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Are we staring at another bubble?

Sep 11, 2009

Stockmarkets across Asia, except Japan, have opened today on a strong note on the back of robust Chinese economic data and higher oil demand forecast from the international Energy Agency, which signals improving prospects of the global economy. Gains are currently being seen in Hong Kong (up 1%), and China (up 1.3%). This also follows the 0.8% rise in the US Dow Jones Industrial index yesterday. As per reports coming out of China, the country's industrial production and investment growth has gained pace. While the former increased by 12.3% in August from a year earlier, the latter i.e., investments during the first eight months of this year have climbed 33% YoY.Easy money, and a flush of that is what we believe has led to such strong performance of the Chinese economy. And this doesn't seem sustainable given that consumption growth in the world's third largest economy country hasn't picked up much pace. It's only that the country seems to be fast-forwarding its infrastructure investments by building today what it would have built tomorrow, thereby raising doubts whether all this is really sustainable.

Then there are some economists who believe that the Chinese recovery is going well, and should get further support from stronger exports over the next few months. Exports to whom, we ask? The western world - US and Europe - remain mired by rising unemployment and squeezed wages. So who is going to buy all the wares that China is producing now to jump-start its economic growth? Probably they might dump all that in other nations, including India!

Forget about the stockmarkets, now it seems that the entire Chinese economy is getting into a bubble territory. It seems to be operating in an altogether different economic reality. And expectations have built up that it will continue to grow, no matter what the global economy is doing.

We wonder if global investors are confusing the Chinese fast growth with sustainable growth. One is aware that a large part of the growth in China's economy over the past decade came from exporting and lending to the US. Now with the latter in a deep recession, the former is suffering from overcapacity. And that doesn,t seem to worry the Chinese policymakers much given that growth in the country is now coming from forced lending to consumers and companies.

We have already realised from the US experience that forced lending is bad lending. And like the US is paying the price now, China will have its share of agony in the years to come. The only question is - when and how much. We have no answer to that!

As for investors in stocks, it is pertinent to stay away from companies that are again showing some promise on the back of cheap borrowed money, especially those from sectors like realty that were severely hit during the crisis of 2008, which now seems to have been forgotten!

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