Why China’s Bubble Economy Could Go Into Freefall

Bloomberg reports that, “China urged local governments to set up an early warning system to ensure sufficient oil supplies at filling stations, which face shortages across the nation.” China faces chronic energy shortages and the social and political instability those shortages foster with the population.

Do you get the feeling the communists in Beijing are barely keeping the Chinese economy together with bailing wire and duct tape? We don’t mean that China’s growth is a fluke. We mean that the tremendous growth unleashed is beyond the control of a central planner. The inability to maintain a fixed price for fuel is one example.

Let’s put it geopolitical terms and turn the microphone over to John Robb, forecasting what a decline in global trade might mean in the next few years in the closing chapter of his excellent book, “Brave New World: The Next Stage of Terrorism and the End of Globalization.

Robb writes that, “High oil prices, a significant drop in global economic activity these high prices cause, and numerous attacks by global guerillas will put globalization in retreat.” This sounds right to us. Peak oil and the dollar crisis are leading to more expensive energy and money. A contraction in globalization is the result.

“The drop in trade and the inflation this creates,” he continues, “will be absorbed badly by most economies. It will be a disaster within China. The Chinese government lost legitimacy in the 1990s because of rampant corruption and inattention to the basic needs of its citizens. Its only source of legitimacy was based on market-state norms: economic opportunity and growth.”

“With the decline of global trade, the Chinese bubble economy will go into free fall. Any claims to its one form of legitimacy that formed over the last three decades of scintillating growth will be shattered in less than a year. Mass protests will rise from the 2006 average of two hundred a day to the thousands. Furthermore, these protests will become more violent.”

Here’s a question for you. If you accept Robb’s premise than the legitimacy and stability of China’s government is a function of economic growth, do you think that government will sacrifice that coal-fuelled growth (and social stability) and reduce carbon emissions because Australia has finally decided to sign Kyoto?

Dan Denning
Markets and Money

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.

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5 Comments on "Why China’s Bubble Economy Could Go Into Freefall"

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Cons of Perth
Dan: “do you think that government will sacrifice that coal-fuelled growth (and social stability) and reduce carbon emissions because Australia has finally decided to sign Kyoto?” No, China is unlikely to do this, they will keep polluting. But I cannot help but sense a conviction on your part that climate change is an economic issue. Sure, it is as well, but more importantly, its a survival issue. It is a matter of risk management. Unfortunately the people well versed in performing risk management are only able to do so looking 10, maybe 15 years into the future. The risk management… Read more »

For a number of years I have suggested that in the coming depression China will descend into anachy and civil war and likely balkanise.

A Chinese saying:
“the hills are high and the emperor is far away” spells trouble for the “corrupt” Communist Party as it did for the “corrupt” Ta Ch’ing Dynasty.


The flip side of the coal-fuelled growth that the government hasd to keep going, is the enormous environmental and health problems caused by unregulated development.

What’s the point of the average Chinese slogging away if the health and lives of their family is destroyed through the pollution of the factories they are working for (or not in alot of cases) ?.

The tipping point will come when the average poor Chinese punter recognises and rejects the donwside of this development and mobilises against it.

Flow-on effects into the world economy anyone ?


ps. there may be an interesting link between any potential mobilisation and the 10’s of thousands of Chinese students who study in the US/UK/Canada/Australia every year.

Expecting young adults who study in these relatively clean, prosperous and open societies to not wish for a similar life in their own homeland would be a hard point to argue.

wow, you boys are way out of date on the new china….. granted the australians, chinese, and amerikans have the same water supply problem, and the ecological problems are NOW. not some hypotheical date down the road. it’s always nice to have some financial hedges that are based on steady growth 10 years from now. suggestions ? please ! but not that many people care to make money work without the quick payoff, and wait half a generation to see if they guessed right. P.S. as to physical gold possesion i keep a small box of some gold rounds and… Read more »
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