Words of warning on China

Globalization creates interlocking fragility, while reducing volatility and giving the appearance of stability. In other words it creates devastating Black Swans. We have never lived before under the threat of a global collapse. Financial Institutions have been merging into a smaller number of very large banks. Almost all banks are interrelated. So the financial ecology is swelling into gigantic, incestuous, bureaucratic banks – when one fails, they all fall. The increased concentration among banks seems to have the effect of making financial crises less likely, but when they happen they are more global in scale and hit us very hard. We have moved from a diversified ecology of small banks, with varied lending policies, to a more homogeneous framework of firms that all resemble one another. True, we now have fewer failures, but when they occur ….I shiver at the thought.--Nassim Nicholas Taleb: The Black Swan: The Impact of the Highly Improbable (April 2007)

Pumping Up China's G.D.P. - Room for Debate - NYTimes.com

" . . . .few analysts stopped and asked: Why should China, a country credited for having a vibrant middle class, a huge internal market and a rapid pace of wealth-creating urbanization, undertake a stimulus program larger both in relative and absolute terms than the stimulus program in the United States, which was at the epicenter of the financial crisis?

The answer is that China’s middle class is far less vibrant than commonly assumed; its internal market (relative to its G.D.P.) is actually modest, and its urbanization is rapid but not wealth-creating. In the face of a precipitous collapse of the demand for exports, the country resorted to the only thing it knew how to do -- embark on a government-organized, debt-financed investment binge to raise the G.D.P.

One theory is that all of these investments are made to prepare for the coming wave of urbanization. This is a myth. The Chinese cities do not lack buildings, which they have in surplus. The cities lack people. Beijing and Shanghai have some of the lowest population densities among the world’s big metropolises. The current infrastructure is more than adequate to accommodate China’s urbanization.

It is likely that a sizable portion of this investment binge is sheer waste and will surely end up as non-performing loans on the banks’ balance sheets. The Chinese term for crisis comprises of two words: danger and opportunity. The corrupt local officials saw abundant opportunities to amass wealth for themselves, and the central government completely lost sight of the inherent danger. The structural distortions of the Chinese economy grew worse and the government did exactly what it should not have done: It wasted a perfectly good crisis."