By Gordon G. Chang, Contributor On Tuesday, Fitch Ratings downgraded China’s long-term local currency debt one notch, from AA– to A+.  The primary reason for the move was the country’s too-rapid expansion of credit, one of the “underlying structural weaknesses” the agency cited in its announcement.  Many analysts in fact think the debt resulting from then Premier Wen Jiabao’s borrowing binge, which began to accumulate in earnest in late 2008, is now China’s number one economic risk. There are, of course, other risk factors now undermining the country’s economic growth.  Among them are an eroding environment, unfavorable demographic trends, and persistent internal discontent.  Yet the events since early last month in North Asia—the tearing up of the Korean War armistice, Pyongyang’s promises of pre-emptive nuclear strikes on the U.S., and the deployment of North Korea’s mobile missiles, to name just a few of them—suggest the biggest threat to the Chinese economy may be the least discussed one: turmoil in the region.  As Fitch carefully noted in its explanation of Tuesday’s downgrade, “The ratings assume there is no significant deterioration of geopolitical risk, for example a conflict between China and Japan or an outbreak of war on the Korean peninsula.” North Asia looks like the world’s most volatile region at the moment.  An assertive China is working to push America aside, grab territory from an arc of nations from India in the south to South Korea in the north, and close off the South China Sea so that it becomes an internal Chinese lake.  Last month, while Chinese leaders talked about enhancing cooperation in the region, two Chinese vessels attacked a Vietnamese fishing boat, setting it on fire. There are many reasons for Beijing new assertiveness, but one stands out: slowing GDP growth, evident since the early summer of 2011.  The economic problems in particular have created a dangerous dynamic, trapping China in a self-reinforcing—and self-defeating—loop.  In this loop, the slumping economy is leading to a crisis of legitimacy, the legitimacy crisis is causing Beijing to fall back on nationalism and increase friction with its neighbors, and the increased friction is aggravating the country’s economic difficulties.  Caught in a trap of their own making, Beijing leaders will continue to blame foreigners for the problems evident in Chinese society and then lash out, as they did in September against Japan, over the uninhabited Senkaku Islands in the East China Sea.  And as they lash out, they are making their problems worse.  The anti-Japan protests in China last fall, for instance, are resulting in Japanese industry reducing its commitment to China by shifting investments into Southeast Asia, as Nissan announced at the end of October.  That, in turn, could push the Chinese economy past the tipping point.  Moreover, the North Korean crisis, which Beijing has been aggravating behind the scenes, is not helping the Chinese economy either.  Commerce between China and the North seems largely unaffected, as various reports from the border crossings indicate.  But the Kim regime in Pyongyang seems to be targeting the South Korean economy

From: http://www.forbes.com/sites/gordonchang/2013/04/14/the-biggest-threat-to-chinas-economy/