China Fueled by Indiscriminate Lending?

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Macroeconomics

A hard hitting article by John Mauldin, president of Millennium Wave Advisor appears to have struck a cord with some of our local contacts in the Chinese market. There is growing disquiet at the volume of funds being lent by banks in China and even more at the indiscriminate and uncontrolled purposes that the funds are being put to. We have reported ourselves just recently at how funds have been flowing into speculative metal investments, a topic Reuters wrote on this week expressing the same concerns.

Mauldin makes several points in his article but the most significant is to put into context the scale of lending going on in China. Specifically he states If I told you that the next US stimulus package would be $4.5 trillion dollars, mostly given to banks that would be forced to loan out the money quickly, do you think that might jump spending and GDP in the short term? Would you start looking for a few bubbles to be created? What about the dollar? Well that is the equivalent of what China is now doing. The volume of credit that is flowing into China is equivalent to one-third of their GDP.

As a friend of ours in Shanghai commented today (and I paraphrase) The Shanghai stock exchange index reached 3456 another historic high since December.  Based on any sound principals, given the current economic situation, it should not have exceeded 2400.  The banks have lent a total RMB 7.6 trillion in the first half of this year or more than double that of the whole year of 2008. The real estate sector has witnessed a 40% price increase this year, which has frightened some developers who thought that prices have gone up too quick and too far. We are facing a crazy stock market and a crazy real estate market pumped by uncontrolled lending.  We will see bankrupted banks supported by government by printing more banknotes, and soon many people in all sectors will face more turmoil¦..

Our contacts, John Maudlin and even an ex IMF economist who reviewed the article have all independently come to the same conclusion. China is headed for banking problems and inflation down the line, may be not this year but early in the next decade.

–Stuart Burns

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