Saturday, July 18, 2009

China's New Burgeoning Bubble

In a true sign that the end of the world is nigh, I'm starting to notice everyone and their brother start to talk excitedly about stocks again - the most recent of whom are coworkers and a gym trainer who exchange gossip over what they've heard - no joke - by other people off the Internet. The Shanghai Stock Exchange's composite index has nearly doubled (YahooFinance) since the lows it hit in November 2008.

I question the reliability pundits who extol the wonders of the Chinese economy without talking about the risks. In point of fact, China's recent economic growth has been driven by a massive influx of capital and credit (ChinaStakes):

Bank lending in the first half of 2009 reached 7.37 trillion yuan, while the total credit growth in 2007 was 3.6 trillion yuan, and in 2008 4.9 trillion yuan. As 2007 and 2008 GDP grew 11.4% and 9%, respectively, then with the nearly 7.4 trillion yuan of credit GDP growth in the first half of this year should be over 15%.

Without efficient demand, China’s too rapid credit growth puts great pressure on the fiscal and monetary policies. Lu Lei, an economist, comments, “Why do we need these investments? If the government hopes to increase resident’s disposable income, it can transfer these investments into fiscal subsidy. And if it aims to increase employment, it should adjust the economic structure, especially focusing on increasing the income of hundreds of millions of farmers, instead of reinforcing the existing structure. If the government can’t stand the temporary economic growth decline and allocate financial resources to structure adjustment, China’s road to economic rebound will be tougher and tougher.”

I can't imagine how this possibly will end well especially as China will not be able to rely on a foreign recovery to pick up the slack (especially ironic as much of the rest of the world hopes demand in China will help lead the recovery).

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