Lethal Illusion: China's bubble economy

China's latest aircraft carrier

Is it possible that Chinese government in its pursuit to overcome its economic competitors in Asia and the West has copied the same systematic mistakes that led to the economic meltdown of the past five years? The rapid rise of the Chinese has fuelled the imagination of economic speculators who have predicted the dominance of the Middle Kingdom in the next century. Indeed, the thriving Chinese economy is flexing its newfound muscles in both financial and military sectors. The Chinese military budget has seen double-digit increases for the past decade. However, the dramatic paranoid reaction to a feared "jasmine Revolution" on China's own soil betrays the Chinese government's external swagger, as well as a fear of its own population. The Washington Post reported that:

"At least 100 activists have been rounded up, and some have been charged with 'crimes' that could lead to multi-year prison sentences. Three lawyers who did nothing but peacefully attempt to hold China to its own laws - Tang Jitian, Teng Biao and Jiang Tianyong - have been 'disappeared' by security agents, who took them away about three weeks ago and have yet to charge them or disclose where they are being held. Equally lawless, even under Chinese law, is the continuing house arrest of Liu Xia, the wife of imprisoned Nobel Peace Prize winner Liu Xiaobo" (read more)

For 2011, the Chinese Government has recently announced a 12.7% increase in military spending which means the official spending of People's Liberation Army (PLA) currently stands at $91 billion. Yet, this huge amount revealed by the Chinese government does not reflect the actual military spending of the country. The full amount spent on the military that remains undeclared. The high degree of opaqueness and secrecy in military spending has caused fear and mistrust with regional neighbors, ensuing an arms race which has seen countries like Japan and Australia acquiring advanced military technology to balance the Chinese military might. In the words of a Southeast Asian country's defense attache in Beijing:

"[China] say thir strategy is peaceful development, but their military modernization, especially in the naval area, speaks another language." (read more)

In fact, the Chinese Navy's harassment of two Philippines patrol boats within Philippines waters which are believed to be rich in oil and gas deposits in March 2011 showed that the fears of China's regional neighbours are more real than imaginary (Wall Street Journal, March 2011).

Economists and bankers are warning that the glittering prosperity of China might be nothing more than an illusion. Apart from their high military spending, China's drive for modernity also consists of expanding their high-speed railway system and big ticket housing and commercial real estate construction projects that are largely empty do not benefit the Chinese people.

"Far from an economic powerhouse, China's economy remains a middleweight when its vast number of poor people is taken into account - the country's per capita GDP is only around US$4,500, 1/10th that of the U.S. As a share of the economy, household incomes have actually declined over the past decade. The problems will only get worse as China's massive population starts to age rapidly over the next decade. With almost nothing in the way of health insurance, welfare or a social safety net for retirement, Chinese feel pressure to save every penny that earn. At the same time, official policies that favour Chinese banks and exporters - namely artifically low interest rates, an undervalued yuan and cheap labour - come at the expense of household savers. Shanghai economist Andy Xie has cited local media reports that some 65 million urban homes reported zero electricity consumption over a six-month period, suggesting there are enough vacant homes in China to house 200 million people. China continues to build new steel mills, cement factories and aluminum smelters even though up to one-third of exisiting plants sit idle" (read more)

New construction, snapped up by speculators, stands empty in one of China's "ghost towns"

Critics of China's high-speed railway system that costs $274 billion have also pointed out that the high construction costs meant that high-speed rail tickets will have to be priced so high that they will be out of the reach of most Chinese. The huge budget set aside for the development of the high-speed railway system also provides Chinese officials ample opportunities to enrich themselves, given the high cottuption rate within the governing and patronage system. All these signs point to growth that is designed to awe the rest of the world but otherwise does not benefit the Chinese population. The dichotomy between the illusion of prosperity and the lack of real advancement of the Chinese people - including the burst if the economic bubble economy - may cause a serious crisis that may cause the rest of the world to feel the pain, as well.