Eric's Beijing Diary

The current market drops in Asia are due to worries about a possible recession in the United States. Market drops like this are not greeted with enthusiasm, but I tend to think they are actually good news. The problem in China is that there is no history of a stock market crash like the crash of 1929 that sobered American investors and tended to curb wild, undisciplined speculation. The Shanghai Stock Exchange has been rising very, very rapidly, and that is always scary. What goes up must come down, and if it goes up too fast, it will come down too fast, and could trigger a crash that would be quite devastating for the economy. So a drop that puts the brakes on speculation is probably going to be good for China's economy in the long run.

I am not against investment. But there is a big difference between investing in real value, and speculation--buying paper wealth or real estate that is highly over valued on the assumption that it will be even more overvalued a year later, and thus gain a profit for the reckless spender. That is a dangerous game, and sooner or later, somebody is going to lose, and lose big.

In his State of the Union speech, Bush referred to the economic stimulus package that is supposed to restore confidence in the American economy. This seems to be working somewhat in the States, but investors in Asia are still nervous. However, if the American economy rebounds, the stimulus package would indirectly affect the markets in Asia. This is just one more example of how dependent the world is on the American economy. The trouble here is that the Chinese people have never been able to consume what China produces. For all China's wealth, there are still 800 million people in this country who live on a dollar a day or less. So China has been very dependent on the voracious appetite of the Americans for more and more stuff. The Americans are addicted to consumption, and as long as they can afford to feed their habit, China is going to be doing well. As China grows, the number of wealthy (a relative term of course) people will increase, and China will eventually be economically independent. That is, China will be able to consume what China produces. But if the spigot should get turned off before China is ready, it would be pretty tough. China has a roaring economy. But while it is very dynamic, it is still quite vulnerable, and thus dependent on America's wealth.