China’s Economic Boom: How Fast is Too Fast?
China’s economy roared into 2010 like a lion
About: (Chinese economy, China economy, china’s economic boom, Securities Journal, Chinese Academy of Social Sciences, China Stock Digest)
China’s economy roared into 2010 like a lion. Germany has now lost its position as world’s top exporter. China officially became world’s number one car market. We’ve noted those developments before, but they became official today. And there’s new momentum for the Chinese economy to discuss.
State media have just announced that Chinese banks gave out $88 billion in loans during the first week of 2010. That’s a bigger flood of money into the economy than the loans bundled during the boom months of October and November, 2009. This frenetic pace of lending will stimulate even more economic action, but is it too much?
Sixteen percent GDP growth for China in 2010; that’s the latest prediction! It’s an explosive new number compared to growth rate projections of two and three percent for the healthiest western economies.
In the official China Securities Journal, the Chinese Academy of Social Sciences declares, “If the government continues with the same strength of macro-economic stimulus as in 2009, GDP growth of 16% is possible and there could be notable economic overheating in 2010.”
Of course there have been hints and speculation that the government will try to rein in overheated sections of the economy. Last week’s miniscule interest rate rise and hints that banks may raise their reserve ratios are two factors that led to a rush for new loans in the first week of this year.
Beijing is walking a fine line between stimulating the economy as much as possible and applying the brakes wherever bubbles appear.
International trade is booming again and there’s no likelihood that Beijing will do anything to stop this revival. China’s exports grew 17.7 percent last month, the first increase in more than a year. Imports rose to a new record. This is pure red meat to an economy which needs to rebuild industries and employment after the global financial crisis.
Chinese stocks traded in Shanghai are up on economic optimism and on news that China’s cabinet has approved market-reform measures such as the launch of index futures and short-selling. That may slowly close the valuation margin between stocks traded on the mainland and those traded in Hong Kong and New York.
Record lending may be further tightened in 2010 as the property sector continues to boom. About one-sixth of China’s nearly 10 trillion yuan in new loans last year flowed into the property sector.
Beijing has vowed to combat excessively fast price increases. The State Council (cabinet) has urged local authorities to increase the supply of affordable housing. Beijing has vowed to curb house buying for “investment and speculation purposes” and keep the minimum down payment for second homes at 40 percent.
It would be a mistake to read this, as many have, that Beijing is clamping down on its world-beating economic expansion. China is intent on leading the world in growth while controlling overheating in select sectors, to prevent the kind of bubble that blew apart the U.S. economy.
That s the right thing to do,watching for bubbles and reacting.So the chinese learn the west how kapitalisem has to be done.Is 10% growh not enough.One should be glad for a year after year steady growth but you see the over reaction on stockmarket nothing has changed in the west only grab the money off today.
good luck
Thanks for your wonderful blog.
Lately, a number of articles mainly published in the US and UK press, have been warning about a major bubble in China. Jim Chanos and others (e.g. Gordon Chang) are predicting this will happen. Any comment?
Gordon Chang is not especially credible as a threat-monger because he wrote “The Coming Collapse of China” before it began its bull run of the past decade. Bad call Gordon.
Jim Chanos is more credible, but as an outsider, he overlooks many of what Asians call “Chinese Characteristics”, the peculiarities of the Chinese system.
These are well explained by an old China hand, Shaun Rein, who also blogs for Seeking Alpha. http://stockwidget.seekingalpha.com/article/182042-jim-chanos-is-wrong-there-is-no-china-bubble
This is a very finely detailed article by someone with long experience inside.
We have recognized in our own commentaries that there are areas where a bubble may develop in China. Real estate is the most obvious area. There is also a possibility of overcapacity in steel and other capital intensive industries such as autos. Any bubble in these regions has clearly been recognized by Beijing, and the government has shown signs of taking positive action (unlike the U.S. government prior to the mortgage implosion).
China has raised interest rates slightly (as a signal), it is expected to raise reserve ratios for banks, it is raising down payments and other restrictions on second property investments, and it is clamping down on a practice whereby banks move loans off their books by selling debt to secondary lenders like trust companies. (This dangerous type of practice helped worsen the US real estate collapse). China has shown determination not to let that happen.
As we have said, China (unlike the US) is aware that it must walk a fine line. It must encourage lending and credit to fuel economic expansion and job creation in a world that is just emerging from recession. On the other hand, bubbles are deeply risky to any economic system and Beijing has given us every signal that it is aware of this fact.
While the US used only the gas pedal to propel economic expansion before the credit implosion, China is alternating between the accelerator and the brake…searching for the best way to propel growth without creating dangerous distortions and using controls to limit over-expansion. There are no guarantees, but China’s centrally-planned economy has a better chance of pulling off this balancing act (and a smaller chance of becoming a runaway train like the unregulated debt bubble that Wall Street eagerly fed) until the whole global financial system was virtually brought to its knees. China had almost no direct hand in buying and selling worthless toxic US debt instruments.
In this world without guarantees, investors must select centers of growth and watch them carefully in case bubbles do develop. China is the engine of Asia and the Asian economies are the burgeoning center of world growth at this time. The current rate of growth in most areas appears to be sustainable at this time.
It is our intent to watch closely for bubbles (as the steel industry may be, perhaps also the auto industry) and avoid them. It is also our duty to find growth centers for our subscribers, and the expanding Chinese consumer market is a source of vast numbers of customers and an emerging core of an alternative consumer market and a growth center after decades of global reliance on the much more stressed and burdened US consumer and real estate markets. They are unlikely to provide worthwhile returns to investors in the near future.