Security of India from Chinese Dragon -II

The focus of this article would be the Chinese Economic bubble.

China today has more Steel Manufacturing capacity than the capacity that is existent in the following countries combined together – US, Russia, Japan and Europe. This overcapacity is just a symptom of the malaise.

The same can be said about the housing bubble in Chinese economy. Not only are the investors in China creating overcapacity, but in their eagerness to create this overcapacity, they are expropriating the property of poor peasants. There have been many instances where in poor citizens have lit themselves on fire on the roof of their building to protest against the acquisition of the same by the state.

It has been estimated by leading global analysts that in early 2008, China exported approximately 43 percent of its GDP. To cope with the declining demand as the recession hit home, China launched a massive $1.8 trillion stimulus and soft lending program. It is estimated that eighty five percent of this money has been given as subsidized loan to state run companies and banks in China. In return, banks and state run companies have invested money in real estate projects, which is leading to a huge real estate bubble in China.

Many a people in the world have brought into the Cash Machine that China seems to have become. China plans to create nearly TEN New York sized cities in next two decades. However, that is possible if only Chinese GDP continues to grow at more than 12% per year and its exports grow almost seven to eight percent per year.

However, if the Chinese exports continue to grow, the other economies will have to absorb all the goods China produces during this export boom. Right now, there seems to be no reason to believe that this is going to happen easily. All other economies are struggling to find a toehold in manufacturing. Subsidies in agriculture are not disappearing. Hence, China cannot continue to consume more raw material and produce finished goods without dumping them in some convenient locations.

This is where the above mentioned example of Steel production comes in. Other countries are not going to roll over and allow Chinese steel to flood the market. CCP (Communist Party of China) is mandating expansion of credit and increasing the capital expenditure. China’s biggest oil refiner has brought more capacity than China needs and thus it is flooding the refined oil product market in Asia. Exports of China’s refined oil products have risen by almost 80% in one year. The lending to Municipalities in China has been a cause of concern because no proper accounting standards are being followed. Victor Shih has already been shouting from rooftops about the problem such a situation will cause.

The world has seen the dubiousness of past accounting scandals among various corporations. We have had a few Enrons and Satyams over the years.

But the biggest accounting scandal in the history of mankind was Soviet Union. The after affects of that scandal are still being felt in places as far off as Cuba and Afghanistan.

What kind of accounting scandal will emanate from China? Only history will tell this to the future generations. In the meanwhile, Indians must be forewarned and forearmed.

PART III TO FOLLOW