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|China´s stockmarket bubble|
Asahi Shimbun - May 21st 2007
What is a bubble? No one really knows: people tend to agree on what bubbles are only after they have burst. But a pretty fair indicator is when a stockmarket index has risen by more than 150% last year, and has risen by more than 50% so far this year. The market in question is the one in
In fact, they clearly are worried. The Chinese central bank has warned retail investors about the risk that share prices might collapse. But there is little that the central bank can do about it, apart from issuing warnings. For the bubble is one of the consequences of an economic policy adopted by
When? We cannot know. But the stockmarket bubble is a clear indicator that a crisis of some sort is on its way for
Any mention of bubbles naturally brings to mind
During the 1960s in
Something has to change. And, again, the government is well aware that it must. Chinese leaders, especially Premier Wen Jiabao, have been making speeches for more than a year saying that the economy´s growth path is unbalanced and unsustainable, and that public spending should be increased in order to transfer resources to health care, education and other public services. But little has actually happened. Meanwhile, investment keeps on growing.
Little has happened because local governments, and powerful forces in the Communist Party, want to keep investment booming, for they profit from it, and want to protect their backers in export industries. They cannot see why anything should change. In a sense they are right: there is no reason in principle why investment cannot keep on rising, to even higher proportions of GDP. The problem, though, is that the fuel for the investment boom—cheap money and a cheap yuan—are bringing inflation.
The money supply is growing rapidly. Increasingly, that growth is being reinforced by the rapid growth in foreign-exchange reserves. Central banks try to "sterilise" that growth to prevent it feeding through into inflation, but in
As Premier Wen Jiabao has said, the current trend is unsustainable. The question is how it will change. The change could be provoked by a collapse in share prices. It could be provoked by an external shock such as an American recession combined with a rise in protectionism. Or it could occur as a result of a political agreement, during or after the Communist Party´s 17th party congress this coming autumn, to control inflation and investment by making a sharp upvaluation of the yuan, probably followed by a substantial increase in public spending on health, education and social services.
The best option for