Thursday, March 01, 2007

How about that Chinese market?

So how about that Shanghai stock market? It's been going like gangbusters - a typical emerging market in its early stages - and now it's dropped 9%, sending the other equities markets around the world into a tizzy. Perhaps China is headed for a developing world financial crisis à la 1998, or Japan in 1990. Some pessimists here think it might trigger a recession. US economic growth will slow in the next couple years, but a recession is unlikely in that same period.

International market gyrations affect everyone now. Many retirement accounts took a hit, and long-term interest rates may rise if there isn't as much Chinese capital available in the global bond market.

It's interesting to consider the future of China, not only in comparison with other emerging markets, but also compared to the theories fashionable in the US for the last decade or so. One theory, promulgated by neoconservatives and others, is that China is like imperial Germany circa 1900. China is the world's last empire, but the theory is almost certainly false. China has a booming economy, but it is also politically weak, and its economic boom is driving multiple social upheavals that the ruling Communist Party struggles to contain. China's foreign policy is fundamentally defensive, but it also - in spite of its economic boom - has little interest in joining a Western- or US-led liberal international order. Its interest in overseas investment is strictly mercenary, with no larger governance or political dimension. (For example, because of its need for oil, China plays a crucial role in backing the petro-dictatorships - Russia, Iran, Sudan, the pre-2003 Iraq, etc. The foreign policy the US is sometimes accused of having, China actually has.) These facts put the kibosh on another, less fashionable but still widely held view, that China is about to fully join the current world order or reshape it as a new hegemon.

There's another circa-1900 analogy that fits China better, and it is the great pre-1914 empire-states that disintegrated as a result of World War I. Austria-Hungary is the most obvious analogue: politically weak, economically booming, undergoing rapid social change as a result. Of course, except in some border areas, China is overwhelmingly Han Chinese in its ethnic makeup, making it very different from the Hapsburgs' polyglot, multiethnic empire. That source of instability is not at work in China's case, and Taiwan will probably not play the part of Serbia - at least, one would hope not.

China is an ancient civilization that will survive and even prosper one way or another. But its current incarnation - politically repressive and corrupt communism, booming capitalist economy on the coast, the rest in a post-communist limbo - has only a limited time left.

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