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China’s rise as a world heavyweight was one of the most important economic stories of the last decade, if not the single most important. China has been a very hot country for investors, but now bearish signs are starting to emerge. If China slows down, which signs are starting to indicate, this will affect the United States negatively as well.

Growth bubble?

Financial blogger Robert Eberenz has posted some disturbing findings about China’s macroeconomic fundamentals:

For all of its size, voracious growth, and absolute authoritarian government, China remains a very un-united place…The wealthiest Chinese province has 13 times the per capita GDP and 8 times the per capita spending magnitude of the poorest province. Likewise, the richest county has approximately 40 times the per capita spending of the poorest county. (World Bank 2008)

Full article can be found here.

Another development, according to ABC News, is that China is actually facing a trade deficit. This is certainly not due to an overvalued Yuan (where China is the only country in the world to get away with employing the “Red Army method” of enforcing a currency peg). China’s stockpile of foreign exchange reserves has helped fuel its powerful sovereign wealth funds, which in turn helped the Chinese government to invest in infrastructure and development. A deficit could curb this, and it could also be a sign of less savings in China–not necessarily a good thing for consumption if rural China cannot afford the luxuries that metropolitan China does.

Social fabric

Stratfor director George Friedman wrote in his book The Next 100 Years that he predicts an eventual fragmentation of the present Chinese country over the next coming decades. This is hard to visualize presently, but it is not entirely unbelievable. One province has had a de-facto rebellion for decades (Taiwan), two cities are basically countries in their own right (Hong Kong and Macau), Western China has no real cultural association with Beijing (Tibet and Uigarstan)—so it is possible. An extreme scenario, but possible. Even if it does not happen, it is an interesting thought experiment in seeing just how united the country is, which is not much without the People’s Liberation Army.

Global effect

Regardless of whether or not modern China fragments (which is still very much a hypothetical scenario), China should not be viewed as invincible, and the country still has much to demonstrate before it overtakes the United States as the world’s superpower. At a certain point, China’s economic growth will leave the country’s government forced to address the serious structural social problems in the country. Businesses may want to operate in China to sell products and establish manufacturing—but will a corporate headquarters want to relocate to a country still under a dictatorship? China is a great place for foreign companies to handle manufacturing, but can China create its own entrepreneurs?

Analysts should not take Chinese growth for granted as a means to add another growth driver for North America, European, and other Asia-Pacific countries. A Chinese contraction will also mean debt squeezes in the United States, where China has been a significant creditor. Watch Chinese financial institutions closely as a bellwether to China’s macroeconomic health.

Disclosure: None

Source: Don't Take Chinese Growth for Granted