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This makes me think twice about my recent arguments about a coming Chinese economic slowdown. I assumed that China would simply repeat the mistakes of Europe in the 1970s, namely letting inflation run too high and thereby suffocating the economy. However, it seems that they are rather poised to repeat the mistakes of the US in recent years. China’s government will spend $585 billion stimulus money (that amounts to a freakin’ 13% of GDP). With this in mind, it is reasonable to assume that China’s GDP growth numbers (annual 8% last quarter) are solely coming from stimulus money, which would mean that China’s private economy is at least stagnating.
The long-term implications of this government behaviour should be clear: there will be massive overinvestment, just like in Japan in the 1980s, resulting in downward pressure on prices. Chinese banks, who are presumably involved in this stimulus game, will go bust and be rescued by the government. Once the bubble is pricked, Chinese foreign investors will bring back their money to China in order to pay for upcoming liabilities. That will send shockwaves to the dollar market and western stock markets. Further, China would be sidelined for some time as an importer of European machinery goods, which will hurt especially Germany and Switzerland.
So, the question is when will all this happen? 2010? 2011? 2012? Anyway, it increasingly looks like the “double dip” is coming.