Wednesday, March 30, 2005

Communists Choking

Stratfor is arguing that China has two economies: State Owned Enterprises (SOE) and import/export industries. State Owned Enterprises are huge corporations which employ a lot Chinese but lose money, and suck up massive subsidies from the Central Banks/Chinese Communists. The import/export companies do marginally better, but rely on ridiculously cheap labor and large loans to pay operating expenses. To stay in business much longer, all these companies are going to need more capital from foreign banks which are going to order downsizing and layoffs in exchange for loans. The Banks have been ordered to loan money to companies with no ability or even intention to pay it back. The size of these outstanding, non-performing loans equals around half of Chinese GDP and no foreign bank is willing to buy this debt, even at a massive discount, unless they are allowed to foreclose and start selling assets. What happens when domestic capital dries up and there is no foreign capital to replace it with the same terms? Ask your great-grandparents what is was like in the depression.

However, the status quo is not tenable over the long run. The Chinese Communists, to keep up with Taiwan, agreed to join WTO. Part of the agreement was to open domestic banking to competition by December 2006. Capital will flee China once savers can opt for interest bearing foreign accounts, which will further lessen the supply of capital in China. Industries, unable to get loans from friendly Chinese banks will be forced to accept terms from foreign banks that will result in layoffs and take-overs. Massive unemployment and concomitant social unrest will result.

The Communists are already trying to innoculate themselves from the upheaval that will put their hold on power at risk. Hence, the Communists are trying to pick a fight in Taiwan and are complaining about American and Muslim aggression on their Western Frontier. The Communists are going to abrogate their responsibilities under WTO, blame the resulting economic displacement on some combination of America, Taiwan and their Muslim minorities and start a war. They are like a gambler short of chips, but big on bluster who is going to bet all on a bluff. When George Bush calls them on it, look for war.