Go Google news on “China labor strikes” and you’ll find plenty of recent articles about the latest worker strikes throughout the country (notably at the Honda plants). We’ve talked about the threat that social discontent could prove to be to China’s economy – should China fail to realize double-digit growth then sustaining their economic model would grow increasingly difficult primarily because its citizens might become worried that the recent thrust towards prosperity is waning.

But we haven’t much discussed what it might mean politically for China. Here’s a very general take from The Wall Street Journal:

Labor experts believe the party's leaders are very concerned about a scenario like that in Poland in the late 1980s in which an independent labor-union movement led to the overthrow of the Polish government and contributed to the dismantling of the entire Eastern bloc under the Soviet Union.

Labor experts say the question that the Communist Party needs to ask is whether suppressing the move toward allowing more independent labor unions also risks fanning more discontent.

So far Chinese leadership has been able to navigate the swells of social animosity, global economic worries, and Chinese bubble speculation. The second piece of ‘Key News’ above makes it sound like they’ll be able to maintain their mojo: China should go on growing just fine at 9% in the second half of 2010.

And so many analysts are perfectly happy to accept that as fact because it helps support the usual story -- rising commodity prices – that has made many gurus and investment managers rich throughout the years leading up to the global financial crisis.

But, as is normal for us, we can’t dismiss the alternative ... for we think there is a legitimate risk that one of the many pieces keeping the China machine moving rattles loose and locks up the rest of the system.

Might it be a Communist Party losing its grip on the economic reins?

If it is, then what might that change?

For starters, the yuan exchange rate has become such a big deal because developed-economy leaders believe its leading to inconvenient global imbalances that must rebalance before the global economy can restore order. Whether or not China believes that too is unclear; but we know they don’t want to budge on the yuan because they don’t want to kill the golden goose (exports) that brought them such economic success and global recognition.

We produced this chart over a year ago, and shared this with you before in Currency Currents many months ago. But we noticed recently that one of China’s economic gurus made reference to this point in defense of China taking a very cautious approach on currency revaluation—the Japanese Parallel.

Key point is that when the G-7 collectively pressured Japan to let the value of its currency rise, it led to a popping of the Japanese credit bubble; we all know the rest of the ugly story there. China is afraid of a similar outcome, as it was an improvement in the US Current account deficit that helped tip the scales in Japan (as you can see in the first gold box overlaid in the chart below). And now, the improvement in the US Current account is even more pronounced as you can see in the second gold box overlaid on the right side of the chart.

Click on image to enlarge!

To the structure of China’s economic machine, we were recently reminded of a major cause behind the global imbalance – China bringing in large amounts of currency reserves from their exports to the West and then investing those reserves back in the US, rather than domestically. We’d been writing about this surplus of capital in the US (that came back from China) as the reason for such irresponsible borrowing/lending practices that characterized the years leading up to the credit crunch; that money needed to go somewhere.

As it was put so perfectly in a research piece passed on to us recently:

It had never been the case in the 20-some years of the Washington Consensus that the US first incurred trade deficits and only subsequently borrowed to finance them. What happened in reality was that first foreign surplus savings were sent to the US and only afterward the US spent some of the money buying imports in excess of exports.

Alright. What I’m getting at is this: will a surge in labor movement prompt the Communist Party to change policy? Might they instead put money into their domestic markets? Absent the capital from China flooding the US, the US current account deficit will continue to improve. Global trade has already experienced a major shock and has not yet returned to pre-crisis activity levels. And there seem to be several headwinds that will keep those levels out of reach for many years, despite implicit global policy to get back to such a dynamic as soon as possible.

Chinese officials have refused to invest in China, for fear that empowered citizens would threaten their rule. But a taste of capitalism could fuel the social uprising and change the game quite a bit. Not to mention whatever other issues arise that require economic transformation – from the Financial Times:

What is really needed, though, is a new approach to growth. Noeleen Heyzer, head of the UN’s economic and social commission for Asia and the Pacific, says the impact of trying to maintain the existing growth pattern over the next 15 years would be environmentally and socially devastating. Governments in Asia, she says, “simply do not have the luxury of growing first and cleaning up later”. If this is to be Asia’s century governments will have to transform economic and urban planning ...

Maybe we do see China eventually cooperate in this global rebalancing game.

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