Can China Lead the Global Recovery?

Thoughts from the Frontline (07/24/2009)
"China is growing by about 8% a year, which is amazing on the surface of it, as their exports are down about 20%. How can that be? I continually read about how China is going to lead the world out of its global funk. But we need to look a little deeper.

If I said the next U.S. 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 jumpstart spending and GDP in the short term? Would you start looking for a few bubbles to be created? What about the dollar?

That is the equivalent of what China is now doing. The volume of credit flowing into China is equivalent to 1/3 of its GDP. Banks with large problem-loan portfolios are now lending even more, in a very short time frame. China has severe capacity-utilization problems, as trade has sharply fallen and U.S. consumers are unlikely to return to consumption levels seen in 2006.

The Chinese stock market is up 85% this year and commodity and real estate prices are rising, as the money supply shot up 28.5% in June alone. My friend has written a very perceptive essay for Foreign Policy magazine, talking about the current growth in China.
. . .don't confuse fast growth with sustainable growth. . .This growth will result in a huge pile of bad debt—as forced lending is bad lending. . .the bottom line is simple: There is no miracle in the Chinese miracle growth, and China will pay a price. The only question is when and how much.
If you are trading the metals, you should be aware that a quick drop could happen if demand falls due to a glut of supply coming back onto the market.

Why would China engage in what seems to be very risky behavior? Because from their perspective, it makes sense. It is not much different than what the U.S. or England is doing to stimulate their economies. Avoiding financial Armageddon may be the measure of success in both countries, with the reality that there will be some pain—no matter what."

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