Sunday, February 21, 2010

China- A Bubble to Deflate or A Big Bang?

Ho Hua mailed it to me for my weekend reading. For those of you who are concerned with the rising China, I suggest you a moment or two to go through the following article.

Australian market news that matters, in 90 seconds or less
Money WeekendSaturday, 20th February 2010Melbourne, Australia
China - A Bubble to Deflate or a Big Bang? By Shae Smith
Dr Phillip Low, a senior member of the Reserve Bank of Australia (RBA) recently announced that Australia's relationship with China has decades to run."For the next twenty years, on average, it is going to be a good 20 years for China and for us". Dr Lowe said.However, on the other side of the world Jim Chanos, famous for predicting Enron's fall, said "short sell China". So who's right? A multi billionaire that has made his fortune from foreseeing a corporation's demise? Or the RBA desperately trying to stave off Australia's impending recession?It's no secret that stimulus is responsible for China's current success. In fact, in an attempt to cool the overheating economy, the People's Bank of China (PBoC) demanded that banks increase lending reserves half a point up to 16.5% for the large banks.This is clearly a desperate move to slow down credit expansion.Dr Lowe from the RBA believes it's a good sign. The slowing down of stimulus and the tightening of monetary policy led him to say "...that is a favourable development in that it increases the likelihood that the Chinese economy is on a sustainable path. Time will tell though."It's strange that Dr Lowe was happy to say 'time will tell' when he openly admitted Australia's reliance on China's astronomical growth. "We are benefitting from high commodity prices and from our links with Asia." He said.He goes on to say "I'm quite optimistic that story [China] has decades to run and that underlies much of the positives for the Australian economy." That's doesn't sound like a twenty year plan, it sounds more like prayers.Especially when 70% of our exports are to the Asian market.But what about Jim Chanos? He's long been heckled for his bearish views on the market. Based on his blunt remark to 'short sell China', should you stop hoping China is Australia's white knight?Even if you push aside Jim's recent comments on CNBC that China is "cooking the books" and "faking, among other things, its eye-popping growth rates of more than 8%", what are the facts?Like many Western economy's today, China is running on stimulus. The fact that the banks tried twice last month to rein in lending is a sure sign of an economy about to burn out. Amazingly lending for January was ¥1.4 trillion (AUD $228 billion). This figure for January is nearly one fifth of the lending planned for 2010. In fact for all of 2009, the Chinese banks lent out over ¥9.5 trillion (AUD $1.552 trillion) to keep the economy humming - or burning in order to survive the 'GFC'. That's an enormous amount of credit to flood an economy.China's excessive stimulus and aggressive lending by the banks have created artificial demand, which has pushed our resource prices higher. When China announced their ¥4 trillion 'rescue' package in 2008, exact details of how it was going to be spent was unclear. Very little information was provided on where the money would be going. Any press release from China stated the stimulus was directed to 'infrastructure and social welfare'.To top it off, the Chinese government instructed the banks to 'loosen credit' and even encouraged the smaller banks to be part of a 'more proactive fiscal policy'. What these packages really told you, was China was going to spend, and it was going to do so in a big way.And that's exactly what they've done.But the side effects of all this spending is only just starting to become clear. The loose credit policies and stimulus have driven up property prices. In the major Chinese cities, house prices were up 9.5%, and land jumped a shocking 106% last year.Is slowing down stimulus too little too late for China?"Bubbles are best identified by credit excesses, not valuation excesses," Jim Chanos said in his TV interview. I like that definition. "And there's no bigger credit excess than China."So, will China be able to cool their economy and let the bubble slowly leak? Or are we waiting for a really big bang?Perhaps Dr Lowe unwittingly said it best with 'time will tell'.Shae SmithAssistant EditorMoney Weekend

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