“You have to look at what’s driving growth in China, it’s mainly investments,” said Patrick Chovanec, an associate professor at Tsinghua University in Beijing.
“This investment is being financed by expanding the money supply, which is fuelling inflation,” he added.
Analysts also said that given the huge amount of loans that had been extended by the Chinese banks, there were concerns about asset bubbles being formed in the country.
“A lot of the investment that is going out, there is a real question being raised about whether it is going to generate return and a lot of it has started to show up as bad debt in the banking system,” Prof Chovanec said.
He warned that the current path of growth in China was unsustainable.
“What we are seeing is not necessarily a strong economy, it’s an economy that has been pumped up on steroids,” he said.
However, Prof Chovanec said that despite the government efforts to rein in growth, a lot of people China wanted the credit-led growth to continue.
“There is a tug-of-war between those who say keep lending and let growth continue, versus those who are more concerned about inflation and want to rein it in,” he said.
And while the spokesperson for China’s statistics office this week downplayed the danger for a so-called hard landing of the country’s economy saying the risk for a severe slowdown was small, Patrick Chovanec is not so sure.
“What China has is growth on steroids,” he says. “It looks like growth and it looks like a strong economy, but resources and energy are not being channeled to the most productive parts of the economy.”
Chovanec believes that the central government can indeed soften and manage the economic downturn that he believes is inevitable, he is simply not convinced that they they will because of the political and economic risks involved.
“They can kick the can down the road,” he says and push back the inevitable, but ultimately that will only make things harder in the long run.
“China will have a correction, China needs a correction,” predicts Chovanec.
July 19, 2011
Kicking the can all over the place; extend and pretend, what else can we call it! Soon most will be digging in trash cans to survive! West
Here too...on Greece, whom are insolvent! I laugh how again it is banks whom need capital; just to survive! Gotta love being a banker; F up and see no pain! LOL
History records that in August 2001, the IMF oversaw a debt exchange for Argentina in an unsuccessful, last ditch effort to avoid default. Indecisive and confused action by European authorities seems doomed to ensure that this restructuring, if it eventuates, will be followed by others and an eventual messy, disorderly and expensive default.
The French proposal perpetuates the lack of acknowledgment that Greece has a “solvency” rather than a “liquidity” problem. Like the EFSF whose structure has been criticised as nothing more than a collateralised debt obligation (“CDO”), it uses financial engineering techniques to defer or disguise losses in an unending game of “extend and pretend”.
According to the Bank for International Settlements, French banks have exposures to Greece, including of around Euros 50-60 billion. German banks have exposures of around Euro 30-35 billion. These banks might result require new capital to absorb the writedowns...
July 12, 2011 12:02 PM