China Syndrome

OK Global Geopolitics Geeks (that's right I'm addressing the G3 posse) here's your fix. Todays topic? China.

Before everyone anoints them the new Superpower, riddle me this. What's China's path to Superpowerdomehood? And here are the rules.

1. China's currency, the renmimbi is pegged to the dollar. This gives them a tremendous edge in production cost, especially when exporting to the worlds largest consumer nation (that us).

2. China growth depends on energy, and more specifically gas, and more specifically, cheap gas. Can't grow without it. As all those hundreds of billions of people start movin' on up, or really, before they can even imagine that deluxe apartment in the sky, they need need cheap go-go juice.

3. The current generation of Chinese have never, ever experienced an economic downturn. All up, and big ups at that.

4. 1.3 BILLION people makes for an amazing market that everyone wants to play in. And when times are great, 1.3 billion people are a great form of leverage for growth, and it makes you the absolute belle of the ball. But when things go bad, that's 1.3billion people to go bad with, and gives you leprosy. Leverage cuts both ways folks.

So now, we know that the Chinese have a great demand for oil which is driving up price. But what's also driving up the price of oil is the fact that its priced in dollars, and has the dollar falls, the price of oil goes up.

And now you have China's knot.

Increasing gas prices will kill their growth. They must have cheap gas. Killing the renmimbi peg will give relief from rising gas prices, but losing the peg kills the production cost edge that drives the economy.

If China keeps the peg it must spend huge chunks of its dollar reserve to prop up our dollar, while also spending huge amounts to subsidize its citizens cost of gas. China does have a massive cash reserve (about 1.2 trillion, most of it dollar backed) but a double whammy like the one above can whip through it, fast. Not only that, but if the reserve looks low enough, speculators will attack the peg, forcing China to again dip into its reserves to protect it, or let it go. If it then fails, China will find itself having blown through hundreds of billions of dollars for no real reason, maybe they can call Bush and start a support group.

If it drops the peg without defending, China's production costs will immediately rise. Cheaper gas, but mores expensive goods. That's a huge risk. Again, 1.3 billion people have hopes of improving their lot in life. If the economy takes a dive, or potentially even pauses, then that's 1.3 billion ticked off citizens. How does any government manage that? While no expert, my brief rundown of revolutions leads me to think that most of them are economically based. When living conditions fall low enough, the people revolt. Now that China's citizens have tasted growth and success, how much of a shock does it take to start splintering the country? Even without that dire prediction, how do you pull 1.3 billion people out of a recession?

Either path has looks like a loser.

The dollar's fall is big news here, but it must be giving China night sweats.

PS. Did you know that the dollar is now worth .97 Canadian dollars. Are things really so bad that we have the cute little currency in North America?

Oh well, I suppose the good news after eight years of disastrous republican economic policy is that it may slow China down.