A Dangerous Bubble is Forming in China

By on April 11, 2010

Avner Mandelman comments on the views of GMOs Edward Chancellor who has penned a research paper pointing to the factors leading to a major bubble developing in China.

First, here are Mr. Chancellor’s 10 criteria for mania:

1. A compelling growth story; 2. Faith in the competence of the authorities; 3. Huge increase in investment; 4. Surge in corruption; 5. Easy money; 6. Fixed currency regime; 7. Rampant credit growth; 8. Moral hazard (a belief that authorities won’t let the bubble pop – and have the power to keep it going – so risk is ignored); 9. Financial structures turn precarious; 10. Rapidly rising property prices fuelled by money made in the bubble, which is plowed right back into the bubble. All these conditions are present in China – in spades.

Mandelman adds his own criteria:

And I’d add one more criterion, a reverse indicator, which emerges at the end of a trend: For example, a book telling us that our own economic system cannot compete with the new autocratic order. In the 1960s it was Russia that would bury us. In the 1980s it was Japan. And now it’s China. A “scholar” named Martin Jacques just wrote a book titled, When China Rules the World: The End of the Western World and the Birth of the New Global Order. Yeah, right.

Mandelman concludes by comparing China to the movie Speed, which can’t slow down without exploding.

Source: The Globe and Mail
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