Wednesday, October 26, 2011
Watch out for China’s ‘freak’ economy
Albert Edwards at SG Securities warned that China’s long-running investment boom has no precedent and is bound to burst. “China is a ‘freak’ economy,” he wrote. “To my knowledge no other economy in history has experienced such high investment/GDP ratios and seen so many sequential years of strong investment growth.” The Asian tigers in the 1990s? Japan? Nothing comes close, says Edwards.
That boom has helped carry the world economy through the troubles of the past five years. What happens if it, too, ends?Don’t ask.
China was always going to end badly. Keeping their currency pegged to the dollar, artificially low, meant that all of the grow China has experienced was kept in country and the truth is that China never had that many domestic investments that made sense. If they had allowed the currency to float, and allowed citizens to invest outside of their country, then the real estate bubble would have been mitigated. In fact, it would have made China a much more wealthy society because they would have been able to buy the productive assets of other countries.
All of this is very bad because China was the economy that kept the credit bubbles effects from being fully felt here and in Europe. Now there is nothing to stop deflation.