affect on the Chinese economy.

China BubblesThese “super bubbles”, as we like to call them, are the most dangerous in that they could (if you accept our bubble bath theory) create an environment where other bubbles pop as well, and thus serious impact on the economy and the people would occur.

Many of these super bubbles are ones that the media has presented in the past as causes for concern. Each of these, are all events that the government themselves are quite aware of and often times will publicly announce their plans to prevent.

The primary reason for such focus is simple. the Chinese government is focused on stability; stability in the economy, stability in the populous, and most importantly, stability in government. Should any one of the events above occur, destabilization could occur on a mass level whereby the government entity itself could come under destabilizing forces.On an international scale, war, global health epidemics, U.S. recession/ depression, or a growth in broad based anti-Chinese would all potentially have a wide impact on the Chinese economy and further more the Chinese people.

U.S. Economic Recession/ Depression:
The United States is china largest trading partner and accounts for more than 35% of exports (Wal-Mart reportedly is 20% of that), and as such any severe downturn in the U.S. economy would lead to a slowdown in Chinese economy. This resulting downturn would be felt particularly by small to medium sized manufacturers who sell to a select few American clients. Overcapacity in the system would lead to higher rates of unemployment, social programs would be put under stress, and the result would inevitably have political implications.

For more read: Brookings Report, Asia Times, Tom Paine

Regional War/ Conflict:
With China’s economic rise has also come responsibility, and in the case of the current North Korean standoff, a failure to meet this responsibility could have economic and political consequences. Should the Korean peninsula escalate, China would no doubt be tied politically between the two sides, and making a decision could pose military risks either way. In addition, should the peninsula erupt once again, trade routes would no doubt be compromised, and thus areas nearest to the conflict would experience economic downturn as the supply chain adjusts further south away from affected lanes.

For more read: Council on Foreign Relations, NPR, PINR

Global Health Epidemic:
In fact, this more than any bubble is probably the most likely as worries about the effects of H5N1 are once again showing up in popular media. With SARS fresh in everyone’s mind, it should not be too difficult to understand how a pandemic could affect China.

During SARS, factories, construction sites, and venues with over 50 people were all shut down. Hotels and planes were empty, and the only items that Chinese consumers were purchasing were Cabbage, instant noodles and vinegar (boiling vinegar was believed to prevent SARS).Issues that could significantly increase the potential economic devastation are how quickly China is able to address the issue (publicly), how contagious and transmissible the disease is, and how well they are able to quarantine the first cases. Should a repeat of the errors of SARS occur, it will have short and long term consequences domestically and aboard.

For more read: Foreign Affairs, World Health Organization, China Daily

Anti-Chinese Sentiment:
Much as the Japanese experienced in the 80’s, the “Chinese” are beginning to experience in some areas a backlash on goods made in China. Whether it is a fear of loosing one’s job or a general sense of economic nationalism, the realization of another “Buy American” campaign could lead to economic consequences as senators look for ways to curb Chinese importsto defend manufacturers in the markets of their constituents.

Recently, this sentiment has been more focused on the RMB rather than a general sense, however Americans (once informed and inflamed) have been known to bring about political change through changes in consumer patterns. with the midterm elections coming up though, political pressure to highlihght the “China threat” could lead to a higher degree of sesitivity on the issue, and a higher level of awareness byt the American consumers of the Made In China sticker on the bottom of items found in the American household.

For more read: China Daily, CS Monitor, Morgan Stanley

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2 Responses to “The Great China Bubblebath: Part 3 – Scary Bubbles”

  1. China Law Blog says:

    March 5th, 2007 at 9:12 am

    Good job on the external threats. Are you saving internal issues for later or did you already cover them in parts I or Ii?

  2. rbrubaker says:

    March 5th, 2007 at 9:48 am

    Hi CLB,

    Appreciate the favorable evaluation. domestic threats next week. It is all written up, but think it is better to separate as the issues are too different.. and out of consideration for readers, the post was already too long

    Have a good week

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