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ASIA EDITMast-SIDELINES 0627 LO_Layout 1 6/20/11 12:31 PM Page 6 Editor Tim W.

Ferguson Editorial Director Karl Shmavonian Art Director Charles Brucaliere Senior Editor John Koppisch Wealth Lists Editor Luisa Kroll Photo Editor Michele Hadlow Editorial Bureaus Beijing Gady Epstein Hong Kong Robert Olsen Shanghai Russell Flannery, Maggie Chen India Editor Naazneen Karmali Contributing Editors Bangkok Suzanne Nam Chennai Anuradha Raghunathan Jakarta Justin Doebele Kuala Lumpur Noelle Lim Perth Tim Treadgold Taipei Joyce Huang Vietnam Lan Anh Nguyen New York Lydia Forbes Columnists Carl Delfeld, Ken Fisher, A. Gary Shilling Production Manager Joanna Mikolajczuk Editor-in-Chief Steve Forbes Chief Product Officer Lewis D Vorkin Managing Editors Tom Post, Bruce Upbin Vice President and Investing Editor Matt Schifrin Executive Editors Dan Bigman, Quentin Hardy, Brett Nelson, Michael Noer, Janet Novack, Michael K. Ozanian, Larry Reibstein, Eric Savitz Art and Design Director Robert Mansfield Digital Andrea Spiegel, New Product Development Coates Bateman, Executive Producer

Editorial Counsel Kai Falkenberg Department Heads Frederick E. Allen, Mark Decker, John Dobosz, Kerry A. Dolan, Parker Gowan, Deborah Markson-Katz, Parmy Olson FOUNDED IN 1917 B.C. Forbes, Editor-in-Chief (1917 1954) Malcolm S. Forbes, Editor-in-Chief (1954 1990) James W. Michaels, Editor (1961 1999) Bill Baldwin, Editor (1999 2010) 6 FORBES ASIA JULY 2011

FORBES ASIA SIDELINES Talk About Imbalances I I n a spring swing through Shanghai, Beijing and Southeast Asia, I kept looking for the pillars to sustain the global economy, even as the U.S., Europe and Japan must struggle a good while longer. Much as the independent strength and potential in a country like Indonesia can be encouraging, my quest for now kept leading me back to China. Many fortunes rest on the Chinese being able to maintain the Magic 8, the 8% GDP growth rate widely thought to be the baseline for ongoing prosperity there. This is a tall order as the central government endeavors to tamp down price inflation and runaway real estate markets in major cities. Global economists have spent much ink and airtime in recent years decrying the world s imbalances, by which they primarily mean the U.S. (borrow too much, save too little) and a few other developed nations . A corollary is that Chi na has abetted this indulgence by buying up America s bonds with its massive savings leashing the yuan to help exports. Trade flows, as a result, get out of whack. None of that has changed in fact, the latest evidence is that China is again mopping up Treasury notes but what s coming into clearer focus is that the Chinese have their own internal imbalances that are no less difficult to correct. Although part of China s growth has been fueled by foreign direct investment; it is internal capital that has driven a surge in property, infrastructure and p

lant capacity. The money comes partly through formal credit from state banks that gets washed through other state-owned enterprises but also from informal channel s that seem to be out of Beijing s control. The rebalancing trick is to get a big share of this buying power into private hands, who will then consume inside China. Instead, such wealth, if it does stay at home, is being parked in whateve r assets might bring a speculative return or a currency hedge against a falling U.S. doll ar. And incomes are showing widening gaps. Result: choked development of the real economy but spurts of activity (and prices) in key sectors such as housing. This unsettled situation, not unique to China but coming on top of years of arrogance and corruption by insiders of the Communist system, is playing out in various Chinese street dramas. These mini-uprisings, in turn, keep the nation s rulers on edge as they look to a reshuffling of their own ranks next year at the 18th party congress. Their reflex is to control when, economically, they ought to let go in order for fundamental change to occur. That s a simple overview of why, even as the region and the world look to China, its 8% growth is looking increasingly magical, and by that I mean unreal. Tim FergusonEditor, FORBES ASIA Magic trick: China grows to the sky. ALESSANDRO RIZZI/GETTY IMAGES