China: A Bubble Ready to Burst?

China’s economy is often presented as dynamic, solid, and growing quickly. But is the foundation of the economy built on sand?

This report by Ambrose Evans-Pritchard seems to indicate that it is. China, it appears, has a serious financial bubble to deal with, one that is expanding and based on bad loans and debt. The financial sector and state-owned businesses are ripe with cronyism. The conclusion: China has no real good options. Inflation is a real threat, but putting the brakes on interest rates and money supply growth could bring the whole thing down. “The true scale of loans to local governments and state entities has been disguised,” he notes. Private credit in China is now 148% of GDP. That compares with an average of 41% for other emerging markets. Money quote:

“China is trying to keep the game going as if nothing has changed, but cannot do so. It dares not raise rates fast enough to let air out of the bubble because this would expose the bad debts of the banking system. The regime is stymied.”

At the recent Asset Allocation Summit Asia 2010 in Hong Kong, former hedge fund manager James Rickard proclaimed that China is “the greatest bubble in history with the most massive misallocation of wealth.” It is a “bubble waiting to burst.” Yikes.