Chinese tumble

One item you constantly see even with some of the more bearish of main stream financial pundits is that China is the expanding future.  Well, almost all of them anyway.

China has devalued their currency to the point where they had to keep lending money to prop up the strength of the dollar so that the price of their goods would not go up and they could keep their people employed.  This of course hurts our exporters, but it also leaves China with a lot of dollars they really cannot do much with.  They have so much cash that right now they have more cash on hand then the entire dollar value of all (yes all) U.S. Farmland combined.  They have reserves of $3 trillion, and U.S. Farmland in total would only cost them $1.87 trillion:  a bargain! (source).

So what is the problem?  Funny you should ask:

China’s Bad Growth Bet

Nouriel Roubini, Project Syndicate, ht MR whose excerpt I used.

When net exports collapsed in 2008-2009 from 11% of GDP to 5%, China’s leader reacted by further increasing the fixed-investment share of GDP from 42% to 47%.

Thus, China did not suffer a severe recession – as occurred in Japan, Germany, and elsewhere in emerging Asia in 2009 – only because fixed investment exploded. And the fixed-investment share of GDP has increased further in 2010-2011, to almost 50%.

The problem, of course, is that no country can be productive enough to reinvest 50% of GDP in new capital stock without eventually facing immense overcapacity and a staggering non-performing loan problem. China is rife with overinvestment in physical capital, infrastructure, and property. To a visitor, this is evident in sleek but empty airports and bullet trains (which will reduce the need for the 45 planned airports), highways to nowhere, thousands of colossal new central and provincial government buildings, ghost towns, and brand-new aluminum smelters kept closed to prevent global prices from plunging.

Commercial and high-end residential investment has been excessive, automobile capacity has outstripped even the recent surge in sales, and overcapacity in steel, cement, and other manufacturing sectors is increasing further. In the short run, the investment boom will fuel inflation, owing to the highly resource-intensive character of growth. But overcapacity will lead inevitably to serious deflationary pressures, starting with the manufacturing and real-estate sectors.

Eventually, most likely after 2013, China will suffer a hard landing. All historical episodes of excessive investment – including East Asia in the 1990’s – have ended with a financial crisis and/or a long period of slow growth.

This of course is back dropped by this type of news:

Chinese authorities move to end lorry driver strike, BBC 23 April 2011.

The rising fuel prices is both because of their keeping their money cheap relative to the dollar denominated oil prices, and a general over heating of the economy.