In my last post I mentioned how China was encountering resistance to its rising power.  Now, via Kindred Winecoff, I see a whole mess of reportage about China's mounting internal difficulties.  In no particular order: 

1)  Nouriel Roubini has focused his Dr. Doom-O-Vision on the Middle Kingdom, and doesn't like what he sees:

China’s economy is overheating now, but, over time, its current overinvestment will prove deflationary both domestically and globally. Once increasing fixed investment becomes impossible – most likely after 2013 – China is poised for a sharp slowdown. Instead of focusing on securing a soft landing today, Chinese policymakers should be worrying about the brick wall that economic growth may hit in the second half of the quinquennium....

[N]o country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.

Commercial and high-end residential investment has been excessive, automobile capacity has outstripped even the recent surge in sales, and overcapacity in steel, cement, and other manufacturing sectors is increasing further. In the short run, the investment boom will fuel inflation, owing to the highly resource-intensive character of growth. But overcapacity will lead inevitably to serious deflationary pressures, starting with the manufacturing and real-estate sectors.

Eventually, most likely after 2013, China will suffer a hard landing. All historical episodes of excessive investment – including East Asia in the 1990’s – have ended with a financial crisis and/or a long period of slow growth. To avoid this fate, China needs to save less, reduce fixed investment, cut net exports as a share of GDP, and boost the share of consumption.

The trouble is that the reasons the Chinese save so much and consume so little are structural. It will take two decades of reforms to change the incentive to overinvest.

Now, Roubini is enough of a persistent doomsayer that it would be easy to discount this argument -- if it wasn't for the fact that this jibes with the opinion  of other China economy-watchers.  This coming-bust prophesizing comes on top of arguments made by Barry Eichengreen, Donghyun Park and Kwanho Shin that as China hits middle-income status, it will hit a "middle income trap" of slower growth.  (One interesting question is whether, as China encounters rampant inflation, its eventual decision to let the RMB appreciate will help ease some of these pressures). 

2)  Meanwhile, China's political leadership appears to be engaged in a full-fledged freakout over the Arab revolutions and any whisper of a similar phenomenon happening in China.  Rising food prices are leading to price controls and an anxious government monitoring if/when more expensive staple goods lead to political unrest.   That said, Chinese authorities seem to be on top of the whole crushing dissent thing: 

According to Chinese Human Rights Defenders, an NGO, by April 4th some 30 people had been detained and faced criminal charges relating to the so-called “jasmine revolution”—an inchoate internet campaign to emulate in China recent upheavals in the Middle East and north Africa. Human Rights Watch, another NGO, reports that a further 100-200 people have suffered repressive measures, from police summonses to house arrest. This has been accompanied by tighter censorship of the internet, the ousting of some liberal newspaper editors, and new curbs on foreign reporters in China, some of whom have been roughed up....

Even more worrying, however, is the increasing resort to informal detentions, punishments and disappearances. These are outside the law, offering the victim no protection at all. The government now dismisses the idea that one function of the law is to defend people against the arbitrary exercise of state power. On March 3rd a Chinese foreign-ministry spokeswoman told foreign journalists: “Don’t use the law as a shield.” Some people, she said, want to make trouble in China and “for people with these kinds of motives, I think no law can protect them.”

3)  As for China's assessment of its external security situation, the  State Council released its 2010 White Paper on defense last month.   As this East Asia Forum summary suggests, there's a slight change in tone from the 2008 white paper:

The introductory assessment of the ‘security situation’ section notes that the ‘international balance of power is changing,’ that ‘international strategic competition centring on international order, comprehensive national strength and geopolitics has intensified,’ and that ‘international military competition remains fierce.’  Despite this sense of turbulence, and as was the case in 2008, the 2010 paper assesses that ‘the Asia Pacific security situation is generally stable.’ But the additional observation in the 2008 paper, namely, ‘that China’s security situation has improved steadily’ does not appear in 2010. One possible reason is that the 2010 paper reports that ‘suspicion about China, interference and countering moves against China from the outside are on the increase.’ 

In light of all these developments, yesterday's Economist editorial should come as no surprise:

The view from Beijing, thus, is different to the view from abroad. Whereas the outside world regards China’s rulers as all-powerful, the rulers themselves detect threats at every turn. The roots of this repression lie not in the leaders’ overweening confidence but in their nervousness. Their response to threats is to threaten others.

