Crunch Time by By Peter Zeihan, Strategic Forecasting March 30, 2010
The primary reason why China’s growth has been so impressive is that throughout the period of economic liberalization that has led to rising incomes, the Chinese government has maintained near-total savings capture of its households and businesses. It funnels these massive deposits via state-run banks to state-linked firms at below-market rates. It’s amazing the growth rate a country can achieve and the number of citizens it can employ with a vast supply of 0 percent, relatively consequence-free loans provided from the savings of nearly a billion workers. It’s also amazing how unprofitable such a country can be. The Chinese system, like the Japanese system before it, works on bulk, churn, maximum employment and market share. The U.S. system of attempting to maximize return on investment through efficiency and profit stands in contrast. The American result is sufficient economic stability to be able to suffer through recessions and emerge stronger. The Chinese result is social stability that wobbles precipitously when exposed to economic hardship.
Political Season Takeway: If Ziehan is accurate, China's economy is extremely vunerable to unilateral retalitation by the United States for China's currency manipulation by simply pinching off China's access to the US market. China's holding of massive amounts of US debt and the threat of not purchasing more is not really a counter either because those debt purchases fuel US demand for China's exports, which they can't afford to have dramatically reduced. The Obama administration's rhetoric on Chinese economic policy may mean a US-China economic showdown over the yuan is on a slow boil to either a confrontation or a caving accomodation of some sort by China, economically or on the foreign policy front, as in Iranian sanctions.