Subprime crisis ripples in China

GC says a financial slowdown in the US could spell political trouble for the government of China. LM �your own background is as a corporate lawyer representing US firms as they deal with China’s state owned businesses, pretty interesting because you’ve seen the Chinese system from the inside . what makes the Chinese system so vulnerable to what’s going on right now?� GC �Well the Chinese economy is really built on very shaky foundations. The problem for China right now is if there is a global downturn, its export-dominated economy is going to suffer because countries just aren’t going to buy as much and that’s going to expose the flaws in China’s system.� LM �to what end though? And doesn’t it have a long way to go if it goes down? The United States has been trying to get a leg up in terms of Chinese exports and US imports for quite some time now.� GC �yes but the Chinese economy is finally pretty balanced, the export sector. The margins are not that big for any one business. Although in the aggregate because there are so many export factories, China makes a lot of exports.� LM �And just briefly, which export markets would you be talking about?� GC �the most important one is the United States. Basically consumer goods, the types of things you see at Walmart. The figures haven’t come in but last year, China’s trade surplus against the United States will be about a quarter of a trillion dollars, maybe even more. But if there’s even a small margin in change, this could have a disastrous consequence and that’s the reason why the Chinese government has been so hesitant about letting the currency float because it’s worried that a more expensive currency is going to put exporters out of business. So there is the perfect storm arriving for the Chinese economy if there are downturns in export markets upon which China relies.� LM �the Chinese government has seen more and more protests of late, there have been thousands of so-called public disturbances, which is their term. Yet the Chinese government and the Chinese economic system seems to weather these things and China seems to go from strength to strength. Is it more adaptable than you might be thinking?� GC �well of course we don’t know what will happen but as we’ve seen, as China has grown more prosperous it’s also become less stable with more protests, protests that are larger and worst of all, protests that are violent. And the thing that’s most interesting about these public disturbances is that we’re starting to see middle class Chinese who have been the beneficiaries of 30 years of economic reform, they’ll take to the streets whenever they think it’s necessary to protect their rights. So we’re seeing a very dynamic and turbulent society and the Chinese government is trying to basically keep a lid on things.� LM �since you called your book in 2001, �The Coming Collapse of China,� is this the collapse you anticipated or do you think it’s not going to be quite that bad?� GC �I really don’t know. What I said in the book is the political system had about a decade to go. That would put it at 2011. This could very well be the beginning of the end. Most people do see an economic downturn as really the beginning of a political crisis because the Communist Party really only has two bases of legitimacy these days. One of them is nationalism and the other is economic prosperity. Without economic prosperity the Communist Party is in for a very difficult period. so I could see the period from 2009, 2010 when you have both the post-Olympics slowdown and just a natural time for recession as being extremely difficult for the Community Party to weather.