Now, as someone who's pointed out these problems on occasion on this blog, you might think I'm pleased as punch about these developments.  Nope.  First, from an economic standpoint, a recessionary China eliminates a vital engine of global economic growth.  Second, as I wrote back in January: 

Exaggerating Chinese power has consequences. Inside the Beltway, attitudes about American hegemony have shifted from complacency to panic. Fearful politicians representing scared voters have an incentive to scapegoat or lash out against a rising power -- to the detriment of all. Hysteria about Chinese power also provokes confusion and anger in China as Beijing is being asked to accept a burden it is not yet prepared to shoulder. China, after all, ranks 89th in the 2010 U.N. Human Development Index, just behind Turkmenistan and the Dominican Republic (the United States is fourth). Treating Beijing as more powerful than it is feeds Chinese bravado and insecurity at the same time. That is almost as dangerous a political cocktail as fear and panic. 

Developing.... in very disturbing ways. 

I see that The Powers That Be at FP are highlighting my foolhardy unconventional wisdom about China's rise on their splash page.

Given the Hu-Obama summit and subsequent flurry of China commentary this week, it's worth highlighting the most absurd data point I cited in that article -- Forbes' magazine's decision to name Chinese President Hu Jintao the world's most powerful individual. Their explanation:

Paramount political leader of more people than anyone else on the planet; exercises near dictatorial control over 1.3 billion people, one-fifth of world's population. Unlike Western counterparts, Hu can divert rivers, build cities, jail dissidents and censor Internet without meddling from pesky bureaucrats, courts.

With these two sentences, the editors at Forbes managed to demonstrate an even shallower analysis of domestic politics than their Dinesh D'Souza cover story on Obama, which I didn't think was possible.

Let's review just a smattering of coverage about Hu Jintao's current ability to exercise iron-willed control over the Chinese bureaucracy, shall we? First, Gordon Chang in The New Republic:

Hu is sometimes called the world's most powerful person -- Forbes magazine gave him that accolade in November -- but he is a weak leader back home. Just how weak was revealed in two startling incidents within the past three weeks. On Tuesday, after the state-run Chengdu Aircraft Design and Research Institute performed the first flight test of the J-20 stealth fighter -- an unmistakable slap in the face of Defense Secretary Robert Gates, who was visiting Beijing at the time -- Hu professed not to know that the test had occurred....

If the Chinese leader was telling the truth, the test flight reveals a remarkable defiance of civilian authority by the flag officers of the People's Liberation Army, an obvious attempt to undermine the military cooperation Hu said he wanted to foster. Or if, as is more likely, Hu did in fact know about the timing of the test, he nonetheless said something that made himself appear inept. One has to wonder about a political system that creates incentives for its top leader to publicly imply that he is both ignorant and weak.

Either way, the unmistakable impression is that Hu seems to have much less influence than is often assumed. This could be due to the fact that China is in the middle of a transition to the next generation of political leaders -- led by Xi Jinping -- who are gaining in power as Hu loses his in the long run up to the actual handover.

Next, the Economist:

China's new raw-knuckle diplomacy is partly the consequence of a rowdy debate raging inside China about how the country should exercise its new-found power. The liberal, internationalist wing of the establishment, always small, has been drowned out by a nativist movement, fanned by the internet, which mistrusts an American-led international order.

Then there's Drew Thompson in -- hey, it's FP!!

China's national security decision-making process is opaque, and so this worrisome disconnect -- who knew what when -- is difficult to ascertain with certainty. It is highly improbable that Hu was unaware of the development of this major military advancement. His role as chairman of the Central Military Commission ensures that he is well briefed about major programs, and he doubtlessly approves their large budgets. What is not known is how much oversight and control the central government leadership in Beijing had over the PLA's decision-making process that lead to highly visible tests at the Chengdu air base just as Gates was visiting China.

And, finally, David Sanger and Michael Wines in the New York Times:

China is far wealthier and more influential, but Mr. Hu also may be the weakest leader of the Communist era. He is less able to project authority than his predecessors were -- and perhaps less able to keep relations between the world's two largest economies from becoming more adversarial.

