Monday, July 13, 2009

More on China

Longer break than anticipated... but I am back.

More on China.

Everyone seems to think that investments by China will help developing economies regain their growth momentum in the second half of this year, pulling the global economy out of the worst worldwide recession in six decades.

On July 8th the International Monetary Fund forecast that China’s expansion will accelerate to 8.5 percent next year from 7.5 percent in 2009. But more and more evidence is croping up to doubt this will happen.

The latest evidence came in last week's debt sale by China (yes... despite the fact that China owns the largest foreign amount of US debt - 790 Billion - China still needs to raise funds by selling it's own debt).

Last week China failed to attract enough bidders in a government debt sale for a second time on speculation record bank lending by Chinese banks will spark inflation in the world’s third-largest economy.

The Ministry of Finance sold 25.1 billion yuan ($3.7 billion) in bills of the 35 billion yuan it had sought, according to statements on the Web site of Chinabond, the nation’s biggest debt-clearing house. The government fell short of its target in a bond sale for the first time in almost six years on July 8.

The auction’s failure reflects concern that Premier Wen Jiabao’s 4 trillion yuan stimulus package will cause bubbles in stock and housing markets, forcing the central bank to tighten monetary policy. The People’s Bank of China this week pushed up money-market rates and drained cash from banks, the biggest investors in the nation’s $2.2 trillion debt market.

“The central bank’s open-market operations suggest concerns that the rapid surge in new bank lending in the first half of this year could fuel inflation,” said Tommy Xie, an economist at Oversea-Chinese Banking Corp. in Singapore. “Some people speculate the central bank will raise interest rates this year but I don’t think they can as global growth slows.”

So what we now have is two very interesting conditions emerging. A perfect storm for inflation in North America with the US Federal Reserve's unprecedented increase in the US money supply and China' rapid surge in new bank lending which is fueling an irrational surge in worldwide stock markets and setting the stage of inflation on the other side of the globe.

This is how you set the stage for worldwide events that slip away from one single central bankers control.


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