02/13/10 San Antonio, Texas – China sees a bubble ahead and is trying to avoid it – is that such a bad thing?
Isn’t this what we expect Ben Bernanke and the Federal Reserve to do here at home – take clear and decisive action to drain off excess liquidity in the economy before inflation takes hold?
The People’s Bank of China did just that after it saw that 1.4 trillion yuan ($204 billion) worth of bank loans were issued in January, more than the total loaned in the three previous months combined.
For all of 2010, the target loan amount is 7.5 trillion yuan, so it’s easy to see why the government might want to slow the pace a bit.
Forbes’ online headline was “China Tightens the Screws,” but let’s have a little perspective.
Barclays Capital predicts that the 0.5 percent increase in bank reserve rates (from 16.5 percent of deposits to 17 percent) will remove 300 billion yuan from the Chinese economy. That’s only 20 percent or so of the amount loaned in January.
And it’s not like cash is going to dry up – the People’s Bank plans to increase the nation’s M2 money supply by 17 percent this year. January’s M1 money supply report showed a 39 percent increase (chart above). Not exactly a screw-tightening.
China’s CPI rose 1.5 percent in January, which is not extreme, and the chart above from BCA Research shows that real estate prices in terms of per-capita income had not entered a bubble phase as of year-end. But perhaps the more telling number was wholesale prices – up 4.3 percent year over year and more than double the increase seen in December. This signals that higher inflation at the consumer level could be around the corner.
Markets are taking a hit based on this news – this shows how important China has become to the world economy. It surpassed Germany as the top exporting country by value at $1.2 trillion, and in January its exports were up 20 percent compared to a year earlier. Even better, its imports were up 85 percent year over year.
What we may actually have is a classic bull market in the making – one that climbs the proverbial wall of worry, which suggests that investors buy on corrections. The table below shows the standard deviation (sigma) over 10 years for the main stock markets in mainland China and Hong Kong. The weekly sigma for the Shanghai A-share market is plus or minus 5 percent, while its normal quarterly swings can be nearly 25 percent up or down.
It’s nearly impossible to pick exact tops and bottoms – adding to core positions after any correction greater than one sigma is a safer and more prudent way to invest.
Beijing is tending to its economy so it performs over the long term. This is central to its goal of social stability through economic prosperity, and it seems to be working – millions of households join China’s middle class every year.
We all know what can happen when an asset bubble grows huge and then bursts – we’re still recovering from 2007-08.
China is a long-term growth story, and how well it manages that growth will have an impact on all of us. A little caution now should be seen as preventative maintenance, and we all know that when we’re talking about cars or economies, that’s a good thing.
You can visit my blog, Frank Talk, for more daily insight and commentary. In July, I’ll also be speaking at Agora Financial’s Investment Symposium in Vancouver. You can find more details here.
Frank Holmes
Frank Holmes is chief executive officer and chief investment officer of U.S. Global Investors Inc. The company is a registered investment adviser that manages approximately $2.08 billion in 13 no-load mutual funds and for other advisory clients. A Toronto native, he bought a controlling interest in U.S. Global Investors in 1989, after an accomplished career in Canada’s capital markets. His specialized knowledge gives him expertise in resource-based industries and money management. The Global Resources Fund was also Morningstar’s top performer among all domestic stock funds in the five-year period ending Dec. 31, 2006.
The Daily Reckoning is your premier source for making sense of the news Washington and Wall Street generate. Each business day, The Daily Reckoning calls on its stable of world-class writers and thinkers to show you how to get ahead.
Start your 100% FREE subscription to The Daily Reckoning today and you’ll get a free research report, “How to Survive the Fall of Social Security.” Simply enter your email address below to get your free report and join over 495,000 worldwide Daily Reckoning subscribers!
We Respect Your Privacy and We will
Never Share or Sell Your Email Address
Hahaha! Long Term growth story *chuckle*
Infinite growth meet the brick wall known as the first and second law of thermodynamics.
The idea of infinite growth on a finite planet is preposterous. The China growth story is preposterous.
Check bloomberg, China has enough Commercial space under construction to equal 6,800 Burj Khalifa’s – 160 storeys x 6,800.
As Hugh Hendry say’s, the wise man don’t invest in overcapacity and especially now given that oil production has peaked since 2005.
And no anyone with a calculator and some insight into physics can calculate that oil can never be replaced. China growth story = biggest scam of the century.
GDP is not equal to Wealth. Malinvestment has occured on a gigantic scale in China. It’s a communist regime.
This article makes my head hurt, what a bunch of baloney. I would continue with my thoughts but my comment would not get posted.
Please, no more of this junk.
I come to this site so I can read the truth, send this article to MarketWatch.