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China and the Credit Crunch

December 1, 2007
Bad reporting and generally an incredible lack of skepticism about Chinese central planning. In the Telegraph, China wins from credit crunch fallout The Financial Times, China Freezes Loans to Tackle Inflation. How the process works: China fixes its exchange rate below market value. Exporters for those costs are in the Chinese currency (i.e. non exports) have lower costs, and therefore can sell at lower prices. There is a shift in the Chinese structure of production toward export-oriented industry and away from domestic consumption. There is a corresponding shift in the US toward the consumption of imported goods and away from the production of those goods or. Chinese consumers face higher prices for imported goods, consume less. In order to maintain the fixed exchange rate, which over-values the dollar in relation to the Yuan, the BoC must buy all dollars offered at the fixed exchange rate and sell Yuan. If it cannot borrow enough domestically, then they must print the difference. The money printing by the BoC has generated a credit bubble in China, which is showing up in their real estate and stock markets. Telegraph problems with article: a. The Telegraph has a very positive take on the build up of reserves. All these reserves represent is the more or less accidental outcome of a price-fixing scheme which has resulted in significant welfare losses for Chinese consumers. b. Does not see any connection between the accumulation of reserves and the banking crisis. 'Shrewd financial stewardship". c. China is largely "insulated" from the crisis? In the sense that they had not purchased the worst kinds of debt. Yes, but they have their own inflationary bubble and have contributed to the mis-allocation of resources. d. Chinese economy "growing stronger by the week"? Seems rather dubious, given that a lot of the investment there is not economically rational and they are in the midst of a massive credit bubble. The author cites new highs in the stock market, which can be just as much a symptom of a credit bubble as of economic growth. 3. "Because of this frenetic financial activity, inflation is rising in China". e. Must not have read, one week before in the same paper, Credit 'heart attack' engulfs China and Korea In addition to the mal-investment generated by their credit bubble, Chinese bank lending is political, not economically driven. Loan rates are capped below market. This resulted in a banking crisis some years ago. The banks were bailed out and recapitalized by the central bank, which moved all of the bad loans off their books. Now only a few years later they are back in the same situation. previous entry I did on the Chinese credit bubble. Recently, the central planners have told banks to stop lending to some sectors, according to the financial times:
    China has for some time tried to rein in the rapid increases in bank lending that have contributed to rising consumer and asset price inflation. But a renewed effort is affecting foreign banks and companies for the first time as the central bank and regulatory officials step up their "window guidance” to try to cool the overheating economy. Executives working at locally incorporated foreign banks said they had not received formal orders from authorities. But in quarterly meetings and regular phone conversations they have been "advised” not to lend to the real estate projects or polluting industries. Domestic state-owned banks must attend separate and more frequent meetings where a similar but far more forceful message is delivered, along with a directive to halt new loan growth altogether until the end of the year.

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