Tuesday, January 24, 2012

Interesting that my 100th post is about China :)
Michael Pettis has finally written a very simple article talking about why we are near the brink with respect to new government action by China.
The crux is that a real estate bubble can be witnessed- prices are falling already. An infrastructure bubble can't be witnessed. It can only be seen when planned infrastructure is left idle, is left unmaintained, or when it lies desolate.
His main point is that cheaper loans as allowed by the central agency affects household consumption through it being a smaller portion of GDP, money being 'transferred' from savers to borrowers (look up 'subsidized loans') and, according to me, through inflation.
He also says that one won't see defaults because the centre will come to the rescue yet again, as it did in 2008 and in early 2000s. We will see debt being serviced through, what can be called, the printing press or the mint.
Eventually, which is not too far off, we will see China's GDP growth slowing down dramatically because fruitless investments in infrastructure are unsustainable. Debt needs to be serviced. Read the article.

1 comment:

  1. Actually just read Pettis'ce myself. I am under the impression that only 36% of the Chinese economy is consumer spending now.

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