Mr. Hu's strange encounter with Defense Secretary Robert M. Gates here last week -- in which he was apparently unaware that his own air force had just test-flown China's first stealth fighter -- was only the latest case suggesting that he has been boxed in or circumvented by rival power centers....

President Obama's top advisers have concluded that Mr. Hu is often at the mercy of a diffuse ruling party in which generals, ministers and big corporate interests have more clout, and less deference, than they did in the days of Mao or Deng Xiaoping, who commanded basically unquestioned authority....

"There is a remarkable amount of chaos in the system, more than you ever saw dealing with the Chinese 20 years ago," Brent Scowcroft, the former national security adviser and Mr. Gates's mentor, said Saturday. "The military doesn't participate in the system the way it once did. They are more autonomous -- and so are a lot of others."

Now, to be fair, it's possible that China is learning how to play the authoritarian equivalent of the two-level game. Even if that's true, however, China is playing that game very badly -- and they're playing it in policy arenas that are guaranteed to trigger a balancing coalition rather than accommodation.

There are a lot of other areas where your replacement-level American commentator is vastly exaggerating China's power. But Forbes' editors easily win the... the....

OK, contest for readers -- name the award that I want to give to writers who vastly exaggerate China's rise!

Back in the day, it was thought that bustling Dubai would act as a guide for how the Gulf economies should liberalize in order to increase their economic growth. Dubai would not bring democratization, but cultural tolerance, transparency and cosmpolilitanism are pretty nice to have, and Dubai seemed to have more of these traits than the rest of the Gulf. 

In the wake of the current downturn, Dubai is struggling along with the rest of the region. Unfortunately, Robert Worth reports in the NYT that the emirate's response has not been in a liberal direction: 

Instead of moving toward greater transparency, the emirates seem to be moving in the other direction. A new draft media law would make it a crime to damage the country’s reputation or economy, punishable by fines of up to 1 million dirhams (about $272,000). Some say it is already having a chilling effect on reporting about the crisis.

Last month, local newspapers reported that Dubai was canceling 1,500 work visas every day, citing unnamed government officials. Asked about the number, Humaid bin Dimas, a spokesman for Dubai’s Labor Ministry, said he would not confirm or deny it and refused to comment further. Some say the true figure is much higher.

I seriously doubt that this tactic is going to improve Dubai's economic health.   

The rest of the essay suggests that the emirate is in such desperate straits that it will be forced to go to Abu Dhabi -- the more conservative and oil-rich emirate -- for a bailout.

Investors pulled their money out of Russia in the wake of the Georgia conflict at the fastest rate since the 1998 rouble crisis, new figures showed yesterday. Russian debt and equity markets have also suffered sharp falls since the conflict began on August 8, with yields on domestic rouble bonds increasing by up to 150 basis points in the last month.... Alexei Kudrin, finance minister, said the capital flight had largely subsided and would be more than made up for by projected inflows. Russia’s foreign currency reserves, at $581bn, are the world's third largest. “There is nothing that has happened that could cause us to change any of our plans,” he said. But the ebbing of foreign investor confidence will make it harder for Russian companies to raise debt and equity finance since foreign sources account for a disproportionate share of long-term capital for Russian corporate borrowers. “The market is vulnerable to foreign capital flight,” said Kingsmill Bond at Troika Dialogue, the investment bank. “The major Achilles heel of the Russian market is that there is very little domestic long-term capital.” Partly as a result of the Georgian conflict, yields on domestic rouble bonds have increased in the last month by between 75 and 150bp, Mr Bond said.

As far as portfolio investors and the Russian stock market are concerned, the main tipping point was the four days following July 24, when TNK-BP’s Robert Dudley left the country, and shortly after that, Putin went after the steel company Mechal and took about $6 billion off its capitalization. Those behaviors really rattled investors and caused a steep dip in the Russian stock market. The war’s effect has been less dramatic.

More broadly, I think Russia as an island of stability and a safe haven from the credit crunch—that perception of Russia is on life support. Essentially over. There’s been four reasons: TNK-BP, Mechal, the Russian government’s willingness to use administrative means to break up cartels and implement de facto price controls (which means there’s more strategic risk in consumer sectors as well as strategic sectors), and fourth is the war. When you add those four together, the investment climate has taken a real, real hit over the last month.

This ain't 1998:  Russia's not going to collapse anytime soon.  But it's hard to see this as a viable developmental model either.