A STALINIST BUBBLE.  The World Socialist Web Site sees the capitalist dynamic at work in China.

Two-thirds of the country’s banking assets are in the hands of major state-owned commercial banks and joint-stock banks, but there are more than 3,500 small banking institutions, such as credit cooperatives, most of which financed infrastructure projects for local governments. The [Standard and Poor] report estimated that some 30 percent of such loans could become bad debts. The level of bad loans in China’s banking system is expected to rise to 5-10 percent over the next three years, sharply up from 1.14 percent at the end of 2010.

Beijing’s tightening credit policy, which includes sharply increasing the reserve requirement ratio to more than 20 percent of a bank’s total assets, is also causing small banking institutions to struggle to find new funds to lend.

It must be bad.  Instead of Marx or Trotsky, the columnist quotes Nouriel Roubini.

Globally, fears have grown that China’s property prices are grossly over-inflated, and headed for a crash. The Financial Times commented on June 1: “Whether China’s real estate market is a bubble that could pop, knocking out Chinese growth and shaking the world’s economy, is a question that is being asked by everyone from Brazilian iron ore traders to hedge fund managers in the City of London.”

Construction directly accounts for an estimated 40 percent of Chinese steel usage. If one includes property-related industries, such as home appliances and construction equipment, the property market broadly consumes about two-thirds of the country’s steel output. Chinese mills produced 626 million tonnes of steel last year, 44 percent of the world’s total.

American economist Nouriel Roubini recently warned in the British Economistmagazine that Beijing’s post-2008 stimulus programs lifted the fixed investment share of the GDP from 42 percent to 47 percent in 2009. That proportion further increased to almost 50 percent in 2010.

“The problem, of course, is that no country can be productive enough to reinvest 50 percent of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. China is rife with overinvestment in physical capital, infrastructure, and property,” Roubini wrote.

Roubini noted that China now featured “highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminium smelters kept closed to prevent global prices from plunging.” He predicted that a crash was likely in 2013, followed by a protracted period of slow growth, similar to the aftermath of the 1997-98 Asian financial crisis.

Any sudden outflow of international funds from China could seriously destabilise the country’s financial system, as happened across South East Asia in 1997-98.

Maybe the Chinese sold all those Treasury holdings to raise cash. If such a sale has a salutary effect on the squabbling in Washington, that's to the good, but perhaps we're observing the state equivalent of the heiress selling some of the silverware so as to keep up appearances.

But Trotsky gets the last word.

 Last month former Premier Zhu Rongji defended himself from allegations in Chinese newspapers that his pro-market tax reforms in the 1990s, which centralised government revenue in Beijing and left no funds for local governments, were responsible.

Zhu criticised the current leadership’s “mistake” of allowing local governments to retain real estate revenues and thus “extract people’s fat” by pushing up prices. He said he was defending the “third generation of leadership” headed by former President Jiang Zemin, which has become notorious for introducing the private housing market in 1998.

Zhu also attacked the current leadership’s policy for subsidising the auto industry. At Shanghai auto shows, he explained, some luxury cars cost more than 100 million yuan ($15 million) each, while some business owners had started to buy private jets. “But what about rural areas, where some are still struggling to feed their stomach?” he asked.

This hypocritical blame game at the top of the Stalinist regime underscores the fears in the ruling elite that China’s increasingly unstable economy has generated social tensions that at some point must trigger an explosive movement by the multi-million working class.

Those social tensions are nothing new. I recall a rather sober assessment of hidden unemployment in the factory cities of Northeast China by then-Ambassador James Sasser. That was in late June of 1997.