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What the Google Attack Means for China's Economy

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Will this be the turning point skeptics are waiting for?

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He adds, "Look around the Chinese society: There really is no organization apart from the Chinese central government, the Communist Party and the Chinese People's Liberation Army that has the resources to conduct such a campaign. The conclusion is inescapable: This is an operation mounted by China."

But what does the Chinese government have to fear from a company like Google? What's the objective, the purpose, of targeting the Internet giant?

The government in China, says Chang, is worried most simply about its citizens communicating freely and openly with each other and the growing unrest in the country. The nation is volatile, he notes, with protests potentially becoming out of hand.

There were more than 127,000 such "mass incidents" last year, he says, a significant increase from the middle of this decade.

If the Chinese economy suffered a setback later this year, Chang says, this social unrest could grow stronger, and ultimately threaten and overwhelm security forces there. The chances of the economy experiencing such a hiccup, as Chang sees it, are real.

"In 2009, the government flooded the economy with $1.1 trillion in stimulus, either directly or through the banks," Chang says. "This is not sustainable in a $4.6 trillion economy. This will create imbalances and dislocations."

Most Chinese men and women no longer support the Communist Party, Chang argues. So those ruling the country have that much more to fear from any kind of broad economic weakening.

"People do not buy into the ruling party's orthodoxy," he says, "so we see a ruling group that increasingly relies not on what it says, but on economic performance and nationalism."

Looking ahead, Google's threat to withdraw from China, says Chang, could have profound ripple effects for other foreign companies working there.

"The truth is, a lot of companies are very upset regarding Chinese predatory behavior," he notes. "China has been trying to close up its economy by excluding foreigners or at least reduce them to minor positions. So this could be a turning point in terms of foreign business investment in China and participation in the economy."

As we noted in a previous article, As China's Economy Grows, So Do the Skeptics, there's a small but elite group of heavyweight investment strategists and market pros that don't believe the hype when it comes to China.

The problem, skeptics argue, is that China's growth isn't natural or organic but due to easy bank lending and massive government stimulus. Short-seller Jim Chanos, founder of Kynikos Associates, is moving to short China while James Grant, editor of Grant's Interest Rate Observer, had this to say:

"Early or late, we say, the economy of the People's Republic will hit something bigger than a speed bump. It will suffer inflation or deflation or a hybrid disorder suitable to an economy that manages to combine the worst features of capitalism and socialism."

Of course, China still retains its many fans, including Pulitzer Prize winning columnist Thomas Friedman, who told his readers this week that he wouldn't bet against China.

He pointed out that China's central bank tightened monetary policy, and he's comforted, he says, by a political class focused on addressing the country's real problems as well as a mountain of savings with which to do so.

"Shorting China today?" wrote Friedman. "Well, good luck with that, Mr. Chanos. Let us know how it works out for you."
No positions in stocks mentioned.
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