Australian politicians have been patting themselves on the back for avoiding the recession that much of the Western world has fallen into, most notably the United States. Our “soft landing” is attributed to two things: a clever “stimulus” package that injected money into the economy to keep things humming along; and the strength of the Chinese economy.
The stimulus certainly got people out there spending money, but it may or may not have done anything in the long term for the economy. We’ll have to wait and see about that. But our big savior is China, which has continued to buy our commodities, and continued to grow at eight percent while the rest of the world has taken a financial cold shower.
Hurray for China!
In fact, it’s become fashionable in many circles to talk of China as the next superpower. Australia needs to align ourselves with them, some say, because America is declining and China is rising.
But let’s not pop the champaign just yet, and take a closer look at China’s so-called miracle growth. It’s eight percent and has been that for several years. Why?
The answer is simple: 8 percent growth, or higher, is China’s official economic goal. In short, they have a “grow at any cost” policy, and growth does actually cost.
America’s President Obama has been criticised for the size of the stimulus package there, which is over a trillion dollars, yet doesn’t seem to be stemming the rising tide of unemployment. But what is less known is that China is also implementing a stimulus package, which is so far having the desired effect of maintaining eight percent growth. What are they doing to stimulate? Simple:
1. lending massive amounts of money internally.
2. initiating huge government spending programs.
Here’s Wallstreetpit on the stimulus:
Let’s review some of the inner workings within the Chinese stimulus and the current view of the Chinese economy and markets. From Stratfor Global Intelligence, we learn:
1. fully one fourth of the Chinese stimulus is targeted at helping the province of Sichuan recover from a massive earthquake in May 2008.
2. the bulk of the Chinese stimulus is focused on infrastructure with little assistance for faltering export based industries.
3. loan growth has exploded in the first half of the year.
The other policy they have is to stockpile foreign currency so as to keep their own currency artificially low, thereby allowing their exports to stay cheap.
All of this is about to bit them in the backside, and there are signs it is alrady happening. For example, with the command to lend, lend, lend, the banking system comes under extreme pressure. And now the Chinese banking system may be overheating.
Foreignpolicy.com comments on China’s debt, that
This growth will result in a huge pile of bad debt — as forced lending is bad lending. The list of negative consequences is very long, but the bottom line is simple: There is no miracle in the Chinese miracle growth, and China will pay a price.
THe money is being rushed out, with no regard to quality. It’s what was called in school “busy work” – tasks assigned merely for the purpose of keeping students busy, but with no intrinsic merit to the task itself.
There is no monitoring of the quality of loans of debts; no attempt to create a rescue plan for the export economy; no desire to allow a correction to have the desirable effect of killing off enterprises that need to die.
It cannot allow market corrections because this will cause social unrest. Only yesterday a Chinese boss was murdered by his workers for trying to retrench some of them.
China is in the process of turning its gargantuan export machine into a command-economy merry-go-round. The result, as with all artificial economies and with all bubbles, is predictable: the whole thing will implode, causing misery and poverty. Australia, which has been riding the wave of the Chinese stimulus, will feel the pain too.
The only question is when.