China has enjoyed nearly two decades of most competent leadership- a rarity in its history. Despite my personal disdain for the likes of Deng Xiaoping, Jiang Zemin, and Hu Jintao, until late 2008 they won well deserved accolades for managing a very large country with many problems reasonably well.
However, with the election of Barack Obama, all of that changed, and I believe the Chinese leadership is now screwing up on both their domestic economy and foreign relations. While it is not yet apparent today, it will become apparent before too long.
Many Chinese could not believe Barack Obama could be elected. He is black. Many Chinese still have a racist attitude, an attitude often reflected as an inferiority complex to Westerners but a superiority complex to blacks. Once the US economic crisis broke out and Barack Obama was elected, the Chinese leadership suddenly became blind to the US strengths and started to become puffed up with pride and overconfidence.
Whereas China's strategic interest is cooperation with the US (as a beneficiary of the US led global order-- in a sense our troops help pay for their steady supply of Middle Eastern oil just as their savings pay for our debt), correction of world imbalances (as a major exporter with a stake in its export markets), action to tackle climate change (as a major coastal country hurt by rise in sea levels), and control the spread of nuclear weapons (as a nuclear weapons state and signatory of CTBT) the Chinese have sided with Iran on sanctions, have not stepped up with the World Economic Forum, have not revalued their currency, and humiliated Obama at Copenhagen. In retaliation Obama has approved a tough arms sales to Taiwan.
In every case China is acting up against their own interest. Why? Puffed up pride. They wrongly believe that they need no one and are at the top of the world. They wrongly believe that they no longer need care what the US thinks.
Newsweek offers an alternative-- the Chinese leadership is responding to blind nationalistic sentiments at home, as measured by the Internet commentariat on Chinese websites. If true, this is a big failure for the Chinese leadership; they are allowing policy to be determined by populist sentiments of nationalism rather than best interest. And by depriving the people of the chance to express themselves religiously, artistically and politically, they turn to nationalism- the refuge of scoundrels. (And by the way, if Obama followed the internet commentariat here in the US, he would switch parties and become a hard core right wing Republican)
Until late 2008 the Chinese domestic economy-- though overreliant on exports-- was for the most part competently managed. Therefore China avoided the 2008 meltdown. However, the day after Obama's election, on November 5, 2008, China announced a $586 billion stimulus. What was not known at the time is that China's leadership also embarked on a plan to explode lending from the 4 major state directed banks as part of the stimulus policy.
The Chinese "stimulus" is an even more exaggerated version of the "Greenspan stimulus" of low interest rates in 2002-2004 -- which, by the way, was almost certainly politically motivated with an eye to Bush's re-election. Just as Alan Greenspan drastically overreacted to an extremely shallow recession following the .COM bust, the Chinese authorities drastically overreacted to the US bust, which did not even affect China that much.
This excess lending would eventually reach over $1 trillion and double the size of all lending in the economy in 2009. The lending soon found its way into the real estate market, where nationwide prices more than doubled.
In comparison, the US Case-Shiller 20 City Index reached 180 in 2005 from 90 in 1999. Hence, China's property market has retraced the entire US move from 1999 to 2005 in just one year--2009.
Real estate prices have increased by 50 percent in Beijing, 200 percent in Shanghai, and 147 percent overall in the top 10 cities. On the island of Hainan, property prices have increased 30 percent in only 1 month. The total property investment on the island is now 10 times the total sales last year.
Even now excuses are being made for China. "They may be lending a lot but it's being invested in infrastructure. Their high savings rate means there will be no bubble." Bullshit. When bank lending doubles in a year and property prices nationwide doubles in a year it's a bubble. When property values increase by 880 percent in one year as in one Chinese city it's a bubble.
How could this have happened? Did the Chinese authorities not see what happened to the US? What caused them to suddenly start inflating a huge real estate bubble at the exact moment that the US real estate bubble's damage to the US economy was revealed for all to see?
The answer is puffed up pride. After seeing the fall of the US economy, instead of making them more cautious, it made them feel invincible. Rather than identifying with us, they were measuring themselves against us, and so when we got shorter, they got taller. They felt they could stimulate the economy in any way and that a bubble could not damage China.
It is counter-intuitive-- but the US NASDAQ bubble and the real estate bubble began circa 1998, when the original Asian property bubbles-- in Japan, and Southeast Asia-- burst in the Asian Financial Crisis of 1997. This crisis was the first classic major real estate bust brought on by ponzi finance. But rather than react with caution, we in the US became puffed up with pride. In the 80's and early 90's we feared Japan and the Asian Tigers overtaking us. When they collapsed in 1997 and 1998, instead of warning us of the dangers of overheating, convinced us that we were now on top of the world and doing everything right-- nothing could go wrong.
What is at work here is a perverse, zero sum sort of thinking. A peculiar right-wing type of thinking. Instead of looking at other humans beings' travails and being warned, we measure our own confidence against others' failure. This is what happened in China in late 2008.
China is now in for the bursting of property bubbles where they have emerged. Lending must be drastically halted for real estate loans. The sooner that it happens, the better for China- and the world.