AsiaPundit must give a tip of his akubra to CSR Asia for introducing me to Brian Schawarz’s blog
and to this article by Schwarz in The American Thinker.

In recent months
the mainstream media has been overflowing with articles discussing the
economic threat that China poses to the global economy in industries
ranging from textiles to autos. In response to these anxieties and
fears, many politicians on both the left and right are pressing for
ill-conceived tariffs on Chinese exports and limitations on Chinese
investment into key industries.
While it is true
many Americans and Europeans face the possibility of layoffs and lower
wages caused by intense Chinese competition, I have watched this
growing backlash against China with a mixture concern and dismay.  As
an American instructor of business management in Beijing and Shanghai
for the last five years, I’m becoming increasing convinced that the
Chinese economy in the years ahead will not be as strong as many
so-called Western experts would like readers to believe.
Before
Westerners get carried away with irrational exuberance about the number
of new Shanghai skyscrapers going up or the millions of new cars
clogging the streets of Beijing, foreigners would do well to gain a
greater understanding of the massive economic challenges its Communist
leaders need to tackle in the next few years.

I’ve long argued that the hype about China’s promise - as well as the hype on the China threat - is all overdone. Schwarz has a good round up on why. On a similar theme, another must read is this MacLean’s article reproduced by Shanghai’s NYT bureau chief Howard French.:

At its apex, Japan’s economy crumbled like a house of cards. The yen,
which had been kept weak to promote exports, was engineered upward to
rein in fast growth, igniting a speculative real estate bubble. When it
burst, the banks, which had lent money to companies based on their real
estate equity, were left virtually bankrupt. Trillions in personal and
corporate wealth disappeared overnight. The implosion revealed
structural rot beneath the economy’s seemingly ironclad exterior. The
upshot was 15 years of stagnation that Japan is only just now emerging
from.
China is, in many ways, following in the footsteps of Japan’s early
success. Nobel prize-winning economist Robert Mundell recently compared
China’s ramp-up to Japan’s beginnings as a low cost manufacturer in the
1950s and ’60s. And now, like Japan was in the 1980s, China is focused
on expanding into international markets and on developing its own
technology for sale to the world.
But other similarities are more disturbing. Andy Xie, chief Asia
economist with U.S. investment bank Morgan Stanley, points to the
US$350 billion in speculative “hot money” that has poured into China in
recent years on the expectation that its currency, the renminbi (or
yuan), would appreciate. Much of that money has been parked in real
estate as the recently privatized housing market goes through an
unprecedented boom. In Shanghai, prices skyrocketed by 28 per cent last
year, with sleek condo towers, office high-rises, hotels and malls
being thrown up at a breakneck pace. The vacancy rate officially stands
at 2.7 per cent, but anecdotal evidence suggests up to 40 per cent of
the new space sits empty.

And with those cheerful thoughts in mind, this week’s comment from Morgan Stanley’s Stephen Roach has left me feeling a bit more bearish than usual.:

Non-Japan Asia… which accounts for fully 28% of world GDP as
measured on a purchasing power parity basis — is likely to be hit
especially hard by the combined impacts of its inefficient energy
consumption technology as well as its excessive dependence on the
American consumer.
China
is the most obvious case in point.  Its oil consumption per unit of GDP
was double that of the developed-world average in 2004.  China, like
many Asian countries, tends to subsidize the price of retail energy
products. While that means the cost of higher oil prices is deflected
away from
Chinese consumers, the impact falls more acutely on its government
finances.  At the same time, in the face of
soaring energy costs, China’s subsidy structure has already caused
serious disruptions to retail supply — resulting in long petrol lines
that are strikingly reminiscent of those experienced in the 1970s.
Moreover, about a third of China’s total exports go to the  United States.
That means one of China’s largest and most dynamic sectors — exports
currently account for more than 35% of Chinese GDP and were still
surging at close to a 30% y-o-y rate through July — is very much a
levered play on the staying power of the overly-extended American
consumer.  That’s a tough place to be for any economy in an energy shock — even China.
 
With the possible exception of Japan and India, the rest of Asia may not be in much better shape.

Also oil-related, Ben Muse looks at China’s energy security, and exposes part of the reason why it’s looking at Central Asia and nearby sources. Currently, about 80 percent of China’s oil has to travel through the Malacca Straits, if Canada’s oil sands become viable they’ll have to pass through an area that’s free of pirates, but closer to the US military.:

Because the earth is round, the shortest route from Canada’s west coast
to East Asia passes  across the Gulf of Alaska and through the
Aleutians into the Bering Sea at Unimak Pass, returning to the North
Pacific through the far western Aleutians.  Once past the Aleutians,
shipping would still have to pass around or between the Japanese
Islands, and between Japan and Korea.
It’s hard to imagine the U.S., Japan, or Korea interfering with the
rights of innocent passage through these waters.  But the Chinese can’t
be entirely comfortable about this source and route.   Canadian oil
would certainly be vulnerable in the event of a conflict over Taiwan.

