Will the Dragon Engulf China's Growth?

WILL THE DRAGON ENGULF CHINA’S GROWTH?

The investment world’s natural inclination

towards China can be justified .The most

populated country in the world (>1.3 billion

people), China

has recently overtaken Germany

as the world’s #1

exporter, and Japan as the

world’s #2

economy. It has now become the

world’s largest national car market. Over

the

past 30

years, China’s GDP

has increased

sixteen•fold. It is assumed

that the Chinese

economy will continue to grow by around 8%

annually in the coming years.

I foresee a bubble forming in the Chinese

economy, and have similar thoughts as

mentioned in the article “China’s Red Flags”, by

Edward Chancellor.

These

indicators signal the

formation of a bubble:

1.

Credit Boom due to Easy Money:

Post•crisis,

the lower than natural interest rates

targeted towards infrastructure spending

led to a growth of money supply by 30% in

2009. New bank lending increased by nearly

RMB 10 trillion, a sum equivalent to 29% of

GDP.

These loans largely went to fund

infrastructure projects, property

developments, and state•owned enterprises

in a number of industries. Such huge

expansion of credit is accompanied by a

decline in underwriting standards.

2.

Investment Boom: The massive 4M RMB

infrastructure bailout package of November

2008 and that of 2009 (58% of GDP) for an

already infrastructurally

sound economy,

put the burden of infrastructural

development mainly on local governments.

Local governments sponsored loans to

finance infrastructure projects, such as new

railroads, toll roads, and bridges, which

could achieve the target level of 8% GDP.

Law forbids such authorities from

guaranteeing the debts. Instead, they set up

funding vehicles whose equity capital was

generally supplied by local government.

Banks provide the rest of the money.

According to the latest official estimate,

total liabilities of various local...