But as we warned as far back as February, China is following the Alan Greenspan model. [Feb 16 2009: Is China Pulling an Alan Greenspan?] We wrote then:
Some very interesting data out of China of late in terms of loan growth - in fact staggering data.
Before I write the rest of this entry don't take it as bashing the Chinese. In fact they are learning from the masters of manipulation - the United States. They are following the Greenspan playbook - to forestall a normal economic cycle flood the system with dollars... which creates new bubbles. Keep kicking the can down the road, until one day it all implodes (which is what we are enjoying now after 20 years of kicking).
But now we see China is embarking on the same game plan - which in the long run will lead to bad outcomes, but in the short(er) run can goose values.
Chinese banks extended a record 1.62 trillion yuan ($237 billion) in loans in January, more than double the year before, as lenders heeded government calls to loosen credit controls to help revive the economy. Facing an abrupt slowdown due to plunging demand for China's exports, regulators have sought to boost liquidity after years of trying to rein in lending. Banks made 771.8 billion yuan ($113 billion) in new loans in December, figures show, up nearly 15 fold over the same month a year before.
Money supply, as measured by M2, climbed 18.8% at the end of January from a year earlier, accelerating from the 17.8% rise at the end of December, according to the PBOC.
Greenspan was lauded as a genius for the sugar highs he created; both on the ground and in the "efficient markets" that are supposed to sniff out stupidity. Any problem in the economy was met with a torrid fire hydrant of cheap and easy money. The aggregate sugar high lasted a long time and hid a lot of disfigurement under the surface. What happens in China? The same? Already there has been talk of much of this money going into the stock market, and real estate market. (sound familiar?) [Jun 29, 2009: China Business News - $170B of Bank Loans Funneled into Stock Market] And many of these loans will go bad... thankfully China has a massive foreign exchange reserve to pay for the bad loans but there will be consequences of inefficient allocation of capital. [May 27, 2009: How is China Spending their Stimulus Money; and How many Loans will go Bad?] As speculators do we care? Apparently not judging from the US model of the past 20 years - we just are happy to get while the getting is good (bubble?! nah!) and when the inevitable sugar high wears off, we'll look at each other in embarrassed fashion that we "were duped".
Also keep in mind the social issues on the ground, as we wrote in 2008 China leaders have to worry about political upheaval; the peasants there actually strike back if things get really bad. [Dec 7, 2008: WSJ - China Fears Restive Migrants as Jobs Disappear in Cities] The peasants in the U.S. on the other hand, turn on American Idol and shrug their shoulders while regurgitating 30 second dogmatic sound bites ingrained in their brains from their affiliated political party. 2 different worlds ;) So a bigger question for China is, even if they know the effects of stimulus are foreboding, can they risk not doing them? [Jan 26, 2009: NYT - College Educated Chinese Feel Job Pinch]
Again, regular readers will be well versed in these topics but I am glad to see the Wall Street Journal catching on as well ;)
- China's government said its economy's rebound remains uneven and unstable, even as a surge in growth has prompted economists to debate whether officials need to start cooling things down. The government's eight-month-old stimulus program helped boost China's gross domestic product growth to 7.9% in the second quarter, the National Bureau of Statistics reported Thursday, up from 6.1% in the first quarter.
- Some economists are urging Beijing to fine-tune its expansionary policies to lower the risks of asset-price bubbles and inflation.
- But Mr. Li noted that prices are still declining and that many industries are faced with excess capacity. "Total demand is still insufficient, and economic growth is below its potential rate," he said. China's consumer price index fell 1.7% in June from a year earlier,
the fifth straight monthly decline, while the producer price index fell 7.8%, the seventh straight monthly drop. Concerns about deflation, as well as continued worries about unemployment, are likely to keep pressure on the government to continue stimulus efforts. - Some economists also remain concerned about private businesses' continued reluctance to invest, especially as industrial profits continue to fall. But the increasing evidence that the worst of the slowdown is over for China is fueling debate about the proper course for policy in coming months.
- Value-added industrial output, the key measure of manufacturing activity, rose 10.7% in June from a year earlier. That compares to growth of just 3.8% in January and February. The expansion in fixed-asset investment -- money poured into items such as plants and real estate -- in urban areas rose 33.6% in the first half of the year from a year ago, as the government ramped up new projects.
- The People's Bank of China has already started to take some measures to fine-tune the rapid flow of credit. On Thursday, the central bank used its weekly sale of three-month bills to continue to guide money-market interest rates higher for the third straight week.
- China's retail sales in June rose 15% from a year earlier, in line with May's 15.2% growth. Although retail sales are an imperfect barometer of private consumption because they include government purchases, the data nevertheless suggest private consumption demand remains steady for now.
[Jan 13, 2009: AP - China Trade Slump Worsens; Exports Fall - So Do Imports]
[Jan 8, 2009: NYT - As Trade Slows, China Rethinks Its Growth Strategy]
[Dec 7, 2008: NYT - China's Economy, In Need of Jump Start, Waits for Citizens to Loosen Fists]
