KEY POINTS:
As I watch the growth spurt going on in China during the run-up to next year's Olympics, I am impressed and concerned in equal measure. The plain fact is that business cycles tend to end in a financial crisis, the severity of which is in direct proportion to
the vigour of the preceding boom.
Hence the paradox that it is countries with especially robust growth that tend to feel the sharpest financial crises.
According to all the laws of economics, China ought to tumble into a financial crisis at some point. I would estimate that point to be right after the 2008 Olympics.
However, please note that I'm not suggesting China will suffer from an existential crisis or apocalypse scenario. Not at all. I am simply saying that, like in all economies, the very fact that China has grown so powerfully lays the seeds for a crash.
Like many countries, an important aspect of the boom to which Chinese middle-class people are exposed to is property. I'm most interested in the middle-class, rather than the corporate sector, because they have political significance.
It's entirely likely that university students incapable of getting a job could go out on to the streets and protest - especially if that personal economic misfortune coincides with a geopolitical event they feel strongly about, such as kow-towing to the US over the Sudan or North Korea.
I was in Tokyo last week and an extremely sage economist working for Nomura, the great Japanese brokerage, told me that Chinese policymakers have been picking his brains about the upcoming crash.
According to this economist, Chinese policymakers are worried about the collapse of the property market. Japan faced one of the most catastrophic collapses in the history of the property market in the 1990s, with land prices falling to just 25 per cent of their peak values.
You can definitely make a convincing case about the Chinese A-share market as well. ICBC is now the second largest bank in the world by market cap. I know that stock prices incorporate expectations of future value, but it seems madness to see ICBC as superior to a modern banking group.
In any case, Chinese policymakers are bracing themselves when the crisis occurs. They have noted that the Japanese Government injected huge amounts of public funds into the economy as the crisis unfolded.
Resisting Western investment bankers - urging them to let the Japanese banking sector "go to the wall" as punishment for "corrupt" and "incompetent" lending practices - they kept the economy afloat through the injection of huge public funds into the economy.
One side-effect is that Japan has similar national debt levels to a Third World country. But the upside is that the economy avoided falling into a slump worse than the Great Depression in the US of the 1930s.
I can just see how the Chinese crisis might unfold. Property prices will collapse; loans against property will go underwater, creating an upsurge of non-performing loans in the country's banks; banks will stop extending new loans and the economy will grind to a halt, throwing millions of people out of work.
Immediately, Western advisers, bankers and journalists will issue articles and books pointing out that China was due such a collapse because of the moral turpitude of its leaders.
When China slides into a recession, or even a crash, policymakers should not panic. Crashes are a natural part of the capitalist cycle and can be contained through Keynesian intervention techniques.
Despite the fact that such a policy is ideologically very unpopular in the US, government spending has worked in Japan by making up for the complete lack of investment on the corporate side.
On the plus side, China's extremely centralised economy might actually help to minimise a recession, since it will be relatively easy for the Government to order its banks to keep on lending even if their balance sheets are underwater - as well as ordering Chinese companies to keep on borrowing and investing.
Hang on, that's not quite right. The banks that control most of the assets in the Chinese banking system are now listed in Hong Kong and New York, as are many leading state firms.
Both these groups might cheekily refuse to do the Government's bidding, citing "shareholder value" concerns. Indeed, with salaries now riding on stock option compensation schemes, top executives will have a lot to lose by listening to the Government.
Oh dear. At that point the Chinese Government realises that raising money on the international capital market is a pact with the devil. You get plenty of cash but onerous conditions come to light when you least desire them.
So if the recession does spiral out of control, it could be precisely because of the Western economic standards that China has already absorbed. Expect plenty of pining for the "good old days" of effective state intervention. And expect China to be punished by foreign investors for its questioning of the global order by the withdrawal of investment funds. At least that impact will be limited, given China's careful strategy of partially insulating the A-share market against foreign hot money flows.
At any rate, China will abruptly be faced with the hitherto hidden cost of dealing with the West.
It's that, rather than a perfectly predictable and containable economic slowdown, which could really hurt China.
