Sunday, August 16, 2009

The rise of China: There is no doubt that upticks in Chinese production and business activity, which have softened the deep blow to their great export machine, has fuelled much of the optimism that has lifted world markets. China’s market is up around 80% from its lows with the major industrialized world seeing gains of roughly 50%. We all know that China was the first to pass a government stimulus plan, and at 550USD billion, its size relative to the Chinese economy exceeded even that of our own. But there was another factor at work in China’s resurgence, namely a literal opening of the credit spicket. Chinese banks, rumored under strict orders, have lent a whopping 1.2 Trillion USD since November 2008. To put these numbers in perspective, this is approximately 4X the total bank credit issued in China for the whole of 2008. The money was used to purchase stock, evidenced by the Shanghai Composite’s magnificent rise. And the money was used to buy real estate, a booming market in China now. It’s interesting as the Chinese, in many ways, seem smart to me. Those thoughts probably are cemented in the fact that they have the strongest balance sheet of any nation on earth, one that reports a surplus. Our Congressional leaders, I am sure, could not even begin to muster the word’s spelling, “Cirplous? (What is this?). But there are certain things that make me wonder if this perceived intelligence is really just a function of the Chinese running a young, populated, underleveraged export center. Export-centric, when faced with a similar growth slowdown to what we are battling in the US, will they make mistakes too? We all know the Chinese own too many dollars via government bonds, but, as they were buyers at much lower prices, their overall portfolio has done well to date. Of course the words to date are important, as it is a portfolio that cannot be easily liquidated. All foreign holders of such debt have their eyes glued on the Chinese—a classic case of a cartel where there are obviously behind the scene agreements on sale limitations. For you econ buffs, it’s a case of prisoner’s dilemma with transparency. Whether or not the Chinese have put too many eggs in one basket will be determined in the future, but I suspect if you offered them out on half the position, they’d take it in a heartbeat. But what about this lending? 1.2 trillion in 9 months, much of it speculating on real estate sounds a little like what just happened in the US, no? As a matter of fact, I have heard that sources on the ground say as few as 5-30% of the purchases are owner-occupied. Familiar? Now, to those calling for an imminent bubble popping here, I will gently remind people that China’s household debt is nowhere near the extremes seen in America, and that bubbles often can take longer to pop than reason dictates. But certainly, there are reasons to be cautious on China. And I do think it self-evident that, as China goes, so does the US, at least in the intermediate term.

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