China’s biggest fear is a US meltdown: Gottliebsen

In the short term the Chinese leadership believes that the Americans have no idea how to manage their current economic situation. China is petrified that the American economy will melt down, creating a deep US recession – or something worse.

Over the weekend I found myself briefly in the company of a person with an intimate knowledge of the concerns and agenda of the top level of the Chinese Government. While I can’t name the person I was talking to, there are few people outside China who are closer to the Chinese leadership.

I asked him what were the greatest concerns of that leadership at the moment. He hesitated for a second and explained that there were two great concerns – one short-term and the other long-term.

In the short term the Chinese leadership believes that the Americans have no idea how to manage their current economic situation. China is petrified that the American economy will melt down, creating a deep US recession – or something worse. While China would ride through an American downturn without major concern, a deep US recession would have grave implications for the whole world, including China. The Chinese have commissioned detailed studies on what the risks are and how the world would be affected if there were a US finance industry melt-down.

I have rated a melt-down as an unlikely event given the fact that the American Federal Reserve and its chief Ben Bernanke appear to understand the issues. The Chinese clearly do not share my confidence and I was surprised to learn of the depth of their concern.

China has invested about one-third of its $1700 billion in currency reserves in US government debt, which gives them an additional level of concern. Many have worried that China might sell down its dollar holdings, but in recent months China has been a buyer, confirming that it does not want to create an American melt-down.

The long-term area of Chinese concern really surprised me. On the surface China shows little concern about carbon emissions, although there was a small segment in the Olympic opening ceremony which focused on the environment. Yet the truth is that China is deeply concerned at its dependence on carbon.

If China was to greatly curtail its growth to reduce carbon emissions it would face incredible social pressures given that the majority of the population live in areas where there has not been substantial benefit from industrialisation.

Even if China pulls out all stops on nuclear energy (and Australia is offering China as much uranium as it can use) plus renewable energy, the Chinese predict that they will still be 70% dependent on carbon by 2030. By that time most of the rest of the world will have their carbon emissions under much firmer control and China will face incredible pressure because, if the scientists are right, some of the worst repercussions from carbon pollution will be emerging.

China therefore needs so called “clean carbon” more than any other nation. The work Australia is doing on carbon sequestration will not only be important for our country but will also be important for China.

This article first appeared on Business Spectator

Read more on carbon emissions and the Chinese economy