My first post of 2010 was The End of the China Decade, but it focused more on the rise of India.

The New York Times published Contrarian Investor Sees Economic Crash in China by David Barboza seven days later.

The prospect of a crash in China is real.  The banking system is closed and may be covering up severe flaws.  They may be hiding very high non performing loan rates. Some of our brightest bureaucrats failed to foresee the vulnerability of our own financial system and we have substantial disclosure. Any growth rate as strong as China’s is subject to a bubble scenario.

While it is difficult to predict how such a crash would impact us it could have severe consequences. China is way too big for any group of nations to bring financial support to it. Our currency could strengthen relatively as theirs weakens, but we could also be in big trouble if they need to liquidate their holdings of US bonds.

One possible benefit is the final proper alignment of their currency; an objective that has frustrated trade politics for decades. This could make American manufactured goods more competitive and jump start re-employment.

The biggest potential problem is the difference in political culture. High unemployment in America causes big deficits because of our social support networks. High unemployment in China may cause starvation on a large scale and much more dangerous political instability.

The biggest worry the current state of global financial instability renders is that such situations foster belligerence.

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