Bad Economy Could Cause China Crackup

I have written a series of blog posts warning about the geopolitical and economic fallout of a sharp slowdown in China's economy. Simply put: Slower growth could lead to dangerous political instability. The sole source of the authoritarian government's legitimacy has been its ability to deliver an even-rising standard of living for more than a generation. Don't believe me? Here is what President Jintao Hu said over the weekend at a party meeting:

“In this coming period, we will starkly confront the effects of the sustained deepening of the international financial crisis and pressure as global economic growth clearly slows. ... Whether we can turn this pressure into momentum, turn challenges into opportunities, and maintain steady and relatively fast economic development is a test of our Party's capacity to govern.”

This is why China has been hesitant to allow any dramatic appreciation by the yuan vs. the dollar. To the extent that a stronger currency slows the economy, the ruling Communist Party views a rapid yuan appreciation as an existential threat. This what journalist Will Hutton, author of The Writing on the Wall: Why We Must Embrace China as a Partner or Face It as an Enemy, told me early last year:

"Unrest is growing even under current conditions. Such a rapid appreciation of the yuan over a short period could be a tipping point for a wave of unrest, which could threaten the regime's stability. The party leadership sees the demand for fast yuan appreciation as an act of economic warfare. In these terms, you can see why. ... The World Bank estimates that if China's growth rate fell by just 2 percent, up to 60 percent of China's bank loans would become nonperforming–so threatening both China's and, via Hong Kong, Asia's financial system. The flow of saving to finance the U.S.'s deficit would dry up, probably forcing U.S. interest rates up–so worsening the economic slowdown. ... There is the risk of a credit crunch forced by the banking system being overwhelmed by nonperforming loans. ... The risk of political instability is low, but it exists."

Me: Let's remember that China a) has been -- along with America -- one of the primary engines of global economic growth as well as buy of U.S. bonds, and b) has nuclear weapons. While no freedom-loving member of Western Civilization has any love for the current despotic regime, neither do we want to see political and economic chaos in China. Fun China Fact: Back in the 1990s, Pentagon analysts thought a bad economy could result in the fall of the Communists from power and the political dissolution of the country into maybe a dozen smaller nations. Hey, have fun, Hillary!