Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

China Boom or Bust?

Economics / China Economy Jan 23, 2011 - 01:09 AM GMT

By: Bryan_Rich

Economics

Best Financial Markets Analysis ArticleAs China’s economy has continued to put up stellar economic growth in the midst of one of the worst global economic crises on record, it’s widely believed that China will lead the world out of its downturn and soon rise to global economic dominance.

So it’s no surprise that there was a lot of attention given to Chinese President Hu Jintao’s visit to Washington this week.


But those who have been swept up by this tide of popular sentiment might be surprised to hear that there’s an alternate scenario that’s equally plausible: China’s economy could represent a major and imminent threat.

Indeed, throughout the crisis, I’ve been making the case that China could be a big problem for the global economy for at least a couple of reasons …

Reason #1 China’s Currency Manipulation

China has gained economic prowess through maintaining an artificially weak currency — to corner the world’s export markets. When times were good, the rest of the world was happy to ignore the ultimate costs of China’s currency policy to the global economy.

But now that the world remains in flux, the Chinese currency manipulation has become a front-burner issue for its trading partners — most notably the U.S. And this is particularly an issue as long as global trade remains out of balance.

Moreover, its currency policy has given rise to currency wars, political divisions and protectionism as I laid out in my column last October.

We may find, though, that China’s currency policy will be moved to the backburner this year. The main reason: No one wants to see China slump. They realize that a significant slowdown in China’s economy would pose a more imminent threat to global stability.

Reason #2 China Boom Could Be Turning into a Bubble

We’ve seen a dramatic slowdown in Thailand and Malaysia, and now the easy-money-based spending in China is coming to a head, threatening its much-beloved growth story.

The speculative boom that drove a mass overbuild in Chinese infrastructure — and that spilled over into real estate and financial markets around the world — has done very little to build domestic demand for the country.

In short, we have to ask: Is China’s rapid growth sustainable? How much of it was driven by China’s easy-money policy responses to the global slowdown?

Remember: When the global economic crisis was at its peak, governments around the world responded by rolling out massive fiscal stimulus packages in hopes of kick-starting recovery. China, still growing around 6 percent, rolled out a package of its own — to the tune of 16 percent of GDP, by far the biggest in the world.

On top of that, the state-owned Chinese banks showered the land with new loans — and continue to do so today.

Take a look at the chart below. It shows the growth in money supply (indexed at 100) in China since late 2007, relative to the U.S.

China Money Supply Growth

You can see the explosive growth in China’s money supply, climbing 79 percent since the onset of the global economic crisis. That’s five times the rate of U.S. money supply expansion!

Now, the Chinese government is beginning to rein in that growth — in an attempt to curtail runaway real estate and food prices. Again, we must ask: Is that a recipe for a major slowdown in China?

Consider this: It was China that supplied cheap credit to the world, financing the unsustainable consumption boom in the U.S.

Therefore, it’s only fair to ask: As the other party to that boom, will China experience a bust of its own?

In this alternate scenario, instead of being the springboard of economic recovery for the world, which much of the world has embraced, it’s reasonable to expect that the Chinese story could end badly.

For a world that has been hitched to the idea that China can grow at a double-digit rate year in and year out, you now have to ask the ultimate question: What would the global economy look like if China slowed down to 5 percent?

Growth at 5 percent would be recession-like territory for China. It would threaten the employment of its billion-plus people, and could even pose the risk of a public uprising against the government.

What This Could Mean for Commodities And the Sovereign Debt Crisis

Fitch Ratings reckons that a Chinese slowdown to 5 percent growth would result in a 20 percent plunge in global commodity prices.

Meanwhile, the most extensive study on global sovereign debt crises — by the academic team of Harvard Professor Kenneth Rogoff and Maryland Professor Carmen Reinhart — finds that, historically, falling commodities are a common trigger that can set off a contagion of sovereign debt defaults.

They also find that the decade-long credit boom is likely to be followed by a decade of deleveraging. Given that analysis, it’s equally possible that the decade-long boom in China could be in for a decade-long retrenchment.

Factor that scenario into a global economy that remains vulnerable to the growing sovereign debt crisis and you can conclude that a flight to safety is in the making.

Regards,

Bryan

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in