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Chinese Bubble?

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01/22/2004

Reckless bank lending and credit for dubious projects flag a future Chinese economic crisis (FinTimes$, letter by me):

"During October 2003 the annualised increase in China's broad money supply topped 21 per cent and domestic financial institutional lending climbed by a yearly rate of 71 per cent. Consistent with a burgeoning boom and bust sequence, property, car and home amenities prices and GDP are all accelerating at a breakneck pace. Coupled with the financial system's propensity to award credit based on political connections rather than on the commercial viability of projects, these gross malinvestments squander capital and generate a growing mountain of bad debt, especially when the inclination to lend recklessly is exacerbated by the heady times of a artificially induced credit expansion. All of this puts China in a dire situation. Chinese banks will continue to lend recklessly as long as Beijing maintains its currency peg and the attendant expansion of the domestic money supply."

Grant Nülle, MBA, is a former legislative staffer, finance director, and budget analyst with extensive experience in fiscal and economic policy. He is currently working on a PhD in mineral and energy economics in Colorado.

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