China Bubble
The China stimulus package has forced banks to force-feed the economy with liquidity. The purpose of the so-called “quantitative easing” was to generate domestic demand while exports slumped. But much of the liquidity has flowed into property and stock markets instead ─ and has partly become government fiscal revenue.
Stocks and properties in China may be 100 percent overvalued. Only two decades of relatively high inflation can justify their prices. However, persistently high inflation leads to currency devaluation, which triggers capital flight and, eventually, an asset market collapse.
The stories coming out of China of millionaires losing their deposits in financial institutions, corrupt, fast and loose lending by rural credit cooperatives and bankrupt consumer lending institutions hollowed out by employees and borrowers make me shudder at the thought of the lending bubble being blown by Beijing. Kickbacks to officials who review and approve loans regardless of the borrowers credit worthiness is a replay of what happened in America.
Beijing’s decision in 2008 to embark on a monetary easing policy in tandem with its stimulus package, encouraged financial institutions to grant loans to fund infrastructure projects ─ Confucian capitalism at its worst because most of the money was spent on personal businesses, stock market and real estate. Worries are mounting that the lending spree will lead to a mountain of bad assets in the banks as well as the misuse of funds. Mainland financial institutions extended a record 7.37 trillion yuan of loans in the first six months of 2009, nearly three times the amount a year earlier.
Official statistics show that rural credit co-operatives had piled up about 590 billion yuan in non-performing loans by the end of 2008. Bad loans at rural commercial banks stood at 19.28 billion yuan at the end of the first half of 2009.
Having started a few thrift and loans, savings and loans, federal and state banks in California in the 1980s go-go years both as a lawyer and a principal, I can relate to how financial institutions get hollowed out by owners, shareholders, employees and borrowers.
John Greenwood, an adviser to the former Hong Kong monetary authorities and who still advises the HKMA, also known as the “father of the peg” in Hong Kong, was back in July 2009 and warned that China’s massive stimulus package could cause serious trouble for the mainland economy within two years. “If China continues with the current rate of money and credit growth, there is an inflationary danger,” warned Greenwood. When something seems to good to be true, it is. World trade ─ the engine of global growth ─ has collapsed. Employment is still contracting throughout the world. There are no realistic scenarios for the global economy to regain high and sustainable growth, which means the China stock market and property bubble inflated by the government’s massive stimulus plan will burst.
Stocks and properties in China may be 100 percent overvalued. Only two decades of relatively high inflation can justify their prices. However, persistently high inflation leads to currency devaluation, which triggers capital flight and, eventually, an asset market collapse.
The stories coming out of China of millionaires losing their deposits in financial institutions, corrupt, fast and loose lending by rural credit cooperatives and bankrupt consumer lending institutions hollowed out by employees and borrowers make me shudder at the thought of the lending bubble being blown by Beijing. Kickbacks to officials who review and approve loans regardless of the borrowers credit worthiness is a replay of what happened in America.
Beijing’s decision in 2008 to embark on a monetary easing policy in tandem with its stimulus package, encouraged financial institutions to grant loans to fund infrastructure projects ─ Confucian capitalism at its worst because most of the money was spent on personal businesses, stock market and real estate. Worries are mounting that the lending spree will lead to a mountain of bad assets in the banks as well as the misuse of funds. Mainland financial institutions extended a record 7.37 trillion yuan of loans in the first six months of 2009, nearly three times the amount a year earlier.
Official statistics show that rural credit co-operatives had piled up about 590 billion yuan in non-performing loans by the end of 2008. Bad loans at rural commercial banks stood at 19.28 billion yuan at the end of the first half of 2009.
Having started a few thrift and loans, savings and loans, federal and state banks in California in the 1980s go-go years both as a lawyer and a principal, I can relate to how financial institutions get hollowed out by owners, shareholders, employees and borrowers.
John Greenwood, an adviser to the former Hong Kong monetary authorities and who still advises the HKMA, also known as the “father of the peg” in Hong Kong, was back in July 2009 and warned that China’s massive stimulus package could cause serious trouble for the mainland economy within two years. “If China continues with the current rate of money and credit growth, there is an inflationary danger,” warned Greenwood. When something seems to good to be true, it is. World trade ─ the engine of global growth ─ has collapsed. Employment is still contracting throughout the world. There are no realistic scenarios for the global economy to regain high and sustainable growth, which means the China stock market and property bubble inflated by the government’s massive stimulus plan will burst.
posted by Peter de Krassel's Custom Maid Politics at 10:26 PM
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