China’s Big Story and Big Worry

“The Financial World According to Inya” Column,
by Inya Ivkovic, MA

China’s economy is likely the biggest story there is right now. But it is also the biggest worry, too, both for Chinese policymakers and the rest of the world. The worry is not just about developed economies going green with envy, but that this super-hot economy could simply overheat and end up going through a significant correction in the near future, potentially irreparably halting global economic recovery.

Consider this: on Monday, commodity prices surged after China reported that its imports have risen almost 60% to $112.3 billion, comparing December 2009 with December 2008. Meanwhile, exports rose just 17.7% to $130.7 billion during the same period, which is also the first increase for the last 14 months. China is also lending more. Loans have soared to $88.0 billion just in the first week of January and almost twice as much compared to the monthly average during Q3 and Q4 of 2009. To many observers, it seems that China has come too far, too fast, carried on a massive $600-billion economic stimulus tidal wave.

Chinese importers and manufacturers are simply gobbling and guzzling copper, iron, gold, oil, coal…you name it. Commodity- based economies, such as those of Canada and Australia, are thriving. But if all that stocking and restocking activity becomes too aggressive, it could also stall global recovery, crushing the demand domestically and taking down international trade activity with it.

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The recent surge in Chinese banks’ lending is also very unsettling. Lending approximately 100 billion yuan a day is far too reminiscent of the U.S. days of easy money, which could — and already has, albeit to a miniscule degree — prompted a hike in interest rates. If interest rates are hiked before the rest of the world is ready, global economic performance could suffer a serious blow.

I already warned our PROFIT CONFIDENTIAL readers about the People’s Bank of China’s move last week to hike the yields on its three-month T-Bills. It was the first such hike in the last five months and it was the first attempt to insulate China’s economy from the effects of its $600-billion economic stimulus. There was no way of ignoring the fact that, while the rest of the world was struggling under the confines of the worst recession in a generation, China’s economic output grew more than eight percent in 2009.

Chinese government and policymakers are clearly worried, but also caught between a rock and a hard place. On one hand, they cannot withdraw the economic stimulus money too quickly out of its financial systems, because doing so could cripple regional and global recovery. On the other hand, if they let the economy spin out of control, the economic output could hit the stratospheric growth rate as high as 16% this year, likely leading to impossible hyperinflationary pressures, particularly in the real estate market.

Walking such a fine line appears almost impossible and how well, or not, China does it affects us all. Hence, we’ll continue watching China’s monetary policy and its impact on global macroeconomics very closely and letting our readers know our thoughts.