Bubble, bubble, toil and trouble

Wu Xiaoling.jpg

Its not only the blog (and fellow blogger John Richardson), who worry about the speculative frenzy underway in China, and its impact on global polymer and chemical markets.

Wu Xiaoling, former deputy governor of the central bank, has called the growth in new lending excessive“, and warned it is creating “bubbles in the property and stock markets”.

Wu says China’s bank lending in 2009 will be “a staggering increase of 40% of the entire stock of outstanding loans“. The blog had to read this statement several times to fully grasp its importance.

It does not mean that bank lending will increase by 40% in 2009 versus 2008 – which would still be a very large increase. It means that the total value of all bank lending at the end of 2008 will have been increased by 40% during 2009.

Roach.jpg

Equally, Stephen Roach, chairman of Morgan Stanley Asia, and a long-time China bull, says he “is starting to worry” about the direction of current policy. The blog likes Roach, particularly for his accurate analysis in December 2007 that “decoupling (of China’s economy from the West) is a good story, but it’s not going to work going forward”. He notes:

• In 2007, premier Wen Jiabao warned the economy was becoming “unstable, unbalanced, uncoordinated and ultimately unsustainable
• Roach claims that current policies “compound the very problems the premier warned of: aiming a massive liquidity-driven stimulus at its most unbalanced sector
• He adds that they “leave little doubt as to how bad it was in China in late 2008 and early 2009“, to cause the government to react in this way

But Roach warns the loan growth is “ultimately a recipe for failure“.

This week, the government began to respond to its critics, with regulators starting to insist that its Rmb 7400bn ($1080bn) of loans so far this year, be “used to bolster the real economy and not to speculate“. But as we know from recent experience, bubbles on this scale don’t usually subside gently. And when they burst, a lot of innocent people can get hurt.

About Paul Hodges

Paul Hodges is Chairman of International eChem, trusted commercial advisers to the global chemical industry. The aim of this blog is to share ideas about the influences that may shape the chemical industry over the next 12 – 18 months. It will try to look behind today’s headlines, to understand what may happen next in important issues such oil prices, economic growth and the environment. We may also have some fun, investigating a few of the more offbeat events that take place from time to time. Please do join me and share your thoughts. Between us, we will hopefully develop useful insights into the key factors that will drive the industry's future performance.

, ,

Leave a Reply