China's Credit Bubble On Borrowed Time As Inflation Bites

by Ambrose Evans-Pritchard - December 5th, 2010 - London Telegraph

The Politburo said on Friday that China would move from "relatively loose" money to a "prudent" policy next year, a recognition that credit rationing, price controls, and other forms of Medieval restraint are not enough. The question is whether Beijing has already left it too late.

Diana Choyleva from Lombard Street Research said the money supply rose at a 40pc rate in 2009 and the first half of 2010 as Beijing stoked an epic credit boom to keep uber-growth alive, but the costs of this policy now outweigh the benefits.

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Ms Choyleva said China drew a false conclusion from the global credit crisis that their top-down economy trumps the free market, failing to see that the events of 2008-2009 did equally great damage to them – though of a different kind. It closed the door on mercantilist export strategies that depend on cheap loans, a cheap currency, and the willingness of the West to tolerate predatory trade.

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Albert Edwards from Societe General said the OECD’s leading indicators are signalling a "downturn" for Asia’s big five (Japan, Korea, China, India, and Indonesia). The China indicator composed by Beijing’s National Bureau of Statistics has fallen almost as far as it did at the onset of the 2008 crash.

"I remain convinced we are witnessing a bubble of epic proportions which will burst – catching investors as unawares as the bursting of the Asian bubbles of the mid-1990s. Ignore these indicators at your peril," he said.

What is even worse for the world is the reality that China has a huge excess of men looking for wives due to the now restricted one-child policy that China practiced aggressively for over a generation.

As noted in the article, we have the same situation with world debt that drove the world to war in the late 30s. Though it happened again in the 80s, the U.S. was not practicing redistribution of wealth at the time and our prosperity drug the world back from the brink.

This time, we are once again under a Democratic Keynesian regime and we are not producing enough growth that the world can rely on us to bail them out. I understand that nothing is quite that simple, but the reality is that these unique pressures are the tipping point of World Wars.

When any autocratic regime is under pressure they look for scapegoats. China can easily point to the U.S. and blame us for our efforts to block their imports as acts of war. An attack on Taiwan would not be defended by our current President. The resulting chaos would not necessarily end well.