China is rapidly sinking into anarchy and civil unrest. The number of protests by injured citizens is estimated at 80,000 per year. The social service network that existed under the pre-capitalist economic model has been removed. Health care and employment are no longer guaranteed. As a result there are many people who are now suffering from ill health who would not have before.

The loss of jobs in government enterprises and the take over of rural land by corrupt local governments and entrepreneurs has displaced many who now constitute a roaming band of marginally employed. They have no ties to the communities where they find employment.

The disproportionate growth in the cities to the detriment of the countryside has put a strain on resources and has led to the need to import raw materials (and apparently food). This has led to an increase in costs worldwide and created the tensions seen in much of the third world. Perhaps China can still extract resources from corrupt regimes in Zimbabwe and Sudan, but what will happen when people are starving elsewhere in Africa and see their resources being shipped off to China while they get no benefit?

In addition to resource shortages the rise of a middle class in the cities has produced internal dislocations. Beijing is already stealing water from nearby regions. Grain is being diverted to livestock feed thus pushing up the cost to those still dependent on a traditional diet.

Rapid expansion in both the industrial and building sectors has led to much quick and dirty construction and policies, which are now severe enough that Beijing won't be suitable for the Olympics without shutting down much of this activity for several weeks. The health effects of pollution from coal power plants and automobiles are now of serious concern.

What all this means is that there is a high probability for yet another internal revolution. Each time things have gone wrong since 1948 the Communist Party has come up with some policy to "fix" it. The "Great Leap Forward", the "Cultural Revolution" and several others have all been disasters. With no democratic structures to provide for debate and feedback the leadership can impose ill-conceived schemes on the whole populace at once. There is no reason not to expect this to happen again.

Parts of the economy may be partially privatized, but the party and the army are still in control. When the seams crack open too wide the response will be disproportionate and cause China to fall back into third world status - at least for a few decades.

Many people are willing to postulate that the US is losing its super power status and rotting from within because of bad policies, so why shouldn't China fall victim to the same sort of fate, especially since has no checks and balances?

Finally, on the issue of what would happen if China "dumped" its treasuries. To do this would require a buyer, there are none who can absorb the amount that China presently holds. Furthermore what would they pay for them with, dollars?

More likely we will see China investing in treasuries less than before and/or using some of their foreign exchange to buy US assets directly. It's never happened before, but the US can also put restrictions on redemption. Other countries have done this in the past and those holding the notes just have to lump it. During WWII the US seized German owned assets in the US and sold them off later. The US could decide to treat Chinese owned assets differently than others and maintain some sort of credibility in world markets. Whether this would work in practice I'm not smart enough to predict.

So instead of WW III we see the Asian Tiger implode and the US gets several more decades of free lunch.

Choose your scenario.

Policies not Politics
---- Daily Landscape