10 Things That Could Go Horribly Wrong In China

China medical operation hospitalREUTERS/China DailyFellow workers, a firefighter and doctors work together to cut steel bars which were pierced through a worker’s body during an operation at a hospital in Hangzhou, Zhejiang province, June 12, 2012.

The world has watched in awe for three decadesas China emerged from obscurity to become the second largest economy in the world.

However, an economy that is so large and growing so quickly is inherently fragile.

The tiniest catalyst could trigger wars, bring down the government, or launch protectionist policies that could send shockwaves through the global economy.

We can think of at least 10 very realistic, destabilizing risks facing China right now.

Rare earths exports could stop.

China accounts for 97% of global rare earth production and is said to have 87% of the world's rare earth deposits. But in an attempt to curb pollution and protect its resources, the country began to slow exports of the minerals.

Critics have also argued that China made this move to draw manufacturing to the country, because the restrictions only extended to the rare earth minerals themselves, not products containing rare earths.

If China stopped rare earth exports this could impact companies around the world since they are used in everything from wind turbines to smartphones.

Inflation could surge.

China has set an inflation target of 3.5% and policymakers watch inflation closely. But consumer prices have been picking up again and policymakers would not want to see a surge in CPI for a few key reasons.

First, rising consumer prices without an accompanying rise in wages could cause civil unrest and policymakers would like to avoid this at all costs. Food prices make up a bigger part of the nation's inflation basket than in developed markets. Second, as the economy slows, a rise in consumer prices limits the ability of the central bank to loosen monetary policy and support growth.

Pollution could spin out of control.

We've seen photos of Chinese cities covered in smog. China has admitted that pollution has caused 'cancer villages.' Pollution, through illness, death, and loss of productivity costs the economy over $US100 billion a year. China is set to spend hundreds of billions of dollars to lower pollution and is handing out the death penalty to the worst offenders.

But experts warn that health care costs stemming from pollution are understated and that this could push foreign companies and investors out of the country.

China and Japan could go to war.

The last year saw Sino-Japanese relations deteriorate as the dispute over the Senkaku/Diaoyu islands began to heat up.

While the two nation's have avoided an outright war, some say this could be a possibility. Last year, Hugh White, a professor at Australian National University argued that the U.S. and Japan could go to war with China. The Obama administration's pivot to Asia itself is considered a response to China's rising military and economic might.

Corruption could cause the collapse of the Party and state.

Chinese policymakers are working overtime to ensure that locals know they are serious about tackling corruption. They have cracked down on gift giving and are trying to make an example of corrupt policymakers like former Chongquing party chief Bo Xilai.

Former Chinese president Hu Jintao warned in his outgoing speech that 'if we fail to handle this issue (corruption) well, it could prove fatal to the party, and even cause the collapse of the party and the fall of the state.'

Unemployment could spike.

Job seekers queue for a job fair in China's Shaanxi Provinc

China officially reported at unemployment rate of 4.1% at the end of June. But this number is largely ignored because it only includes urban workers with Hukou. It doesn't measure migrant or rural workers, who see much higher rates of unemployment.

In 2008 during the financial crisis, China unleashed a massive 4 trillion yuan stimulus to support employment. Chinese policymakers are more concerned about unemployment than they are about slower growth because of the risk that poses to the Communist Party rule.

With an economic slowdown at home, lackluster global economic growth, and manufacturing moving to other nations offering cheaper labour, a spike in unemployment. What's more recent reports show that many choose no work over working on a farm.

China's cyberattacks on the US could destroy jobs and shift military power.

The Chinese government has been accused of spying on U.S. companies. Cyber security firm Mandiant traced the attacks to a building belonging to the People's Liberation Army.

Mark Anderson paints a scary picture in the Financial Times: 'In the post-information age, the global economy is driven by technology, and IP is its primary asset class… Nations in this new information economy find themselves in one of two businesses: robbing others' 'information banks' or protecting their own. A successful IP theft or protection strategy can mean jobs lost and gained, middle classes destroyed and created and military power shifted.'

Chinese-US trade relations could collapse.

China has been America's fastest growing export destination, with U.S. exports to China growing 294% from 2003 - 2012. This compares with an 111% increase in U.S. exports to the rest of world for the same period.
This could be devastating for American states like California which count China as one of their top three export destinations.

President Obama said he wanted to double U.S. exports. But with many in the U.S. calling China a currency manipulator and two countries caught up in trade disputes, a collapse in trade

American dependence on China could backfire.

The U.S. is dependent on one Chinese company for a chemical in the fuel needed to operate a HELLFIRE missile. It is also dependent on China for a rare earth mineral called lanthanum for its night-vision goggles, according to Politico.

This heavy dependence on China for crucial raw materials in the arsenal and other tools used by the U.S. military could backfire if relations with China sour.

The economy could experience a hard landing.

The latest GDP data out of China confirmed that the economy decelerated to a growth rate of 7.5%. The slowdown is real. And there are concerns of credit and property bubbles could soon turn to crises.

This would be a disaster for China, and it would certainly be devastating for countries like Australia, Taiwan, Korea, and Malaysia which count on China for their exports.

This would also be painful for the U.S. as it would mean lower revenues for American companies with significant exposure to China. It would also curb purchases of U.S. Treasuries.

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