Friday, March 11, 2011

China: The Black Swan

According to an old saying on the stock exchange, “if the USA sneezes, the rest of the world catches a cold”. But in the meantime it would seem as if this had become true for China. We remain critical vis-à-vis the unlimited China optimism that seems to be the current consensus. The Chinese economy has grown by almost 10% per year in the past ten years. According to Bloomberg, the consensus expects real growth of 7.7% p.a. for the next 20 years, which we regard as drastically over-optimistic. The extrapolation of historical growth rates is dangerous, as a look through history books shows. Sometimes this boundless optimism reminds us of Japan at the end of the 1980s. 20 years ago the Japanese GDP accounted for 18% of global GDP – today the share has fallen to 8%. The daily news reports about billions worth of takeovers and investments by the Chinese underpin this picture. An interesting detail: Hong Kong has passed Tokyo as most expensive office location.
The stimulus package in 2009 worth almost 14% of GDP helped repair the economic dent quickly yet superficially. Artificial stimulus of this sort naturally comes with quicker results in a centrally controlled economic system. State-held companies accounting for almost 30% of aggregate output can be forced to invest, as banks can be forced to lend. China is currently inflating its money supply by a more substantial degree than any other nation ; M2 increased by almost 20% in November y/y and at the moment amounts to 185% of GDP. On average M2 has increased by 18.8% p.a. in the past decade, while GDP has been growing at 10.9% annually. China currently has the highest M2/GDP ratio worldwide.
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