What if the Chinese Bubble Bursts? - The Centre for Independent Studies
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What if the Chinese Bubble Bursts?

In China’s state-led political-economy, the CCP and state-controlled entities are the primary dispensers of capital, land and business opportunity. The CCP knows it will likely remain in power so long as it can continue to nurture the state-controlled sector; and by doing so, underwrite prosperity for the tens of millions of well-connected insiders who continue to benefit disproportionate from China’s rise. In the event of a Chinese asset bubble bursting (such as in the property market,) the paramount objective will be regime preservation. The CCP will act quickly and decisively to restrict and then reverse the damage – to the short-term benefit of commodity exporting countries like Australia and Brazil, but at greater long-term cost to countries like America looking to lower reliance its reliance on exports from Asia.

Indeed, if the onset of the global financial crisis in 2008 is any guide, we already know what Beijing will do in the event of a bursting of its bubble.

First it will immediately force its state-banks to massively increase lending so that other state-controlled entities can buy any distressed assets and prop up asset prices as long as possible. Ignoring the build-up of hidden non-performing-loans on the banks’ balance sheets, the CCP will order the huge state-controlled sector to continue investing and building within China – providing a temporary fillip for commodity exporters.

Second, China will rely increasingly on offering even more advantages to the export manufacturing sector in the form of increased currency manipulation, subsidies, tax deductions and other incentives. It cannot do otherwise since some 250 million Chinese depend directly and indirectly on this sector for a job. Beijing cannot afford to have tens of millions of unemployed workers in once-thriving coastal provinces venting their anger against the regime. Paradoxically, China’s increased reliance on exports means that it will be an even more reliable buyer of American debt since it will not convert its burgeoning surplus US dollars back into yuan in order to maintain a weak currency. But more generally, the bursting of the Chinese asset bubble will seriously set back American plans to improve its domestic export manufacturing sectors and ‘rebalance’ the global economy in the process.

Dr. John Lee is the Foreign Policy Fellow at The Center for Independent Studies in Sydney and a Visiting Fellow at the Hudson Institute in Washington, D.C. He is the author of Will China Fail?