Eurozone crisis bares China's Achilles heel 
Rodger Baker explains how Europe's debt crisis has exposed the vulnerabilities inherent in the Chinese economic model.
The Chinese continue to watch the way in which the Europeans are trying to deal with their financial and political crisis right now. For China this is particularly important. Number one, Europe has become China's largest export market and that has a major impact, of course, on the way in which the Chinese operate their economy. Number two is that a continued or an even deeper crisis in Europe could pull the entire global economy into recession.
Chinese exports to Europe and to much of the rest of the world saw a particularly sharp drop in 2009. This was something that the Chinese government had to rush to stabilize — they counteracted that dip in exports with a huge increase in domestic investment. The Chinese had hoped, during that time, that the Europeans would simply build themselves back up, pull themselves out of this particular crisis and that China would be able to continue with its fairly rapid expansion of exports to Europe to keep its economy chugging along as China headed towards its 2012 leadership transition. Although Chinese exports to Europe picked up a little bit in 2010, the rate of growth that the Chinese had been seeing in the previous four or five years slowed down quite a bit. The problem for China is that as the pace of export growth slows, the pace of import growth doesn't. The Chinese still need a very large amount of commodities. They're importing these commodities, not only to feed their export market, but to feed all of this new domestic investment. And that means that while the Chinese may not be making as much selling, they are still having to buy at very high market prices to be able to develop internally. The European crisis, and really the slowdown in the United States as well, has brought home to the Chinese something that they already knew but had hoped to be postponing — and that is the need to fundamentally restructure their economy. The Chinese base their economy very strongly on what we have seen in other Asian economies; it is an economy that needs continuous growth: a constant increase in exports, more money, more money every year and that would allow the Chinese simply to borrow, to supply employment, to not have to worry about things like profits, but rather to find ways to funnel money down into the population. If we look at the Chinese, we see that there are maybe 300 million people who are part of the really economically active part of China. However, that leaves out more than a billion people, who are not a part of this Chinese economic growth and activity. Historically, it is not from the coastal areas, nor from the wealthy areas that trouble comes in China. It is from the rural areas, from the people who are poor and who are not connected to this economic system. One of the solutions the Chinese have tried to apply is urbanization: the idea that if they build it, people will come and if people move to the cities they will suddenly have jobs, and by having jobs in the cities and living in cities, they are going to become consumers. Certainly this is not the case for the entire billion of the population that's not active, but maybe for another hundred million, 200 million, 300 million. And that would help to better distribute wealth throughout China; it would also ease China away from their heavy dependence upon exports. This boom in urbanization coincided with this government need to spend a lot more on domestic investment. It also fell right inside of what was already building as a speculative bubble in real estate investment. And that investment was coming not only from the coastal populations in China — the ones who are trying to find ways to save for the future and therefore invest in real estate — but also from businesses, from state-owned enterprises (SOEs), who are buying real estate, watching prices go up and then betting against that real estate, or investing or taking out loans against that real estate, to be able to continue to operate their businesses. So we have a China that is facing a real estate bubble in an attempt to build a new urbanized society, but the individuals who would be moving into that urbanized society can't afford to move in because of the rises in housing prices. The government is trying to find ways to slow down that increase, but if they move too quickly it could undermine the collateral for the loans from state-owned enterprises, it could pull away the nest egg from their middle class and that could cause a very rapid backlash against the central government. For China, then, what this European crisis has done is it has brought something that they've known for a long time right up into the forefront. They no longer have the ability, it seems, to simply keep pushing back economic change and perhaps not even the ability push back political change in the country because the European crisis has ended their ability to count on this continuous rise in exports.
