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Why China’s Unstable Economy May End Up Like Frankenstein’s Monster

June 15 (Bloomberg) — Anyone who thinks their job stinks should consider the one Xi Jinping is about to take on.

Xi is expected to replace Chinese President Hu Jintao in the fall. He must have some serious misgivings. If the last 20 years were a golden age for the world’s most populous nation, today is one filled with growing doubts. The Bo Xilai scandal has shattered the veneer of political stability, cyber- dissidents are emboldened in their challenges of the Communist Party and diplomatic headaches abound — many of them concerning the U.S., where China may figure in November’s presidential election.

No issue looms larger than China’s suddenly shaky economy. The world is now bracing for a slowdown that pundits said was unlikely to happen. So are officials in Beijing, who worry that social unrest could boil over quickly if growth evaporates.

A bit of perspective is in order. Any serious slump in China probably is a few years off, not something that will send markets into a tailspin in the next few months. Look to Europe for that.

That’s not to say that a slowdown to 7 percent growth or even 6 percent is good news for anyone. The repercussions would hurt big commodity exporters such as Australia, Brazil and Canada, and make it even harder for Europe’s leaders to resolve the debt crisis. Remember that just a few months ago, traders were speculating that China would deploy its $3.3 trillion of currency reserves to bail out Europe.

Stock and commodity markets would be sideswiped by a China slowdown. That gloom would feed back through lower consumer confidence and business sentiment. That’s in addition to any trauma should Greece abandon the euro or if Italy is next up seeking a bailout following last weekend’s rescue of Spain’s banks.

There are reasons to believe China has the wherewithal to stave off a slump in the short run. Its central bank last week cut interest-rates for the first time in four years, and there was speculation this week about additional stimulus packages.

Gloomy data on industrial production, fixed-asset investment, exports, retail sales, coal and electricity have Chinese policy makers ready to double down on the massive 4 trillion yuan ($586 billion at the time) stimulus it tossed at the economy in 2008. Assume the next one will be huge and aimed at keeping today’s 8.1 percent growth rate from slipping to the 6.4 percent that China International Capital Corp., the nation’s biggest investment bank, says is possible this year.

That’s where the trouble begins. Last time, it was easy for China. Throw piles and piles of money at new infrastructure projects and watch gross domestic product boom. This time, China must be smarter. Xi, and whoever succeeds Wen Jiabao as premier, must avoid the asset bubbles and property-price spirals that accompanied the largess of 2008. Anything that pushes real estate further out of reach for China’s 99 percent increases the odds that protesters will converge on Tiananmen Square.

Expectations are growing that the next fiscal injection will be targeted at strategic industries that create jobs without dangerous excesses. The question is how the central government can control the stimulus after it’s turned over to local officials. Provincial leaders are prone to financing pet projects, which may lead to more unproductive investments, corruption and public discontent.

The big risk for Xi’s team is that little of this money will go toward retooling the economy. China has made minimal progress cultivating a deep domestic market for consumption that relies less on exports and embraces full currency convertibility. To the contrary: China shows no signs that it is interested in growth that benefits anyone other than the elites and their extended families.

China’s leaders have a choice. Either they make those difficult but necessary changes, with the chances of producing more sustainable growth. Or they kick reforms down the road, administer another stimulus, and risk a bigger crash in the years ahead. At the moment, the temptation is to pick No. 2.

All stimulus and no reform gives China some Frankenstein- like qualities — a powerful economic creature born out of unorthodox experiments. Unproductive spending of the magnitude China already has unleashed, and what seems to be in the pipeline, may result in a Japan-like debt mess. When China’s reckoning does come, and every industrializing nation has one, it may be far worse than investors believe. Xi will have to do a much better job than his predecessor to keep that reckoning from becoming a monster all its own.

Wall Street’s 1 Percent Meets 2 Billion Seeking Answers

Oct. 19 (Bloomberg) — It’s all about location, location, location, as they say in real estate. Protests, too.

There were more obvious places for Tokyo’s Occupy Wall Street protest to converge on Saturday than the nightlife district of Roppongi. It could have begun in Nihonbashi, home to the Tokyo Stock Exchange; Nagatacho, Japan’s Capitol Hill; or Ueno, where droves of Tokyo’s homeless congregate.

