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China's Bull: Don't Rest On Its Economic Laurels

Bull In China Jim Rogers
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From Wall Street to Guangdong Road, one hot-button issue is taking the financial airwaves by storm: The bull in China's economic "shop." And, according to the mainstream majority, the recent slew of positive data suggests this horned beast is here to stay. Off the top are these third-quarter 2009 stats: A 16.1% leap in China's industrial production, a 16.2% increase in retail sales, and a strong rise in GDP to 8.9%. In the words of one November 11 CNBC report:

"The underlying growth story is a real one. China is now experiencing what the United States did during the Industrial Revolution. It's like the only successful story in the global economy. It's like the locomotive pulling the globe..."

Does that sound familiar? It should.

Two years ago, in the third quarter of 2007, China's industrial production also stood high: at 18%. During the same period, China saw a powerful 16.4% rise in retail sales (a five-year high), and 11.5% GDP (a 13-year high).

Then, as now, the usual experts hitched their bull market bandwagon to the positive "stars" in China's economic galaxy. Here is a statement from a major Chinese official published in an October 25, 2007 New York Times: "The macroeconomic controls this time around have not only effectively prevented the economy from transitioning from speedy growth to overheating... but at the same time have not resulted in a sharp downturn."

Yet -- do you remember what happened to the Shanghai Composite Index then? The chart below vividly illustrates what started that very month. In short: "a sharp downturn" (higlighted in red).

Shanghai Composite
The market plunged 70% into the two-year low in November 2008.

A First-Hand Look at China's Bull Market: The latest Asian-Pacific Financial Forecast includes a special, in-depth 4-page essay on China's long-term growth prospects.

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Clearly, China's robust "fundamentals" did not save Chinese stocks two years ago. So what? Who cares? -- say many officials today. This isn't 2007. Things in China are different. Well, they're absolutely right. This isn't 2007. It is different. Two years ago, the main fear of China's monetary officials was that the easy lending environment would cause an unsustainable asset bubble. Their concern was justified, as new loans in China stood near their highest level in four years.

Flash ahead to 2009: New loans in China exploded off the charts to their highest level ever. See for yourself, as the November 2009 Asian Pacific Financial Forecast captures the credit-crazed scenario with this compelling picture (Elliott wave labels erased for this article):

Shanghai Composite

And, as the November Asian-Pacific Financial Forecast reveals: In the first five months of 2009, one-fifth of the new loans issued in China went to stock market investment.

Now that's something to think about.

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