Believe it or not, I hadn't heard about China's bad debt situation. (Yes, I live in a bubble I guess.) So we've got one debtor nation investing heavily in the debt of another nation? That sounds like a potential cascade! Also, who does China owe?
Bad debt is more about poor internal investment. China's state run banks are a disaster waiting to happen. Foreign direct investment and breakneck growth have papered over this problem. China's economy has been growing so fast that the precarious state of the banks hasn't yet caused a real problem. But now that their economy is on the verge of overheating, they face the age old problem. Imagine you're flying a light plane at high speed and see that you're headed into a mountainside. If you don't act, you're going to crash. But if you pull back on the stick too hard, you'll stall out and go into freefall. China's problem is exacerbated by the extraordinarily weak banks that have absorbed and wasted billions in FDI and consumer savings. That capital now sits on the books as dubious state enterprise loans that can't be collected on. This makes for a very precarious situation when the growth slows or stalls and the rottenness of the underlying support structure is exposed.
Aaah, that explains a lot of things. I keep reading in the pop press how the Chinese have essentially leapfrogged the industrial and technological revolutions. I always wondered how they pulled that off so miraculously. Now I see how: good old fashioned debt. This does sound precarious to say the least, esp. since they have no experience (in recent history) at free mkts, finance, etc.
Current (may3) issue of business week mag has an extensive China article describing the problems and thier impact on world econ. Worth the price.
Interesting quote: "To get rich is glorious," said the late Deng Xiaoping in what has become a motto for the Chinese economic transformation over the past two decades. That quote is from a good summary article: http://www.washingtonpost.com/wp-dyn/articles/A25793-2004Apr19.html
Also, that article states "Like many Chinese, Li has been studying what happened to the Japanese bubble economy, and he worries that an appreciating Chinese currency could make the bubble here worse. The sharp rise in the Japanese yen during the 1980s pushed real estate and stock prices to unrealistic levels, he notes. " I'm not sure if I understand why a strong Yen would inflate real estate and stock prices?
Because people would rush in to buy the currency (through purchases of real estate, stocks, etc.) and participate in an anticipated continuation of the appreciation.
China is a castle of cards right now. Any minor shock could send it spiralling down. Economic regulations are very dodgy whether they apply to bank loans or stocks and bonds. Credibility in the system is very weak, hence the problem that the government is facing. They cannot risk anything too drastic or FDI will dry up and everyone will try to get out at the same time. If the yuan were to rise too fast, the products made in china would get quickly expensive and all the surplus (real estate, commodities etc...) accumulated over the years would find less and less use until the whole thing collapses, people can't pay their debt anymore and banks start going down, at which point everyone gets out, the yuan plunges as interest fall to try to jumpstart an overheated economy. This is why it is not in China's favor to go for a complete free floating currency. That is where they get their competitive edge from. They have to slow down the economy to a more reasonable level and get rid of that major waste they are creating every year in building stuff that won't find any use until 5 years down the road.