China Business:

China’s lending boom since December 2008 has boosted bank loans by RMB 7.4 trillion (USD 1.08 trillion). Many analysts think that an economic boom will follow in the second half of 2009 – they will be disappointed. Much of the lending has not been invested and has flowed into asset markets and many believe that it will lead to a spending boom; creating a bubble to support the economy which at best brings some short-term benefits and more long-term pain. Some of the speculation is actually hurting the Chinese economy. The surge in commodity prices is fueled by China’s demand for speculative inventory. The damage is already significant. If lending doesn’t cool, this force would transfer Chinese income to foreigners and trigger stagflation for a long time to come.

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The international media has been reporting record commodity imports from China. The surge is portrayed as reflecting China’s recovering economy, indeed, the international financial market is portraying China’s perceived recovery as the harbinger of global recovery, pushing up stock prices around the world. But China’s imports are mostly for speculative inventories. As there are so many Chinese speculators, their demand is driving up prices, making the expectation self-fulfilling in the short term.

My comment: Money growth is running at a 28.5% annual rate of course there is speculation in China as money flows into the stockmarket and real estate market. As Mises said all credit fueled booms eventually blow up and so will this one. That’s why I sold my Chinese and Taiwanese stocks. They may in fact go higher but it will be all speculation and not the fundamentals. However I am long term bullish on China for many reasons. If the market crashes there I will be looking to buy on the cheap.

John Polomny
The Real Deal