China has been keeping its currency pegged to the dollar and lived off US consumption. Now US will not be consuming much for a long time, so China has nowhere to sell their goods to. Unemployment and riots are at hand, it seems.

Of course, that's wrong. China can and will continue growing, but this time the engine of growth will be their own consumer market. Which is huge. There are already more internet users in China than people in the US.

When renminbi will start appreciating vs. other currencies, the population will start feeling richer and will consumer more, import more and borrow more. Today they already have shortages of consumer goods on the mainland, such as cars, even though dozen of producers are struggling to keep up with demand.

China, in other words, is where Japan was in the 60s and early 70s (maker of transistor radios and cheap scooters, export-oriented mostly). And it will go on to become what Japan was in the 80s, only with 1 billion population.

The article is correct in stating that internal consumer demand is not a proportionately large part of China's economy. The two largest, disproportionately largest, sectors of China's economy are real estate and exports.

Further, China's recovery program is not oriented towards increasing the relative size of this sector of the economy but rather, as the article says, increasing the amount of internal capital investment through forced bank loans.

In all emerging market economies that managed to stabilize their currencies and make them appreciate (Latin America in the 90s) this has led to domestic consumer booms and reduction of current accounts surpluses (or running up deficits). China has not gone this route yet, but this is a massive reserve of growth. I am sure their leaders understand this. Of course, to focus on domestic market instead of exports, it represents a major policy change. But fundamentals increasingly point at this scenario, so we may reasonably assume that this is what will eventually happen.

I also do not buy the 'forced loans' concept. Throughout last years of rapid growth Chinese authorities have been in fact imposing artificial caps on domestic credit growth, since they don't have developed domestic debt market, and therefore lack effective tools to sterilize their dollar interventions. Immediately after financial crisis, the Chinese have removed many of those lending restrictions, as part of their 'stimulus'. Now, because of the developing stock market bubble in domestic Chinese stocks, the authorities are bringing the lending restrictions back.

I think the idea of 'forced loans' came from the same area as fables of state-planned road running through schools and kindergartens (but not through villas of state officials). It is so heavily mixed up with ideological propaganda and clichés, that it does not really deserve a serious discussion.

The fact that state imposes cap when it wishes should make it more likely that the state can also impose loan levels when it wishes. Moreover, I have read a number of news items

I think the idea of 'forced loans' came from the same area as fables of state-planned road running through schools and kindergartens

Uh, the point was not about exactly which projects the Chinese state choose to impose but that the Chinese can impose project and solely and only on bureaucratic initiative, even those projects involve considerable hardship on people. A well-known example of this is the Three Gorges Damn - up to a million people are thought to have been displaced by this initiative.

There are a lot of news reports that confirm fear of general unrest on the part of the Chinese leadership. Here is a recent New York Times article on the subject:

http://www.nytimes.com/2009/07/18/world/asia/18xinjiang.html

http://en.wikipedia.org/wiki/Confucius#Politics

I'm interested why you believe that modern China will not repeat 4000 years of history. It is not an accident that "history repeats itself" is a well worn phrase. I see no reason why it should not apply to modern China any less than the modern China of 1980's (Deng), 1960's (Cultural Revolution), 1950's (Communists), 1910's (Nationalists), or earlier.

http://en.wikipedia.org/wiki/History_of_China <- tiny sample.

[1] Note that I didn't say a service to foreign people.

The Chinese economy will suffer as a result of the business cycle in the United States but they've resisted calls to borrow and spend recklessly as those in Washington would have them do. The notion that bubbles are caused by growth on its own is a terribly flawed notion. Even the Federal Reserve admits that their own loose monetary policy contributed to our present woes.

The Chinese for now are committed to the dollar but when they aren't that spells bad news for us and good news for them. When they realize that they can spend that money at home on the goods they make at home I feel like the party is going to be over for the United States. We're seeing the beginning of the end of the American empire now and the ascent of China and for now at least the ascent of China is based on sound fiscal policy just as the United States during its formative years was.

I see a good but maybe rocky future for China in the short term and a good future for China in the medium and long term.

The article says, and gives examples, that China has been malinvesting for quite a while, a fact confirmed by other observers,

http://www.rgemonitor.com/asia-monitor/257180/chinas_present...

and that current international conditions basically force China to "invest" thoughtlessly for domestic political reasons, in disregard of economic reality.

The problem with bubbles is the economy recovers to a more efficient system where the greatist fool is now broke, which is less comfortable than the mid bubble / pre burst days. China like Japan is going to over invest in infrastructure / housing and have the same issues.

China is much closer to the US when it comes to infrastructure: they need a lot for such a big country. Whether they spend it wisely will be the issue.

That was more than three years ago - it will be slightly lower in Japan now, and higher in those Chinese regions.

> There's one fundamental difference between China and Japan

Another that people seem to keep forgetting is that the Japanese people are largely a single people and had something approaching a functional parliamentary system during their rise. The Chinese are trying to maintain centralised planning for the largest show on earth, and their social systems are unhealthy.

Further more, if it weren't for the US, China would already be running a net deficit. That's how strong and big the internal demand is in China. That doesn't mean their economy can't overheat, but it does mean that even in a recession they would still be a BIG consumer.

And lastly China is successfully and very slowly reducing it's US dollar exposure.

Disagreed - as the article and in other analysis points out, China has over 2 trillion in US dollars -slowly reducing or not adding to this huge pile of US dollars will have little impact on the near to mid term situation. China has alluded to reducing their treasury holdings but have not done anything thus far, IMO, it is just a leveraging tactic for negotiations - China must keep the yuan down in order to subsidize its exports without which they do not have much else driving their economy.

What's the basis for this claim? How are they doing it?

If "slowly reducing its dollar exposure" means selling dollars in the morning and buying more in the afternoon, then it might be true but ...

I think the author's point is that very slowly may not be successfully in current conditions.

This article is full of stupid statements like the above. A democracy can do whatever the voters tell it to do, including telling banks to make loans or not make them, including dissolving corporate structures, including redefining corporate person-hood. There are _some_ limits imposed by the constitution, but even those can be dealt with.

China may or may not have economic failure on the scale the U.S. is dealing with. At the moment its really hard to say. This article contains little to prove the author's thesis.

Won't happen of course as it would be perceived as a loss of sovereign power but remains an interesting speculation.

That -is- new, but unlikely for the reason I gave.

Since China isn't a democracy, it doesn't suffer these problems.

Liberty and democracy aren't the same thing. If anything, a more democratic country would be more able to coerce banks in (something resembling) the public interest than a country with a more aggressively limited government.

Sometimes someone says something so asinine that it saves you the trouble of having to consider their other arguments. Assuming a Gaussian where none exists is a pretty amusing mistake to make considering the events of the past couple of years.