Economist Andy Xie: It's time for China to pop the bubble

I know I haven't done as much China blogging lately. To be honest, I'm not sure what to make of things. A lot has been happening. Protectionism is creeping up which ironically has benefited us since we developed alternative manufacturing sources through Asia as a contingency plan. China continues to grow while the rest of the world stagnates - and that has created resentment - but I suspect China's growth is uncertain at best. Capital is deployed inefficiently and creating bubbles in China. From economist Andy Xie (China International Business):

Profit drives investment, which in turn powers employment, and that then grows consumption. When profit is due to asset appreciation and not sustainable, it may lead to crisis. Large bubbles often occur during prolonged prosperity, when people stop paying attention to risk and there is excessive demand for risky assets, leading to an asset bubble that prolongs prosperity beyond the normal cycle.

Possibly half of China's bank lending is going into property-related businesses or local governments that are pledging land as collateral. While the current boom has catapulted China ahead of Japan to become the world's second-largest economy, we must remember the excesses in this cycle and the need for an adjustment as soon as possible. Nothing reveals the vulnerabilities more than the banking system's exposure to unsustainable economic activities that are dependent on land appreciation. China should proactively bring about the needed economic adjustment.

For more thoughts, economist and outside observer Michael Pettis considers what China's alternatives are, and what will happen as the RMB is forced to revalue.