China's Money-Printing Addiction Could Spell Disaster

A couple of articles discussing the speed at which the Chinese government is hitting the printing presses crossed my desk today.

Combined, they give an interesting view into the economic dynamics at work in China as it attempts to adjust to its new role as an economic superpower.

This article from Taiwan points towards a money supply out of control.  It has some interesting tidbits of data and a great quote.

In the past 10 years, China’s M2 has expanded at the average rate of 18.8% a year, despite the fact that the country, which has an average gross domestic product (GDP) growth rate of 10.9% and an average inflation rate of 3.2%, needs only 14.1% of growth in money supply to sustain its economic development.

This has driven China’s M2-to-GDP ratio in the past decade to the highest in the world.

“In the past 30 years, we have used excessive money supply to rapidly advance our economy,” said Wu Xiaoling, vice chairman of the Financial and Economic Affairs Committee of China’s National People’s Congress.

China has not only been the country that prints money at the fastest rate but also been the country with the largest money supply in the world in the past decade, according to the Chinese-language Southern Weekly.

Furthermore, China continued to be the largest money-supplying country in 2010 as its M2, a broad measure of money supply, was up 19.46% at the end of November from a year earlier, said the weekly.

This compares with 3.3% and 2.5% of annual M2 growth in the US and Japan respectively over the same period.

It appears to have caused a 9 times increase in Beijing property prices in the last 8 years.  While China is focused on growing its economic engine, the damage it is doing to itself is increasing.

The difference in the value of the average mud hut in the village compared to the average cost of a new high rise condo has never been larger.  Don’t laugh, villagers do make it into the city, and can quickly see the difference in valuations.  It gets worse when their property is taken from them for new local developments, at ever high retail prices.  The trickle down valuations are not working in China any better than they have worked in the US.

The implications are pointing towards a Boom Bust Gloom type of cycle.  China is one food staple event away from the masses realising that the dream has passed them by.  The cost of food is going to severely impact the cost of migrant workers ability to survive.  Step increases in wages will be necessary sooner rather than later.

The NY Times has an article today on Chinese foreign currencies swelling at above trend expectations.  In simple terms, as China collects FX reserves, it requires its internal banks to release the same amount of capital for domestic growth.  Thus they amplify their FX earnings with domestic stimulus.

The Chinese foreign reserves leaped by $199 billion in the fourth quarter, to $2.85 trillion. The increase was much larger than economists expected, and the numbers suggested that China had about doubled its intervention in currency markets to about $2 billion a day.

This is why the Chinese economy has performed like a “Tour de France” rider, bouncing back quicker and climbing faster than anyone else.  They are juicing their economy every way they can.  Their economy will perform amazing, right up until it has a heart attack.

If China was to acknowledge how undervalued the Yuan appears to be, it would have to raise its internal stimulus program to even higher rates. They can’t handle the additional stimulus without hyper inflation breaking out.

They can’t slow down, and they can’t go faster.  Catch-22 is back.

I believe this is the second edge to the economic sword hanging over China.  They are now addicted to needing an ever increasing supply of foreign capital, to stimulate the internal money growth rates.

If growth ever went negative, the system is not setup to allow a pretty unwind.  There is only expectation of future growth.  Growth only lasts, until it doesn’t happen, which China is not prepared for.

While China has control of its own internal domestic markets, and it has been allowed to keep a near peg to the US dollar for the last decade.  It cannot provide endless stimulus to both its internal markets, its external markets and control inflation.

One of three, YES. Two of Three, Maybe.  Three of Three, ZERO CHANCE.

The coming months and years ahead are going to be affected by the out of control growth of today.  The affects of a runaway money supply are well known. Anyone who is a student of economics knows what is going to happen next, but like all great bubbles, its impossible to time when they will pop.  China is no different.

They are so dependent on demand growth, they have decided to try and prop up the European bureaucrats with fresh capital.  These new private placements in European Sovereigns will help keep Europe from dissolving into a mess this winter, while allowing the problems to fester at both ends longer.

Combined, when Europe does shatter, it will hurt the China worse.  They will have thrown away their national savings, on buying debt from an international organisation that is dissolving under its own weight in front of everyone in the world.  The leading party will have used up internal domestic creditability by publicly propping up a coalition of the unwilling to be economic governed with Chinese home savings.

The old Chinese proverb/curse about interesting times, comes to mind.

Filed under: Banksters, Cabel, Cartel, China, Commodities, Communications, Currency, Debt, Economic War, Economics, Europe, Global Macro, International, New York Times, Risk Management, Uncategorized Tagged: Boom Bust Gloom, China, China’s catch 22, Europe, FX, FX Stimulas, Money Supply, Proberb, Tour De France, Yuan

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