Wednesday, September 21, 2011

IMF Economist Warns on China's Economy

China is a train wreck waiting to happen. China's central bank has been pumping massive amounts of money into the system (largely to prop up the US dollar). This is causing huge price inflation in the country and resulting in a now slowing of money printing by the People's Bank of China. The slowing of money growth means the current capital structure can't be supported. Hello, down phase of the business cycle.

Seasoned global business operators are beginning to understand this, on the other hand, international "consultants," who have never earned an entrepreneurial penny in their life, don't have a clue. A member of William Cohen's operation told me last night that everything was just great in China.

The IMF's AndrĂ© Meier  is in the camp that understands what is developing in China. WSJ reports that he "assessed the risk of a banking crisis in China and is less than reassuring."

A huge expansion of credit in China since 2008 helped that country prosper despite the global financial crisis. But that lending spree may produce “significant write downs” on debts by local governments, Meier says in an  IMF Global Financial Stability Report.

Meier says, add to that a real estate boom, which has boosted property prices by at least 60% since the end of 2006, and measures to cool the market “might induce a sharper-than-expected correction in prices,” which could further undermine the ability of local governments to repay debt.

Finally, Meier reports that China has the wherewithal to bail out its banks, including $3.2 trillion in foreign exchange reserves. But Meier says that may not be sufficient to “preclude significant bouts of uncertainty as to how losses will ultimate be allocated” among private investors and the central government. Already, Meier notes, Chinese bank stock prices are slumping.


  1. You mean Chinese central bankers are just as stupid as western central bankers? Based on the success of the earlier communist model, I'm not sure why this is a surprise.

    Perhaps the real lesson is that western central bankers are just as stupid as Chinese (previously communist) central bankers.

  2. But to keep up with the money supply in the USA and all those dollars coming in to China from American consumers via Chinese exporters, they will be forced to print more Yuan.

    If there's a short-term boom coming in the USA, I would argue a short-term boom would follow in China, despite a slowdown from the 08-09 monetary stimulus.

    2. The Shanghai index was the first stock market to top out after the March 2009 bottom. The top was in August 2009.

  3. "Meier says, add to that a real estate boom,..."

    Two words: Ghost cities.

  4. I agree and have heard this from many sources, but I don't think anyone has reasoned through the most likely and important dominoes that this will trigger.

    I'm not sure either other than assuming China will be selling more foreign reserves, increasing interest rates around the world. But that maybe partly offset by a decreasing demand for credit. I won't even speculate how long till or if this will cause China to break their current fixed exchange to USD.