Tuesday, September 13, 2011

The Chinese Bubble and Conflict

I came across an article entitled "When the China Bubble Bursts" by J.R. Nyquist (h/t SurvivalBlog). Although not reported with much fanfare in the American media, there is substantial concern that China is in the midst of an real estate bubble that could burst with devastating results both in China and for the world at large (more here; see also this about China's "Ghost Cities"). Certainly, China's own debt issues compare unfavorably to the worst of the Western nations, (see also here), while income disparity is much higher than other comparable economies (more here). China is also facing issues with inflation, and there are reports of simmering social issues (more here and here). China is further facing a "demographic" bubble, that could find it falling into the same socialist trap as Europe--too many old people supported by too few young workers.

Mr. Nyquist makes the following observation and question:
If the world has invested in the wrong things, and China is one of those things, then the bursting of the China bubble may be the greatest catastrophe of all. China’s financial system is a mess, and a major crisis cannot be far off. With the U.S. economy dipping lower and Europe facing its own financial nightmare, China cannot postpone its own day of reckoning. So what will China’s leaders do? What plans have they made?
He attempts to answer the latter question, suggesting that their (i.e., the Chinese leaders') best strategy would be a war with the United States.
The strategic thinking of the Chinese Communist leadership holds that as long as America continues to enrich China, and as long as China can build its military power, then peace is workable. But when the economic wellspring runs dry and the Sino-American partnership has exhausted its profitability, then peace becomes unworkable. Rising discontent within China must then be diverted. The natural course would be for the people to hold the country’s leaders responsible, and to remove them from power. Many of these leaders would be tried as criminals, and would lose their heads. The only alternative to this would be war with the United States. This course automatically shuts down the Chinese democracy movement, which would have to choose between China and America in the course of a life-and-death struggle. In such a contest, the Chinese Communist Party automatically wins the assent of nearly all Chinese – including democrats. 
It seems counter-intuitive that two nations that have such close economic ties--in fact, whose economies depend on one another--would go to war, yet this is what history teaches us. In The Future of War by George and Meredith Friedman, the authors discuss and analyze this very issue. I apologize for the lengthy excerpt, but I think it embodies important concepts for analyzing the future of the Chinese and American relationship:
The argument that interdependence gives rise to peace is flawed in theory as well as in practice. Conflicts arise from friction, particularly friction involving the fundamental interests of different nations. The less interdependence there is, the fewer the areas of serious friction. The more interdependence there is, the greater the areas of friction, and, therefore, the greater the potential for conflict. Two widely separated nations that trade little with each other are unlikely to go to war--Brazil is unlikely to fight Madagascar precisely because they have so little to do with each other. France and Germany, on the other hand, which have engaged in extensive trade and transnational finance, have fought three wars with each other over about seventy years. Interdependence was the root of the conflicts, not the deterrent.
 There are, of course, cases of interdependent in which one country effectively absorbs the other or in which their interests match so precisely that the two countries simply merge. In other cases, interdependence remains peaceful because the economic, military, and political power of one country is overwhelming and inevitable. In relations between advanced industrialized countries and third-world countries, for example, this sort of asymmetrical relationship can frequently be seen.
 All such relationships have a quality of unease built into them, particularly when the level of interdependence is great. When one or both nations attempt, intentionally or unintentionally, to shift the balance of power, the result is often tremendous anxiety and, sometimes, real pain. Each side sees the other's actions as an attempt to gain advantage and becomes frightened. In the end, precisely because the level of interdependence is so great, the relationship can, and frequently does, spiral out of control. (Friedman, pp. 7-8) (italics on original).
 The Friedmans then compare and contrast the Cold War with the situation prior to the outbreak of World War I, and suggest that it was the independence of the Soviet Union from the United States that allowed each to forgo extreme measures and gave them freedom to maneuver. However, prior to World War I, the European nations' interdependence, measured by international investment and trade, was greater than it is now (at least at the time the Friedmans wrote their book), and it was this high amount of interdependence that created the conditions for war.

According to the U.S.-China Business Council, the United States imported over $364 Billion from China in 2010. As of October 2010, China held over $900 Billion of U.S. debt (only slightly more than Japan), and the most recent statistics from the Treasury Department indicates that China holds $1.2 Trillion in United States government debt. That is a lot of interdependence between two governments with conflicting goals concerning South-East Asia, and where one (China) is increasingly becoming confident of its military prowess and technical capabilities.

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