An Economy So Hot, Government Cools It

For a third time this year, the Chinese Government has told Chinese banks they need to again increase their reserves, reducing the amount of money they can lend. This is another effort by China to curb its red-hot economic growth.

The Chinese economy grew by close to 11% last year. After years of its economy growing by at least 10% per annum, the Chinese government has tried to cool its growth by increasing interest rates and by getting its banks to raise their reserves to stunt borrowing.

Unlike the Fed here in the U.S., Beijing is very active in monitoring the actions of its economy. But the word here might be more “helpful” than “active.” Imagine if the U.S. Fed interfered during the tech boom of the late 1990s and asked all tech companies going public to have a minimum amount of starting sales. Investors would have been spared billions by not investing in tech start-ups that never achieved real sales.

Imagine if the Fed made 100% financing of new home purchases illegal while asking for a minimum down payment on all home purchases. If it did, neither the subprime market in the U.S. would be collapsing, nor would home owners face the negative equity situation many are.

China is obviously very concerned that its rapid growth might come to an abrupt halt, causing economic grief for its population. Beijing is using whatever reasonable measures it can find to reduce investment speculation in China so growth remains sustainable. I admire how Beijing helps its marketplace. Sometimes, here in America, I feel the speculation doesn’t stop until the developers and Wall Street get rich on a cycle, and the “public be damned” when that cycle contracts.

If you haven’t yet started investing in conservative Chinese companies, the timing may still be good.

NEWSFLASH — Defaults on payments of riskier types of home mortgages in the U.S. are rapidly rising. According to a just- released report from First American Loan Performance of San Francisco, payments on 14% of subprime loans (that have been packaged into securities) were at least 60 days late. The fast rise in late payments and defaults in the subprime market have forced many subprime lenders either out of business or into bankruptcy.