China Bears Raise Fresh Concerns

The “China Bears” are at it again with one prominent member of the club – Marc Faber – even suggesting that the Chinese economy could “decelerate very substantially in 2010 and could even crash”. Faber – who publishes the Gloom, Boom, and Doom Report – said in a recent Bloomberg TV interview that “it does not make sense for China to build more empty buildings and add to capacities in industries where you already have overcapacity”.

People's Bank of China

According to Faber, much of China’s recent growth is not because of increased demand, but is actually the result of excessive lending and government stimulus spending. Lending for instance, has forged ahead at a torrid pace that is set to eclipse last year’s record of 9.59 trillion. This is in addition to over $8 billion worth of foreign investment – an increase of 7.8 percent over the previous year – and 4 trillion yuan in government spending. In short, China is awash in cash.

With so much money sitting there just begging to be spent, large state-owned enterprises (SEOs) have become more creative in finding ways to put this money to work. After all, once you’ve completed all the dams, railways, and highways you can possibly build, where can you turn to next? Well, property naturally; and government agencies – together with some of the country’s largest companies – are abandoning their core responsibilities in order to invest in everything from office towers to shopping malls.

Recent actions taken by the People’s Bank of China suggest that the Central Bank is aware of the potential for trouble. While the steps have been tentative at best, the Bank has directed commercial banks to reduce lending to developers. On February 12th, the Bank of China increased bank reserves by 0.5 percent (50 basis points) in a bid to further reduce liquidity in the banking system.

These token measure are unlikely to do much to dampen the land rush however, and the situation is quickly turning into a highly-leveraged, asset bubble. Remember, it was the 2007 collapse of the U.S. housing market that triggered the recession – does the potential for a collapse of China’s economy spell round two?