While a big slowdown would hurt Chinese the most, collateral damage would still be huge
(MCO)Moody’s Investors Service, the credit ratings agency, says China has underestimated by half a trillion dollars the exposure of state-owned banks’ loan portfolios to local governments. Despite five interest rate hikes since last October, inflation is now running at 6.4 percent, the fastest since 2008. Second-quarter gross domestic product grew at 9.5 percent, its slowest pace in almost two years.No one is writing off China. An April Bloomberg survey of economists estimated the economy would grow more than 9 percent this year. The government is flush with cash and ready to prop up key banks and companies in case things get dicey. Yet bearish investors, such as James Chanos of Kynikos Associates, question whether China can beat inflation and stop over-investing in real estate projects and factories without triggering a hard landing. “A lot of people in the broader market are now asking these questions that they weren’t asking before,” says Patrick Chovanec, a business professor at Tsinghua University. “Before, the China story was so powerful that it overcame all doubt. Now there has been a big shift in sentiment.”
If a crash or slowdown occurs—which most analysts define as growth below 7 percent—it will be brought about either by inflation or a reversal in real estate. The Chinese Communist Party is loath to allow high inflation, says Chovanec. In the 1940s, hyperinflation turned ordinary Chinese into Communists. Inflation of around 20 percent was one reason protesters took to Tiananmen Square in 1989. Should inflation exceed 10 percent for long, “they pull a Volcker,” says Chovanec. Paul Volcker, the former U.S. Federal Reserve chairman, defeated high inflation in the U.S. with rates so steep they plunged the country into severe recession.
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3 comments:
First time to this site. Nice. Only suggestion is that you show the article that your bloggers are responding to. I found myself so intrigued and forgot where I was. In the face of these economic troubles, I suggest everyone stock up on Rice, Cans of anything, Bullets and maps.
The media is hilarious. Painting a "crash or slowdown" as a mere 7% growth in GDP
537-It would be in China, where real inflation is skyrocketing, and home/property values are crashing faster than they are here in the States. Add to that the boatload of bad loans and overbuilding of production facilities by the gov't/gov't controlled companies. For their current "system" to work, they in essence are attempting to outgrow the inflationary issues. Not to mention the many Chinese firms that in the past 1-2 years with cooked books that've cooled off foreign investors and made a lot of analysts question the overall "truth" in the Chinese economy.
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