China's Great Old Credit Boom

Things are getting out of hand. Recent credit growth data from China’s economy should be enough to excite the bears and the bulls alike. Total social financing, the metric of credit growth used to encapsulate both bank and non-bank lending in China, was a whopping US$400 billion in January alone. Or $4.8 trillion annualised!

That’s up 50% from December and 100% on January 2012. These mere numbers don’t convey the enormity of the credit bubble forming in China. The bulls look at the result of the credit creation as it flows through the system and rejoice at China’s marvellous command economy. The bears look at the distortions created by the boom and wait for its inevitable implosion. It will be ugly.

Chinese manufacturing data is due out today. It should be very, very strong. If not, then we’re at a loss to explain where all that ‘money’ is going. Actually, no we’re not. More than likely it’s going into the pockets of officialdom. They’re having a great old credit boom.

Australia’s biggest iron ore miners, BHP, RIO and Fortescue, aren’t though. They’ve enjoyed a nice share price bounce since mid-2012 but the rally now looks like faltering. With an eye on China, it’s not a share price ‘correction’ we’d be buying.

The problem with credit booms is that they unleash so much buying power into the economy that inflation begins to rear its head. Then interest rates rise to head off inflation. But the boom is so sensitive to the cost of credit that any interest rate rise bursts the bubble.

They’re having similar problems over at the US Federal Reserve. Their policy of QE to insanity has sparked a speculative frenzy in the asset and credit markets. Now the Fed doesn’t know what to do. It can’t stop buying bonds (someone has to finance the US government’s out of control spending) but it’s trying to give the impression that it wants to.

A few weeks ago, we profiled an interesting speech from little known Fed governor Jeremy Stein. He focused on the speculation going on in the enormous ‘shadow banking’ system and raised the possibility that monetary policy should be a tool to control that speculation, instead of just the regulatory tools endorsed by Bernanke.

Last week, in an interview with CNBC, Fed Governor James Bullard mentioned Stein’s speech as an important one. But he also made it clear that monetary policy is currently very loose and will stay that way for some time.

In other words, while the Fed pays lip-service to intelligent analysis on the destabilising effects of long term easy money, it’s not going to lean against the speculative tide of capital flowing into all corners of global assets markets. So expect this rally to run up further and get more out of hand in the weeks to come. That’s your sign of increasing deterioration! Increasing asset prices! So deceptively simple…

And don’t forget, it’s the ongoing currency wars helping to fuel all this speculation. Currently, Japan and the UK are winning the latest battles. More on that tomorrow…

Regards,
Greg Canavan
for Markets and Money

Join me on Google+
From the Archives…

High Tide on Main Street?
22-02-13 – Bill Bonner

The Fed’s Funny Money is Losing its Mojo
21-02-13 – Dan Denning

Resurrecting BHP, the ‘Big Australian’
20-02-13 – Dan Denning

End of the Australian Boom?
19-02-13 – Satyajit Das

Bond Guru Still Likes the Unthinkable: US Treasuries
18-02-13 – Chris Mayer

Claim your FREE Special Investor Report…

Five Fatal Stocks You MUST Sell Now
Markets & Money Free ReportIf Markets and Money editor, Vern Gowdie is correct, the Australian stock market could be headed for a devastating correction to rival the GFC. And these five stocks will be dragged through the financial carnage.

Download this free report now and discover:

  • The five biggest threats to your wealth on the ASX: Discover why these five household–name stocks pose a threat to your wealth… and why they’ll be the first to lose you money when Aussie stocks drop dramatically.
  • The ‘wealth destruction effect’: High share prices in the US have created the illusion of wealth. This ‘wealth effect’ has filtered through to our market and economy. But when the ‘bubble of all bubbles’ bursts in the US, stocks will drag our economy down with them. These ‘fatal’ five will be the first to fall.
  • Get out while you still can: Why we’re just months away from a major correction in the US markets… and how that will swiftly hit the ASX. These five companies make up nearly half the entire Aussie market… and you almost certainly own one of them.

To download your free report ‘Five Fatal Stocks You MUST Sell Now’ simply subscribe to Markets and Money for FREE today. Enter your email in the box below and click ‘Send My Free Report’.

We will collect and handle your personal information in accordance with our Privacy Policy.

You can cancel your subscription at any time.

Greg Canavan

Greg Canavan is a Contributing Editor at Markets & Money and Head of Research at Port Phillip Publishing.

He advocates a counter-intuitive investment philosophy based on the old adage that ‘ignorance is bliss’.

Greg says that investing in the ‘Information Age’ means you now have all the information you need. But is it really useful? Much of it is noise, and serves to confuse rather than inform investors.

Greg Canavan

Latest posts by Greg Canavan (see all)

Leave a Reply

Be the First to Comment!

Notify of
avatar
wpDiscuz
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@marketsandmoney.com.au