Chinese Bubble-Popping: Tale of the Liquid Dragon

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Includes: FXI, FXP, HKG, HSXUF, XPP
by: Forex Traders

In July exports fell by a 23% annual rate in China. In six out of the past seven months prices have been falling. Unrest in Tibet and the Eastern Xinjiang Province continues to bring widespread international condemnation of Chinese policy. Economic growth is expected to slow to eight percent this year, even by the unreliable statistics of a closed, controlled society like China.

Fortunately (or not quite so, depending on your point of view), the Chinese have read well on their American textbooks of air economics, and bubble growth strategies, and do not shrink from applying the lessons learnt. In a bid to outdo the living masters of the art, Mr. Greenspan and Ben Bernanke, they are inflating money supply and bank lending at a rate which puts even the most ardent supporters of quantitative easing to shame. In the past six months alone, Chinese banks, under government dictate, have expanded credit by a massive $1.1 trillion. Non-performing loans? Asset bubbles? Inefficiency? Such worries are only for the faint of heart, the monetary authorities of China argue, as they join the global rodeo-ride on the ocean waves of liquidity.

So far so good. The global asset markets have staged impressive rallies. What happened to the S&P 500 is common knowledge. Many respectable people are even predicting a healthy bubble-market that will take us to ever greater summits, just as unemployment hovers around a lofty ten percent peak. Not to be outdone, the domestic and foreign sufferers of Chinamania have drawn Shanghai shares to a 91 percent rally between August 4th and the beginning of this year. No doubt the people at the helm at the Federal Reserve look enviously at the new records broken by the nominally socialist nation, but the fact remains that the Chinese are taking a path tread by many others before, with always deleterious results. Think of the 1920s boom, and the 1929 crush. Think of the Lawson Boom, and Black Wednesday. Think of the Greenspan Era, and our mortgage bubble. When governments play with the money supply, the result is almost always a catastrophe, but the Chinese apparently want their own chapters in economics textbooks.

Not withstanding the enthusiasm and euphoria of the nation’s admirers, the Chinese story is still a side-note to the development and unraveling of this crisis. They did finance the American bubbles, and they have shown great competence in creating their own. And it goes without saying that they have enormous potential as one of the superpowers of this century. But they are run by an old guard which still believes in government intervention in every aspect of society, and worst of all, believes in the myth of its own success and efficiency. It is not hard to thrive with an unlimited supply of dirt-cheap labor, and it is not hard to appease a population with experiences of widespread starvation just five decades, or two-three generations ago. But once the horn of bounty runs out, great adjustments are awaiting which will make clowns of those who write eulogies to the efficiency of the Chinese Communist Party every other day.

Meanwhile, thanks to the coordinated efforts of governments, the Chinese one included, humanity is going through stage 2 of the Japanese experience. Can one resurrect a destroyed and bankrupt economic system merely by throwing more money at it? Is it possible to make geniuses from bankrupt crooks (such as the bright minds at Bank of America (NYSE:BAC), Citigroup (NYSE:C), and others who have created the mortgage bubble here) by stuffing ever greater amounts of cash in their pockets? The coming lost decade for the world is going to be about finding the answer to that question.

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