Rock, Hard Place, Chinese Economy

At this point, the Chinese bubble theory is well out there. With a number of high profile public acknowledgements of the liquidity driven bubble over the past 6 months, China is finally looking to take steps to prevent (or at least slow down) the massive publicly funded inflows into related financial markets. With the Shanghai Composite Index down about 22% in August, China is caught in a somewhat tricky situation as it attempts to slow the flood of money without plunging the economy into a further spiral.

Depending on the specific measures taken, we could see a controlled deleveraging or a clumsy, heavyhanded attempt to put the brakes on. The prospect of a highly leveraged Chinese economy facing a sudden liquidity shortage is terrifying for both economic and political reasons. With increasing unemployment for college graduates and a significant deterioration across other macro factors, the only real driver has been record lending by Chinese central banks. Despite all the cosmetic changes, China remains a centrally controlled economy and it is a very tough challenge to manage liquidity flows across the financial system without blowing up the current structure.

Comments

[Dave Wrixon:]

Where do you get this drivel? Fox News?

Sep 06 05:11 AM

[Michael Clark:]

If we put a few news items together regarding China...China leaders encouraging Chinese to buy gold/silver, China moving its gold reserves from London to Hong Kong...I'd say the Chinese are getting ready to hunker down in a huge global depression in which precious metals are the ONLY asset holding its value. 'V-shaped recovery": it sure doesn't sound like it.

Sep 06 05:23 AM

[Alphameister:]

Drivel indeed! Can you spell "superficial drama queen"?

Sep 06 11:02 AM

[Tony Daltorio:]

The key point is that China is trying to rein in its "bubble".

Meanwhile, the US and the Federal Reserve's Ben Bernanke keep huffing and puffing in an effort to re-inflate burst bubbles and inflate even more current bubbles (Treasuries).

Sep 06 11:46 AM

[RECESSIONPROOF:]

i am the hammer

Sep 06 02:49 PM

[Ricard:]

Good comment. China has also raised reserve requirements to curb lending.

The picture is looking more and more cautious at least from the authorities in China.


As far as the author's statement:

"Despite all the cosmetic changes, China remains a centrally controlled economy and it is a very tough challenge to manage liquidity flows across the financial system without blowing up the current structure."

...I think China has proved that a centrally controlled economy is much easier to manage than one that is controlled by an unregulated financial sector. The downside is a lack of innovation, but when it comes to finance, 'creative' feats of engineering generally are not conducive to positive economic activity.


On Sep 06 05:23 AM Michael Clark wrote:

> If we put a few news items together regarding China...China leaders
> encouraging Chinese to buy gold/silver, China moving its gold reserves
> from London to Hong Kong...I'd say the Chinese are getting ready
> to hunker down in a huge global depression in which precious metals
> are the ONLY asset holding its value. 'V-shaped recovery": it sure
> doesn't sound like it.

Sep 06 10:36 PM