Thomas P.M. Barnett :: Weblog

ARTICLE: “China Puts Growth Atop Agenda: Hu Pins Stability of Nation, Communist Party on Economic Progress,” by Andrew Batson and Jason Leow, Wall Street Journal, 16 October 2007, p. A4.

ARTICLE: “Fear and Hope Rise With China’s Stocks: Market Frenzy Nurtures New Investors and Firms; ‘It’s Like a Bubble,’” by James T. Areddy, Wall Street Journal, 16 October 2007, p. A1.

ARTICLE: “Can China Fund Meet Tricky Task: State Firm to Juggle Demand for Returns And Political Worry,” by Jason Dean, Wall Street Journal, 1 October 2007, p. A1.

Hu’s got plenty to brag about.

China’s per-capita GDP has almost doubled during his first term. How many leaders can say that?!

China’s is now above $2,000. If it is doubled again by 2020, as Hu proposes, then China really moves out of that range for mass violence that I’ve calculated in the past (virtually all of the mass violence/civil strife cases of the post-Cold War era have occurred in countries with less than $3,000 per cap GDP).

Do I want China to get to that point? You bet.

Do I understand that current number hides a lot of inequality? Yes, and so does Hu.

Hu also knows that the only way China can move ahead at this point is to up his mix of technology and productivity dramatically, especially as China’s labor pool will shift, age-wise, quite dramatically in the coming decades. Already, we see China’s absolute labor pool peaking in 2015--not exactly a long time away.

The ride between here and there is likely to be quite bumpy too. China’s stock markets are volatile and Shanghai’s Composite is showing a price/earnings ratio one associates with bubbles of the Asian sort (Taiwan was 100 when it popped, Japan was 71, China is now 69; all of these numbers tower over our own pre-high tech versions, which were 28 in 1929 and only 18 in 1987, but none reach(ed) our Nasdaq-driven tech bubble, where it topped out at 123!).

China’s current stock mania does, as the WSJ states, look “increasingly unsustainable.” It has increased six-fold in two years, which means all that money is coming out of mattresses and old jars and going into the markets like crazy, which is a bit crazy, because those markets are built on very limited transparency regarding Chinese companies, and because foreign investors are highly limited, you’re not getting outside judgment to augment your own echo-chamber.

Will it pop?

Of course it will.

Will it “also leave behind much lasting good, because it is helping build a modern, market-driven financial system,” as Areddy argues?

Yes.

Interesting to see China’s total value of stock basically reach the status of a true Old Core country: roughly equal to its national GDP ($3.7 trillion). Already, China’s markets boast the world’s most transactions and will raise more money via IPOs than any other market this year.

Here’s the huge milestone that really matters:

For the first time since China’s economic overhauls began almost 30 years ago, money from the investing public--instead of the Communist Party--is fueling expansion of the corporate sector. The boom is helping to create a class of Chinese companies among the most valuable in the world.

Mark that in your mental models of global change, because it is possibly one of the most seminal events of my life.

But again, a crash will happen and logically soon. That’s never been the question. The only questions that matter is how the CCP handles it, and how the rest of the global community handles it.

Naturally, and as I have briefed and written for now for a couple of years, it’s easy to compare China today on stocks and infrastructure booms with America in the 1920s:

China today looks like the U.S. of the 1920s to Marc Faber, a well-known money manager based in Thailand. He notes that just as Chinese investors are confident about their economy, the U.S. economy was surging on hopes about technological changes like the radio and about the rise of a consumer class.

Of course, the 1929 crash set in motion a host of new rule sets in America, prompting “the creation of basic investor safeguards that strengthened the market and probably limited fallout from later tumbles.”

Not “probably,” I would say.

So like I say, China will learn from scandals and crashes. The key for us, is how we mentor them in this process, because we’ve been there and done all that before.

But you look at all that uncertainty and looming new rule sets that the Party knows full well it’ll have to adopt as the country matures and moves through all these inevitable crises, and it’s little surprise to me that China has no desire whatsoever to stick its neck out on the Burmas and Darfurs and Irans and North Koreas of the world. Why pick up the quagmire when you got this much going on at home?

But the truth is--and will increasingly become--that China has no choice. The rise of the China Investment Corp is a good example: $200B of its $1.4T pile of U.S. dollars. With its development trajectory and demographic trajectory, China can’t sit on all that money and get low U.S. T-bill rates. It needs to invest like a Boomer who’s suddenly found investing religion at age 52! Aggressively.

And yet to do that, even with seeming blue chips like Blackstone, and then drop 1/6th of your investment in a few months, and THAT’S scary enough to get popular political backlash at home. Imagine what happens when the military intervention goes wrong?

Can America change that equation? It won’t be easy nor quick to pull off. Chinese won’t want to feel like our fodder or our suckers. But clearly they want a more proactive stance in global affairs, and increasingly, they’ll want it out of fear and vulnerability, because increasingly Chinese money and people working abroad will be put at risk--both naturally (due to sheer volume) and malevolence (opponents of globalization’s penetration of their traditional cultures will soon target the Chinese as agents of change).

I know the arguments for Sino-American alliance seem too far down the road for many thinkers, but they are not.

That reality is rushing toward us--as always--faster than we expect.