Thursday, July 15, 2010

Is China the next bubble?

If you look at the following assessment from Sumant Sinha, that looks quite probable:

For many years China has been growing rapidly. Its stock market has been among the best performing in the world. On the back of a deliberately cheap currency policy China's exports have swamped the world. It will shortly cross Japan to become the world's second largest economy. Per capita income has almost trebled in the last 10 years. Infrastructure has boomed and the country is unrecognisable to those who revisit it after a gap of afew years. In many sectors China adds capacity in a single year equivalent to India's cumulative installed capacity. It has become the world's largest consumer of many commodities (and the world's largest polluter). By any measure, these are phenomenal achievements.

And yet uneasy lies the crown. Much of the capacity that has been created is not being used. In sector after sector, there are excess capacities. The currency cannot be kept cheap forever and when it gets to realistic levels, it will surely impact the external sector negatively. Worryingly, the response of the government to the current crisis has been a further opening of the bank lendingpigot to create even more capacities. Economic growth cannot endlessly come from capacity creation. Chinese planners understand this and are now doing their best to ensure that consumer demand manifests sufficiently to absorb all the excess capacity, being created. But if this does not happen the banking sector will be left with a huge amount of non-performing and unproductive assets. Markets will go into a tail spin, the government will be forced to step in and things could well go out of control.

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