Breakout

China: New Year, New Regime Facing Big Challenges

Breakout

Amidst the revelry and aspirations that the Year of the Snake will bring prosperity to China, some might argue it already has. The country's various stock indexes (FXI) are all sharply higher over the past few months, and reports of economic improvement abound. The latest data point, for example, showed a four-fold increase in imports as well as the best month of exports in nearly two years.

And yet, one veteran observer of the country is not all that impressed. Gordon Chang, author of The Coming Collapse of China, paints a much more dour picture that could see this Snake party turning into a Snake bite.

"Yes there will be an uptick. It won't be pronounced though and it won't last long," Chang says in the attached video, "because China is not solving its fundamental economic problems."

For example, he says the country is pouring more money back into infrastructure and property again, something Chang says is ''exactly the wrong thing to do" because it takes China away from its "only sustainable growth model which is a consumption based one."

Add in the fact the he feels the new Communist party conservatives will continue to make the environment very difficult for investors. "Chinese leaders will talk reform but they're not actually going to implement reform," he says.

Chang is also monitoring the impacts of a "negative feedback loop" which he says is hindering growth too. "You have a slumping economy causing a crisis of legitimacy (which is) causing Chinese leaders to fall back on nationalism, which means increasing friction with other countries, and that friction is aggravating China's economic problems," he explains.

Despite its problems, a bad year of Chinese growth would still be a great year for most countries and even Chang concedes that some companies will still do well there. "But not the big ones like Caterpillar," he says, which has already begun downplaying the importance of its business there after taking a big, costly hit.

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