As if China’s economic woes were not enough, the country is also going through its once-a-decade change in leadership. The transition is challenging because new leadership may not be willing to take a bold approach to the economy.
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The so-called princelings have benefited greatly from the current system. They seem ironically short sighted in their quest to keep the status quo. And the current government is increasingly distracted by the situation.
Overzealous investment by the government and a slowdown in consumer spending is creating large imbalances that will be harder to resolve painlessly. FedEx recently warned that dire times are coming soon for China.
The global economy is weakening and the political situation has paralyzed China’s government. Direct foreign investment has fallen for nine months out of the past ten.
China’s political system has operated on more of a consensus basis since the 1908s and 1990s when Deng Xiaoping steamrollered his conservative opponents and introduced market reforms.
China’s new economic voice is its prime minister, Wen Jiabao. He wants to break up monopolies, boost consumer spending, and move the economy away from investment in real estate and heavy industry.
But a market collapse would be seen as a positive for a new leader, who could blame the whole mess on previous leadership.
The situation is driving local areas to take matters into their own hands, taking advantage of the recently relaxed bank loan policies. They are creating local infrastructures
that create jobs. The problem here is that the municipalities cannot repay the loans.
And then, the financial system will crack. China’s is the world’s third largest economy. A fiscal collapse would have global ramifications.