The Next Great Bubble: China

One more bubble, please.

After the bubbles in technology, housing, and commodities, we saw the mother of all bubbles: the one in global liquidity. The world economy seemed to require bubbles for its continued functioning.

I get the distinct feeling that investors’ prayers are now being answered: There's a new bubble now - or an old one is being re-inflated, depending on your perspective even as I type this. I’d like to call it the Troubled China Revival Program (TCRP).

Why start reserving bubble-naming rights? Well, I recently received an email from a friend that had the following subject line: “China … Record Loan Addition, Record Money Supply, Record Auto Sales, Record Imports of Copper, Iron Ore, and Coal, Strong Property Sales.”

I checked every figure (the hyperlinks above are mine), and every single one checked out. I couldn't quite believe what I was reading. I had thought China was in a spiraling-down recession. But even the decline in electricity consumption -- a true gauge of economic growth -- decelerated from 3.7% in January and February to a mere 0.7% in March. (Take a look at the FXI for more.)

So is China really the first nation to rebound? Is this the first sign of a rebounding global economy?

I'm sorry to say that the answer to both questions is no.

China's fortunes over the past decade remind me of Lucent Technologies in the 1990s. Lucent (now Alcatel-Lucent (ALU)) was selling equipment to dot-coms. At first, its growth was natural, the result of selling telecom equipment to traditional, cash-generating companies. Thereafter, it was only semi-natural: Dot-coms were able to buy Lucent's equipment only by raising money through private equity and equity markets, since their business models didn't  factor in the necessity of cash-flow generation.

Funds to buy Lucent’s equipment therefore quickly dried up, and the company's growth should have decelerated or declined. Instead, Lucent offered its own financing to dot-coms by borrowing and lending money on the cheap to finance the purchase of its own equipment. This worked well enough - until the time came to pay back the loans.

The US, of course, isn't a dot-com. But a great portion of our growth came from borrowing Chinese money to buy Chinese goods - which means that Chinese growth was dependent on that very same borrowing.

Now the US (and the rest of the world) is retrenching, corporations are slashing their spending, consumers are having moments of sickening recognition - and the consumption of Chinese goods is on the decline.