NEW YORK (TheStreet) -- The past few months have seen a perfect storm in China. Externally, the whole world was slowing down, the eurozone was facing looming disaster, industrial metals and coal prices were in free fall just as stockpiling in China reached the height, and MuddyWaters picked the perfect time to expose the rampant fraud and mismanagement among Chinese public companies.
Internally, inflation was sizzling, social discontent against economic polarization and corruption was boiling, labor cost was rising, real estate and credit bubbles were busting, power transition was running into unexpected troubles and various interest groups (both political and economic types) took advantage of the paralysis to speak up. It was not exactly chaos yet, but it sure looked close.
But things have changed dramatically over the past week.
The Outright Monetary Transactions announced by the European Central Bank and especially QE3 by the Fed have substantially lessened the tail risk in global economy over the short term. Of course, neither solves the problem, and the latter carries enormous longer term risk but that's for another day.QE3 will no doubt increase the inflation pressure in China, making it much trickier for the central government to strike the balance of stopping the real estate and credit bubbles and preventing free-fall, amidst the tangled battle against local governments and various powerful interest groups. But it helps, lessening a much deeper problem: overcapacity in virtually all sectors of manufacturing. As long as the export machine gets chugging along again, it buys precious time to deal with all other issues. The vacuum and rumor mill one month before the big meeting formalizing the once-a-decade power transition also came to an end last week as the anointed new leader, XI Jinping, surfaced after weeks of sudden disappearance from media. There are definite signs of his opponents, primarily Bo Xilai who recently lost his bid in a very public and scandalous fashion, are stilling fighting. For example, suspicion that the recent waves of anti-Japanese demonstrations across 40-plus cities in China have Bo's hand behind the scenes seems quite reasonable. This has desperation written all over it. The best the opponents can hope for at this stage is to gain a bargaining chip or two; the worst is that they overplay their hand and get wiped out for rocking the boat for everyone in power.
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