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29 March 2008 On the Road from Samaria When they manipulated the stock market, I remained silent; I was making money and felt superior to the crowd. When they silenced their critics, I remained silent; I was self-righteous and felt they got what they deserved. When they came for the blue... More
  • The China Bubble and the Convergence of Oligarchies  5 comments
    Jul 16, 2009 5:12 AM

    The China Bubble and the Convergence of Oligarchies

     


    This is an interesting story from a source that we will be consulting regularly for their news items and insightful analysis.

    Regular readers of this blog will notice that we strike the same recurrent themes.

    Some years ago Mr. Bill Gates traveled to China, and liked what he saw. This was the model of capitalism which he favored: a small but powerful elite centrally planning economy peopled by semi-feudal serfs, and living large on the backs of the many.

    With all deference to Jimmy Rogers, China is a bubble. The central government will grow increasingly repressive and manipulative as the people improve in education, health and material means. Propaganda will grow more sophisticated and remain as pervasive as it is today.

    When the bubble bursts, the iron fist will be unveiled and there will be popular uprisings, and those who believe they are in elite positions now may then find themselves on the docks piled on their baggage waiting for the next ship to take them to safer destinations.

    This is certainly nothing new. After the collapse of the first Federal Reserve credit bubble in the late 1920's, the West turned to Soviet Russia and the fascist countries of Italy and Germany for the answer to the 'failure' of Western free market capitalism. Hitler and Mussolini were heavily favored by Wall Street, having a firm hand to rein in the mob.

    On the optimistic side, freedom wanes, but still and in remarkable ways, never seems to die.

    The Daily Bell
    Chinese bank announces bombshell
    Issue 343 • Friday, July 10, 2009

    Yesterday on their website, the People's Bank of China announced a shocker. New Chinese bank lending for June was 1.53 trillion yuan ($224 billion), double the lending in May. The total already for the year is an astounding 7.4 trillion yuan when the target for the entire year was 5 trillion.

    Putting this in context, total lending this year so far has amounted to 25% of 2008 GDP. As I wrote earlier this week, Chinese regulators are getting concerned that this lending is going towards poor credit and bleeding into commodity market speculation.

    As most know, bank lending is high powered monetary stimulus due to its high velocity. This is the key difference between fiscal stimulus vs. monetary stimulus. Actually, monetary stimulus will only work well if the banks receiving the funds lend them out. In the US, this is clearly not happening due to banks loan losses and caution over new lending (expanding balance sheet.) In China, this is not the case and new loans are flowing. -
    CNBC

    Dominant Social Theme: China is heating up.

    Free-Market Analysis: We've written about this before. China backed into "capitalism" about 30 years ago and the impetus for where it is now was increased by the problems with Tiananmen Square. The Chinese leaders are not interested in political theory at this point (if they ever were). Their currency is power and the way to maintain power is to create an apolitical system where citizens "can grow rich." Western systems work a good deal better than communist systems in this regard. And thus China has built a facade of a Western system.

    Yes, it is really only an imitation of a Western system (from a political and big business perspective anyway) in our opinion, just as its banks are only imitations of Western banks and its stock markets are only imitations as well. In fact, to grow rich by investing in the Chinese stock market one apparently simply has to listen intently to the noises coming from the government as to what companies will grow and what companies will not. (And this is different from the US now in what way? - Jesse)

    As far as the banks go, the system is probably even more basic than in the West. The central bank prints as much money as it can, and the commercial banks disseminate it. These banks may act as independent entities, but they still have a foot in state government as do many large companies in China.

    It is all fairly well jury rigged. China has incorporated a façade of Westernism but to cast China as the world's financial engine is to understand how desperate the West has become. China's economy grows by 10 and 15 percent a year, and now appears be heating up even more. This is not normal growth but central banking generated growth. The same clique still runs China, but the economy has been supercharged by additional printing.

    China is said to be turning inward now, as Western countries cannot afford to buy its products. But whether China will be able to maintain its growth by using its own huge population as a purchasing pool remains to be seen. What will certainly happen sooner or later is that the supercharged money being used by the Chinese will create the same boom-bust cycle as has happened elsewhere. Only when it ends in China after so many years, it will be the mother-of-all blow-offs.

