Is the Chinese economy a house of cards?

November 26th, 2009

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When you trawl through the mainstream media, blogs and pundits’ opinions, you will notice that there’s increasing reservation on China’s ‘impressive’ economic growth. One of the world’s most notorious short-seller, Jim Chanos recently announced his intention to short China. He’s the one who famously shorted Enron and Macquarie Bank.

Jimmy Rogers, on the other hand, is bullish on China. But that’s not mean that he believes that it’ll be forever blue skies ahead for China. In fact, he acknowledges that China will experience problems from time to time. Unfortunately, his bullishness gets the more attention from people. We do not know whether it’s because he seldom talks about his reservations on China, if any, or it’s selective hearing from the ears of people.

Anyway, this new-found bearishness on China is based on the idea that China’s economic growth is:

  1. An artificially induced bubbly boom through the force feeding of credit into the economy and government stimulated infrastructure investments (white elephant infrastructure projects??)
  2. Based on doctored figures

Back in July, we wrote of the massive force-feeding of credit in China:

  1. Is China setting itself up for a credit bust?
  2. How big is the credit bubble in China?

Indeed, there is a burgeoning asset price bubble in China. Hong Kong luxury apartments have sky-rocketed in price. There are even stories of speculators stockpiling physical base metals. There are also many anecdotal evidences that China infrastructure oriented stimulus is resulting in huge white elephant infrastructure. For example, this YouTube video showed a huge Chinese ghost city built from scratch in Inner Mongolia. We heard of reports of massive 5-lane motorways with no traffic.

Yu Yongding, economics professor at the Chinese Academy of Social Sciences (and formerly a member of the People’s Bank of China monetary policy committee), has recently sounded the alarm (see China bubble puts our recovery in doubt). We first mentioned this economist back in October 2007 at China considers leaking money to overseas stock when he warned the Chinese government on certain policies.

More ominously, we are seeing signs that the Chinese government is repenting on their extremely lax credit policies. As China’s banking regulator warned (see Capital crunch for Chinese banks),

China’s banking regulator has warned it would refuse approvals for expansion and limit banking operations if lenders did not meet new capital adequacy requirements, a move that has prompted the country’s largest state-owned banks to prepare capital-raising plans for next year and beyond.

Even the adviser to the People’s Bank of China is sounding the alarm on asset price bubbles. As China Faces Asset-Bubble Risk, PBOC Adviser Fan Says (Update2),

?The real risk is really asset bubbles,? Fan, who heads the National Institute of Economic Research, said at a business conference in Hong Kong today. A ?Chinese asset bubble would be something very dangerous, that would cause the overheating? elsewhere as well, he said.

Also, Bloomberg reported that China is taking the first steps in capital control in a bid to stem its asset price bubbles (see China Tightens Rules on Transfers to Stop ?Hot Money? (Update1)) from overseas speculative capital.

If Australia has to thank China’s economic strength for protecting its economy from a hard landing, what will a bust in China do to Australia?

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