Asia Sentinel - China Pops the Bubble? - the onus is on the US consumer

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China Pops the Bubble? - the onus is on the US consumer

The panic flight of investors from mainland and Hong Kong stock markets on Wednesday is for good reason. The possibility that Beijing might turn off the massive liquidity spigot that has fueled the equity market is coming none too soon. China's credit explosion has not just delivered another stock market bubble but a commodity one as well. The stock blowout was well illustrated by the launch of Sichuan Expressway "A" shares, which immediately rose 200 percent over the issue price and now are at a huge premium over their Hong Kong-quoted equivalent. China's stocks have so far gained almost 90 percent this year. But how much of this is sustainable? For sure, final demand in China has been picking up, led by government directed capital investment. There is clearly some rebound in stocks of raw materials which were allowed to run down as a result of financial sector disruption and overall economic uncertainty in late 2008. Some import figures are not necessarily good indicators – coal for example as China is largely self-sufficient. Some of the buying may be being encouraged by the government to reduce the size of China's trade surplus. As for China, investment spending will account for 75 percent or so of the 8 percent claimed growth. That will make China's economy even more unbalanced than it was before the crisis and raises huge question marks over the balance sheets of its banks. Expansion in their equity base has fallen far behind loan growth and threatens huge problems if the loans go sour.

The Chinese Banking Regulatory Commission is clearly worried, urging banks to lend for real investment not speculation but more than words are needed to restrain the lending frenzy. There is all too little sign of the changes that China needs if the underlying global imbalance problems are to be resolved: a shift from investment to consumption-driven growth in China, and a sharp decline in its external surplus. Given the reluctance of China to allow its exchange rate to appreciate, the onus is on the US consumer to stop consuming. Or on the US to promote further decline in the dollar which would infuriate China and ratchet up tensions between China, determined to keep its currency linked to the US, and other countries, notably those in Europe.