China's bubble machine looming over world markets

China is a hot topic again this year with some market commentators postulating that continued growth there will pull the global economy out of this downturn. I wish it were that simple. Contributing about 8% of world GDP, even with expected growth rates of 8% in 2009 and 2010, China can add about .6% to world growth.
In commodities the Chinese government has been buying its brains out; stockpiling supplies for anticipated future demand. This has helped to firm commodity and energy prices over the past few months. The trouble is that demand is so far not apparent, and the inventory of supplies is now to the rafters. Last week in Australia, Nouriel Roubini was warning that commodity prices may now be once again vulnerable to a sharp pull back should Chinese stockpiling take a pause in the fourth quarter. See: Roubini warns China could cause commodity price slide.
Over the past couple of years as global demand for Chinese exports has swooned, the Chinese government has been struggling to maintain growth at home by pumping cash reserves into its banking system. Forced lending has resulted in the typical results: bad loans, bad business and asset bubbles re-flating.
Leading the global surge back to risk appetite the past 4 months has been the Chinese stock market, up now 100% year to date. Remarkably however, it is still more than 80%% below its recent cycle peak in 2007. The trouble with bubbles is they always burst and coming into the fall, the risks of a major sell off in China are mounting. The ramifications for other world markets are ominous.
“The stock market is in a final frenzy again. The most ignorant retail investors are being sucked in by the rising momentum. They again dream of getting rich overnight. As in the past, retail investors usually lose, especially like the ones jumping in now. The final frenzy usually doesn’t last. The turning points in China are often related to political calendar. Retail investors hold the popular belief that the government won’t let the market drop before October 1, the 60th anniversary of the PRC. Last time it was the 17th Party Congress in October 2007. This sort of belief is self-fulfilling in the short term. The market tends to roll over around the time. If the past is of meaningful guidance, this wave will taper off before October.”
See this full article for an on the ground assessment of China's bubbles brewing.
Meanwhile today we learned that the Baltic Dry Index, a measure of shipping costs for commodities, had its worst week since October as Chinese demand for shipments of coal and iron ore slowed.

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3 Responses to China's bubble machine looming over world markets

  1. Anonymous says:

    Contrary to popular belief, the US recovery will be much stronger than most of the skeptics would believe it. Perhaps the Chinese know this too…..

  2. Anonymous says:

    Thanks again, Danielle, for shining enough light to see through the fog of “recovery” and avoid the mistake of jumping on any bandwagons that play on the notion that NOW is a good time to invest in sectors that would benefit from China's growth (such as the din of many financial analysts who purport it to be an opportunity to profit from the demand side of commodities). Your astute observations again reminds one to keep in mind Einstein's famous definition of insanity: “Doing the same thing over and over again and expecting different results.”

  3. Anonymous says:

    Hey Danielle,
    What a difference six months makes. I agree with your logic but not sure if I am un-biased given that I've missed a lot on the recent upside.
    One of my all-time favorite strategists is bullish. He's not well known by the man on the street, but the top players have a lot of respect for him:
    http://www.moneycontrol.com/india/news/fii-view/china-onlyshort-term-fear-for-global-mkts-clsa/410130
    FYI – I restarted my own blog.
    Cheers,
    Truth or Talk

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