    Conclusion: It is difficult to see what Chinese leaders expect to happen once the bubble busts. Maybe they are gambling that they can control the unrest that will come in its wake. Maybe they assume the bubble will not bust for many years. (And this is different from the US now in what way? - Jesse)

    But articles like the one excerpted above show us that sooner or later China's overheated and pseudo-Western economy will implode, and likely even more violently than Western economies ever have. And here's a thought: The Chinese in the meantime are said to be big buyers of gold on a government level and also personally. Perhaps what is going to eventually happen is better known in China than the West.

    http://jessescrossroadscafe.blogspot.com/2009/07/china-bubble-and-convergence-of.html

     

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Comments (5)
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  • Ben Gee
    , contributor
    Comments (14172) | Send Message
     
    Chinese authorities are well aware the bubble theary. At the end of 2007, when China's economy was over heating, interest rates were raised many times and so was the bank reserve ratios. If there is any sign of inflation, Chinese authorities will act quicklyand decisively to squash it. China grew at double digit for almost 30 years, do you actually think one quarter growth of 7.9% will create a bubble?
    16 Jul 2009, 06:07 AM Reply Like
  • Sober Realist
    , contributor
    Comments (530) | Send Message
     
    Author’s reply » Half of China's Stimulus money has gone into stock and real estate speculation, as estimated by Chinese Communist officials themselves. This doesn't count the speculative inventory building of commodities by people in China other than China's State Reserve Bureau, such as producers, distributors and other speculators. And the other half of the stimulus money will go to state-controlled enterprises. "Indeed, official media have estimated that around 90% of any new lending will be directed towards state-controlled entities. Very little of the stimulus package will be used to create better conditions for private sector enterprises."

     

    "Yesterday on their website, the People's Bank of China announced a shocker. New Chinese bank lending for June was 1.53 trillion yuan ($224 billion), double the lending in May. The total already for the year is an astounding 7.4 trillion yuan when the target for the entire year was 5 trillion.
    Putting this in context, total lending this year so far has amounted to 25% of 2008 GDP."

     

    That kind of loose liquidity is producing bubbles. No government can loan out that kind of money and not expect bubbles to occur.

     

    On Jul 16 06:07 AM Ben Gee wrote:

     

    > Chinese authorities are well aware the bubble theary. At the end
    > of 2007, when China's economy was over heating, interest rates were
    > raised many times and so was the bank reserve ratios. If there is
    > any sign of inflation, Chinese authorities will act quicklyand decisively
    > to squash it. China grew at double digit for almost 30 years, do
    > you actually think one quarter growth of 7.9% will create a bubble?
    16 Jul 2009, 07:40 AM Reply Like
  • Tom Au, CFA
    , contributor
    Comments (6879) | Send Message
     
    You understand how China really works, and why Bill Gates likes it.
    16 Jul 2009, 09:30 AM Reply Like
  • Ben Gee
    , contributor
    Comments (14172) | Send Message
     
    China is also engaged in a natural resourses buying spree. Lots of these are financed by bank loans. As long as commodity prices stay stable or go up, these loans will be fine. Further more, the Chinese government will not allow Chinese banks to collapse no matter what. Chinese government has much greater power to regulate than its counter parts in the West.
    17 Jul 2009, 07:05 AM Reply Like
  • Sober Realist
    , contributor
    Comments (530) | Send Message
     
    Author’s reply » I'd like to believe you, but I'm convinced otherwise by Michael Pettis and Derek Scissors. China does not have a developed internal market to take the place of Western consumption which is what China's economy is designed for. Disturbingly, China is not making any serious structural changes to alter its export driven economy and, in fact, are intensifying it. The recent rise in auto/retail sales or financial asset pricing is more a function of rising confidence on the part of the well-to-do or upper-middle classes and is not stable demand.

     

    On Jul 17 07:05 AM Ben Gee wrote:

     

    > China is also engaged in a natural resourses buying spree. Lots of
    > these are financed by bank loans. As long as commodity prices stay
    > stable or go up, these loans will be fine. Further more, the Chinese
    > government will not allow Chinese banks to collapse no matter what.
    > Chinese government has much greater power to regulate than its counter
    > parts in the West.
    17 Jul 2009, 08:03 AM Reply Like
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