The Great China Bubblebath: Part 4 – Scary Bubbles (2)

Wednesday, March 14, 2007 9:55
Comments Off on The Great China Bubblebath: Part 4 – Scary Bubbles (2)

When thinking worst case scenarios in China, and how they relate to business, often times it is a political based discussion. With that said, these are issues that china will need to address ongoing when transforming their economy and political base.

China Bubbles These “super domestic bubbles”, as we are going to call them, are the most dangerous in that they could (if you accept our bubble bath theory) severely impact the ability of China to continue daily business as is.

In many ways, I believe that it is these bubbles would have a greater impact on China’s economy and people than the international issues we highlighted in the last post.

Unlike the international phenomenon which are in the popular media often, many of these domestic issues are not in the international press. however, when they are, it is usually for a reason (i.e. 7th fleet is taking a tour of the straits). In addition, unlike many of the international issues that exist where the central party does not comment on a daily basis, the central party has been active in addressing many of the below issues publicly. sometimes, very bluntly…

Collapse of Central Party:
China has a history of dynastic change. The turn of power from Zheng ZiMin to Hu Jintao was widely praised as the first time china’s leadership has changed hands peacefully (I am not sure on the timeframe for that). Obviously, this is the biggest bubble that could pop. If this happened, you better pack your bags, cause business would come to a halt.

The most mentioned policy of late to address the underlying issues is the Harmonious Society concept (backed by go West and revitalize the Northeast). In addition, the government has invested a gabillion dollars into the infrastructure of the country, education, and in agriculture tax reform to bridge the wealth gap.

For more read: China Leadership Monitor Report, Stanford Report

Taiwan Conflict:
For myself, the economic power of this tension was evident in 1996 while I was traveling to Singapore. The 7th fleet was in the middle of what was the biggest concern regionally.

Worst case scenarios have been run by everyone from the various governments in the region, think tanks, and local papers, and it is pretty clear that should such a conflict occur, it would lead to a full stop to all economic trade between Mainland China and its major trading partners. In essence, it would create the world’s biggest supply bottleneck, and firms like Wal Mart would be heavily affected.

For more read: Journal of East Asian Affairs , NDU, European Inst. for Asian Studies

Big 4 BankRUPTCY:
China’s big four banks (IBCB, Bank of China, Bank of Agriculture, and Construction) are all widely known to have massive amounts non-performing loans, poor risk analysis departments, and a whole host of management issues which have reduced the profitability and efficiency of these banks.

To date, the banks are supporting by two things: (1) the government and (2) a 40% savings rate, and while the government is sure to support these banks, at some point the savings rate will have to decline whether it is because other alternatives present themselves (bonds, CDs, etc) or through consumerism.

Should one the banks fail for any reason, it would be catastrophic for China, and those doing business in China, it would be very difficult to continue as the effects could have disastrous impacts on its employees.

For more read: MIT Press , IMF, OECD

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