Is China the Next Bubble?

NYT: "To the West, the hallmark of the last quarter-century in China has been rapid economic growth. But for hundreds of millions of Chinese, it has meant something else: a respite from the wars and the domestic strife that had dogged the country for more than a century before, from the Taiping Rebellion of the 1850's to the Cultural Revolution in the late 1960's and early 1970's.

In the years immediately after the Tiananmen Square killings in 1989, China became relatively placid, perhaps in part from fear. But that calm seems to be fading now.

Because China is now so important to the global economy and to global political stability, the possibility of economic trouble is starting to draw serious attention among economists and China specialists.

While the wages may sound low to Westerners, even with free room and board, they are high by local standards, holding down turnover and training costs. The workers, mostly young women who stay one to three years and then return to their home provinces to start small businesses or families, wear green and yellow company-issued windbreakers and sit in chairs at long metal tables under fluorescent lights, clipping wires, filing plastic and installing copper disks to make reliable electrical connections.

The People's Bank of China, the central bank, has reported an acceleration in wholesale price inflation this winter. The big question is how quickly this will feed into consumer price inflation, which could antagonize politically important urban residents. If consumer prices start rising significantly, the central bank will come under growing pressure to let interest rates climb, which could make more factories less competitive as loans become more costly.

China still has some advantages that, at least in the short term, may forestall a plunge in investment. One is a banking sector willing to lend heavily to even the most indebted companies, provided that they have political connections. But in postponing the final reckoning in the current business cycle, China may be making an eventual bust even worse.

China Green exports three-quarters of its fresh vegetables, and the prospectus for its I.P.O. warns that it relies heavily on sales to several Japanese companies. If there were a prospectus for China's economy, it would need to warn of a high dependence on sales to America.

Rapid growth and a persistent imbalance in China's trade with the United States have turned Chinese exports into obvious targets during an American election year. In the last few months, United States trade officials have begun to take the legal steps needed to impose steep tariffs on Chinese products as varied as color televisions, furniture and bras.

Lists of potential causes of a Chinese economic derailment tend to start, and sometime end, with a banking crisis. By plying borrowers with ever more loans, following lending criteria that credit ratings agencies contend are laced with corruption and political influence, Chinese banks have wound up with extremely high proportions - as much as 45 percent - of nonperforming loans.

But if the economy slows sharply, political instability could follow. That would be a serious problem, and not just for China, but also for the rest of the world."