And is China about to collapse?

I am bored to death, sick to my back teeth, of attending conferences where the only view on China is one of almost exponential continued growth. Read this from Will Hutton, a top China sceptic for a sobering reminder that China has some major structural weaknesses. You thought the Asian Financial Crisis was bad? If he’s halfway right, this will make 1997 seem like a sunny stroll in the park

One Response to And is China about to collapse?

  1. Paul Hodges 1 March, 2007 at 8:35 am #

    The current China-inspired ripple in the world’s stock markets brings this subject back to the headlines again.

    To me, the Chinese are behaving just as traditional monetary authorities used to do. Faced with a Shanghai market that rose 130% last year, a sure sign of a speculative bubble, they have reined in bank lending with three successive 0.5% rises in the amounts that banks have to deposit. In this, they are fulfilling the main central bankers’ function, as famously described by William McChesney, the long serving Fed Chairman in the 1960s – “The job of the Federal Reserve is to take away the punch bowl just when the party starts getting interesting.”

    It is still unclear to me why Alan Greenspan failed to carry out similar steps in 1996, when he claimed to detect ‘irrational exuberance’ in the US markets of the time. This was clearly a mistake, as his ‘easy money’ policy allowed the dot-com debacle to develop, and then the current housing bubble in many Western countries.

    What seems to have happened over the past decade is that Western central bankers have confused being ‘market friendly’, which we can all support as a policy, with being ‘friendly to markets’. They have forgotten that markets are only a tool. As a result, ‘liquidity’ is being pursued as an end in itself, and markets are no longer serving their principal purpose of channeling cash to companies to fund their growth. Instead, we are seeing record amounts being returned to investors via buy-backs etc.

    When a company such as Dow Chemical can seriously be considered as a ‘buy-out’ candidate, it is clear that this trend needs to reverse. The chemical industry would certainly be better off if it was being presured by investors to grow, and to develop new products and services, rather than being seen as a plaything for the asset-shufflers on Wall Street. Lets hope the Chinese authorities continue to follow McChesney’s dictum, and to remind the other central bankers of their fundamental purpose in life.

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