April 17, 2007

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Two good Bloomberg articles on some of the economic problems facing China, one macro and one micro:

1. William Pesek looks at the explosive growth of China's foreign exchange reserves. China is rapidly attracting capital inflows, it's stock market has tripled in 12 months and is clearly in a bubble and despite the PBoC's efforts it keeps getting worse. The answers? Well the yuan has already started appreciating (albeit slowly) and things have only gotten worse. China is awash with money and liquidity. There's one way out of the mess: the PBoC could stage a massive bonfire of all those US dollars in their vaults (even though in reality they're just bits and bytes, but that's not anywhere as near as enticing an image). Sure it's destruction of wealth accumulated through the hard work of millions of citizens, but it eliminates the liquidity problem with a puff of smoke.

2. Two reports look at Dongguan's South China Mall and find in it's emptyness a microcosm (if the world's biggest shopping centre can be a microcosm of anything!) of another Chinese economic problem: too much investment in non-productive assets (i.e. real estate) and not enough domestic consumption to take over the export-driven economic growth engine. Without increased spending by Chinese citizens, the country will continue to rely on its exports to grow, which will increase all the pressures and problems outlined in the first article above.

While you contemplate all that, bear in mind China has managed to grow at an amazing rate for a lengthy period of time. In the long term China will continue to grow and amaze, but it's going to be a bumpy ride.

posted by Simon on 04.17.07 at 11:03 AM in the China economy category.


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