The Chinese Fear Bear

The Soviet bear, back in the days, was a nasty beast with potential dire consequences had it decided to bite. Of course the fear was emanating from the Soviets military power. But what ultimately brought down the iron curtain was not a military style confrontation. Simply put it was the superior economic system of the West backed by democratic principles and the ability of capitalism to thrive.


Now, the talk is of a Chinese bear and what China's recently acquired status as the second largest economy could mean to America's economic dominance. A command economy will never pose a threat to a free economy because over the long run market forces are much more powerful than a State's plan or a one man's ideology. These exact market forces brought change to the former communist block countries and forced China to adopt some of the economic principles she so despised for such a long time. China's continued rise as an economic as well as military power strong enough to challenge the dominance of the U.S. faces daunting challenges. Other than the ability to mobilize large numbers of troops China's military is still a long way from reaching the technological level of its western rivals or Russia. Additionally the Chinese military has more pressing issues to deal with near home preventing it from really exerting any meaningful power on the world stage. China shares a huge border with India. Both lay claims to territories occupied by the other. As both are developing and using more resources they will be facing each others off to capture more of the world resources needed to meet the needs of their poor populations.



As I have mentioned several times in previous pieces the Chinese economy has been nothing more than an export machine dependant on the well being of western economies and their consumption needs. Therefore, there is no meaningful Chinese middle class able to keep that Chinese economic engine humming. As long as this is the case the potential of a strong and sustainable independent economy capable of challenging the U.S. remains small. China's per capita income is about $3,600 compared to $39,000 in the U.S. and about $25,000 in the EU. Therefore the prediction that China will soon overtake the U.S. economically has to be predicated on the impossible assumption of double digit growth for many years to come while the U.S. stays in a lackluster state. The export model will work for a developing economy for a short while but unless that economy can turn a producing population, at least in part, into a consuming one the model will eventually fail. China got in the limelight lately simply because of its export economy and its abundant cheap labor which by definition is the essence of a poor, albeit, upcoming population. Everyone talks about China's up and coming segment of the population or the newly made millionaires and billionaires; but no one ever mentions the vast poor segment that struggles each day to make a living. This is exactly why China can not grow at double digits forever. As China is forced to fight inflation to protect especially the poor the economy will slow pinching its most vulunerable and vast population segment, the poor, she will also be compelled to use some of its massive foreign exchange reserve domestically to stave off civil unrest leaving her with less to project power internationally.

Until China develops a consuming middle class, adopts more of the free market principles, abandons command of economic activities, moves towards a more democratic political system and has a military that is able to project its power on the world stage without having to keep an eye on its neighbors (including Russia and North Korea) there is no reason to fear a Chinese bear. A Chinese bear market, on the other hand, is a different story. As China takes steps to fight inflation, which could have a devastating impact on its poor population, the Chinese stock market will correct (inflation not the only cause. See previous posts). Actually we may see a steep correction in 2011, but over the next few years opportunities are abound in China. So fear no Soviet style bear or a Chinese economic takeover. As Larry Kadlow says: free capitalism is the best path to prosperity.








You may email the author at gnasr59@yahoo.com


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A Rare Opportunity Indeed