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  • China Bubble About To Burst? 0 comments
    Jul 28, 2009 11:35 AM | about stocks: ACH, CEA, CHA, CHL, CHU, FXI, HNP, PTR, ZNH
    A large portion of the Chinese economy is state-controlled.  With state-controlled companies comes state-controlled (and lower) profits. As I have written previously, I am a fan of China because it is a great growth story. However, I am no fan of chinese equities.

    Caption: Chinese Premier Wen Jiabao in a helicopter (Xinhua/Liu Weibing)

    Now there are even more reasons to shy away from investing in China, as Aaron Task writes in China's New 'Great Wall' Built on Easy Money, Speculation and Toxic Debt on Yahoo Finance:
    China's GDP growth and stock market are the envy of the developed world. But recent events stand in stark contrast to the "strong, prosperous and successful" China that President Obama described at the opening of this week's strategic economic dialogue.

    Indeed, The FT reports Monday that "Chinese regulators ordered banks to ensure unprecedented volumes of new loans are channelled into the real economy and not diverted into equity or real estate markets where officials say fresh asset bubbles are forming."

    Because the economy is state-controlled, the ruling Communist Party "might be able to avoid a crash [but] if you make bad economic policy you have to pay for it sometime down the road," he says.

    Quoting William Gamble, President of the consulting firm Emerging Market Strategies, Aaron Task warns us that China may be a bubble about to burst:

    Because policymakers are pumping money like mad to prevent unemployment and social unrest,  Gamble believes China's economy may very well be a bubble set to burst. With $1.2 trillion of new loans made since November there's "basically a wall of money that's not going anywhere," Gamble says, suggesting real estate speculation and bad lending are rampant. 

    Significant Points From The Yahoo! Article
    1. China as a nation whose "GDP Growth and stock market are the envy of the developed world."
    2. Easy credit causing a speculative bubble in the real estate and equity markets.
    The fact that China is in a speculative bubble is not in and of itself newsworthy. What is newsworthy is that the current China speculative bubble sounds eerily similar to the US situation just a few years ago.

    You would think that China's Helicopter Wen would have learned a lesson from the recent credit-fueled real estate boom and bust in the United States.

    Full Disclosure: Author holds no position in any commodity derivative or in any fund mentioned in this article. Author owns a small position in Chinese equities (for sentimental reasons.) This article is for informational purposes only and is not meant to be construed as an invitation to invest with any specific strategy or to buy or sell any securities. You should perform your own due diligence and consult with a professional before investing.

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