PresidentObama’srecenttriptoChinareflectsasymbioticrelationshipattheheartoftheglobaleconomy:ChinausesAmericanspendingpowertoenlargeitsprivatesector,whileAmericausesChineselendingpowertoexpanditspublicsector.Yetthisarrangementmayunravelinadangerousway,andifitdoes,themostlikelyculpritwillbeChineseeconomicovercapacity.<br/>SeveralhundredmillionChinesefarmershavemovedfromthecountrysidetothecitiesoverthelast30years,inoneofthelargest,mostrapidmigrationsinhistory.Tohelpmakethiswork,theChinesegovernmenthassubsidizeditsexportersbypeggingtherenminbiatanunnaturallylowratetothedollar.Thishassupportedrelativelyhigh-payingexportjobs;additionalsubsidieshaveincludeddirectcreditallocationandpreferentialtreatmentforcoastalenterprises.<br/>Thesearen’ttherecommendedpoliciesyouwouldfindinabasiceconomicstext,butit’shardtoarguewithsuccess.Mostimportant,ithasgivenmanymoreChineseastakeinthefutureoftheirsociety.Thosesamesubsidies,however,havespurredexcesscapacityandcreatedadangerouspolitical,dynamicinwhichtheseinvestmentshavetobeproppedupatallcost.<br/>Chinahasbeenbuildingfactoriesandproductioncapacityinvirtuallyeverysectorofitseconomy,butit’snotclearthatthelatestroundofinvestmentswillbeprofitableanytimesoon.Automobiles,steel,semiconductors,cement,aluminumandrealestateallshowsignsoftoomuchcapacity.InShanghai,thecentralbusinessdistrictappearstohavehighvacancyrates,yetbuildingcontinues.<br/>Chineseplannersnowtalkoftheneedtorestrictinvestmentinsectorsthatareoverflowingwithunsoldproducts.Theglobalmarketisnolongerstrong,anddomesticdemandwasneverenoughinthefirstplace.Regionalofficialshaveanincentivetopropuplocalenterprisesandproductionstatistics,evenifthatmeanssupportingprojectsoraccountingpracticesthatarenotsustainable.(315Words)