As fragile as China.

As I've remarked before (here and here), much of the current worldwide economic recovery is due to China. For that reason, the greatest sensitivity to continued recovery is what happens in and with respect to China.

This recovery is as fragile as China (meaning delicate plates as well as the country).

Demand from China has driven up commodity prices and kept production flowing from manufacturing-based economies. For evidence, look no further than companies like Caterpillar and the land-office business they are doing in the far east.

If something were to go wrong in China, the economic impacts would reverberate throughout the global economy.

What could go wrong? If you haven't noticed, there have been a lot of political issues surfacing between China and the U.S.

This includes the U.S.'s desire for China to allow it's currency, the yuan/renminbi, to appreciate. This would make U.S. manufacturers more competitive with China. China has no interest in making itself less competitive, so this creates a lot of tension between the U.S. and China.

And then, there's the spat between Google and China over censorship and hacking. It shows the inherent conflicts that exist between a command and control government like China's and free market enterprises like Google.

Of course, there's also the Dalai Lama. He represents the Tibetan government in exile and China doesn't like his concerns being heard by the most powerful nation in the world. President Obama met with the Dalai Lama this week, infuriating China.

Then, there's also our insistence on selling high-end weapons to Taiwan, whom China considers to be an errant state. It would be like Russia selling arms to Alaska, with Alaska being quite clear it would like to secede from the union.

So, there are a lot of political issues going on between the U.S. and China, not to mention they hold a ton of U.S. national debt. It's a touchy situation.

China, too, has its own internal problems. Approximately 700 million people live in poverty in the Chinese interior while another 600 million are growing rapidly nearer the coast. Growth and trade has been great to the 600 million and less so to the 700 million. That is why some 20 million Chinese, a year, are moving from the hinterland to the coast looking for work.

This dynamic means that China simply can't let growth slow too much. If it does, they will have a revolution in short order. Such is the history of China over the last...oh...2,000 years.

China is an island, geopolitically, and it has repeatedly cycled between external growth/interaction and internal strife/revolution. Until they change their political system from centralized command and control, as it's been for 2 millennia, this external/internal cycle will continue.

This internal dynamic is the main reason why China won't let its currency appreciate, and why they are working so hard to stimulate worldwide growth. China needs worldwide growth because they need someone to sell their low cost goods to.

The problem is that political tensions with large economies like the U.S., Europe and Japan are all working against this process. And, of course, the U.S., Europe and Japan all have major internal issues of their own that make them less than conciliatory towards China.

With all that on the table, how long until we see Chinese fragility? I don't know, and neither does anyone else. But, it's reasonable to assume the game can go on for several more years.

If China plays their cards right, then perhaps they can keep the game going long enough for the rest of the world to work out its problems and start growing again on its own.

If they slip up, though, which seems highly likely over the next five years, then that fragility could crack the delicate plate and lead to worldwide consequences.

We'd all like to see China succeed. If they do, then the world economy gets bailed out of its experiment with too much leverage. If not, it could lead to another major economic upheaval.

For now, expect China to keep the game in play. It should be good for stronger economic growth than most are forecasting. But, when the end-game arrives, it won't be pretty.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.