China's future

I just watched a very heated debate on CNBC about the stock market in China.  While everyone knows about the ghost cities that have been built to stimulate the economy (newly built, but empty), and most acknowledge the likelihood that the official economic data released by the nation's rulers are likely to be no more accurate than what we used to get from the Soviets, some argue that the only thing that matters is whether the stock prices go up or not.

Uhh, no.  If the market is a bubble built on fake numbers, a crash is inevitable.

The problems are many and varied.  Via Meadia points out that wealthy Chinese are becoming better at breaking the rules:

“We all noticed what we suspected, which is that there was significant capital flight,” says Michael Pettis, a finance professor at Peking University who witnessed capital flight up close in his previous career trading Latin American distressed debt. “It’s not a good sign when local businessmen begin to think it’s better to take money offshore, especially when the world economy is in such bad shape.”

What was once a manageable trickle of cash leaving the country has become an untamable river. More and more wealthy Chinese are circumventing the law to pay for foreign goods...

...

 China is quickly finding out that a wealthier population is often more demanding. The past few years have seen a spike in domestic unrest, as millions of Chinese demand higher pay, better living conditions, and an end to government corruption. Now wealthier Chinese are skirting the rules too, finding ways to avoid the restrictions the Communist Party counts on to keep the country under control. It’s becoming increasingly difficult for Beijing to keep the lid on the tensions around the country.

This is a serious change for China and it’s not yet clear how the ruling party plans to deal with this transition. How Beijing handles this is one of the biggest questions of the 21st century. Watch closely.