Friday, January 15, 2010

The Collapse of China in 2010?

My predictions for 2009 didn’t pan out, but only because massive intervention in the financial markets by central banks staved off a cataclysmic collapse. Whether 2010 will see that respite turn into a stronger recovery or send the world into another heart-stopping descent into crisis will depend on what happens in China.

At first flush, the news out of China looks good. As widely reported last week, it has replaced Germany as the world’s top exporter. Beijing claims that overall economic growth has been continuing at a rate of over 8 per cent. World commodity prices have not collapsed because of demand from China. The Times of India was among those impressed by all this. Its lead editorial on 14 January contrasted the slow growth of the United States with that of “China racing up the world economic ladder” to replace Japan as the world’s second-largest economy soon, and perhaps even claiming the top spot from the US by 2030-2040.

Sorry to rain on this parade, but none of it is real. The picture of China as a dynamic economy is an illusion. The country’s economy is actually a gigantic Ponzi scheme run by one of the most corrupt and criminal regimes in the world. When I say the fate of the world hangs on what happens in China, it is not economic projections I refer to but the prospect of violent political upheaval and chaos affecting one-sixth the human race. Consider the following points.

1. The Communist Party of China (CPC) has been in power for over six decades. During that period it has killed between 40 to 50 million Chinese, mainly by creating massive famines in the pursuit of “Marxist-Leninist principles,” but also through violent programmes to “eliminate class enemies.”

2. More than three decades after the death of the monster who led that madness his porky face continues to adorn every currency note in the country and to look down from giant posters and statues on public places throughout the land. Instead of being held accountable for crimes against humanity the Party has remained in power, and its members are attached like leeches to the entire economy, from the biggest foreign deals to the workings of smallest village cooperative.

3. The economic “reforms” that began in the 1980s and ostensibly moved the country into a free-market system did nothing of the sort. The introduction of stock markets in the 1990s merely opened up an entirely new river of illicit funds for the “Communist” mafia. An expert report published by UNESCO in 2001 noted the “strong intervention of large sums of illegal hot money from state units” in the new stock markets, accounting for as much as “half of the free-float, or some US$35 billion, according to local brokers in Shanghai and Shenzhen.” The amount of "twilight capital" drawn “from state enterprises, pension funds, insurance premiums and state bank loans to securities firms” has grown so large that any attempt to curb it will crash the markets, which no longer serve as a mechanism for economic valuations.

4. Western corporations profited hugely from this system and did not object. But that might be about to change as a result of the latest criminal enterprise of the Chinese State, a wide effort to hack into the computers of Western corporations and acquire proprietary information. In the case of Internet giant Google, the hackers also tried to get information on human rights activists. As a first response, Google has stopped cooperating with State authorities in censoring the Internet for its Chinese users, and has threatened to pull out of the country entirely.

5. If Western corporations stop cooperating with the Chinese State its Ponzi scheme will swiftly come to an end. Investors will begin to see that much of China’s economic growth in 2009 was illusory. It achieved the “world’s top exporter” ranking only because its exports fell less steeply than those of Germany; and the continued demand for commodities came largely from the infrastructure projects financed by Beijing’s massive stimulus spending.

6. If Chinese markets crash it will quickly burst the real estate bubble that has kept house and apartment prices soaring in China while the rest of the world struggled through the swamp of the sub-prime mortgage crisis. It will also reduce millions of small State enterprises to bankruptcy, for their resources have been used by Communist Party functionaries for stock market gambles.

In sum, China faces an earth-shaking economic and political upheaval in 2010. If the Communist Party tries to hold on by using the army against the Chinese people, we could be looking at a period more violent and disastrous than either the "Great Leap" or the "Cultural Revolution." The collapse of China will also have major economic and political repercussions abroad. To survive them without enduring the worst recession the world has ever known we must begin planning coordinated and extraordinary action now.