China has been consistently been held up as one of the bright spots in the global economy – this doesn’t quite seem to square with my pessimism in general. Either I’m wrong; or only half-right (“things are bad here – but they are much worse elsewhere.”)

Take, for example, the litany of positive indicators:

… Record Loan Addition, Record Money Supply, Record Auto Sales, Record Imports of Copper, Iron Ore, and Coal, Strong Property Sales.”

The above list comes from Vitaliy Katsenelson (The Next Great Bubble: China). His point is largely the same one that Professor Michael Pettis has been making – without a market ready to replace the U.S. and soak up large amounts of exports, China (certain parts of it, anyway) are in for a much rougher time than everyone’s been used to.

On the other side, the only hard evidence available seems to be just that: collapsing exports throughout Asia (and the suggestion that even this trend could be reversing?)

There are of course, other concerns: anecdotal reports of large amounts of unused infrastructure; unclear numbers of non-performing loans (if I understand the situation correctly, all of the State Banks are able to carry commercial loans at book value, even when nothing actually happens with the building. Might this develop / pop analogous to the U.S. bubble? Can they be held long enough to become performing loans?)

Talk to most people here and you’ll get the same response. A street vendor, when asked of his opinion of the global crisis, put it thus: “there are over a billion people here. We don’t need to rely on the U.S. If every one of us buys only a toothbrush from you, you’d be rich.”

Sure – assuming everyone brushes their teeth [or values it enough to buy a new one and maybe forego a meal.] Extreme, crass example – the more nuanced counterpoint, one that Pettis has been making for a long time now, goes something like:

… if the explosion in new lending (loans are up 15% in the first quarter of this year) leads, as it almost certainly will, to a subsequent explosion in non-performing loans, in the next few years just as China is expanding its production and struggling with US reluctance to absorb its rising excess capacity, the resolution of the NPLs will itself constrain Chinese consumption. Resolving future NPLs, in other words, will reduce future domestic consumption growth in China, just as the current resolution in the US of bad loans and shattered household balance sheets must come with reduced US consumption growth.

Why are they pursuing this strategy, instead of trying to wean themselves from the debt-fattened teat of Uncle Sam? It has a lot to do, unfortunately, with the people I spend my mornings talking with, and what they might do if they can’t find work for a long period of time.

The policy reaction to all sorts of problems – from simple things like traffic accidents and internet censorship – to these grand, impossible to grasp concepts, always seems founded on a tacit assumption of palpable fear that the country is sitting on a tinderbox. It’s a sense you don’t get just by watching the news about China, or even living here – though my position is rather privileged at present.

Chinese policy makers must realize the risks they are taking by sacrificing longer term growth for immediate gain. Perhaps there’s no other feasible way. Like my street vendor, they seem to have bought the line (hook + sinker) that 1 billion+ couldn’t possibly go wrong. History, unfortunately, is littered with examples to the contrary.