Is China's Bubble About To Pop?
-- November 3, 2003

Recently, the People's Bank of China raised bank reserve requirements. Why? They fear the massive amount of credit in the economy could lead to a crash. Bank lending rose at a 50% annual rate during the first half of 2003. Banks gave cash to ailing state-owned enterprises -- companies with too much debt already. Plus, they extended big loans in the real estate sector, creating a housing bubble of their own.

Banks, flush with cash, funded many dubious and redundant projects. And that means that much of the money now funneled into the private sector will not be recovered by the banks. It's a credit bubble the government is trying to deflate before it pops.

In fact, Morgan Stanley predicts that China's growth in fixed investment and imports will be cut in half during 2004. Now, these forecasts assume Chinese monetary authorities will be successful in deflating the credit bubble in an orderly fashion. But imagine what happens to these growth numbers if the bubble busts!

If China's growth slows, it could spell big trouble for the global economy. Right now, China is growing about three times faster than the G-7 industrialized economies. China's growth in 2002 accounted for 17.5% of total world GDP growth in 2002. They generated 60% of the world's growth in imports and exports. China's purchases of goods from abroad surged 41% in the first nine months of 2003. And, China is set to surpass Japan as the world's third largest importer, behind the US and Germany.

So keep a close eye on China for an indication of potential trouble at home.

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