Long-term Bearish on China
By: Steve Saville | Mon, Apr 12, 2010
With China's banking system being slightly less transparent than the average house brick, there is no telling how big the bubble will get before it bursts.
As discussed in a previous commentary, if the government doesn't deliberately deflate the bubble it could continue until the effects of the massive monetary inflation become evident in food prices. Once this happens, the political cost of not stopping the inflation will, we think, be greater than the political cost of continuing it.
It is not possible to know, in advance, when a great credit bubble will burst. Also, it is dangerous to bet against a bubble because the nature of these things is to go on for much longer than a rational observer would expect.
What we do know is that when they burst the result always includes a severe economic downturn and the wiping out of much of the 'wealth' that was created during the bubble years.
We think it's a good bet that China's government will make the same mistakes that were made by the US government during the 1930s, Japan's government post-1990 and the current US government, thus setting the stage for a long-term decline once the bubble eventually bursts. This is the main reason we are long-term bearish on China's economy.
As things now stand, we are inclined to give China's bubble the benefit of the doubt; meaning that we are disinclined to bet on falling Chinese asset prices at this time. It looks like China's stock market, as represented on the following chart by the Shanghai Stock Exchange Composite Index (SSEC), made a major peak in 2007 and is in the midst of a post-crash rebound, but the post-crash rebound may not be complete. A signal as to whether or not it is complete will be the direction of the breakout from the triangular pattern that the SSEC has traced out since last August. A downside breakout from this pattern could be interpreted as a warning that the credit bubble is in trouble, although it should be noted that the epicentre of China's boom is the property market, not the stock market.
http://www.safehaven.com/article/16406/long-term-bearish-on-china
By: Steve Saville | Mon, Apr 12, 2010
With China's banking system being slightly less transparent than the average house brick, there is no telling how big the bubble will get before it bursts.
As discussed in a previous commentary, if the government doesn't deliberately deflate the bubble it could continue until the effects of the massive monetary inflation become evident in food prices. Once this happens, the political cost of not stopping the inflation will, we think, be greater than the political cost of continuing it.
It is not possible to know, in advance, when a great credit bubble will burst. Also, it is dangerous to bet against a bubble because the nature of these things is to go on for much longer than a rational observer would expect.
What we do know is that when they burst the result always includes a severe economic downturn and the wiping out of much of the 'wealth' that was created during the bubble years.
We think it's a good bet that China's government will make the same mistakes that were made by the US government during the 1930s, Japan's government post-1990 and the current US government, thus setting the stage for a long-term decline once the bubble eventually bursts. This is the main reason we are long-term bearish on China's economy.
As things now stand, we are inclined to give China's bubble the benefit of the doubt; meaning that we are disinclined to bet on falling Chinese asset prices at this time. It looks like China's stock market, as represented on the following chart by the Shanghai Stock Exchange Composite Index (SSEC), made a major peak in 2007 and is in the midst of a post-crash rebound, but the post-crash rebound may not be complete. A signal as to whether or not it is complete will be the direction of the breakout from the triangular pattern that the SSEC has traced out since last August. A downside breakout from this pattern could be interpreted as a warning that the credit bubble is in trouble, although it should be noted that the epicentre of China's boom is the property market, not the stock market.
http://www.safehaven.com/article/16406/long-term-bearish-on-china
