My Chief Economist David Karsbøl has produced short piece on China growth - I remain extremely sceptical of the illussion of 8% even 5% growth in China - a lot of hope is built on China being able to pull demand with it and infrastructure et al... I will be surprised to see 5% growth, even 3% .... I think, unfortunately that China is going to have tough times ahead and as David points out the similarities with the US in the 1920s are more than relevant.
David Karsbøl, Chief Economist, Saxo Bank:
China, China, China. China has been THE story in the past five years. Who would not be invested in a country with minimum 10% growth per year, with a strongly growing consumption (at least sometime in the future), thousands and thousands of new millionaires and a voracious appetite on commodities? Everyone depended on China – both to get a return and to explain how the global growth could and would continue. Everyone wanted to go there, either physically or by investing.
Well, isn’t this exactly how investors were perceiving the United States in 1929 (albeit US growth was only averaging 4% p.a. before 1929, but it was still somewhat higher than in the rest of the world)?
There are more parallels: Both China and the US in 1929 experiences extremely strong growth rates (roaring twenties in the US) for almost a decade, which completely blinded observers. Both have had some of the world’s highest savings and investment rates in their boom periods. Both had significant current account surpluses that they tried to cope with (China by buying US Treasuries, the US by buying gold). Both were trying to uphold pegs to faltering and unsound assets: The US tried to prop up the GBP at a ridiculous rate after the re-peg to gold caused by WW1 inflation and China is now trying to peg to the USD, which despite the newfound strength is still trending lower and will end in catastrophe. For both of the countries and their boom periods, monetary policy was extremely expansive at the same time as the general price levels were flat to only moderately increasing, which led observes to erroneously conclude that monetary policy was “neutral”. Therefore, very big bubbles were allowed to evolve and burst.
In the 1930’s, the US was one of the economies worst hit by the crisis, because their monetary policy was taken to the farthest extremes. Chinese monetary policy has consistently been most extreme among the G20 countries. Over the past 10 years, annual M2 Money Supply growth in China has averaged +16%. That should be very frightening for the eternal China bulls. They will be lucky to see positive growth in the next three years.
David Karsbøl, December 11th, 2009
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