Instead, activists chose the city’s hedonistic melting pot of hipsters, strippers, gangsters, expatriates and bankers. Not just any bankers — Goldman Sachs ones who work in the swanky Roppongi Hills complex. Amid the hundreds of activists, I saw signs saying “No Greed,” “Taxiderm the Rich” and my favorite, held by a 20-something woman: “Stop Vampire Squids.”

It was a reference to Goldman Sachs Group Inc., which was labeled a “great vampire squid wrapped around the face of humanity” in a 2009 article in Rolling Stone magazine. For better or worse, Asians see Goldman Sachs both as the gold standard of investment banks and a byword for how incestuous ties between banks and government concentrate wealth in the hands of a few.

When this sentiment reaches egalitarian Japan, you know it has legs. Like-minded protests are popping up in Australia, Hong Kong, India, New Zealand, the Philippines, South Korea and Taiwan (one planned in Singapore was pre-empted by police).

Those who dismiss this groundswell of anger thousands of miles from New York do so at their own peril. And those seeking clarity on Occupy Wall Street’s focus and goals can find it in Asia: The widening gap between rich and poor is threatening the very tenets of capitalism and democracy.

Lopsided Asia

Asia’s development is becoming more and more lopsided. Economies growing 5 percent or 7 percent a year fail to distribute the spoils with any semblance of balance. The well- off and politically connected get more and more, while everyone else feels left behind. As the world slides anew toward recession, this rich-poor deficit will expand.

This region could be as wealthy as Europe by the middle of this century. It’s not because Europe’s living standards are falling as we speak, but because Asia is booming. To get there, Asia must address poverty, make economic opportunities accessible to all, attack corruption, improve education and health care, and encourage entrepreneurship.

The price for dragging its feet in recent years can be counted on the streets, where protesters are becoming more vocal. Their numbers are modest so far, but the power of social media ensures crowds will grow. Expect demands ranging from the establishment of 40-hour work weeks; more equitable pay and benefits; and better health, safety and environmental standards.

The ‘1 Percent’

Of course, Asia’s rich like the status quo. Most in the region get wealthy via rising stock and property prices. While protesters rail against the huge bonuses that bankers receive, Asia’s nouveau riche would probably prefer even bigger ones. That way, you keep the top end of the market — which protesters call the “1 percent” — happy with larger and larger bonuses, and all’s well.

On the ground, things look very different as economies slow. Asians are still miffed at the events of 2008, when over- leverage and irresponsible policies in the West led to a financial crisis that damaged regional markets and living standards. There are hard feelings that the U.S. employed every policy it told Asia to avoid in the late 1990s, including devaluing its currency. The U.S. and Europe have yet to fix underlying weaknesses in their economies.

If things get as bad as pessimists Nouriel Roubini and Nassim Taleb warn, Asia might face social instability as high food and energy costs meet falling incomes and rising unemployment. The only bull market will be in inequality.

The ’99 Percent’

In Japan, the media portrayed Saturday’s demonstrations as anti-nuclear in nature. With the Fukushima plant still leaking radiation and Tokyo Electric Power Co. as incompetent as ever, anti-nuke protesters were in the mix. Yet the real story was the so-called 99 percent calling for more equality.

Japan long prided itself as an egalitarian Mecca, yet that’s fast changing as deflation deepens, public debt rises, the population ages and China’s competitiveness grows. In an August report, the government said almost 40 percent of workers are now “irregular.” That means they get lower pay, fewer pension benefits and less job security.

In China, the Communist Party must narrow its rich-poor gap if it is to retain legitimacy and avoid instability in the years ahead. Officials from Seoul to Jakarta face great challenges, too. And while few want to abandon capitalism, Asia’s masses increasingly fear its side effects, including a replay of the 2008 meltdown.

What China’s environmental disasters and train crashes have in common with Japan’s Fukushima crisis, India’s dysfunction, Indonesia’s depletion of resources and deadly floods in the Philippines is corruption. In Asia, it’s often hard to tell where the public sector ends and the private sector begins, and vice versa — just as it increasingly is with Wall Street and Washington. Locations change, but the underlying problem doesn’t.

The key is genuine accountability, transparency and steps to give the 99 percent more say and a bigger share of the spoils. Those who want to dismiss Occupy Wall Street should consider that a couple of billion Asians, or more, aren’t about to.

(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)