AsiaPundit earlier agreed with Bingfeng’s analysis that the problems with healthcare in China are not caused my the growing privatization of services, but that market-oriented services are still developing. Sun Bin has further evidence.:

"When Gao Qiang, China’s health minister, responded to scathing
criticism of his country’s health system this month he turned his ire
on local hospitals, saying they had put profits ahead patients. Mr Gao
raged that patients were being billed for drugs to cover the cost of
everything from wages to building maintenance, leaving an increasing
number of citizens unable to afford to see a doctor.
From the hospital’s perspective, however, the picture is very
different. A squeeze on government funding and strict price controls on
most services mean they are forced to rely on drug sales for up to 70
per cent of their budgets.
"The problem with hospitals centres on the draconian capping of
doctors’ fees and in-patient beds," said a foreign pharmaceuticals
executive. "The result is that they run these services at a loss and
have to make up the money elsewhere." The cost of a bed in China’s
hospitals, even in large cities, can be as little as Dollars 1 a day.
Prices are kept low in the name of maintaining what the government
calls "social stability".

Peking Duck guest blogger Martyn really should have his own site. The latest offering takes a look at China’s swelling foreign exchange reserves.:

Some Chinese officials argue that the money would be better spent
recapitalizing the state banks or to import oil and build up strategic
reserves, of which it has none. Others say the money should be used to
fund overseas acquisitions by Chinese firms.Conservatives want to keep
the money in financial instruments. They say, quite rightly, that the
inflow of hot money is only a temporary phenomenon and point to the
billions of dollars of liabilities in bad loans held by the state
banks, pension and welfare liabilities and debts owed by securities
firms.There is also the possibility of trade disputes or a trade war
with the US or the EU, which would sharply reduce the trade surplus, or
a financial crisis at home or in Asia.

Further on China’s reserves, Brad Setser points to some useful posts on the end of Bretton Woods II.

It seems like some in Asia are a bit worried that so much of the
world’s wealth is denominated in the currency of the world’s largest
debtor. Cynic’s Delight highlights their concerns well in a recent
post.

"Chalongphob Sussangkarn, president of the Thailand
Development Research Institute, a Bangkok based think-tank, said, "It
is quite hard to understand why the world’s largest debtor (the United
States) is the one that controls the world’s financial system. We (East
Asia) always monitor what the US Federal Reserve says about interest
rate movements. (East Asian) creditors should be the ones who determine
the world’s fate."
Frankly, the United States’ Asian
creditors should be worried.  The Fed has made it clear that its
preferred solution to the US trade deficit is a big dollar
depreciation.  And the required depreciation could be large indeed.
See Rogoff and Obstfeld.

Yu Yongding is always worth listening
to as well - and while his voice is only one of many that matter in
China, the fact that he think China already has too many reserves is
significant.

The New Economist points to a Bank of Japan paper on China’s revaluation, which endorses the PBoC’s cautious approach.:

We analyze the impact of Japan’s exit from its peg
on exports and investment.  The results point to sizeable effects of
the yen’s revaluation on both variables, especially investment.  While
our analysis suggests that a rapidly-growing, export-oriented economy
can operate a heavily managed float despite the presence of capital
controls and the absence of sophisticated foreign currency forward
markets, it underscores the importance of managing the exchange rate
with domestic conditions in mind and avoiding the kind of large real
appreciation that would sharply compress profits and damage investment.

For China this suggests starting with a modest band widening and
a limited increase in flexibility, and not with a large step
revaluation which could have a sharp negative impact on investment and
growth.  Our results thus provide support for the kind of measures
taken at the end of July

The Economists View and the Globalization Institute both point to a WaPo item on China’s stock market reforms.:

Analysts emphasized that the plan should not be construed as an
indication that the government has embraced wholesale privatization.
The majority of the companies that trade on the Shanghai and Shenzhen
exchanges are small arms of giant firms that remain wholly controlled
by the state, or inconsequential and poorly managed firms … The
government’s decision to put more of these shares into private hands
does not signal an intent to relinquish control over the largest and
most strategically important state-owned firms, which still dominate
key sectors of the Chinese economy such as steel, auto-making,
telecommunications and commercial aviation. "This is basically a
mechanism to get the stock market to function, which it has not done in
four years," said Arthur Kroeber, managing editor of the China Economic
Quarterly. "This is the state privatizing junk that it’s not interested
in but retaining control over the core companies.

Also of interest: Tyler Rooker looks at China’s GDP and purchasing power parity; Danwar ponders a link between China’s bank bailouts and the revaluation; and Logan Wright examines recent statements from the People’s Bank of China, and tries to weigh how much the central bank is intervening in the currency market.: