China's Dangerous Bubble: CCP Had No Choice

Update 6December2010: More on the China bubble via TNE. China is an insular society and culture, so that by the time outsiders comprehend what is going on, it may be too late to save themselves from the fallout.

Stories about China's economy are typically upbeat, presenting the country as the most prominent success story of the recent prolonged global downturn. But you can also hear discordant notes such as this:

“It is the greatest bubble in history with the most massive misallocation of wealth,” said James Rickards, formerly of hedge fund Long Term Capital Management. He told a business summit in Hong Kong that stock market speculation on credit and wasteful spending by officials were disasters waiting to happen. _Times

We expect to hear China bears talking about a "China Bubble" in real estate, commodities hoarding, infrastructure (to nowhere), and so on.

Despite the global downturn, China's economic growth rate remains above 10 percent. But there is mounting evidence that Beijing has misallocated vast amounts of capital, touching off a real-estate crisis that could yet drag the world's second-largest economy down to earth. _Reason

But when even the China bulls begin sounding cautionary notes, it is time to look more closely at the middle kingdom's state of affairs.

There is undoubtedly a bubble emerging in some of the stock prices of Chinese companies, so be really cautious about where you place your bets in the coming months. _ShaunRein_China_Bull

Can the Chinese government deal with this inflationary phenomenon before it brings the entire house of China tumbling down? Opinions are mixed.

I believe China’s ability to alter its own course is grossly exaggerated. As a net exporter with relatively minimal internal consumption as a source of economic activity, it is basically at the mercy of importing nation’s ability to buy their goods. Any attempt to stoke the ability of these nations importing will be ancillary at best. The “reported” success of their bubble blowing is showing only one side of the equation – the bubble blowing. Signs of a traditional bubble (such as the one whose bursting the US and Europe are struggling to escape from) are everywhere, yet the mainstream media has not focused nearly as much attention on such. Unless the laws of basic human nature has changed, expect to see China suffering from the effects of profligate excesses just as the others that tried to inflate their economies the quick and easy way did. _ZeroHedge

One of the problems is that Chinese communist officials themselves are heavily invested in state owned banks and industries, and stand to lose a great deal if they face the economic bubble and misallocation honestly. Corruption in high places is almost as bad in China as in Russia, Cameroon, or other developing nations. As a result, it is likely that the bubble of lies will grow to devour much of what the decades of partial economic reform have accomplished.

As empty apartment buildings, shopping malls, highway overpasses, and other shoddily built structures continue to collapse decades before their time -- their dust and rubble lost in the polluted and poisonous air, land, and water of China and the China Seas -- more observers are likely to flash to what is happening. When that happens, more investors will begin to exhibit a healthier caution when looking at opportunities in China.