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Is China Condemned to Repeat America's Mistakes?


With naivete comes unreliability -- both in products and information.

As if the Chinese are taking advice straight from the pages of Alan Greenspan's The Age of Turbulence: Adventures in a New World, the government is throwing yuan into the system every which way in hopes of stimulating recovery.

In the first 6 months of 2009, M2 money rose 29% and the banking system reported that lending in June was 4 times as large as last year. China's officials are draining liquidity into the Chinese economy, but the problem is that it's not going where it should be: 20% of the new lending was invested in the stock market in the first 5 months of this year. And the minimum mortgage payments were cut from 30% to 20% to help drive up home sales.

This brings me to my next point of skepticism: the Chinese stock market. The Shanghai Index has risen over 75% since November 2008. The best performing country in the world can't justify such drastic marketing upswings, let alone an economy that's struggling to find the strength to get back on its own 2 feet without the help of US credit-compulsive consumers.

That kind of upward momentum screams equity bubble. Even worse, the Chinese housing market is starting to mirror the US housing market several years ago. Mortgage standards are being lowered -- albeit not anywhere close to where US standards fell to -- and banks are being told to raise coverage ratios for an expected rise in non-performing loans. In fact, I've read reports that an increase in vacancy of unfinished buildings is being spotted.

It's deja vu. And we already know the outcome of this story. The US is experiencing its last chapter right now.

The Chinese government needs to step in and mop up the excess liquidity, or things are going to get messy. Monetary policy is too loose and both stock market and real estate bubbles are clearly in sight. As long as the government continues to flood the market with yuan, the bubbles will continue to balloon.

If both of these asset bubbles collapse -- and they likely will -- all of the capital the government lent will be wasted. Long term, that means no real economic growth will have been created.

In order to create real growth, China must alter its current recovery method. The government needs to find ways to drive personal consumption. The Chinese have a tendency to save for a rainy day. They prefer to invest in stocks or a home, rather than spend or borrow to purchase frivolous goods.

While the Chinese should never strive to emulate the spending habits of many Americans, the government needs to provide incentives for the Chinese to buy the goods they make -- the goods that we Americans can no longer afford. Otherwise, real growth won't be achieved.

As critical as I've been on China, I do have faith in the country. Heck, I'm moving there because of the great opportunities the country has to offer. However, I'm certainly concerned about the recovery strategies the country is taking, and fearful that I could end up being smack dab in the middle of the same crisis I just lived through here in the States over the past 2 years.
No positions in stocks mentioned.
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