For more than a month now, the Indian market indices have been taking their cues from Shanghai. Or so it seems. Since everyone knows that China is the market of the future, it’s not a bad idea to hitch India’s wagon to a rising star, is it? The Chinese government has claimed that its economy is growing at 7.8%, which is an incredible achievement, especially during a slowdown.
However, markets in China have been sliding and experts and China specialists are sceptical about the actual rate of growth. Some market watchers claim that China’s rapid growth is due to malinvestment— artificially induced low cost of credit and an unsustainable increase in money supply, caused by the government pumping huge amounts of money for domestic banks to lend. An even more serious doubt has been cast on the Chinese figures by Marc Faber. In a recent interview, the noted economist and China watcher observed caustically, “The Chinese government is one of the few governments in the world that knows its GDP numbers three years in advance.”
One more warning comes from a former Morgan Stanley analyst and China expert, Andy Xie, who says in a report, “Chinese asset markets have become a giant Ponzi scheme. The prices are supported by appreciation expectation. As more people and liquidity are sucked in, the resulting surging prices validate the expectation, which prompts more people to join the party. This sort of bubble ends when there isn’t enough liquidity to feed the beast.”
Of course, China bulls insist that this is just doom mongering. They believe that the high asset prices reflect China’s huge growth potential. As Xie says, “One can never make an iron-clad case to pin down an asset boom as a bubble.” But as Faber says, “If you throw money at the system, lots of things go up in value—but maybe they go up for the wrong reasons.” This is something that the credit rating firm Fitch Ratings seems to have taken into account. Fitch, widely seen as being bullish on China, has become wary in the past several months. In a recent report, it said, “Future losses on stimulus could turn out to be larger than expected, and it is unclear what share the central and/or local governments will be ultimately willing or able to bear.”
In 2007, Chinese premier Wen Jiabao had warned that his country’s economy was becoming “unstable, unbalanced, uncoordinated and ultimately unsustainable”. All the signs now seem to indicate that not much has changed in China over the past two years. So the dragon might not be the next big saviour of the world’s economy; it could actually prove to be the next big threat.
Causes for Concern:
