China’s foreign exchange reserves soared by US$ 453 billion in 2009, or 10 per cent of 2008 GDP. Bank lending increased 32 per cent to 9.6 trillion yuan. And yet nominal GDP rose only about 5 per cent.
Clearly, the financial side drove China’s GDP growth last year, reflecting a new reality of the post-financial crisis world. But all that money produced relatively little GDP growth because it worked its way into a single sector: property.
Two market beliefs animate this continuing movement. First is the belief that China’s currency will only appreciate. The other is that China’s land prices will drive money flows.