Coming Soon: The Great Bubble of China

July 30, 2009by CaraTan

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Beijing, China, 30 July 2009. China is growing at an amazing rate, and when the global economic crisis comes to a close this incredible power will inevitably emerge with more momentum than ever. But this has to taper off eventually, and when it does, it will be more than just a decline. We will see that great bubble burst.

Growth happens over months and years. Crashes happen overnight. And even though China's exports are down in excess of 20 percent and the US and Europe have ceased being the big spenders in China they once were, Asia's biggest nation is growing at about 8 percent per year.

Being a command economy, when the Chinese central bank makes a decision, results happen fast. This directive approach can see money creation, lending, and even spending ramp-up almost immediately.

It doesn't have to wait for markets to react and resopnd. The communist government makes the orders to print more money, lend here, borrow there, and it hardly has to wait to see the results. This is why the money supply in June rose 28.5 percent. Domestic spending is ordered via the government's mandates to build new infrastructure, for example. No messy lobbying, protesting, or even voting can prevent these projects. Of course, this is only done through government-owned organizations, of which there are plenty.

The central government has less control, however, over the spending and consumption of its billion citizens. Though the fact that the currency is non-convertible means that the buying power is lower. But consumer spending is only a fraction of the country's economy.

So what we have is a sort of artificial stimulation of the economy. This dirctive spending is not backed-up by fiscal or other economic principles. It is rooted in communism, not capitalism.But what choice does China have? It must accelrate its growth or else face the prospect of millions of angry farmers who can't sell their goods; of those that have recently moved to the cities for a better life that are out of work.

We all know how worried China is over social instability. Hungry and angry workers are not the solution. Give them work and ensure that funds flow freely...or else.

Yet all these freely-flowing funds are from forced lending, which invariably leads to bad debt. Kind of like the subprime crisis in the US. Another tough factor facing China is the US interest rate. For years, the US has been buying Chinese goods. China turned around and invested these proceeds in us Treasurys - somehwere around $2.2 trillion-worth.

This has inflated the value of the dollar, and kept the renminbi low, ensuring that foreigners could still easily buy cheap products from China. But China needs these funds now, and taking them out would only result in its currency rising to a degree that Chian would lose its competitive edge. (Incedentally, the US dollar would plummet.)

Soon this bubble, which is not founded on the old laws of economics, will pop. The longer China drags this out, the harder the fall will be.

Chen Xiulian, EconomyWatch.com

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