China's Self-Made Crisis

By Derek Thompson

If polls are any indication, Americans tend to think China runs the largest economy in the world, educates the smartest students, and steals millions of our jobs. The instinct to idolize your rival is strong in us, but on the occasion of this week's China summit, let's remember the country is dealing with its own internal demons:

Food costs account for 40% of disposable income in China. To control prices, the central government has placed limits on the number of purchases on such things as cooking oil. There are rumors the central government is releasing stockpiles, yet prices continue to rise. China has 20% of the world's population, but just 6% of the farmable land. If the central government begins to implement price controls, shortages are inevitable. A recent reported from World Economic Forum warned that shortages could "cause social and political instability, geopolitical conflict, and irreparable environmental damage." The central government seems to have few options to control food inflation without causing a major disruption in the rest of the economy.

Chinese soldiers and their families are mostly from rural China, the majority of whom have not benefited from China's rising economy, with 600 million still earning less than $6 a day. Indeed, in many aspects, quality of life has deteriorated for those without connections, a prerequisite for wealth in the eyes of most Chinese according to polls. Many do not view competition for material goods as healthy, pollution and waste have worsened exponentially, housing prices have skyrocketed, and now food prices surging. Businessweek reported that ordinary Chinese are increasingly yearning for a return to Mao style communism - "a more equal" society, with Conqing Party Boss Bo Xilia gaining support and pushing for membership to the inner circle.

To summarize, banks have ignored PBOC orders, the military is doing their own thing, and food prices are surging with few solutions available to the central government. They have a fixed asset bubble, a likely onslaught of bad loans in the offing, and millions of jobs tied to construction. Many Chinese are worse off and the military is more sympathetic to ordinary Chinese than the noveau riche. Inflation is nearing levels associated with social unrest. The situation is a powderkeg.

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This article available online at:

http://www.theatlantic.com/business/archive/2011/01/chinas-self-made-crisis/69739/