Is China the Next Bubble?

Is China the Next Bubble?
By Keith Bradsher

...Japan had its bubble in the late 1980's, when the Imperial Palace grounds in Tokyo became worth more than all the land in California. Thailand and Indonesia had their bubbles in the mid-1990's, when speculators and multinationals poured money into what seemed like a Southeast Asian miracle. The United States had its Internet and telecommunications bubble in the late 1990's, when stock prices looked as if they could rise indefinitely and unemployment kept hitting new lows.

Each of those bubbles ended badly, with millions of families losing their savings and many losing their jobs.

As 2004 begins, China's economy looks as invincible as the Japanese, Southeast Asian and American economies of those earlier times. But recent excesses - from a frenzy of factory construction to speculative inflows of cash to soaring growth in bank loans - suggest that China may be in a bubble now, especially on the investment side of the economy.

Bubbles can last years before they pop, but they seldom deflate painlessly when they do. Nobody knows how harmful a sharp economic slowdown would be to China, a country undergoing huge social changes, like the migration of peasants to the cities. The Communist Party rests its legitimacy on delivering consistent annual increases in prosperity.

The Chinese government is showing concern. In the last few weeks, the central bank has tried to dissuade banks from reckless lending while the government has bailed out two of the largest ones, to prepare them for possible hard times as well as planned stock sales. The State Council, China's cabinet, has warned that it will discourage further construction of new factories in industries like aluminum and steel, whose capacity has grown swiftly in the last three years.

Because China is now so important to the global economy and to global political stability, the possibility of economic trouble is starting to draw serious attention among economists and China specialists. ...Continued