China's Economic House of Cards

China is nothing more than an economic house of cards, ready to fall with the slightest breeze. The country feeds its GDP with piles of debt, using the borrowed money to pay for commodities, which are then used to build unwanted structures, all in the name of progress.

When it finally comes tumbling down, the Chinese crash will reverberate around the world. But don’t think the country is feeble or weak! Even with a failing economy, China can still cause mayhem in Asia, and the biggest obstacle standing in the way of China imposing its will on the region — the United States — appears to have lost its resolve.

This is the future of the Middle Kingdom in Asia, as forecasted by Gordon Chang, Chinese Economic Analyst and well-known author. Mr. Chang spoke at our recent Irrational Economic Summit in Miami. I had the pleasure of sharing a meal with him and his wife, Lydia, after his presentation, where we continued the conversation about what might happen on the other side of the world.

Given China’s enormous need for energy, I thought the most likely place for Chinese military action was in Siberia, along the border shared with Russia. After that, it seemed logical that China would like to rid itself of the crazy weirdness that is the Kim dynasty in North Korea.

The best option would be to replace the young Kim Jong-un with a less rash puppet leader to maintain the buffer country between China and South Korea. As a side benefit, the Chinese population could add a few North Korean women to its ranks in an effort to ease the imbalance caused by the one-child policy. In no uncertain terms, Lydia and Gordon explained that even while China is stumbling with a slowdown in the domestic economy, the leadership has its eye on one prize…

And that’s Japan.

Japan and China’s Tension

The animosity between Japan and China is no secret. The feud stretches far back in time, and includes the First Sino-Japanese War in 1895 and the infamous rape of Nanking in WWII. There’s no doubt that much of the anger stems from the changing of the guard as to which country dominates the region. China dominated for centuries, but was replaced in humiliating fashion by Japan in the 1800s.

Even when Japan was defeated in WWII, the country was still able to rebuild quickly and expand economically, while China suffered through its Cultural Revolution. The last 20 years have been exceptional for China, as the country has grown dramatically while Japan has faltered. But there is more to be done, and China sees an opening.

Recently the Chinese started a construction project in the Spratly Islands, which are part of a contested group of islands in the South China Sea. The main opponent in claiming the islands is the Philippines, which had maintained a presence in the area but their resupply efforts were cut off by the Chinese Navy.

These events caused uproar in diplomatic circles, but nothing else. The U.S. answer to the Chinese actions was a weak denouncement. If the U.S. is willing to let the Chinese bully a main ally like the Philippines, then how far can China push a country like Japan?

We’re about to find out.

Action Behind the Scenes

The Senkaku Islands are rocks, but they do have strategic and symbolic importance. The islands sit at a gateway to the area in the East China Sea near Taiwan.  They were ceded to Japan in the 1890s. Exercising control over the islands today is one more way that China can show Japan which country controls the region.

As for Russia, the Chinese recently signed a decade-long energy deal that should keep the two countries linked for at least a few years. On North Korea, the Changs explained that while the country is an embarrassment to China, the older members of the Chinese military fought alongside their North Korean counterparts in the Korean War, so they are willing to stand with them, even when run by a dictator like Kim Jong-un.

The one question that the Changs found troubling about recent Chinese activity is, “Why now?” The country could have acted earlier, before Japan and South Korea gained nuclear capability. Or, China could have simply sat back and waited for Japan to devolve as its population dies away through attrition.

Perhaps the leaders of China recognize the depths of their own economic troubles, and are willing to pick internrnational fights in order to rally nationalist feelings among the population. If that’s the case, then the eventual end game of all of this could be a very tense military standoff between China and Japan that could embroil the U.S.

One thing more damaging to the world economy than a contraction of the Chinese economy would be an armed confrontation with the Middle Kingdom. It’s possible that a lot is riding on the fate of a small group of islands in the East China Sea.