Follow up from Paul on China

trevor - nice post on china.  and thanks for the shout-out, too.  i think you make many good points, and i agree with you on the scope of the problem and some of the potential (partial) solutions.  it is going to be messy, and any major periods of instability from these problems might fuel certain politically charged problems on both sides.

i agree that domestic consumer spending is a possible solution, and from what i've been reading from michael pettis, other china hands here at Harvard, and the soon to be defunct Far Eastern Economic Review, there are two sides to the debate over this shift.  there are those who see this as a solution, and are advocating for a major shift in the economy to encourage this more; this transition might result in lower growth for a few years as industries adjust to working with new markets, but in the long run will help tremendously and avoid disaster.  the other perspective would like to keep the status quo and continue enjoying rapid [growth].  the latter group is winning at the moment.

to expand [on my point,] china's ethnic nationalism is directed at japan, but it is also directed elsewhere around the world.  remember back to when the olympic torch was moving around the world in the leadup to the beijing olympics.  the chinese were livid that there were so many protesters throughout the west; they found it disrespectful and a charge against them as people.  ever since the expansion of european imperialism into china (ie, the british occupying the summer palace in beijing in 1860, the british and french occupying parts of shanghai until WWII, the british winning land in 1842 on what would become hong kong, and a joint european-american army putting down the Boxer Rebellion in 1900), the chinese have been characterized as "the sick man of asia" that used to be a great power.  after the qing dynasty fell in 1912, things fell apart even more, and various nationalist movements in china (this includes both chiang kai-shek in the 1920s/30s and Mao Zedong in the 1930s onwards) have largely been attempting to help "the nation stand up on its own two feet" and gain respect and prestige again.  the beijing olympics mollified some concerns that they weren't respected, but there is still a large, silent, lingering distrust of the rest of the world.  this is a slowly bubbling pot.
-paul