Tuesday, June 30, 2009

Dangerous Malinvestment in China

An Austrian sounding analysis of the current state of the economy in China, from Edward Harrison:

Late last year, I predicted that China, as a major exporter to the West, would feel a huge impact from the meltdown in the global economy, taking it’s growth rate down to 2% (See Top ten predictions for the 2009 global economy). Forgetting about the fact that data are highly suspect in China, I see that prediction as very unlikely to come true due to huge fiscal stimulus in China. The Chinese government is very much wedded to it’s 8% growth target and will do whatever it takes to come close to
that target – including flooding the domestic banks with a wall of money to lend.

However, preventing a downturn with easy money is a dangerous way to reflate the economy. The likely malinvestment will be large...

Harrison then points out, in a fashion similar to my own comment yesterday, that this bubble can go on for quite an extended period of time, but make no mistake, it is a money induced bubble.

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