China Struggles Against Bust
By Staff News & Analysis - January 13, 2010

Even China's own government officials are now worried about a bubble brewing in the world's second biggest economy. Government researchers estimate that the economy may grow as much as 16 percent this year, pushing inflation higher and risking a bubble in the real estate market, Bloomberg reports. The researchers say the government must withdraw its stimulus to keep the bubble from bursting. "If the government continues with the same strength of macro-economic stimulus as in 2009, there will be notable economic overheating in 2010," Yao Zhizhong and He Fan, economists with the Chinese Academy of Social Sciences, said in an article published in the official China Securities Journal. The government adopted a $586 billion fiscal stimulus package last year, and the central bank loosened monetary policy. Already the central bank has started to reverse its stimulus, guiding three-month bill yields higher for the first time since August. China also has raised the proportion of deposits that banks must hold in reserve, in the clearest sign yet that it has started to tighten monetary policy with its economy roaring back to the brink of overheating. – MoneyNews

Dominant Social Theme: Now they tell us.

Free-Market Analysis: Last year ('09) we made two pretty good calls against the prevailing wisdom of the day. We proclaimed that the Federal Reserve was in big trouble as an institution (an somewhat unheard of idea when we mentioned it) and not much later we pointed out that the Chinese economy was in a state of a perpetual bubble. While these were fairly bold statements, we were not especially surprised when both of these prognostications received growing support in the alternative press and then the mainstream press.

Today our perceptions on both these fronts seem fairly old hat. The Fed is under attack from all quarters and may actually end up being audited. The Chinese bubble has not yet burst – it has been inflating for many years – but there aren't a whole lot of articles being written about the Chinese miracle anymore. Most articles we read these days about China are a good deal more grim. Here's some more from this one:

Yao and He also are concerned about China's exploding trade surplus. The country's exports jumped 17.7 percent in December from a year earlier.

"The export rebound will add significant momentum to China's growth, contributing about 7.5 percentage points to growth in GDP," Yao and He wrote.

The two government economists aren't the only ones concerned about a bubble in China. Legendary short seller James Chanos is betting on a collapse there.

"Bubbles are best identified by credit excesses, not valuation excesses," he said recently on CNBC. "And there's no bigger credit excess than in China."

We pointed out that a Chinese growth rate of 10 percent or more PER QUARTER year in and year out was not a testament to vibrant management but to unbridled money printing. The Chinese people as a whole are entrepreneurial and hard working, and the "people's part" of the economy has truly been privatized. But when it comes to its larger financial sector, the Chinese government has adopted wholesale the socialist mixed management of Western nations – especially the United States.

Despite the similarities, there are differences between Western and Chinese economic practices that are likely far more specific than are being reported. Fifty years ago China was still treating its educated classes as the enemy and sending them to prison. It is only in the past 25 years or so that China has made significant progress from a "modernization" standpoint. But if you read articles today in most major mainstream publications, you will find that this 25-year overlay is ignored. Instead, Chinese fledgling financial institutions are treated as the equivalent of Western counterparts.

NOTED: UK universities warn that they face 'meltdown' … Oxford, Cambridge and other British universities said Tuesday that the government's plan to cut hundreds of millions of pounds (dollars) from their funding would put their world-class reputations in jeopardy. Unlike most elite institutions in the United States, Britain's top schools rely almost exclusively on taxpayers keeping them going. But strapped for cash, the government has slashed its higher education budget by 600 million pounds (nearly $1 billion) over the next three years-a figure British media say comes to a 12 percent reduction when combined with other cuts. British universities have little chance of raising big funds on their own: Student fees by law are capped at about 4,000 pounds a year, and endowments generally are no more than modest. (Ed note: And so the revolution eats its own …) – AP

After Thoughts

We can't prove it, but we tend to believe most of what the still-communist government has erected from a financial perspective – banks, stock markets, financial structures generally – are functioning from a command-and-control standpoint. That is, they tend to do what the party wants them to do. In the West, financial institutions have difficulty because they are ultimately beholden to central banking monetary inflation plus a growing regulatory apparatus. But we think in China, the situation is much worse and the lack of free-market autonomy for the financial sector is most pronounced. Right now, all of this is papered over by the Chinese penchant for printing endless billions of yuans. Money printing covers up a host of problems. But when it stops, watch out.

Share via
Copy link
Powered by Social Snap