atomic_fungus (atomic_fungus) wrote,

#416: China

China's stock market may undergo a "marked correction". In MBA-speak this means, "It's 1927 all over again! ...maybe."

Prior to the recession that began in 2000, notables in the American business world said that our stock market was overvalued--with then-record Dow-Jones Industrial Averages hovering decently in the five digits, with the Dot-Com Boom still perking along, it was said that we didn't have the economy to support such a high DJIA.

They were right. The Dot-Com Bubble popped, 9/11 happened, and it took a while for our economy to "pay back" the credit card bill.

In the 1980s, Japan was poised to take over the world, economically, it was said. Their economy was a powerhouse, a close partnership of business and government that was unstoppable. They were sure to surpass the USA as the number one economy in the world!

...then their currency rose against the dollar. That's really all it took; with a dollar fetching only half the number of yen it had bought only a few months earlier, Japan could not sustain its explosive growth. Japan's economy relied on cheap yen and exported unemployment, and when the former went away, the latter followed...and the "close partnership" that supposedly made them unstoppable became the millstone that it always does. Japan's economy is only now beginning to crawl its way out of the post-Bubble recession, and it's not a fast crawl, either.

So, whither China?

Chinese businessmen are angry that American businessmen are saying that China's stock market may have a foundation of clay. "They just want to see China fail" seems to be a typical comment.

One of China's greatest weaknesses is its arrogance. The political leadership, in particular, seems to have a curious inferiority complex which somehow turns advice into denigration and an attempt at foreign control. Far from being a modern nation, much of China still exists in grinding poverty; only the cities are modern and the "worker's paradise" is only a paradise if you're in on the cash flow.

People are borrowing money to get in on the market. That kind of thing utterly thrashed the financial world in 1927; when the stock prices dropped, the banks couldn't collect on their loans (and failed), and consumer confidence was so badly shaken it took ten years and a war to restart the economy.

All of this wouldn't really be that much of an issue if it wasn't for the other story I have lined up for this entry. Absent that, a major failure of China's fiscal system would not effect America all that much.

America would find itself the dumping ground for all sorts of cheap consumer goods on a scale which, even now, is unprecedented, as China desperately tried to gin up enough cash to pay the bills. It would fail, of course; either the glut of goods would drive demand down below profitability, or the US would say, "Okay, no more dumping; have a tariff!" And China would fall into a rather deep recession.

But then this would come into play.

Like any Communist nation, China concentrates on having a strong military--a very strong military. They have to, for several reasons.

The military is a perfect place to indoctrinate young adults into the system. It ensures that adults are in the habit of doing what they are told, when they are told to do it, and otherwise not to think at all. People who don't instinctively obey, and people who think too much, are enemies of the state in the making. (One reason Pol Pot and the Khmer Rouge killed all intellectuals, including people who happened to wear glasses.)

The strong military is needed to ensure maintenance of terror. Citizens can't own weapons; the military has a monopoly on force, and a strong military ensures that people won't try to revolt. (But see "Tiannenmen Square".)

Finally, there is the minor fact that Beijing regards China as "split"--Taiwan is part of China but they are, for the moment, allowing it to pretend to exist as a separate entity. And this forms the crux of the situation.

If China's economy fails, Taiwan--with all its juicy capitalist money and hardware--becomes a major priority: with the infrastructure of Taiwan, China can get into making state-of-the-art computer hardware and other electronics. Taiwan has all sorts of goodies, including very fat bank accounts full of American dollars.

China with long-range nuclear-tipped ICBMs can credibly tell the US, "We're taking Taiwan now. If you interfere, expect to lose some cities." They might not be deterred by the US saying, "Look, if you hit us, we will hit back." After all, one of the major political parties in the US is talking about walking away from a military victory a la Vietnam in 1974 and letting it turn into a crushing defeat--and for many of the same reasons and in exactly the same way.

And a scant five years after the world saw the US abandon its allies in South Vietnam, a different President hemmed and hawed and sat on his hands while citizens of a different country committed an act of war which--a scant twenty years earlier--would have prompted an immediate and vicious counterattack.

It's not hard for countries antagonistic to the USA to understand how it works: give the American people a fast and decisive victory and they're all for it--but drag the conflict out, keep the violence away from the homeland, and a slow steady drumbeat from the useful idiots in the press will turn the tide in your favor. This technique worked for the Viet Cong in the 1970s, and it could still work for Al Qaeda in Iraq.

The real error China may make is assuming that it must threaten us with missile attacks to keep us from getting involved in defending Taiwan. The USA has never really committed itself to Taiwanese independance, and it's unlikely that--given a shooting war, in today's climate--we would do much of anything. But Beijing is very smart about the politics; with the right President, they need do nothing but issue a statement to the US press, and then move into Taiwan. I can think of at least two candidates who would not even object to it.

And even though China claims to have a "no first use" policy, who thinks they would even hesitate to use them in a shooting war? China lacks much of the wherewithal to wage war at sea; taking Taiwan would require some creativity, and that kind of warfare is something the USA got very good at in the 1940s--and can still manage even today. China would have to use nuclear weapons just to even the odds against an America seriously committed to preventing a Chinese seizure of Taiwan.

So a failure of the Chinese economy could thus precipitate a very serious diplomatic situation.

A nuclear attack of any kind on the American mainland--regardless of source--would stir the American people into a frenzy. Imagine the days following 9/11, but multiply it by at least 100--that's how bad it would be. If a major American city was vaporized I fail to see how the country could not shift to an all-out, total war footing--rather than a strategic victory it would be a serious mistake.

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