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Wednesday July 15, 2009 - 17:42:15 GMT
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Forex Blog - China's Bubble Building

China's Bubble Building


I cringe every time I hear uber-capitalists that permeate the airwaves marveling at China’s economy and successes in averting an economic meltdown that has hit much of the rest of the world.  China, like Japan in the late 1980’s, is some sort of miracle.  When capitalism is working China is the best at the game, selling cheaply manufactured goods to the rest of the world while modernizing the domestic economy with the proceeds.  When capitalism is not working like in the last 20 months, China is the best at command economics – efficiently spending government treasure to produce a domestic demand-led economy to offset the export-led economy’s collapse.  China, we are to told to believe, is far better at getting money to shovel ready projects than the US, UK or Germany where governments have none of the insights and efficiencies that the Chinese Communist Party and government bureaucracy has at its disposal.  After all the CCCP has a long history of efficiency in economic policy… 


Sense any sarcasm?  Well if you don’t than I stink at getting my message across.  China published new money supply data today for the month of June and it surged 28.5% y/y (M2) up from 25.7% in May while bank lending soared with yuan loans up 34.5% y/y to record level and up from 30.6% in May.  Getting an auto loan in China today is about as hard as it was to get a mortgage in the US without any proof of income or employment in 2006.  If China has any record on bank lending it is not a pretty one.  The government can easily make banks lend and people seem willing to borrow but getting paid back is something that is not imbedded in the culture nor is credit history. 


Also China reported Q2 foreign reserves (FX) and it surged $177.9bln in the month to $2.13trln compared to $7.7bln increase in Q1.  Keep in mind this comes at a time when trade is under severe stress suggesting capital inflows are running full blast into China – officials are absorbing foreign currency from speculators eager to buy Chinese assets – the government calls this hot money.  Even in Hong Kong the real estate market is starting to go up again (never really went down). 


China’s GDP for Q2 is out Thursday (later tonight for those of us in the US east coast) and is expected to show 7.5% y/y growth up from 6.1% in Q1 and the government has all but promised an 8% rate of growth for 2009. 


If this were happening in the US, the IMF would be all over it crying foul and one can only imagine what airwaves would be filled with – hyperinflation is around the corner…already on this track until US June payrolls silenced this chant. 


Even the PBOC seems to be increasingly uncomfortable with the money awash in the banking system and unlike the rest of the world being lent by banks to the public (households and firms).  In recent weeks PBOC officials have been speaking publicly about inflation risks ahead and the need to move early to avoid spike in the price level.  Earlier today the PBOC announced to a handful of Chinese banks that they would have to buy CNY100bln ($15bln) in special bills in September to reduce amount of funds banks have to lend ahead.  While as a share of money in circulation this is a drop in the bucket, but symbolically it is significant as it is the first sign the authorities are considering taking the jiu bowl away.    


Meanwhile the domestic political problems plaguing China’s leadership is another source of strain on the government and may prolong any reasonable attempt to rein in the money supply (when Hu Jintao left G8 early to return to address unrest in northwest China’s Muslim minority region says it all).  China also recently cancelled a shipment of coal from Australia when the ship was in the South China Sea…very unfriendly gesture and a slap in the face of contract law.  Could it be that the new normal for the world also implies a new normal for China and sustaining past rates of growth and investment are no longer realistic without causing huge distortions like an exploding money supply and giant sucking sound from massive foreign (speculative) capital inflows?


China is decoupled…yes hearing that one once again.


If the world is depending on a China-led recovery to compensate for the anemic rebounds in developed economies like in the US and Europe, then it will be one disappointing outcome as China could well prove as inept at command economics as it has throughout its post-1949 history.  Let 100 Flowers (Green Shoots) Bloom!


David Gilmore 


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